Opportunity Zones have potential to bring investment, jobs to Clark County

In the meantime, the developers of the AC Hotel project are eager to get started, and held the project’s first investor meeting in February. A room full of potential investors gathered at WareHouse ’23 to hear the pitch for the 150-room hotel.

Rick Takach, CEO of the hotel’s developer Vesta Hospitality, kicked things off by outlining a number of factors to sell the project as a strong investment: the prime location, the Marriott affiliation, the involvement of the port and the booming Waterfront Vancouver development just down the street.

“We know this market cold,” he said to an audience of about 30 potential investors in the room, plus more who had tuned in to a livestream of the meeting.

From there he turned things over to staff from the financial firm Fairway America, which is partnering with Vesta to create the Vesta Opportunity Zone 1. The fund is expected to provide about a third of the project’s financing, with the remainder coming from construction loans.

Since the Opportunity Zone program is just a few months old, Fairway General Counsel Jay Zollinger said he’d been asked to begin his presentation with a 10-minute overview of the program.

“That is, frankly, an impossible task,” he said. “No one really fully understands the program because the IRS is still ironing out the bugs.”

Still, he made a valiant effort.

The program was created in 2017 as part of the federal Tax Cuts and Jobs Act, and is intended to help attract investments and spur development in low-income, neglected areas. It allows for the creation of investment Opportunity Funds, which must be spent on projects and investments within a designated zone. In exchange, investors who purchase units of membership in the funds get access to several benefits.

“The pitch regarding the Opportunity Zone is that investors are able to sell any type of asset and defer the capital gains taxes they would have otherwise paid on those assets if they invest it,” says Darris Cassidy, a partner at Fairway America. “For certain investors, that’s very appealing.”

If investors keep their money in the fund for five years, they can avoid paying taxes on 10 percent of the gains that they invested. After seven years, the tax exclusion rises to 15 percent of the gain. And if they maintain the investment for at least 10 years, they can avoid paying any taxes on capital gains earned from the fund.

Several of the AC Marriott’s potential investors pressed Zollinger and Cassidy about the specifics of the opportunity zone fund, and about whether any of the unresolved IRS bugs could impact the hotel project.

Zollinger said that the Vesta fund is intended to be a “middle-of-the-road” type of project that easily fits within the criteria of the zone to avoid any future changes. Some of the rules for multiproject funds are still being hammered out, Zollinger said, which is why Vesta and Fairway opted for a single-project fund for the hotel.

Clark County’s zones

The Opportunity Zones were all chosen in a state-level process that played out last year. Up to 25 percent of each state’s low-income census tracts were able to be designated as Opportunity Zones. That formula allowed Washington Gov. Jay Inslee to designate 139 zones.

“Low income tracts” were defined as tracts with a poverty rate greater than 20 percent. In order to be nominated as a zone, each tract needed to either be low-income or contiguous with a qualified low-income tract.

Washington’s Department of Commerce allocated the tracts into pools: each county and federally recognized tribe would be able to choose a certain number of “set aside” tracts that would be guaranteed for approval, and the remainder of the 139 tracts would be chosen through a competitive process in which municipal governments and organizations could nominate candidates.

Clark County was allotted four guaranteed tracts. The Columbia River Economic Development Council took the lead on the selection process, working with an ad-hoc committee of staff at the county, the cities and local agencies such as the ports and the Camas-Washougal Economic Development Association to determine the county’s roster.

“We probably looked at upwards of seven, eight or nine census tracts when we were first given the task,” said John Collum, Vancouver economic development principal planner. “We spent probably a month here internally, looking at various tracts.”

All of Clark County’s qualified tracts ended up being located in urban areas, and there were no qualified tracts in Ridgefield, Camas or Battle Ground, according to Port of Vancouver Economic Development Director Mike Bomar, who was the president of the CREDC during the selection process. Some of Vancouver’s census tracts were automatically ruled out by the low income criteria, but the city still could choose from more than 20 qualified tracts, according to Department of Commerce records.

“Lower income areas are usually the urban areas, the central districts,” Collum said. “We still need jobs and we still need affordable housing. It goes back to kind of basic economic development 101.”

The committee narrowed the list by focusing on tracts where an Opportunity Zone designation could supplement existing efforts to assist economically distressed communities by bringing in new businesses and jobs, as well as looking for tracts with high redevelopment and business expansion potential.

“First and foremost, where was the highest need? Where could we do the most good?” said Bomar. “The (Vancouver) waterfront is doing better than it was in 2015, we assume, and has a high probability of investment.”

Downtown Vancouver and Fourth Plain emerged as the strongest candidate areas, Collum said. The committee chose the two downtown Vancouver zones for guaranteed slots, according to Bomar, and Collum said the city chose to nominate only two competitive entries in order to avoid “competing with itself.” The Fourth Plain area was chosen for the competitive process because it appeared to be the best fit for the Opportunity Zone criteria. The Tower Heights area was also considered, Collum said, but the planners decided the Fourth Plain and downtown sites stood to benefit more.

The city opted to submit two zones at either end of the Fourth Plain corridor in order to balance concerns about gentrification in the area and keep the focus on the most business-oriented areas.

“(The tracts in between) were a bit more residential in nature than commercial,” Collum said.

The selection process for Washougal was more straightforward because only two of the area’s tracts met the Opportunity Zone criteria. One of the city’s downtown tracts was selected in the competitive process, and another tract on Port of Camas-Washougal industrial land was chosen for a guaranteed slot.

“We actually did very well through that process,” said CWEDA president Paul Dennis.

The final guaranteed slot went to a tract in the Hazel Dell area of unincorporated Clark County, in order to spur development along the Highway 99 commercial corridor.

Only one of Clark County’s nominated tracts was rejected: a large industrial tract centered on the Fruit Valley and Vancouver Lake areas, which was nominated by the Port of Vancouver.

“We didn’t get the port’s industrial area, which is frustrating,” Bomar said, “but in terms of designated tracts per county, we did really well.”

There is one quirk in the selection process, Collum noted: many economic development corridors are located along major roads, but those roads often serve as the dividing lines between census tracts. As a result, there are several tracts that don’t quite line up with their intended economic zones; in the Uptown Neighborhood, for example, the east side of Main Street is an Opportunity Zone, but the west side is not.

Next steps

The announcement of the AC Hotel fund came several months after the initial announcement of Clark County’s Opportunity Zones, and Vancouver City Councilor Bill Turlay brought up the lull at a council work session last week.

“It seemed like some time ago there was a big fanfare about that,” he said, “and I didn’t hear anything for quite a while.”

Richard Keller and economic development director Chad Eiken offered a brief update on the rollout process, and Keller said he expected the AC Hotel to be the first of many projects to take advantage of the zones.

“Anyone who does a project within our opportunity zones — which is two thirds of downtown Vancouver — is going to declare it an Opportunity Zone project, because there’s no downside to it,” he said.

The delay has been caused in part because financial groups are awaiting the final round of guidance for the program from the IRS, he said.

“A year ago there was nothing, and now there are all kinds of funds,” Keller said. “The final rules are supposed to come out in the first half of this year, maybe even sooner, in the next few months. At that point when things are solidified, you’ll start to hear a lot more about it.”

In the meantime, according to Collum, Vancouver is working on an Opportunity Zone prospectus document that can be distributed to potential downtown developers. The city won’t create or administer Opportunity Zone funds, Collum said, but intends to help market the zones and provide information to interested parties.

“Our focus has been on the prospectus,” Collum said. “I think we see our role as being a supporter.”