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Downtown Napa Is An Opportunity Zone. How It Got That Way Remains A Touchy Subject

In 2018, the list of those surprised by downtown Napa's new opportunity zone status included Jill Techel, the city's longtime mayor, who said she learned of the program while attending a U.S. Mayor’s Conference session on economic development.

“I said, ‘Wow, that’s really interesting,’” Techel told Bisnow in an interview. “And they said, ‘Look here, Jill. You have two.’ And that’s really how I found out about it.”

It comes as a surprise to many that Napa, a region long associated with wine and various types of epicurean opulence, is benefiting from the federal government's Opportunity Zone program, which when passed into law by the Tax Cuts and Jobs Act of 2017, was supposed to jump-start economically distressed communities by giving investors tax breaks to develop there.

Downtown Napa

Synonymous with some of the best wine in the world, Napa County has a median home price of about $700K, well above the $226K national figure, and a median household income of $84.7K, which easily eclipses the national figure of $63.1K. Various metrics were used to determine which neighborhoods may qualify for the OZ program's official designation, which was awarded in 2018.

Nonetheless, the area also has two opportunity zones, both of which are in the city of Napa and separated by about a mile. One is in the city’s western half, on that side of Highway 29, while the other encompasses much of the city’s downtown.

Whether Napa’s opportunity zone status is consistent with the tax program’s explicit goal of uplifting federally defined low-income census tracts is a matter of debate, but participants involved in attracting the program's notice say the designations themselves were no accident.

Of California’s 3,516 federally defined low-income census tracts, the state could nominate 25%, or 879, for opportunity zone designation in 2018. The selection process was led by the state’s Department of Finance, which proposed an initial list of 798 census tracts, the release of which was followed by two weeks of public comment and eventual nomination of all 879 tracts in the spring of 2018.

Several critics of the decisions say that the state's reasoning in 2018 that designated downtown Napa as one of the county’s two opportunity zone selections, when 16 tracts were eligible, is flawed, and raises serious questions about misuse of the program.

The tract’s median family income was less than 80% of the metro area’s median family income, but its poverty rate was a relatively low 10.3%, according to Urban Institute Senior Fellow Brett Theodos. Using data on multifamily, single-family, small-business and commercial real estate lending, Theodos said downtown Napa ranks in the top 10% for capital inflows among the state’s over 3,500 qualifying low-income communities.

“The statute allowed too many places to be eligible. A place that has 10% poverty, I think, likely, should not have been eligible in the first place,” he said. “Even apart from that, it should not have been picked by the governor.”

In Napa County, two tracts initially proposed were replaced in favor of the two now designated. Records of the public comment period provided by the Department of Finance show a recommendation by Metropolitan Transportation Commission Principal Planner Vikrant Sood that the original two tracts, one of which is a tract on the southern outskirts of Napa city, be replaced by the two eventually nominated by then-Gov. Jerry Brown.

A government agency leading transportation planning and financing in the Bay Area, the MTC identifies Communities of Concern using various criteria including level of English proficiency, income levels, number of rent-burdened households and percentage of minorities, based on the American Community Survey by the Census Bureau.

In the downtown Napa tract, about 3% of residents are Black and 42% are Hispanic, and in the western tract, about 71% of residents are Hispanic, according to Urban Institute data. One of the tracts replaced, on the southern outskirts of Napa, has a population of under 800, 20.3% of which is Black and 14.2% of which is Hispanic. The ultimately chosen tracts have populations of over 3,000 and 6,000, according to Urban Institute. 

“The replacement tract is identified as a Community of Concern by MTC and [the Committee to House the Bay Area] in Plan Bay Area 2040, the region's long-range land use and transportation plan/Sustainable Communities Strategy,” Sood wrote as a comment for both replacement tracts.

“The tract to be replaced is not a CoC. The replacement tract is not far from the tract that it would replace,” it read. “The replacement tract also has more people overall, and more low-income residents compared to the tract it would replace.”

City officials and developers told Bisnow that downtown Napa qualified for opportunity zone status because tract eligibility was based on census data from the first half of last decade.

Many neighborhoods around the country had changed dramatically since coming out of the nadir of the Great Recession, and developers and city officials say the same is true for downtown Napa. Techel said the city only recently began shedding its reputation as a “drive-by zone” for tourists of the region.

“It was a floundering, dead center of town that didn’t have investment and was really struggling in 2005,” she said. “We were getting a lot of visitors to that county of Napa that at one point weren’t spending any time in the city of Napa.”

Techel said that much of the city’s inactivity back then was a result of decades of recurring flooding from the Napa River that county flood control projects finally started to control by the end of the 2000s. She said flood control, combined with city planning for downtown and burgeoning investor appetite, has made the Napa of 2020 very different than the Napa of a decade prior.

Downtown Napa's redeveloped Gordon Building, rehabbed by Zapolski Real Estate using opportunity zone investment.

To date, Napa has seen only a limited amount of opportunity zone investment, according to Napa Community Development Director Vincent Smith, but that is starting to change.

Using opportunity zone funding, Zapolski Real Estate plans to lead a $250M mixed-use project in downtown Napa, after the developer used the program to redevelop downtown Napa’s historic Gordon Building, which suffered significant damage from the region's 6 magnitude earthquake in 2014, but reopened this year.

The city is also assisting another owner and developer, Jim Keller, on an approved apartment project west of the highway in what could be that tract’s first opportunity zone project, according to Smith.

Zapolski Director Andrew Mazotti, whose company started acquiring Napa properties in 2011, said he understands both why the city’s downtown was given opportunity zone designation and why, by 2018, the reaction to that designation was shock for a lot of people. By then, the city enjoyed sold-out luxury hotels, a lineup of upscale boutiques and foodie destinations that people saw as incongruous with opportunity zone qualifications.

Prior to the opportunity zone program, Zapolski Real Estate was heavily involved in the area, launching the $200M First Street Napa project, which has attracted the four-star Archer Hotel, Lululemon and Spaces, a brand of coworking company Regus, among dozens of other new tenants. 

“I think people were shocked because of the press on everything that was going on downtown,” Mazotti said. “In [2011], downtown Napa was pretty desolate. You had a lot of lower incomes, you had a lot of people living on the street. People weren’t looking to live downtown because their homes were flooding."

Investment in the city picked up well before its downtown was granted opportunity zone designation. Zapolski's 2012 purchase of Napa's 156K SF Town Center, which it turned into First Street Napa, closed the day after the city upzoned downtown with its Downtown Specific Plan. Though Mazotti said vacancy at that project was well over 50% when Zapolski acquired it, he also said other big projects in Napa like Andaz Napa, a hotel, and the city's Riverfront condos were materializing.

Both Theodos and Chelsea Garber, a co-author of a 2020 paper on how opportunity zones were selected, said there were better options in Napa County if governments looked solely at distress levels. One tract in Napa County ranked in the bottom 10% of capital inflows and had a 14.2% poverty rate, though that tract’s average median family income between 2011 to 2015 of $67K was well above downtown Napa’s of $52.6K, according to Urban Institute data.

“If I look even within Napa County, it looks like there are other tracts that were eligible that had much lower median family incomes and much higher poverty rates,” Garber said. “So if you’re just thinking about the merit of the choice as being based on those distress factors, then there are others that would have been quote-unquote better choices.”

Even so, Garber said states strategized based on local needs and the limitations of the program. Developers say opportunity zone tax advantages aren’t enough to turn a project that doesn’t pencil out into one that does, meaning states were probably incentivized to some extent to favor zones potentially on the cusp of revitalization, like downtown Napa.

“If you pick a place that is so distressed that no private investor is going to undertake a project there, in some sense, it might be a wasted designation,” Garber said. “Or it might not actually be fruitful in terms of investment activity.”

Garber also said that while some tracts around the country have improved so much that they would no longer qualify, Napa’s two tracts don’t yet fall into that category.

Mazotti said it is a difficult question but that he thinks it was right for downtown Napa to have gotten the opportunity designation, citing its place on the cusp of revitalization and potential role in addressing the Bay Area's housing crisis.

“The investment needs to stand on its own without the OZ designation and developers won’t develop in far riskier markets just to make a couple hundred more basis points on their [internal rate of return],” Mazotti wrote in a follow-up email. “So when you look at places like downtown Napa that have investment interest already, you may have a much better shot at the program doing its job.”

Techel and Smith did not immediately respond to requests for comment on criticisms of the design of the opportunity zone selection process.

In an interview with Bisnow, California Department of Finance Chief Economist Irena Asmundson said she could not comment on specifics on how downtown Napa became an opportunity zone selection two years ago, but she did provide Bisnow with a record of public comments.

“This is the process we had, and, clearly, it was qualified,” she said.

For his part, Sood said his comment still makes sense, at least for that time, and that much of his recommendation was based on demographics. 

“When I made the comment, the underlying data kind of supported the statement, and that's based on the overall intent of the opportunity zones to be designating areas that have low-income, impacted communities,” Sood said. “Our definition of that is formalized as Communities of Concern that we use for our own planning processes. We have multiple criteria, but mostly it's low-income communities of color.”

Michael Banner, president and CEO of Los Angeles LDC, a nonprofit community development investor, said the designation of an already well-off area as an opportunity zone risks leaving more disadvantaged areas ignored.

“The investments might not necessarily go to places where it is solely an opportunity zone which has all of the under-investment characteristics,” he said.