Developer tapped into federal opportunity zone designation
At one point last year, Ken Cruse, developer of the historic Redmond Hotel, considered scrapping his increasingly expensive renovation plan and converting the building to a coworking space.
The city of Redmond came through with a total of $3.5 million in loans and forgivable loans, and Cruse realized he could raise even more money because the hotel sits in a federally designated opportunity zone.
The Redmond Hotel is now an $11.8 million project, half of which is supported by subsidies and tax incentives. “It’s a hotel that needed every penny of incentive,” Cruse said Friday in a presentation to the Central Oregon Opportunity Investing Conference at Tetherow Resort in Bend.
Redmond officials were pleased to see more private investors get behind the hotel, which is viewed as a catalyst for downtown, said urban renewal project manager Chuck Arnold. And those investors stand to benefit from significant tax breaks outlined in the Tax Cuts and Jobs Act of 2017.
With 86 opportunity zones in low-income and economically distressed areas of Oregon, community development advocates hope the new federal program will lead to more win-win scenarios like the Redmond Hotel. So far, investors gravitate to the few opportunity zones that are likely to offer a high rate of return, even without the tax savings. Those include downtown Portland and the Pearl District. In Central Oregon, three census tracts on the east side of Bend are designated opportunity zones, along with tracts in Warm Springs, Madras, Crook County and Redmond.
“When they drew the zones in Central Oregon and Bend, they drew them around our most valuable commercial real estate,” said Adam Bledsoe, a broker at Compass Commercial Real Estate Services.
The firm began fielding calls from investors across the country a year ago, he told the conference audience of potential investors and finance and real estate professionals.
The idea behind opportunity zones was to draw some of the nation’s $6.2 trillion in capital gains, which is money earned on stocks or real estate, into disadvantaged communities, said Brad Ketch, founder of the nonprofit Community Development Corporation of Oregon. That organization has a for-profit subsidiary, Oregon Community Capital, that invests in opportunity zones.
Deferring and avoiding capital gains tax is the big incentive for investors. Under the new law, they can take a capital gain on stock or real estate, invest it in a qualified opportunity fund and defer the tax. They can also reduce their taxes on the gain if they leave the money in the fund for at least five years.
Appreciation on the new investment in the qualified opportunity fund can be tax-free if the investment is held for 10 years.
“With opportunity zone investing, you can have your cake and eat it, too,” Ketch said.
Oregon Community Capital is building an 84-unit apartment building in Gresham with a number of apartments set aside for low-income families, Ketch said. He hopes opportunity zones spark that kind of “workforce housing” across Oregon, but he thinks the activity will be in urban and suburban areas, such as Bend, before Warm Springs or Crook County.
“All the early interest is in zones that have a clearer investment thesis right now,” Ketch said.
Economic Development for Central Oregon was instrumental in selecting the opportunity zones in this region.
The federal designation draws on data from 2011 through 2015, which shows the three census tracts on the east side of Bend with unemployment rates ranging from 3.7 percent to 7.7 percent. Those census tracts qualified for the federal New Markets Tax Credit program, so they automatically qualified as opportunity zones, said Roger Lee, CEO of EDCO.
EDCO asked Gov. Kate Brown’s office to include the Bend census tracts because they cover the Bend Central District and the former KorPine mill site, where roofs collapsed under heavy snow in January 2017, Lee said.
“We’d hope to have some in La Pine, as well, but they were not selected,” Lee said.
Rush to build
Hunter Renaissance Development LLC might be one of the first developers in Central Oregon to break ground on housing backed by an opportunity fund. The company acquired nine acres in Redmond’s opportunity zone along SW Canal Boulevard and plans to build 116 townhouses, partner Jeanmarie Kapp said.
The development, dubbed 21 Canal, will be similar in design to The 27 Elm, a smaller townhouse complex on Elm Street in northwest Redmond. The difference is that 21 Canal is backed by the National Equity Fund, a Chicago company that worked with low-income housing tax credits but recently set up an opportunity fund.
“They decided to use us as their beta,” Kapp said. She and her mother, Nancy Kapp, built, renovated and managed multifamily housing in the Chicago area for 30 years. They came to Oregon to build market-rate housing for middle-income people, she said.
As soon as the opportunity zones were designated, Hunter Renaissance began searching for building sites in Washington, Montana and Idaho, Kapp said.
“They were kind of at the forefront of understanding opportunity zones,” said Tj Toney, founder of Pacific Construction & Development in Redmond.
While serving as general contractor for the 21 Canal project, Toney has also set up an opportunity fund of his own. His company Toney Properties sold several piece of real estate last year and invested the gain in a new fund. That fund built a light industrial building in Redmond and is backing construction of two duplexes near the Old Mill District in Bend, he said.
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