Vallejo gets 6 of 21 North Bay redevelopment ‘opportunity zones’ with tax breaksApril 25 2018
BY: JEFF QUACKENBUSH NORTH BAY BUSINESS JOURNAL | April 23, 2018, 10:21AM04/23/2018
Part of the federal tax-reform law late last year were the creation of “opportunity zones” where investors could get tax breaks in exchange for chipping in cash toward redevelopment.
On Wednesday, the U.S. Treasury Department designated all 879 of California’s nominated census tracts as qualified opportunity zones under Internal Revenue Code Section 1400Z-1(b)(1)(B). And 21 of those zones are in North Bay counties: Solano has nine; Sonoma, three; Marin, one; Napa, two; Mendocino, three; and Lake, three.
And Vallejo has six, including the 11th-hour inclusion of its Mare Island area.
“A lot of cities find their toolbox a little bit lighter after the end of redevelopment (agencies) in California,” said Alea Gage, an economic development project manager for the city of Vallejo. “Particularly, for a city like Vallejo, we often don’t have a lot of wiggle room in terms of what our general fund can bear.”
Vallejo had several project areas for redevelopment, funded by property-tax increments over 30 years, before the state of California dissolved local redevelopment agencies (RDAs) in February 2012 during a budget crisis. The Legislature had created the framework for the agencies under the Community Redevelopment Act of 1945, but it wasn’t until the passage of Proposition 18 in 1952 that the local RDAs shifted from federal help to tax-increment financing based. Local governments could declare areas economically blighted and channel the growth in property taxes in those areas to a fund for improvement projects, such as affordable housing.
Vallejo had been planning to complete tens of millions of dollars’ worth of improvements in RDA project areas, Gage said.
“The waterfront project was relying heavily on tax-increment funds,” she said.
The city has been working under a disposition and development agreement with Callahan Property Company of Pleasanton since 2000 to redevelop two areas of the Vallejo waterfront across from Mare Island. The latest iteration of the plan calls for 601 housing units on 52 acres in two areas of the waterfront.
Since the end of the RDAs, Vallejo has been looking for ways to create public-private partnerships on Mare Island, downtown and the waterfront, but state programs introduced since then weren’t the right fit, Gage said. The five zones Sacramento nominated from mainland Vallejo line up with existing RDA project areas, such as the Sonoma Boulevard corridor.
Though the recovery from the last economic recession has been a boon to San Francisco Bay Area real estate, increasing property values have only come to Vallejo recently.
“While we have lower land prices than other parts of the Bay Area, that can sometimes be accompanied by lower sale prices,” Gage said. “You can buy low, but you may have to sell lower relative to other places. At the same time, the cost of construction and the cost of labor for the Bay Area can be a real barrier to new development. So, in a community like Vallejo, it’s hard to make projects pencil.”
Interest in new-home projects has been active for properties in the city, but developers have gone elsewhere when they calculate sale prices for the homes, she said.
Though the federal government has yet to release full details of the opportunity-zones program, it appears to have broad enough parameters to spur the kinds of redevelopment investment the city is seeking, Gage said. Guidance the IRS has provided so far is that investment in the zones can lead to deferral or elimination of capital gains–related taxes on real property and, perhaps, equipment.
North Bay qualified opportunity zones
Of the 879 qualified opportunity zones with tax breaks and other incentives for property investors, 21 of those zones are in North Bay counties (interactive map).
Source: California Department of Finance
“That would be a real significant boost to Mare Island, where we have a lot of very specialized companies and advanced manufacturing happening,” Gage said. “We’ve seen Vallejo have tremendous momentum over the past few years, but when we talk about attracting new employers, this is yet one more incentive to get them here.”
Started in 1854, the Mare Island Naval Shipyard was decommissioned in 1996 and turned over to the city. Vallejo in 2005 worked with private partner Lennar Mare Island in the redevelopment of 650 acres of the base, converting many of the existing military buildings into a community with homes as well as businesses. The island currently has about 110 businesses with 2,500 full-time employees in 3.6 million square feet of commercial space.
Mare Island businesses Savage & Cooke and newcomer Factory_OS wrote letters to the Governor Brown to nominate Mare Island for an opportunity zone. Also involved in securing Solano six designated zones were Rep. Mike Thompson, state Sen. Bill Dodd, Assemblymember Timothy Grayson and the Solano Economic Development Corporation.
The governor’s office in early March put out a list for public comment of 798 nominated census tracts for opportunity zones, and 879 ended up being recommended to the federal government. The main criteria were the poorest areas of each county and with at least 30 businesses in the census tract, which is generally designated to include about 4,000 residents.
The inclusion of Mare Island as an opportunity zone could help fuel redevelopment of 157 acres at the north end of the island, she said. The city in early April wrapped a request for qualifications from developers interested in building offices, manufacturing, research and development, light-industrial and retail space on that land. The City Council has approved a north Mare Island specific plan and certified environmental reports for 1.2 million square feet of such space there.
“To talk about an investment in land like that, if that were to qualify for the opportunity zones, it could really dramatically improve the viability and financial feasibility of a project in north Mare Island,” Gage said.
Gage declined to talk much the developers that responded to the north Mare Island RFQ, except to say they were interested in mixed-use and commercial projects. Staff is reviewing the submissions to prepare recommendations in coming weeks for the City Council.
Contact Jeff Quackenbush at firstname.lastname@example.org or 707-521-4256.