The North Bay Business Journal - July 22, 2019

Santa Rosa project tests new opportunity zones

By JEFF QUACKENBUSH North Bay Business Journal

A four-story mixed-use building under construction in central Santa Rosa is on the leading edge of a new way to attract investors to projects in California and nationwide in economically challenged areas.

A local funder of Hugh Futrell Corporation’s Art House project at Seventh and Riley streets used an investment vehicle that rolled out with the 2017 federal Tax Cuts and Jobs Act and recently has come to fruition in Cailfornia and other states. The midrise building is in one of 879 qualified opportunity zones in California, including 21 in the NorthBay, designated by Treasury Department in April 2018.

The Internal Revenue Service only this past April released guidelines on how qualified opportunity funds for tax-deferred investment in those zones would work. That regulatory clarity seems to be generating activity.

“Our office is aware of numerous projects which are in process in the Northern California region,” wrote a spokeswoman for the Governor’s Office of Business and Economic Development in an email to the Business Journal. Because no mandatory reporting is required, a detailed look at activity by such funds remains anecdotal, she wrote. Altus Equity Group, a Rohnert Parkbased alternative asset investment firm, raised $4 million toward the $11 million Art House project via a qualified opportunity fund. While the tax deferral and exclusion provisions for zone investment were a draw for equity capital to the project, they weren’t for all the investors involved, according to Forrest Jinks, president and general partner.

“The benefit for the opportunity fund is for people that invest gains,” Jinks said.

Altus structured the Art House money as asingle-asset fund, similar to the firm’s other plays outside of opportunity zones. But the project’s location inside a zone attracted Altus to an asset it normally would pass on: riskier ground-up development versus existing properties with cash flow.

“The tax benefit is not enough to go into a project that wouldn’t make any sense otherwise,” Jinks said. The firm’s tax consultant, Moss Adams, pointed to potential for a 3% boost to internal rate of return on investments in zones. So that could be enough to push a project into Altus’ investment growth target.

He noted that two other properties in Santa Rosa’s opportunity zones are being positioned as targets for opportunity funds, and Altus is consulting on one of them.

“It just needs higher rents,” Jinks said. With construction, land and financing interest rates what they are, the goal is to get the projected investor equity returns up a couple of percentage points to make a potential deal attractive. Other options include more solid lease terms or a tenant with better credit.

“Any project, including this one, must stand on its own, regardless of tax advantages,” wrote Art House developer Hugh Futrell to the Business Journal.