Downtowns, Main Streets and city centers across the country are witnessing a renaissance. As more Americans and workers choose the convenience and connectivity of walkable neighborhoods, communities are seeing new businesses, restaurants, and shops open in areas that were formerly vacant or economically distressed. This movement presents an economic opportunity for communities, investors, and companies alike.
Welcome to the Opportunity Zone, which gives both individuals and corporations the chance to re-invest existing capital gains into Qualified Opportunity Zone Funds in order to receive tax breaks for helping fund investment in impoverished areas. The mission for some of these zones is to create a sense of cohesive community in an always changing and developing cityscape.
Opportunity Zones (OZs) have become a critical tool in the future development and revitalization of cities. According to the The Rockefeller Foundation, OZs “have the potential to become the largest community development program in our nation’s history.”
Such is the case in San Diego, which is listed as one of the top 10 OZs in the U.S. San Diego actually has 35 census tracts designated as OZs by the U.S. Department of Treasury because of their poverty, business activity, and geographic diversity. Investors who build in opportunity zones get a tax discount after five or seven years and ultimately pay no taxes on capital gains after 10 years.
One of San Diego’s OZs that has been getting a lot of attention lately is East Village downtown. Nestled in the midst of this zone is 1155 Island, which is being rebranded from a law school to a tech-friendly cultural space. Built in 2011, the building, formerly the Thomas Jefferson School of Law, is a185,000 square foot, eight-story, Class A LEED Gold office property. Owned by Miller Global Properties and Barings Real Estate, the building is considered one of the highest quality office properties in downtown San Diego with outstanding ceiling heights, floor-to-ceiling glass, functional floor plates ranging from 20,000 square feet to 28,000 square feet, and a fully finished restaurant space on the ground floor.
One of the cool things about 1155 Island is that it’s located in the heart of downtown across from Petco Park. This area is also becoming a commercial hot spot and a hub of exciting and innovative development, and with the opportunities of the OZ, will have an even bigger impact in the community’s growth.
“The building is located in the ‘BallPark District’ of East Village, which is the most exciting neighborhood in downtown,” said Lindsey Giacchino, Senior VP, Acquisitions and Asset Management for Miller Global.
Giacchino said the building has been re-imaged to attract startups, tech, biotech and fintech companies. “The building was a build-a-suit for a school and was built for high-occupancy use, which makes it extremely unique in that the restroom counts, stairs, and elevator capacity at the building are perfect for tenants that want density,” she said. “The ceiling heights on the lower floors range from 18-to-20 feet and the upper floors range from 14-to-16 feet, with full floor-to-ceiling glass, so the space is light and bright and has tons of volume. The building also has over 13,000 square feet of outdoor decks, providing great indoor/outdoor work environments.”
“The great thing about 1155 Island is that the density we have is appealing to multiple clients looking to add efficiency in their workplace,” she added. “Tech obviously is a natural fit because most of those users want cool, creative space that offers density for their open plans, and 1155 Island does that well.”
Extensive renovations have been made to 1155 Island, including completely demolishing all the former law school’s interior finishes; the entire building is now a warm shell and ready for tenant improvements.
“We also demolished a three-story staircase in the lobby, filled in the floors, and created an inviting new lobby that features an indoor/outdoor living room with full height sliding doors onto the upgraded patio that will be shared with our new restaurant tenant, Callie (opening in Spring 2020),” Giacchino said. “The living room and outdoor patio is liquor licensed by Callie, and tenants can enjoy the breakout space as another extension of the workplace.
As San Diego continues to grow its innovation and entrepreneurial roots, creative companies will continue to expand their urban footprint. In fact, San Diego was recently named a top growth area for high-tech jobs.
“What is appealing about the San Diego market is that it has been one of the last to recover from this latest cycle, so we felt the market has room to grow and new construction has been limited, especially compared to other markets,” Giacchino said. “Add in San Diego’s ability to recruit and retain employees because of the lifestyle, and the real question of why we invested in this market is “why not?!’”
In terms of the city’s and downtown’s burgeoning startup and tech scene, Giacchino believes it’s “a testament to the universities as well as the city of San Diego that they have been able to recruit and retain tech talent. That is the key driver of why companies want to be in San Diego and I think it’s great for the city.”
Phil Jelsma, Partner at San Diego-based Crosbie Gliner Schiffman Southard & Swanson LLP agreed. In fact, he said OZs have helped attract more capital to communities like East Village, transforming them into more desirable places to live, work and play.
“I think we have already seen an increase in property values in Opportunity Zones and over time more businesses are realizing they can obtain some of these benefits by opening or relocating in Opportunity Zones,” he said.
For East Village, he said the benefits of investing in this area include proximity to downtown, Gaslamp Quarter, public transportation and, of course, the ballpark.
“We are already seeing the flow of capital into East Village,” said Jelsma, an expert in OZs.
So, what benefits do companies have in moving to East Village and 1155 Island? He breaks it down by the numbers.
“Equity invested in Opportunity Zone businesses is entitled to deferral of federal capital gains until December 31, 2026. If the funds are invested this year, 15% of the federal capital gain is forgiven and ten percent is forgiven if invested in 2020 or 2021. If the equity is in a Qualified Opportunity Zone Fund for at least 10 years, there is no federal capital gains tax on the sale of the business in the Opportunity Zone or on the sale of the interest in the Qualified Opportunity Zone Fund.”
Those who invest in an Opportunity Zone business through a Qualified Opportunity Fund also get the same benefit as real estate investors, which is deferral of capital gains and excluding the gain on the Opportunity Zone business if held for 10 years, but no tax credit.
Due to the incredible tax incentives and revitalization of downtown, including in East village, Jelsma said he expects to see more investors and companies invest in San Diego OZs. He also believes OZs will help further fuel downtown San Diego’s tech and startup scene.
“Opportunity Zones attract new capital to improve existing real estate and help to promote jobs growth,” he said. “Those new jobs will bring employees who want to live close to where they work.”
Editor’s Note: Home Brew is original content created by Fresh Brewed Tech that showcases the cool and creative spaces that San Diego’s innovative companies call home. This is where the magic happens.