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- April 16, 2019: Vol.28, Number 5

New opportunity zones provides upward momentum for Houston

by Jody + Barhanovich

The creation of the new federal opportunity zone program is enhancing investor interest and placing upward pressure on property valuations in downtown Houston, according to the Deal Sikes property valuation firm.

“Investors are gaining an understanding of the benefits and potential value of property owned in one of the new opportunity zones,” said Mark Sikes, principal at Deal Sikes. “This is particularly true in downtown Houston where the investment potential is significant. Over the last year, valuations appear to be up 5 or 10 percent for specific properties in downtown because of the opportunity zone designation.

As additional transactions are closed, price gains may prove to be even stronger.”

Opportunity zones were created by Congress as part of the Tax Cuts and Jobs Act enacted in December 2017 to promote investment and deliver improvement to distressed communities. Subsequently, more than 8,000 census tracts around the nation, including over 100 in Harris County, Texas, were designated as opportunity zones.

The opportunity zones allow investors to defer capital gains tax if the properties are substantially improved and held for a number of years. If a property is held for 10 years, the capital gains may be permanently excluded from federal taxation.

“The requirement for substantial improvements to the property will likely exclude class A office towers from the opportunity zone benefit,” said Sikes. “However, downtown’s older commercial buildings, parking lots and obsolete office properties appear to offer investors significant incentive for development and growth to enjoy these tax incentives.”

Hines recently started development of a 46-story residential tower in downtown Houston designed to take advantage of the Opportunity Zone tax benefits.

“Sophisticated investors are already making significant moves,” said Matthew Deal, principal of Houston-based Deal Sikes. “This trend is likely to spread as the IRS clarifies its regulations, and attorneys and tax consultants become more familiar with opportunity zones, which offer major federal tax incentives across the city and the nation.”

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