What started as a needle in a haystack, two pages in the enormous 2017 Tax Cut and Jobs Act Law, has now burgeoned into an industry within the Commercial Real Estate community. The municipalities that have been left behind in the latest economic expansion are finally seeing investment funnel their way. Those two pages gave the framework for the most talked about subject in real estate investment of our time: The Opportunity Zone.
The Opportunity Zone tax benefits are as follows: When you sell anything that triggers a capital gain you can purchase a property or business and defer the tax on the capital gain. Your gain will be reduced by 10% if you hold the Qualified Opportunity Zone property or business for five years, and 15% if you hold it for at least seven years. Additionally, if you hold the Qualified Opportunity Zone property or business for 10 years or more you will have no Capital gains tax on the appreciated value of the asset when you sell it!!
The first round of regulations was published in November of 2018 and focused on real estate investments as the policy makers thought real estate could provide an immediate impact. And they were right. The Opportunity Zone regulations have evolved since then with the second round, published in April 2019, which dramatically eased restrictions on the properties that qualify and further helped define a Qualified Opportunity Zone business. This truly surprised, in a great way, all investors and business owners in the space.
For those of us in California, there were investors hesitant to invest due to the mindset that CA was not going to conform with the Federal Law. Fiona Ma attended the first OZ Expo in Los Angeles in January of this year and assured the crowd the governor was adamant about changing the perception that California is not business-friendly; which was greeted with applause from the crowd. Moreover, the latest revisions to the California budget, not only conform to the Federal Law, they are looking to layer their own provisions to further investment in the Opportunity Zones. This will help afford-able housing and green technology projects get off the ground. The bipartisan support of the Opportunity Zone provision gives great confidence to everyone that the Opportunity Zone is here to stay.
Members of the Lee & Associates Office Advisory Group, Marshal Vogt and Matt Orville, joined Caribou Industries’ pioneer, Michael F. Harrah (the largest landlord in Santa Ana with over 5 million square feet) on a trip to D.C. to meet with the White House Office to confirm the projects he has been working on in Santa Ana over the past two decades do conform (See Michael F. Harrah, Southern California Opportunity Zone major development collection overview site plan) to all Opportunity Zones regulations. “THE ONE,” which will be detailed further in this article, not only conformed to the regulations, the White House labeled the project, “the poster child of the Opportunity Zone initiative nationwide.”
All in attendance were elated to see a project of such magnitude with permits shovel-ready to provide the beacon for the initiative nationwide.
At the meeting, the White House confirmed the regulations are not going to get tighter, as they do not want to pull the rug out on developers and businesses currently working through the current regulations. In speaking with the Treasury Department and the Executive Office of the White House, it was understood very clearly that they only want to bring more properties and businesses that are currently on the fringe of qualifying into compliance. Comments are due July 9th and the Treasury Department along with the Policy heads of the Executive Office of the White House will consider all the comments.
MORE ABOUT THE ONE
The poster child of the Opportunity Zone Initiative nationwide is “THE ONE”, a shovel-ready project that will be an iconic world class landmark, 37-story superstructure, LEED-certified Class A office mixed use development. This building will feature a rooftop VIP heliport, two alfresco first-class restaurants just below the heliport at 500’ above the ground, and a 550-seat live entertainment presentation theater. The urban core of Orange County is once again going to flourish in Santa Ana as the Capital City of Orange County. All the small businesses in the area are optimistic knowing that when “THE ONE” is completed in 30 months, all ships will rise with the rising tide.
“THE ONE” could only take off with the perseverance of the owner/contractor/developer Michael F. Harrah, who has worked on permitting, CEQA and EIR approvals for over the last 17 years and has spent over $150 million in the process. Couple this with the Opportunity Zone initiative, which is providing the fuel through incentives to wealthy investors, those looking to diversify out of the stock market, and opportunity funds looking for iconic projects that will provide a return to everyone involved and the surrounding community.
“THE ONE” is 614,000 leasable square feet. The Office Advisory Group of Lee & Associates-Orange is the exclusive leasing agent for the building. There has been great interest in leasing space in the most iconic building in the history of Orange County. Companies that have always looked to Silicon Valley, Silicon Beach, Los Angeles or San Diego now have an option in Orange County, the 4th largest county in the US. These companies require an urban core feel, abundant amenities and access to public transportation for their workforce at a substantially lower price than competitive markets.
Public transportation is unparalleled at “THE ONE” and makes this a true Transit Oriented Development (TOD). OCTA/Fed recently funded a $500 million light rail connecting the cities of Santa Ana and Garden Grove. “THE ONE” front doors will be two light rail stops from the Metro Link and Amtrak station allowing tenants to hire in Los Angeles, San Diego and Orange Counties and still have a traffic-free commute to the office.
The light rail will connect “THE ONE” with another highly innovative project owned by Harrah, The 625IVE. The 625IVE is the prior OC Register major newspaper printing press plant (since 1908) site. It sits on 20 acres adjacent to the Amtrak and 5 freeway. The total scope of this project will have two 40 story high-rise mix-use towers, 1,200 work force apartment units, a hotel, a 22-story office tower and mixed-use retail to provide amenities to the urban campus, the ultimate urban mixed-use mini-city in Southern California.
Tenants leasing at “THE ONE” now have their housing issues answered. 888 Main is the very first adaptive re-use project in the city of Santa Ana. 888 Main was a 110,000 sf 10-story office building and Harrah is currently adapting the building into a 148-unit world class work force apartment complex with 13’6” ceilings, modern finishes, ocean views on the upper floors, a gym, coffee shop, and live-work concepts on the first two floors. 888 Main will be the coolest spot to live in Orange County and draw in a younger, professional crowd to the local retailers during the evenings and week-ends. As an added benefit, the most recent regulations state that vacant buildings circumvent the substantial completion requirement for a Qualified Opportunity Zone property.
Opportunity Zones are here to stay. The ultra-chic Santa Ana urban community is ready to reap the benefits of the new Opportunity Zone initiative and the steadfast, pioneering spirt of Michael F. Harrah.
For more information on Opportunity Zones or the projects mentioned, reach out to Matt Orville, Principal, Lee & Associates – Orange at morville@ lee-associates.com.