Public Policy

Fellow Democrats Stop California Governor’s Opportunity Zone Push

Bloomberg Law

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Posted Sept. 11, 2019, 1:16 PM

  • Gavin Newsom sought narrow benefits for housing, green energy

  • Time runs out for deal in state legislature

By Laura Mahoney


California Gov. Gavin Newsom has failed to win support from lawmakers to create state-level opportunity zone tax breaks this year.

Newsom narrowed an already narrow proposal in last-minute negotiations this week with fellow Democrats, who control both houses of the legislature. But his plan never emerged by the Sept. 10 deadline for bills to be eligible for votes before lawmakers adjourn for the year Sept. 13.

“The administration remains committed to advancing the key priorities of affordable housing and green technology,” Newsom spokesman Jesse Melgar said.

Newsom wanted to give investors in California projects the chance to defer or reduce state tax gains on investments in the zones—a move that would complement the federal program. He tried to convince legislators that his plan was more focused, effective, and transparent than the federal opportunity zone tax breaks.

The governor faced stiff opposition from labor groups even though he agreed to limit the program to housing and green energy projects, cap investments from individual funds at $100 million, and cap total state allocations at $5 billion.

The California Tax Reform Association—representing unions including the California Labor Federation and Service Employees International Union—pushed lawmakers to reject Newsom’s plan as a tax break that wouldn’t result in more investments. Such criticism has also plagued the incentive at the federal level.

“Rather, such an effort would simply be a giveaway of California’s taxpayer dollars to wealthy investors: the epitome of corporate welfare,” the group’s leaders said in a Sept. 9 letter to the chairs of the Assembly and Senate budget committees.

CalOZ, an organization representing investors and business groups advocating for state-level zones, will continue to push for creation of a state-level benefit in 2020, President and Co-Founder Kunal Merchant said. Forty-six of 50 states have enacted state OZs already.

“We were already behind and this just puts us more behind in terms of attracting investment,” he said.

California designated 879 Census tracts as opportunity zones in March 2018. They are spread across 57 of California’s 58 counties, and many have poverty rates of at least 30%.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com.

Op-Ed: Sports sector a great fit for ‘Opportunity Zones’

Sports Business Journal

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Nationals Park and its surrounding development played a key role in the revitalization of a long-blighted area of Washington, D.C. (Photo: Ballparks of Baseball)

By Rob Simmelkjaer and Kunal Merchant

June 17, 2019

When Nationals Park opened in Southeast Washington, D.C., in 2008, it was the centerpiece of a plan to revive a long-blighted section of the nation’s capital. Eleven years (and $670 million of public financing) later, the Anacostia neighborhood is widely seen as a triumph of urban development, with the ballpark just part of a revitalized area that includes a wide array of residential and commercial development.

It was this type of success story that was envisioned by policymakers and politicians when they included a provision in the new tax law called the “Investing in Opportunity Act” designed to attract private investment capital into economically distressed areas. The law allowed for the creation of more than 8,000 “Opportunity Zones” around the country — low-income census tracts designated by the governors of all 50 states.

Opportunity Zones were the brainchild of tech entrepreneur Sean Parker, whose think tank Economic Innovation Group helped write the policy. Parker recruited a rare bipartisan group of leaders in Washington, led by Sen. Cory Booker (D-N.J.) and Sen. Tim Scott (R-S.C.) to turn it into law. Here’s how it works:

  • A company or individual who sells any investment at a profit would normally be subject to a capital gains tax of either 15% or 20% of that profit.

  • Under the Opportunity Zone program, if that same investor reinvests the cash proceeds of that sale into a Qualified Opportunity Fund — a fund that invests in projects or businesses located within an Opportunity Zone — they get to both reduce that tax bill and defer it to years into the future.

  • Perhaps most significantly, any additional profits that an investor realizes from their subsequent Opportunity Zone investment may be completely tax free.

What does all this have to do with sports? Sports is among the industries best positioned to take advantage of this tax incentive. While the program is still in its infancy, we foresee at least four potential pathways for sports and Opportunity Zones to intersect:

1. Stadium and arena construction and renovation. Fourteen of 28 NFL stadiums (counting the new stadiums in Los Angeles and Las Vegas) sit within Opportunity Zones, with another five adjacent to zones (see chart). MLB, the NBA and NHL have 13, 12 and seven buildings in zones, respectively. Clubs looking to upgrade or replace their facilities could invest or raise capital using the benefits of the program. The private capital unlocked by this incentive could give clubs an alternative to public financing, which faces growing skepticism from elected leaders and taxpayers.

2. Ancillary mixed-use districts. The strategy of building retail, housing, office and hospitality destinations to complement arena and stadium projects is increasingly becoming core to the business models of sports teams, particularly when community expectations are high for venue projects to generate broader economic and community benefits on game and non-game days alike.

3. Youth sports complexes. These are another potential beneficiary. The last decade has witnessed a building boom of multisport youth facilities nationally, but there remains an acute shortage of places for kids to play in lower-income areas. Directing Opportunity Zone dollars to the creation of new youth sports facilities is consistent with the pro-social policy goals of the program, and could help stem the steady decline in youth sports participation that we have seen in these communities.

4. Sports-related operating businesses. While early Opportunity Zone investment has favored real estate, the program is primarily intended to provide patient and discounted capital to support businesses with the potential to create jobs in areas that need it most. If sports entrepreneurs are able to position ventures authentically in Opportunity Zone communities, emerging areas like esports, drone racing, sports media and tech, incubators and other models could show promise as well. (Sportsbooks and golf courses, it should be noted, are excluded from the program.)  

Investors and those seeking to raise investment capital need to know that the clock is ticking on this program. Investments in Qualified Opportunity Funds must be made by the end of 2019 to qualify for a 15% reduction of capital gains taxes for investments held at least seven years. The biggest economic benefit to investors, however, is the ability to achieve tax-free profits on Opportunity Zone investments that are held at least 10 years.

There is an estimated $6 trillion in unrealized capital gains currently sitting on paper in the U.S. Those dollars have the potential to transform struggling communities and create countless jobs. The sports industry has a chance to play a major role in this process while also realizing significant economic benefits. The opportunity of a lifetime beckons.

Rob Simmelkjaer is an attorney and a former executive and journalist at NBC Sports and ESPN.  In April 2019 he joined CapZone Impact Investments as a Senior Advisor.

Kunal Merchant is Managing Director of Lotus Advisory and Co-Founder of CalOZ, a non-profit trade organization focused on Opportunity Zones.

CalOZ Attends White House OZ Conference

On April 17, CalOZ attended the White House Opportunity Zone Conference & Breakout Sessions with State, Local, Tribal, & Community Leaders. The event coincided with the release of the second round of IRS regulatory guidance regarding OZ fund investments. CalOZ President Kunal Merchant pressed Treasury Security Stephen Mnuchin for details regarding OZ fund metrics and reporting - a critical component to ensuring investments fulfill their intended community purposes.

Former Kings Executive Launches Opportunity Zone Group

The prospect of opportunity zones has generated excitement over the last year, but some developers, funds and communities aren’t sure how to leverage the new tax incentive program. That’s why Kunal Merchant, a former Sacramento Kings executive and aide to former Mayor Kevin Johnson, says he’s launching CalOZ, a new group dedicated to navigating the complicated framework around opportunity zones.

New State Group to Promote Opportunity Zones

A new California organization has been formed to help investors and developers take advantage of federal Opportunity Zones. CalOZ “will promote competitive, equitable and sustainable Opportunity Zone investments in California.”