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How a Trump program could spur a new wave of Bay Area development

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Dozens of low-income neighborhoods across the Bay Area are bracing for a potential rush of new development after being marked as “opportunity zones” — a new federal designation that suddenly makes them prime targets for investors but also opens them up to gentrification and worries of rising rent prices.

President Donald Trump’s 2017 tax law offers significant tax breaks to investors who fund a new development or new business in designated low-income neighborhoods, including most of downtown San Jose, large swaths of West and East Oakland and San Francisco’s Hunter’s Point and the Outer Mission. The rules around the program have taken shape in recent months, and interested investors and developers are lining up, setting the stage for a possible building boom.

“There’s going to be so many people looking to make things happen in these areas that they’re going to find that projects that never would have been done will be done,” said developer Erik Hayden, president of Urban Catalyst, which launched earlier this year with the specific purpose of building in opportunity zones. Hayden’s team already is planning six projects in downtown San Jose.

Under the new program, investors can avoid paying federal capital gains taxes for seven years if they invest in an “opportunity fund,” which backs projects in the newly created zones. If they invest this year, they’ll pay 15 percent less tax at the end of that seven-year period. And if they hold onto the opportunity zone investment for 10 years, they’ll pay no tax on the profit. Gov. Gavin Newsom has proposed adding additional state tax incentives for investments in opportunity zones.

To qualify as an opportunity zone, a neighborhood must have a poverty rate of at least 20 percent or a median family income that doesn’t exceed 80 percent of the regional or statewide median income. Using that criteria, California officials selected nearly 900 of the state’s roughly 8,000 census tracts for the program.

The goal is to spur job growth and economic opportunities in disenfranchised areas that developers tend to overlook. But critics worry the program instead may drive up rents in low-income neighborhoods and push poor residents out. The program doesn’t require developers to build affordable housing or provide any other safeguards against displacement.

“What I’m afraid of is the watering down of Black culture and legacy in East Oakland,” said Marquita Price, urban and regional planning officer for The East Oakland Collective, a civic engagement, economic empowerment and homelessness services organization.

Price is exploring how her community can start its own opportunity fund and use the federal tax breaks to bring affordable housing and other needed amenities to East Oakland.

In San Jose, 11 census tracts are designated opportunity zones, including most of downtown, North San Jose, East San Jose and Little Portugal. The per capita income of residents inside those zones is $30,151, compared to $40,275 in the city at large, according to the San Jose Office of Economic Development. And 67 percent of residents in San Jose opportunity zones are renters, compared to 43 percent in the entire city.

There’s evidence the federal program already is pushing real estate prices up. The average sales price of a home in an opportunity zone rose 25 percent this year over the year before, according to a nation-wide Zillow analysis. By contrast, the average sale price rose just 8 percent in low-income neighborhoods that were eligible for opportunity zone status but were not selected.

Several neighborhoods included in the federal program were gentrifying even before they were deemed opportunity zones, leaving some to wonder if they need the tax incentives. The Ice House — a large condo development going up in West Oakland — is in an opportunity zone, for example. So is a South Berkeley neighborhood blocks from the UC Berkeley campus. Zillow listed that Berkeley neighborhood as one of the nation’s most attractive zones for development under the federal program, saying median home prices there rose more than $300,000 in the three years before it was dubbed an opportunity zone.

But Cynthia Parker, president and CEO of nonprofit affordable housing developer BRIDGE Housing, is hopeful the federal program will help the Bay Area’s poor by making it easier to build low-income housing. Cities struggle to get enough affordable housing built in part because it’s so expensive to build, and it doesn’t provide the profits that market-rate housing does. It can cost close to $600,000 to build one unit of affordable housing, and it can take up to 14 different funding sources to get one project off the ground, Parker said. The new tax breaks could help BRIDGE fill its funding gaps, she said. BRIDGE already is working on about 20 projects in opportunity zones in Oakland, San Jose, San Francisco, Oregon and Washington.

“We’re very excited about it,” Parker said.

In San Jose, where officials say high building costs are preventing them from meeting their housing production goals, staff are doing their best to lure investors into their opportunity zone neighborhoods. The city’s Office of Economic Development held a workshop in February to teach the community about the tax incentives, and dozens of investors, nonprofits, officials and others from around the Bay Area showed up. City staff also put together a flashy brochure explaining how opportunity zones work, and providing information about the San Jose neighborhoods that qualify.

Urban Catalyst has submitted preliminary paperwork with the city to get its first opportunity zone building approved — a six-story office and retail development on South First Street in downtown San Jose dubbed the Fountain Alley Building. The company has five other downtown buildings planned, some of which will be residential and include housing for students and seniors.

It’s all because of the opportunity zones, Hayden said.

“Would I be focused so much on downtown San Jose if it wasn’t for the opportunity zones?” he asked. “The answer’s probably not.”

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©2019 the San Jose Mercury News (San Jose, Calif.)

Visit the San Jose Mercury News (San Jose, Calif.) at www.mercurynews.com

Distributed by Tribune Content Agency, LLC.

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