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Downtown Richmond Designated As Opportunity Zone — What Does That Mean For Future Development?

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RICHMOND, TEXAS — There has been a great deal of hoopla about the potential of the Opportunity Zone program, which is expected to spur development in economically disadvantaged areas across the nation. 

What happens over the next few years in Richmond, Texas, a railroad town of roughly 12,000 people on the outskirts of Houston, may answer one of the biggest questions of the program — are tax breaks alone enough to bring developers to an area they wouldn't typically invest in?

While the town has experienced increased interest since two areas in its borders were named opportunity zones, the answer here may be no.

Richmond, Texas Opportunity Zone
A former hotel with ground-level retail in downtown Richmond.

Richmond, a small town roughly 30 miles southwest of Houston and 8.5 miles from powerhouse suburb Sugar Land, incorporated in 1837 and remains a capsule of Texas history. Historical preservation has been paramount to the local leaders and residents.  

As the county seat of Fort Bend, Richmond serves as the largest employment base of county employees and businesses in the professional services sector. The local economy is strongly tied to the healthcare sector with the OakBend Medical Center and surrounding medical office buildings. 

Two of the fastest-growing master-planned communities in the Houston region are in Richmond: Johnson Development's Veranda and Harvest Green communities, which will total more than 5,000 homes at full build-out, Development Corporation of Richmond Executive Director Cameron Goodman said.  

Richmond has been waiting for the wildfire-like development that transformed Sugar Land to sweep into Richmond, he said. 

That has been slow to happen. City officials are optimistic that the Opportunity Zone program, along with the other city economic development initiatives, may be the catalyst needed to spur development.   

"Investors can create unique businesses that seek to be located in a different setting that would not be found on a freeway frontage or in more densely populated urban areas," Goodman said.

Two opportunity zones — the historic Downtown district and a large tract near Highway 90 and the Grand Parkway — are within the greater Richmond area. Each presents vastly different investment opportunities: one focused on preservation and the other on new construction. 

Revitalizing A Railroad Town 

Upholding the historic charm is a primary goal for future development, Goodman said.

Boutique and independent concepts would align with the authentic setting of existing businesses in historic Downtown, which include long-standing businesses such as Sandy McGee's Restaurant, Joseph's Coffee Shop and several vintage resale shops. The downtown district is home to several monthly events, like festivals, farm-to-table dinners, boutique crawls and live music.  

"We want businesses that will complement and not change Richmond," Richmond Commissioner Barry Beard said. "This is not a place geared for big-box stores.”  

Richmond, Texas Opportunity Zone
The former Sunset Saloon building in an opportunity zone in Richmond, Texas

Redevelopment interest in Downtown has picked up with the announcement of the Opportunity Zone program, Goodman said. Since 2015, about 10 new concepts from a juice bar to a Kombucha brewery have opened their doors. He went from showing properties once or twice a month to six tours since early November. 

The oldest building in Richmond, constructed in the 1860s, was the first property purchased partly because of its location in an opportunity zone. Fort Bend Interest Co., owned by Beard and a business partner, will use capital gains from the sale of a business and a Richmond-area townhouse to create a fund to renovate the building, Beard said. 

The plan is to maintain the historic integrity of the former Sunset Saloon and develop a food and beverage concept. The site is near the railroad tracks on Calhoun and South Sixth streets. 

Other historic properties are also for sale near Morton Street, the retail hub of the Downtown district.

The former Exchange Hotel, built in the 1880s and now owned by Leu Zewde, is well-positioned to remain as a boutique hotel with retail and restaurant offerings, Goodman said. There is vacant retail space as an Italian restaurant moved out. 

Robert and Nancy Hentschel own Queen Theatre, which opened in 1926 and was renamed as Lamar Theatre in the 1940s. The couple plans to redevelop the property to feature film and live performances, Goodman said. The theater will also include a food and beverage component. Neither Zewde nor the Hentschels could be reached to ask what role the Opportunity Zone program plays in their plans.

For more traditional developers looking to build shopping centers, multifamily communities, office buildings and mixed-use environments, the play will be in the other opportunity zone in Richmond, Goodman said.

The zone is bounded by Highway 90, the Grand Parkway and Harlem Road. It is closer to and more similar to booming Sugar Land, and has more commercial development activity underway than Downtown Richmond does.

The majority of the land in the zone is owned by three entities: R E Smith Interests Inc., Johnson Development Corp. and the state of Texas, Goodman said.  

Harvest Green, an agricultural-focused, 1,300-acre master-planned community by Johnson Development, has sold about 19 acres of the available 120 acres zoned for commercial use between Harlem Road and the Grand Parkway, Harvest Green Managing Director Jerry Ulke said.  

New developments in those 19 sold acres include the newly opened Timewise and Shops at Harvest Green, along with a future specialty grocery site, I-Shine Car Wash and a new neighborhood retail center. 

Johnson Development is also under contract with a large commercial developer for a 27-acre tract along West Airport Boulevard and the Grand Parkway. The developer will bring Flix Brewhouse there in the near future, Ulke said.

Richmond officials want to use public dollars to make the opportunity zones a better investment, Goodman said. Incentives include the train noise reduction project, the installation of wayfinding signs throughout the city and the creation of an incentive program that provides up to $25K in matching grants for downtown area redevelopment projects.

“There was a time when there was little to no interest [in Richmond]," Goodman said. With the opportunity zone designations, he thinks that is all over.

"It is going to happen for us. We want to shape the development and not let it shape us.”

Downtown Richmond Designated As Opportunity Zone — What Does That Mean For Future Development?
A map that outlines the opportunity zones, tax increment reinvestment zones and management zones in Houston.

But Where Are The People?

Talk of buying land in Harvest Green using an opportunity zone fund has been minimal, Ulke said. He is concerned people may not know about the capital reinvestment program. 

The program's interest may have less to do with a lack of knowledge than insufficient demand for development for that area of Richmond. Before the opportunity zone can spur real activity, Richmond needs a larger population base, some experts said.

"Most opportunity zones are not ready for immediate development," Rubicon Realty Group principal Inna Gallagher said. The retail developer, which is based 14 miles from Richmond in Missouri City and is active in the Missouri City/Sugar Land band southwest of Houston, has no plans to develop retail centers in the Richmond opportunity zones.

Local developers Planned Community Developers, Stream Realty Partners and Regency Centers Corp., all active in and around Sugar Land, also told Bisnow they have no interest in the area.

The Opportunity Zone program is being marketed as having the potential to spur activity in areas that don't get developer attention now, but that may not be realistic. Some experts argue the program will accelerate projects that developers may have been on the fence about or already had in the works.

“I think it's undetermined how much more construction opportunity zones are going to spur than what’s already going on,” CoStar Quantitative Analyst Mark Hickey previously told Bisnow.

A new report from Real Capital Analytics noted that many opportunity zones can be classified as already in the midst of transition.

“[The] tax benefit doesn’t change the fundamentals of sound real estate investing,” Origin Investments co-founder Michael Episcope previously told Bisnow. His company launched a $105M Opportunity Zone Fund and is already building in opportunity zones in Denver and Charlotte, North Carolina. “These projects need to pass the same scrutiny as developments in non-opportunity zone areas, and be able to produce viable, risk-adjusted returns. All opportunities should be evaluated on their strength as stand-alone investments and the ability of the manager to perform.”

"When considering an investment in the Opportunity Zone Fund, a company needs to evaluate what aligns best with their investment goals," Gallagher said. "The costs of assembling and carrying the land for so long are substantial. It may make more sense to pay the 15-20% capital gains tax now and use the after-tax income for various short-term investment opportunities."  

The retail demand hasn't reached Richmond yet, Gallagher said — the infrastructure needs are met but an increase in population and the employment base is required to support additional retail development, she said.

Two adjacent markets, Aliana and Sugar Land, are still absorbing new retail space and have more space under development with deliveries scheduled over the next three years. Harvest Green has at least three large tracts zoned for multifamily or mixed-use development.

Harvest Green, the primary residential developer in the area, has 700 occupied homes and at build-out in three to five years will have 1,800 homes. With a population of only about 12,000 in Richmond, an additional 1,100 homes could move the needle in the city. 

After the Aliana and Sugar Land projects are absorbed and Harvest Green builds out rooftops, the Richmond market may be more ripe for retail investment, Gallagher said.   

But a retail developer would have to be willing to hold on to land in that zone for a few years. 

"That part of Richmond is not ready for more shopping centers yet," she said. "Retail follows rooftops and employee hubs. The customer base needs to be in place first."