Carving out opportunity zones

 Investors can delay paying capital gains taxes if they invest long-term in opportunity zones, part of the Tax Cuts and Jobs Act of 2017. Eleven such zones exist in San Jose, including one downtown.  The premise behind opportunity zones, which are located in low-income areas, is to redevelop properties that will create job and housing growth.

A local real estate development group, Urban Catalyst, has a deal with Gary Dillabough’s Urban Community to redevelop the former Lido nightclub site on South First Street into a five-story, 50,000-square-foot office building with retail spaces on the ground floor using opportunity funds.  Preliminary review of the project concept will begin this month, said Joshua Burroughs, senior vice president of development for Urban Catalyst.  

“We are also looking forward to participating in the activation of Fountain Alley,” Burroughs said.

Payment of capital gains taxes on investments into opportunity funds are delayed for 10 years, said Nathan Donato-Weinstein, senior executive analyst with San Jose Office of Economic Development, at the February meeting of the San Jose Downtown Association.  A discount of 15 percent on those taxes is applied after seven years (10 percent after five years). The bigger payoff is that any income generated by the opportunity fund over the life of the investment is not taxed at all, Donato-Weinstein said.

“Anyone with capital gains from stock, business or property can invest in these types of funds,” Burroughs said.  “We are hyper-focused on downtown San Jose, so it would be amazing to have local boosters from our networks here invest in the fund so they can further participate in the revitalization of our downtown core.”

Urban Catalyst expects to announce in coming months more opportunity fund sites in SoFA, Diridon Station area and St. James Park, Burroughs said.  Except for the areas around the convention center, arena and San Pedro Square, most of downtown is included in the zone.

Investors in Urban Catalyst are part of a multi-asset qualified opportunity zone fund, which means investments are diversified over multiple properties and projects.

“The more money raised, the more projects we can invest in downtown,” Burroughs said.  “We are geographically singular, but we are diverse in our properties and product types.”

Urban Catalyst hopes to produce four or five medium-size multi-tenant office buildings for small-  and medium-size businesses, one or two student housing projects, co-living concepts, assisted living / memory care buildings, existing building repositions and a few industrial R&D projects, Burroughs said.