The city of Escondido is looking for business people interested in investing in the future of the city’s downtown area, using a new tool that has just become available for the city called an Opportunity Zone or OZ.
According to the city’s Economic Development Manager Michelle Geller, “Opportunity Zones are a new tool providing tax incentives for reinvestment of capital gains. Opportunity Zones allow investors, fund managers and communities to use privately-sourced funds for eligible economic development and community re-investment projects.”
Geller told The Times-Advocate: “It’s still very much a work in progress because it’s so new. We are trying to put all the pieces in the place for investors to take advantage of it. California and the governor’s office is really acting as an intermediary between federal and municipalities and as a portal to get the information out.”
The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017. This act created qualified Opportunity Zones across the U.S. A total of 879 of these designated Opportunity Zones are in California. This designation is valid for 10 years.
The Tax Reform Act created a new method of deferring taxes on capital gains that is more flexible and multifaceted than the traditional 1031 exchange. Investors can now defer capital gains on the sale of ANY asset (not just real estate), pay lower taxes on those deferred gains, and pay no capital gains taxes on any increase in the new investment’s value if they hold the asset for a minimum of ten years.
How it Works
Like a 1031 exchange, investors must reinvest capital gains within 180 days. The investments must go into an Opportunity Fund, which invests in real estate or businesses located in specific geographic districts within each of the 50 states. Large parts of the U.S. fall under these zones, including many commercial, industrial, and residential areas. In this case that is the OZ in downtown Escondido
Investments held through Opportunity Funds enjoy a tax deferral until December 31, 2026, or the date of a sale, whichever is earlier. The original capital gains tax is reduced by 10% after 5 years, and by 15% after 7 years. After 10 years, investors pay no capital gains on the new investment’s increase in value.
Escondido’s Opportunity Zone (OZ)
Escondido’s designated OZ is located in the central part of the city. It includes investment opportunities in and around the Civic Center, Grape Day Park, and Historic Downtown.
Geller commented “The honest truth is there are still a lot of questions as to how it will look. They have cut them very broad. It could be affordable housing, small business or clean energy. More things are on the table than are not. It’s a tool to generate investment in specific areas. Our zone is the central part of the city, Grand Avenue, the civic center and areas around that. Investors can come in, maybe purchase a building that has gone into disrepair, open a business, or do one of many eligible projects and then they can defer capital gains. It’s not unlike a 1031 exchange that real estate people know about. It’s targeted into one area.”
Although there are thousands of Opportunity Zones all over the U.S. there are only two in North County, said Geller. Vista has the other one. There are more in downtown San Diego. But Escondido’s OZ could be considered unique, she says. “When you have an Opportunity Zone in an area with no other attractive aspects about them, maybe it won’t spur much, but when you overlay it on an area that already has dozens of positives as to why it is a good investment, that’s an extra motivation to use this tool.”
Nevertheless, it is early to determine if Escondido’s OZ will attract investors. “Everybody is putting their marketing strategies in place,” said Geller. “Funds are being built in anticipation that opportunities that will arise. I wanted to get the information out there to start conversations to get investors and real estate brokers to know about this tool.”
So, could a tool like the Opportunity Zone impact the downtown’s “empty storefront syndrome” that many point to as a problem along Grand Avenue, to use one example?
Geller commented, “It could work with an empty storefront that is on the market that someone wants to sell. That someone wants to wait for the perfect tenant.”
Learn more about Escondido’s Opportunity Zones here: www.escondido.org/oppzones.aspx
Interested in investing in Escondido’s Opportunity Zone? Contact Michelle Geller, economic development manager at firstname.lastname@example.org or 760-839-4587.