San Jose’s proposed tracts illustrate the difference between meeting federal eligibility requirements and providing practical opportunities for investment or development.
California’s draft Opportunity Zone 2.0 map raises a policy question that extends beyond San Jose: When several census tracts meet the federal eligibility requirements, what additional factors should states consider before making their final selections?
Income and poverty data identify communities eligible for consideration. Those data do not indicate whether land is available, zoning permits additional development, parcels can be assembled, infrastructure is adequate or a project can obtain financing and regulatory approvals.
These practical conditions do not determine whether a community needs or deserves investment. They may, however, affect whether an Opportunity Zone designation results in qualifying investment activity during the designation period.
San Jose provides one case study. Fifteen of Santa Clara County’s 17 recommended tracts are located within the city. The number of recommended tracts may appear significant, but the number alone does not indicate what types of investment or community development could realistically occur within them.
This article discusses public policy and land-use considerations. It does not evaluate or recommend any security, fund, property or investment strategy. Opportunity Zone designation does not establish the merits, suitability or expected performance of any investment.
Eligibility Is the Starting Point
Under Opportunity Zones 2.0, a census tract in a metropolitan area such as San Jose generally qualifies for consideration if:
- Its median family income is below 70% of the metropolitan area median family income; or
- Its poverty rate is at least 20%, and its median family income does not exceed 125% of the metropolitan area median family income.
Meeting one of these tests makes a tract eligible for consideration. It does not guarantee that the tract will be selected or receive investment.
Governors may nominate no more than 25% of their states’ eligible low-income census tracts. California must therefore choose from a larger group of qualifying communities.
The state’s selection process may consider economic conditions, community priorities, local recommendations and other policy factors. Development feasibility is one additional consideration that may help officials evaluate what forms of activity a designation could support.
Sources: California Governor’s Office of Business and Economic Development and IRS Revenue Procedure 2026-14.
Eligibility Does Not Establish Investment Merit
Opportunity Zone designation may permit certain qualifying investments to receive preferential federal tax treatment if all applicable statutory, regulatory and holding-period requirements are satisfied.
Designation does not:
- Establish that an investment is appropriate for any person.
- Indicate that a project is economically feasible.
- Guarantee that a tract will receive investment.
- Reduce or eliminate the business and real estate risks associated with a project.
- Guarantee any tax outcome.
- Provide liquidity or protect investors against loss.
The availability and value of any federal tax treatment depend on numerous requirements and an investor’s individual circumstances. Tax laws, regulations and interpretations may change.
California does not conform to the federal deferral and exclusion of capital gains invested in Qualified Opportunity Funds. Investors should consult independent legal and tax professionals before making decisions involving Opportunity Zones or Qualified Opportunity Funds.
Practical Conditions Within a Tract
Federal eligibility standards are intended to identify economically distressed communities. They are not a substitute for project-level due diligence or land-use analysis.
Factors that may affect activity within a designated tract include:
- The availability and ownership of suitable land or commercial property.
- Existing land uses and zoning restrictions.
- The ability to assemble parcels.
- Infrastructure availability and capacity.
- Environmental or entitlement requirements.
- Construction costs and financing conditions.
- Local market demand.
- The time required to obtain approvals and complete a project.
Even when these conditions appear favorable, a project may not proceed or may fail to meet its objectives. Real estate development involves substantial risks, including changes in market conditions, construction costs, interest rates, financing availability, regulations and demand.
What the Draft San Jose Map Illustrates
Several of San Jose’s recommended tracts appear to provide limited opportunities for ground-up multifamily development based on their current land uses, ownership patterns and zoning.
One recommended tract includes both San José State University and San Jose City Hall. Several recommended tracts in the Alum Rock area consist largely of established single-family neighborhoods.
Institutional ownership and existing development patterns in these locations may limit the number of sites available for additional multifamily housing. A complete assessment would require project-specific review, including title, zoning, environmental, infrastructure, financial and market analysis.
Limited potential for ground-up multifamily development does not mean that these communities are undeserving of designation or investment. It also does not mean that housing should be the only objective of Opportunity Zone policy.
Depending on applicable law and local conditions, Opportunity Zone capital may be used in connection with operating businesses, infrastructure, energy projects, rehabilitation of existing properties or other qualifying activities. Whether any particular activity qualifies or is economically viable depends on its specific facts.
Other eligible San Jose tracts appear to contain underutilized properties, transit access or zoning that may permit additional development. These characteristics do not guarantee that investment or development will occur. They are factors the state may consider when comparing eligible tracts.
Designation Does Not Guarantee Capital Deployment
The original Opportunity Zone program illustrates the difference between designation and reported investment activity.
A June 2026 Treasury analysis found that 77% of Opportunity Zones in the 50 states and Washington, D.C., had received reported qualified investment through tax year 2024. Approximately 23% had received no reported investment, while another 34% had received some reported investment but less than $1 million.
These figures have important limitations. They do not establish why a tract did or did not receive investment. They do not measure investment performance, project viability or community benefit. Treasury also identified limitations in the available tax data.
Accordingly, the figures should not be interpreted as evidence that any particular tract was selected correctly or incorrectly. They indicate only that designation has not resulted in the same level of reported investment activity across all tracts.
A designation permits qualifying activity under the program. Developers, businesses and investors must still identify opportunities, conduct due diligence, obtain approvals, arrange financing and satisfy applicable program requirements.
Source: U.S. Treasury Office of Tax Analysis, June 2026.
Factors States May Consider
No single formula can determine which eligible census tracts should receive Opportunity Zone designations. The circumstances and priorities of individual communities vary.
When comparing eligible tracts, states may consider questions such as:
1. What community needs have been identified?
Economic conditions, poverty, housing needs, infrastructure and local priorities may all be relevant.
2. What forms of qualifying activity might be possible?
Potential activity could include housing, operating businesses, infrastructure, rehabilitation or other uses, subject to applicable requirements.
3. Are properties or facilities available?
Ownership patterns and existing uses may affect the practical availability of sites.
4. Do zoning and local plans permit additional activity?
An Opportunity Zone designation does not override local land-use rules.
5. What barriers could prevent execution?
Infrastructure requirements, parcel assembly, environmental review, approvals, construction costs and financing conditions may affect feasibility.
6. What additional due diligence would be required?
Census-tract-level analysis cannot replace a complete evaluation of a specific property, business or investment.
Considering these questions does not require states to select only locations that are easiest to develop or expected to generate the greatest financial return. Such an approach could be inconsistent with the program’s focus on economically distressed communities.
Instead, feasibility analysis may provide additional context regarding the types of activity a designation could potentially support and the barriers that may remain.
Housing as One San Jose Consideration
San Jose has experienced limited housing supply relative to demand. That condition may support considering housing capacity as one factor in the tract-selection process.
An Opportunity Zone designation does not resolve the many obstacles to housing production. It does not change zoning, lower construction costs, ensure financing, accelerate approvals or guarantee that a housing project will be completed.
However, when the state compares eligible tracts, it may consider whether current land uses, zoning, transit access and infrastructure are consistent with local housing goals.
Housing capacity should be evaluated alongside economic need, community input, business-development potential, infrastructure priorities and other relevant considerations.
California’s Next Step
During the public-comment period, Urban Catalyst asked California to reconsider several recommended San Jose tracts and evaluate other eligible local tracts that may provide different opportunities for housing or other development.
California has said it will review public comments alongside demographic and socioeconomic indicators, local recommendations and other factors as it prepares its final nominations.
The state must now determine how to balance those considerations. A tract’s eligibility, development characteristics and community needs provide different types of information. None independently establishes what investment will occur or what benefits a designation will produce.
San Jose has 15 recommended tracts. Before finalizing those recommendations, California has an opportunity to evaluate whether the proposed selections appropriately reflect the city’s needs and the practical limitations within each tract.
Continue Following Opportunity Zones 2.0
This article builds on the September edition of The Urban Catalyst Brief, Urban Catalyst’s monthly LinkedIn newsletter covering legislation, regulatory guidance, tract designations and real estate considerations related to Opportunity Zones 2.0.
Read the newsletter and subscribe to The Urban Catalyst Brief on LinkedIn.
For additional discussion of the proposed San Jose tracts, read Erik Hayden’s analysis, “Are These the Right Opportunity Zone Tracts for San Jose?”.
Urban Catalyst is an Opportunity Zone fund manager and ground-up real estate developer based in downtown San Jose, California.
Important Disclosurs
The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by an issuer, or any affiliate, or partner thereof ("Issuer").
All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM.
With respect to any performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. Assumptions are more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment.
These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified.
Past performance are no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.
Real Estate Risk Disclosure:
- There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
- Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- Potential for foreclosure – All financed real estate investments have potential for foreclosure;
- Illiquidity – These assets are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
- Stated tax benefits – Any stated tax benefits are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.
Opportunity Zone Disclosures
- Investing in opportunity zones is speculative. Opportunity zones are newly formed entities with no operating history. There is no assurance of investment return, property appreciation, or profits. The ability to resell the fund’s underlying investment properties or businesses is not guaranteed. Investing in opportunity zone funds may involve a higher level of risk than investing in other established real estate offerings.
- Long-term investment. Opportunity zone funds have illiquid underlying investments that may not be easy to sell and the return of capital and realization of gains, if any, from an investment will generally occur only upon the partial or complete disposition or refinancing of such investments.
- Limited secondary market for redemption. Although secondary markets may provide a liquidity option in limited circumstances, the amount you will receive typically is discounted to current valuations.
- Difficult valuation assessment. The portfolio holdings in opportunity zone funds may be difficult to value because financial markets or exchanges do not usually quote or trade the holdings. As such, market prices for most of a fund’s holdings will not be readily available.
- Capital call default consequences. Meeting capital calls to provide managers with the pledged capital is a contractual obligation of each investor. Failure to meet this requirement in a timely manner could elicit significant adverse consequences, including, without limitation, the forfeiture of your interest in the fund.
- Opportunity zone funds may use leverage in connection with certain investments or participate in investments with highly leveraged capital structures. Leverage involves a high degree of financial risk and may increase the exposure of such investments to factors such as rising interest rates, downturns in the economy or deterioration in the condition of the assets underlying such investments.
- Unregistered investment. As with other unregistered investments, the regulatory protections of the Investment Company Act of 1940 are not available with unregistered securities.
- It is possible, due to tax, regulatory, or investment decisions, that a fund, or its investors, are unable realize any tax benefits. You should evaluate the merits of the underlying investment and not solely invest in an opportunity zone fund for any potential tax advantage.
The above material cannot be altered, revised, and/or modified without the express written consent of Urban Catalyst.
