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SUBMITTAL OF THE STOCKTON OPPORTUNITY ZONE PRIORITIES MAP TO THE CALIFORNIA STATE GOVERNOR
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RECOMMENDATION
It is recommended that the City Council approve a motion:
1. Authorizing the City Manager to submit the Stockton Opportunity Zone Priorities Map (Attachment A) and/or priority census tracts to the California State Governor; and
2. Authorizing the City Manager to take necessary and appropriate actions to carry out the purpose and intent of the motion.
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Summary
Congress established the Opportunity Zone program in December 2017, as part of the Tax Cuts and Jobs Act in an effort to stimulate long-term private investments in low-income communities. Governors must submit Opportunity Zone designations by March 21, 2018. Opportunity Zones cannot exceed 25% of the low-income qualified census tracts within each state. City staff has identified qualified census tracts that meet the low-income criteria, and that also demonstrate a need along with the opportunity for investment. It is requested that the City Council approve the Stockton Opportunity Zone Priorities Map for submittal to the California Governor prior to the March 21 deadline.
DISCUSSION
Background
The Opportunity Zone program was established by Congress in the 2017 Tax Cuts, and Jobs Act signed into law on December 22, 2017, to spur long-term private sector investments in low-income communities across the nation. This new economic development program offers a way for investors to reinvest unrealized capital gains into distressed communities through Opportunity Funds in exchange for a graduated series of incentives tied to long-term holdings.
Opportunity Zones offer investors three incentives for placing some of their unrealized capital gains to work rebuilding economically distressed communities:
1. Temporary Deferral - An investor can defer capital gains taxes until 2026 by putting and keeping unrealized gains in an Opportunity Fund.
2. Reduction - The original amount of capital gains on which an investor must pay deferred taxes is reduced by 10% if the Opportunity Fund investment is held for five years and another 5% if held for seven years.
3. Exemption - Any capital gains on investments made through the Opportunity Fund accrue tax-free as long as the investor holds them for at least ten years.
Opportunity Funds are investment vehicles organized as corporations or partnerships that hold at least 90% of their assets in qualified Opportunity Zone business properties. There are several types of business properties eligible for investment:
• Original-issue stock of a qualified Opportunity Zone corporation.
• Interest in a qualified Opportunity Zone partnership.
• Tangible property used in qualified Opportunity Zones.
In other words, just about any asset including high-growth startups, small businesses, real estate, manufacturing facilities, brownfield redevelopment, incubators, co-working spaces and rental housing may qualify as eligible Opportunity Fund investments.
Those that will likely have interest in investing or establishing an Opportunity Fund include banks, venture capital partnerships, angel investor groups, multi-family developers, philanthropies, and CDFIs. Local municipalities may be able to set-up their own funds as well.
Present Situation
The California Governor has 90 days from enactment (or March 21, 2018) to designate Opportunity Zones for the state to the U.S. Treasury Secretary. The Secretary of Treasury has 30 days to review the recommended Opportunity Zones and approve or deny them. Opportunity Zones cannot exceed 25% of the low-income qualified census tracts within each state.
While governors are given broad discretion when it comes to designating Opportunity Zones, Congress has advised them to give preference to areas that:
1. Are the focus of mutually-reinforcing state, local, and private development initiatives.
2. Have demonstrated past success in utilizing programs such as New Market Tax Credits, Enterprise Zones or Promise Zones.
3. Suffered major recent job losses from plant closures or relocations.
Because it is unknown how the Governor will determine which qualified census tracts throughout California to recommend designation as Opportunity Zones to the Secretary of Treasury, City staff has identified three tiers of priority for the qualifying census tracts in Stockton, with Tier 1 being the highest priority:
• Tier 1 includes areas that have the highest likelihood for private investments, such Downtown Stockton, Port of Stockton, north and south shores of the Deep Water Channel, and industrial areas located in south and east Stockton.
• Tier 2 areas have more limited opportunities for commercial investment, such as commercial corridors along El Dorado Street and Pershing Avenue, the Miracle Mile, and properties along Airport Way and Dr. Martin Luther King Jr. Boulevard.
• Tier 3 includes census tracts that are mostly residential with very limited investments for Opportunity Zones.
It is at the Governor’s sole discretion to recommend which qualifying census tracts are designated throughout California so long as it does not exceed 25% of the state’s low -income census tracts. Approving a prioritized list of census tracts allows staff the ability to submit and advocate for designations of the most census tracts as possible for the City of Stockton. These prioritized tiers of qualified census tracts include a balance of areas that have demonstrated the greatest need of investment with those areas that provide greater opportunity for private investment. Overall, the priorities as recommended supports both neighborhood revitalization and large commercial development that would generate job growth.
Should these areas in Stockton be designated as Opportunity Zones, it could bring awareness of the program to local bankers, financial institutions, investors, and business networks to encourage the establishment of Opportunity Funds. Once an Opportunity Fund has been established, the City and the private market could then actively promote itself to potential investors.
Staff is requesting that the City Council approve the Stockton Opportunity Zone Priorities Map so that eligible census tracts may be submitted to the Governor’s Office prior to the March 21 deadline.
FINANCIAL SUMMARY
There is no negative financial impact associated with this action.
Attachment A - Stockton Opportunity Zone Priorities Map