Distressed and developing areas across the city of San Antonio might soon see a surge of new capital investment under a provision of the most recent tax overhaul.
The City of San Antonio has created a list of projects that could be developed in what are called Opportunity Zones, the federal government’s new community development tax incentive program, and is preparing public information workshops and an online information portal for interested investors and the public.
“There is a lot of excitement around this program,” said Mike Etienne, director of the EastPoint/Promise Zone neighborhood revitalization initiative, who is managing the program for the City. “We’ve received numerous calls from investors who are interested in investing in the East Side, in the Westside, in the World Heritage area, and downtown.”
Under the Opportunity Zones program, private investors can reduce their federal tax liability on capital gains if they invest in other businesses, real estate, and commercial development within opportunity zones.
To be eligible for Opportunity Zone designation, census tracts must have a poverty rate of at least 20 percent and a median family income less than 80 percent of the area’s median income. San Antonio and Bexar County has the second highest number of Opportunity Zone tracts – 24 – of all metropolitan areas in the state.
The nine Opportunity Zones include several census tracts in almost every council district and area of the county, including downtown, the near West Side, near and far South sides, the East Side, Northeast corridor, a southeast area of Bexar County, and the Port San Antonio/Lackland and Brooks area communities.
The Opportunity Zone concept was introduced by a bipartisan public policy firm and created by the federal Tax Cuts and Jobs Act of 2017 to encourage businesses to develop and invest in low-income communities.
After the new tax code was enacted in December, the U.S. Department of the Treasury gave state governors 90 days to designate up to 25 percent of eligible census tracts in their states as Opportunity Zones for a 10-year period. Texas has 5,265 census tracts, and of the 2,510 eligible tracts, Gov. Greg Abbott chose a total of 628.
In all, the Treasury Department certified 8,762 Opportunity Zones in the United States. The Houston metropolitan area has the most in Texas with 150.
“As we continue to recover after [Hurricane] Harvey, these Opportunity Zone designations will also provide a much-needed boost for local communities impacted by the storm,” Abbott stated in an announcement made in March. “With the potential for billions in new investment, I look forward to our state continuing to flourish, bringing further growth and opportunity to the people of Texas.”
The City has been meeting with stakeholder groups in the zones to raise awareness about the program and its benefits, and to identify good redevelopment projects that will be pitched to investors, Etienne said.
Etienne said that potential investors and developers are waiting for the program guidelines to be released by the Treasury Department and Internal Revenue Service before making any moves.
The IRS is currently working on specific guidance for how the program will work for investors and the types of projects that will be eligible. That guidance is expected sometime this summer. In the meantime, the IRS has published a list of frequently asked questions to its website.
Some details are already known, however. Investors must invest their capital gains in the Opportunity Zones through Opportunity Funds. O-Funds are a new class of investment vehicle meant to spur economic development in distressed areas by providing investors with certain tax benefits. Investors could be motivated to invest because they can defer and reduce capital gains taxes by rolling investment earnings into O-Funds instead of into traditional stock portfolios.
Designating zones for economic stimulus is nothing new for the City. San Antonio was one of several U.S. cities designated an Empowerment Zone by the U.S. Department of Housing and Urban Development in 2002. That designation allowed businesses to receive wage credits, deductions, capital gains incentives, and bond financing to help stimulate investment and job creation.
In 2014, the poverty-plagued East Side of San Antonio was named a Promise Zone. Though the designation does not provide federal funding, it brings to the area preferred access or extra points on various federal funding streams as well as some business hiring tax credits and incentives.
“We think the Opportunity Zone program will further the momentum we see happening in the Promise Zone because it will bring more capital to the East Side, so that’s exciting for us because we have great momentum right now,” Etienne said. “I toured [the area] and we have development happening in just about every corner. So with this Opportunity Zone program, that will bring more investment to continue the momentum we are seeing.”
In the meantime, the program is starting to feel “like designing a plane mid-flight,” said Jackie Gorman, CEO of San Antonio for Growth on the Eastside (SAGE). “The program is still nebulous. So it’s hard to say how it’s going to impact the East Side or anywhere else. Just because we’ve got areas identified, that doesn’t mean it will attract an investment. There are two pieces to this. You still have to have a project that will attract an investor.”
By contrast, she said, with the federal New Markets Tax Credit program, which attracts private capital into low-income communities by allowing investors to receive a tax credit, the rules are clear and the kinds of investment opportunities eligible are known.
When IRS guidelines for the Opportunity Zone program become available, the City will post information on upcoming workshops and potential projects here.