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How The Deal Went Down: The First Opportunity Zone Project In Houston

A rendering of Hines' The Preston in Downtown Houston

Once word got out that Downtown was designated as one of the 150 qualified opportunity zones in Houston, Hines Director Chris Rector’s phone began to ring off the hook. 

Newly created opportunity zone funds were calling, pleading to partner on Hines' planned multifamily development, now named The Preston

Hines selected Chicago-based Cresset-Diversified QOZ Fund, which provided $87M in equity for the 373-unit luxury apartment tower on the former parking lot of the Houston Chronicle, Cresset Partners Managing Partner Mark Stern said. 

“We never contemplated utilizing any sort of incentive program or partnering with a group,” Rector told more than 300 attendees at Bisnow's Houston State of the Market event Wednesday. “We bought [the site] because we believed in the real estate.”

Before the U.S. government provided additional guidance on the opportunity zone program, many investors voiced concern and confusion on how the program was going to be implemented, Bisnow previously reported. (In mid-April, the government released the second set of regulations.)

Hines met with several opportunity zone funds, and a major concern was the credibility of a number of groups, Rector said. The selection of Cresset-Diversified was strongly based on the firms' prior relationship, having partnered on 10 previous projects. 

Hines Director Chris Rector, Cresset Partners managing partner Mark Stern, City of Houston Deputy Director of Economic Development Gwen Tillotson, CoStar Market Economist Justin Boyar, Winstead P.C. shareholder Brandon Jones and Pender Capital Vice President Kristin Rick discuss the potential of opportunity zones in Houston at Bisnow's Houston State of the Market event May 1.

Rector said Hines was confident in the tax and accounting expertise of the Cresset-Diversified team and its ability to decode and implement the OZ program. 

“I don’t know if we would have utilized the funds without our relationship with Diversified Real Estate," he said. 

Stern was an early adopter of the OZ program. The federal government released the program on a Friday in October, and he launched the Cresset-Diversified fund the following Monday. From the launch, Stern had a plan to secure the best partners, the best sites and the best prices.

The Preston checked all of those boxes, he said. Once the fund announced the partnership with Hines, fundraising skyrocketed.  

“When I look back it, there has been a lot of fast-moving pieces, but our thesis worked,” he said.  

While the program is outlined as a tool to spur capital investment in economically disadvantaged communities, many worry that the program will only enhance projects already in the pipeline, and ones in high-end areas. 

“Yes, I know these cities are looking for developers to come in and help," Stern said. “But what we are focused on today is the low-hanging fruit, the properties you would have developed if they were not in an opportunity zone.”

Cresset-Diversified QOZ Fund plans to invest in more secondary and tertiary markets in 2020 and 2021, Stern said. Cresset-Diversified is under contract on four properties, in Downtown Houston, Portland, Nashville and Denver, including three deals with Hines.