OPPORTUNITY ZONES SEEN AS SOLUTION
While fundraising has been slowed by the pandemic, investor thinks program has a bright future
The Preston, the high-end rental tower being developed downtown by Hines, received its financing in part through the first investment by a fund formed by Chicago-based Cresset Partners and Diversified Real Estate Capital targeting “opportunity zones.”
The opportunity zone program, created as part of the Tax Cuts and Jobs Act of 2017, is meant to spur private investment in economically distressed communities by offering tax breaks to investors who make long-term investments in the target areas.
The Preston is one of four Hines developments getting funding from the Cresset-Diversified fund, which was launched in late 2018 and had raised $465 million by the end of the first quarter of 2020.
Cresset launched its second qualified opportunity zone fund at the beginning of this year. While fundraising has slowed because of the pandemic, Managing Director Nick Parrish believes the program has a bright future. He explained why in a conversation with the Chronicle.
Q: What’s your outlook for opportunity zone investments?
A: Coming into year-end 2019, early 2020, it felt like there was good momentum. You had real projects getting done. Then COVID hit and took the wind out of the sails, not just for qualified opportunity zones, but risk assets broadly. So everything slowed down.
We’ve been seeing renewed activity and I think it’s because
the opportunity zone program thesis hasn’t changed. In some ways there are some benefits in the current environment. The idea of owning real estate for a long period of time and not paying taxes is still attractive. The program requires you to hold real estate for at least 10 years. Investing for 10 years gives you a very long-term perspective, which amidst all this chaos is very valuable. We’re in an environment where taxes are likely going up with all the fiscal spending.
There is a social component to this program as well. We’re in an environment where all of the U.S. is an opportunity zone now. We’re in need for development, redevelopment and investment into the economy. The government only does so much.
It incentivizes private investors to help spur economic development in these communities. As a result, we think the demand for interest in this program is only going to increase.
Q: In February, Hines CEO Jeff Hines said opportunity zones were bad public policy. While he acknowledged his firm has done such deals, he said it doesn’t seek them out. He questioned the locations of the zones and said artificially affecting market forces can “create issues.” What did you think about that?
A: The legislation is not perfect. It certainly is trying to do good, but there’s friction. This is common knowledge, but one of the interesting dynamics is they used data based on census tracts from 2010, and a lot of markets have changed since then.
Also, I like to remind people this is a long-term program. You can invest up to 10 years. We’re basically two years in. My hope is over the 10, years you’ll see a much broader deployment of capital in more areas.
We’re building the tower in Houston and we’re creating several probably thousand temporary jobs, which were deemed essential business during quarantine. Houston is among the major urban markets in the country that has largest gap between full-time jobs in downtown and residents. So part of selecting that zone in Houston, part of it was to drive residential development in downtown’s core.
Q: But for a very highend resident, right?
A: Is it. But it’s fulfilling a very specific economic development agenda for Houston, which is to bring the tax base downtown.
This equation has changed a little bit post-COVID, because right now job creation is perhaps the greatest need. You’re incentivizing economic development. You put in a 40-story building like that and it’s got to have coffee shops, parking garages, spillover.
Q: Why do you like Houston as an investment?
A: Look at where the population is going in the U.S. You’ve got the Sunbelt effect. People are increasingly leaving large northern cities. Texas has been a (beneficiary) of that.
Yes, there are still booms and busts with the energy cycle, but Houston’s diversifying. You look at M.D. Anderson and health care, the technology that’s springing up there. While still concentrated in energy and infrastructure, it’s certainly not to the same degree it was.
That’s the nice thing about qualified opportunity zones, boom and bust cycles are less relevant when thinking about 10-, 15-year time horizons.
Q: What about the cost of opportunity zones in terms of lost tax revenue?
A: They’ve deemed this program revenue neutral because some of what this is incentivizing is investments. People talk about the Apple example. Say someone bought Apple 20 years ago. They’ve owned it so long and the tax bill is so egregious that they don’t want to sell it because they’ll have to pay taxes. Providing an off ramp for those people allow them to sell things they wouldn’t have sold. While you’re deferring, it you’re forcing gains in the system that otherwise wouldn’t have been there.