By Opportunity Zone Magazine Staff

California Gov. Gavin Newsom has unveiled a plan to bring his state’s laws into conformity with the federal Opportunity Zone program — but some industry-watchers say they want his proposal to be less restrictive to drive more OZ investors to the golden state.

Gov. Newsom’s budget proposal proposes establishing conformity with the federal OZ program — but only for investments made through newly created California Opportunity Funds. To qualify, funds would be required to invest in clean energy or affordable housing projects based wholly in California.

Gov. Newsom argues that the conformity proposal does enough to open California for OZ investment, while ensuring that capital is deployed where it’s most needed.

“These conformity provisions are expected to generate $200 million in 2018-19, $1.7 billion in 2019-20, and then about $1.4 billion annually on an ongoing basis,” Newsom’s report predicts.

The proposed approach to conformity could also help reduce the potential for displacement of Opportunity Zones’ existing residents as investors move in, argues Novogradac partner Kevin Wilson.

“California is in a strong position to address these concerns by ... providing ‘guardrails’ to ensure that the investments that qualify for the state OZ incentive adhere to certain standards,” Wilson writes.

The proposal could exclude some planned projects and stifle California’s nascent OZ sector, said Kunal Merchant, co-founder of nonprofit industry group CalOZ.

“This is the beginning of a brand-new marketplace, and in the last few months we’ve seen an incredible diversity of ideas,” Merchant says. “Why would you close that door before it has chance to open?”

The new proposal would cap total investment at $5 billion, allocated to funds by the state’s Franchise Tax Board in amounts of up to $100 million on a first-come, first-served basis. The Governor’s Office of Business and Economic Development would play a supervisory role and would vet requested allocations in excess of $100 million.

That process would increase red tape and place California’s OZ system out of reach for small investors and developers, Merchant said. More than 40 states have already conformed with the federal OZ framework, mostly in a far less restrictive way, he points out.

“Investors are going to be looking to place their Opportunity Zone dollars elsewhere,” he predicts. “If you add more complexity, you make it harder and harder for people to pursue projects.”

Gov. Newsom can revise the plan ahead of the June 15 budget deadline, with the mayors of 13 of California’s largest cities co-signing a letter urging him to allow their communities to create customized OZ-eligible categories. That would allow municipalities to attract grocery stores into food deserts, promote transit-friendly housing, and spur the installation of rural broadband, they argue.

“There are many worthy projects that our unique communities are eager to see happen,” the mayors write.

Merchant says policymakers are open to revising the conformity framework, but points out there isn’t much time left.

“People need to be calling and emailing everyone they know with the simple message: This is an important program that’s trying to address the most important economic issues of our time, and we need to give it a chance,” he says.