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Austin’s opportunity zones expected to see increased investment, development in 2020

Wednesday, December 18, 2019 by Chad Swiatecki

Real estate professionals and the investment community expect development activity to increase in the 21 census tracts in the Austin area that qualify as federal opportunity zones. Those zones, created as part of the 2017 federal tax cut, were designed to promote investment in distressed communities and adjacent tracts by allowing investors to reduce or delay their capital gains payments by putting their money into areas in need of an economic stimulus.

At the December breakfast for the Urban Land Institute Austin, panelists discussed the state of opportunity zone investment in Austin and the final regulations governing the program scheduled for release soon.

The program, which has more than 600 qualified zones in Texas, has caused some concern in Austin from residents and activists fighting gentrification and displacement of longtime residents.

Warren Walters, managing partner of W2 Real Estate Partners, said opportunity zones are intended to act as an accelerator for areas that already have some potential for development based on population or job growth. Walters, whose group is involved in development projects in two opportunity zones in Austin, said investors and developers have thus far been cautious about deploying their money.

“By and large this program is an accelerator. It’s not going to make a community investible if it has no economic engines,” he said. “But it is going to take areas on the periphery of cities and speed up their development by two to four, or even 10 to 15 years. If a place isn’t going to work on its own, I don’t want to resort to gimmicks to make it.”

Cory Older, president of River City Capital Partners, said one hurdle slowing investment activity in Austin under the program is the requirement that money put into qualified investment funds must be put to use in less than six months to qualify for the maximum tax benefits. That rule, coupled with Austin’s notoriously slow planning and approval process, makes it difficult to find investment capital unless a project is already at the “shovel-ready” stage.

“We have all these deadlines we’re working with and the site development process in Austin is very long and the step up in cap gains reduction happens in 2021, and if you start a project here today that’s kind of the timeline you’re looking at,” he said. “I wish there were some kind of expedited process for obtaining permits because to optimize these funds in Austin it’s going to be difficult for them to come in before the site is shovel-ready, so if we could figure out a way to expedite the permitting process it would allow us to take advantage of a lot more.”

Like Walters, Older said opportunity zones are intended to provide a small incentive to attract investors who are already on the fence about how to use their investment capital. He said that’s happening far more instead of causing high-volume investors to sell off stock and equities to move into the real estate game, which he said was part of the thesis for creating the program.

“The benefits aren’t so great that it makes sense to do development in the middle of nowhere, and we’re seeing more development happening in places where there was already development happening,” he said. “It’d be scary to start seeing development where there were no economic drivers, so it’s good that it is more of a nudge and not causing development where it shouldn’t occur.”

Jill Homan, president of Javelin 19 Investments, told the sold-out audience that her firm is looking to use investment dollars in opportunity zones in Dallas, Austin, San Antonio and a handful of other regions in the southeastern U.S.

She said cities looking to maximize the program’s impact need to understand the different needs of developers and investors, in order to present the right land and investment deals at the right time.

“A number of cities have engaged with (investment) money about the areas, and the disconnect is that I need to see investable projects that I can get into in the next six months,” she said. “Sometimes there’s not an understanding of how investments work so if you’re a city and you have land, then your market is developers and that’s who you need to talk to. If you are a city and you have projects, then your market is investors. Those who are really engaging all those pieces and then promoting all those investment opportunities, I find, are the ones that are getting the most capital attention.”

Cory Older is board member candidate for the Capital of Texas Media Foundation, which is the Austin Monitor’s parent company. Map courtesy of the city of Austin. .

This story has been corrected to accurately reflect the location of the opportunity zones in Austin.

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