Opportunity has come knocking, and San Antonio investors and real estate developers are not waiting, as the saying goes, to build the door.
Ever since the Tax Cuts and Jobs Act of 2017 created the community development program known as Opportunity Zones, that group, along with contractors, municipalities, and others, have been looking for the U.S. Department of the Treasury to define how the program will work.
The program, intended to encourage long-term investments in low-income urban and rural communities, provides a tax incentive for investors to reinvest their unrealized capital gains into qualified opportunity funds that are invested in designated Opportunity Zones.
With Treasury’s Oct. 19 release of its first set of guidance, which puts specific timing and investment parameters on what will qualify, the clock is ticking.
On Wednesday, Dan Kowalski, counselor to the U.S. Secretary of the Treasury, appeared before a group at Texas A&M-San Antonio, which itself is within a designated Opportunity Zone. As an advisor to the Treasury secretary on the administration’s domestic policy agenda, Kowalski focuses on budget and fiscal policy.
He outlined the rules, responded to the concerns of potential investors, and evaluated different scenarios as they sought to learn what kinds of projects and financing structures are allowable and feasible.
“At Treasury, we work every day to ensure every community in America is able to attain the benefits of economic growth,” Kowalski said. “Opportunity Zones is an important tool in that effort. … We believe Opportunity Zones will be transformational, stimulating economic growth and job creation to revitalize distressed communities and expand prosperity.”
There are 8,176 Opportunity Zones nationwide. They are composed of census tracts that have an average 32 percent poverty rate – 1.7 times higher than the national average – with populations making 37 percent below the area median income.
San Antonio and Bexar County have 24 such census tracts, the second-highest number of Opportunity Zone census tracts of all metropolitan areas in Texas.
The nine Opportunity Zones comprising those tracts are located downtown and on the near West Side, the near and far South Side, the East Side and the Northeast corridor, along with communities in the Port San Antonio/Lackland and Brooks area and much of southern Bexar County.
Kowalski said Treasury officials expect projects in Opportunity Zones will begin happening soon, even as the government continues to develop guidance around the program.
“The investment of realized capital gains in designated Opportunity Zones can qualify for capital gains tax relief,” he said. “The statute requires that the investment of capital occur quickly so that the residents of Opportunity Zones will benefit quickly. The incentive, in our view, is not intended to shelter gains without providing tangible benefits and immediate community impact.”
The program is also designed to spur new business formation and expansion and, thus, create wealth within distressed communities.
“The new and expanded businesses will create jobs, many of which will be held by local residents,” Kowalski said. “Those workers, in turn, will create enhanced markets for housing, groceries, health care, and other businesses that improve quality of life. And that will lead to further investment. This cycle will help many of the 35 million residents of Opportunity Zones achieve prosperity.”
Wednesday’s program was sponsored by U.S. Rep. Will Hurd (R-Helotes). “Now that we have the actual language that goes into a level of detail, people can start taking advantage of this opportunity,” said Hurd, who has an office on the Texas A&M-San Antonio campus. With all 700 acres of the 9-year-old school located within an Opportunity Zone, he said, a project that could qualify would be on-campus housing.
“That’s the perfect example of what an Opportunity Zone can do and how it can help with the growth of Texas A&M-San Antonio,” he said. “I think we can see Texas A&M-San Antonio grow to the size and stature of UTSA in a fraction of the time.”
But the projects that could be built or capitalized range far and wide – from affordable housing to luxury hotels.
“We think Opportunity Zones will be a major success story to tell,” Kowalski said. “They are a natural fit for affordable housing and mixed-use development. These projects could include amenities like retail, restaurants, hotels, and event space that’s not necessarily available in these communities.”
He said Opportunity Zones also are well-suited to industrial projects, offices, and warehouse space, especially because many are close to interstates, river crossings, and rail corridors.
“I was even talking with someone a week or so ago who wants to use Opportunity Zones for indoor farming,” Kowalski said.
“If we have a project that happens to be in a zone, we’re certainly going to try to make the effort to figure it out,” said AREA Real Estate Principal David Adelman, a downtown developer who moderated the event. Asked if he thought the program was a good thing for San Antonio, Adelman said he felt it was, but to what extent is still unknown.
Adelman said that a project best suited for an Opportunity Zone is one that needs an economic boost to push it over the line, making it a good deal for investors. “It’s trying to find the sweet spot … and sometimes it’s not easy.”
The City of San Antonio Economic Development Department (EDD) is working to create a list that aligns with the city’s needs and goals and developing a website with more information for investors and developers.
“One thing we’re looking to do is gather input in the Opportunity Zone areas, find out what are the existing assets, what are some potential projects, and what projects are seeking capital, and we will be working on that in the coming months,” said Sarah Esserlieu, interim special projects manager at the EDD.
“With an influx of potential investment coming to San Antonio, we want to be sure that the investments that are coming are in line with community and city goals … and that has a real and tangible community benefit.”