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.
The Opportunity Zone Act, approved by Congress as part of the Tax Cut and Jobs Act enacted in December 2017, was designed to promote investment and deliver improvement to distressed communities. Subsequently over 8,000 census tracts around the nation, including over 100 in Harris County, 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, Sikes said. However, downtowns older commercial buildings, parking lots and obsolete office properties appear to offer investors significant incentive for development and growth to enjoy these tax incentives.
The Hines development firm 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.
Deal Sikes provides valuation and counseling services for real estate firms, governmental agencies, law firms, and investors across the region. www.DealSikes.com
Mark Sikes or Matthew Deal 713-662-3500