In September, Urban Catalyst Founder and CEO Erik Hayden participated in the Opportunity Zones 2.0: Community Readiness and Project Development Workshop in the Sacramento area.
Presented in partnership with the U.S. Department of Housing and Urban Development, the workshop brought together developers, government officials, economic development professionals, community stakeholders and capital providers to discuss how communities can prepare for the next phase of the Opportunity Zone program.
Erik joined a panel focused on investor readiness and capital formation. The discussion examined a fundamental question: What characteristics help position a development project to attract capital?
Erik’s perspective was straightforward:
Capital can only fund projects that can actually be built.
Our previous article examined why development feasibility matters when states select Opportunity Zone tracts. Erik’s discussion in Sacramento addressed the next question: Once a tract is designated, what helps position a specific project to move from concept toward construction?
An Opportunity Zone designation may affect the potential federal tax treatment of a qualifying investment, depending on individual circumstances and compliance with applicable requirements. It does not replace the fundamentals of real estate development.
Designation alone does not establish market demand, secure control of a site, obtain entitlements, provide infrastructure or resolve a financing gap. It also does not guarantee that a project will be completed, generate returns or produce a particular community outcome.
Before capital can move, a project still needs an experienced team, evidence of market demand, control of an appropriate site, a viable approval path, sufficient infrastructure and a realistic capital structure.
Project readiness begins with the team responsible for executing the development.
Relevant experience may include:
Experience does not eliminate development risk or guarantee a successful outcome. It can help demonstrate whether a team understands the challenges involved and has established processes for addressing them.
A credible execution plan should also identify who is responsible for each part of the project, how decisions will be made and how potential conflicts will be managed.
The strength of a concept matters, but execution ultimately depends on the people responsible for turning that concept into a completed development.
A project needs more than a compelling concept. It also needs a supportable market use and control of a suitable property.
For a multifamily development, market analysis may include:
For a commercial, hospitality or mixed-use project, the relevant indicators may differ. In every case, the central question is whether the proposed development responds to a supportable market need.
Market conditions can change, and projections may not be realized. A well-supported demand analysis nevertheless provides a more informed foundation for assessing the proposed development.
Site control may take the form of ownership, a purchase contract or another enforceable agreement. The terms of that control can affect whether the property remains available throughout the entitlement and financing process.
The development plan should also identify which zoning, land-use, environmental, utility and other governmental approvals have been obtained, which remain outstanding and what factors could affect the proposed schedule.
Opportunity Zone designation does not override those requirements.
A project may have an experienced team, site control and appropriate zoning but still face practical barriers to construction.
Infrastructure capacity, utility access, environmental conditions, demolition requirements, construction costs and contractor availability can all affect timing and feasibility.
A construction-readiness assessment may address:
Unexpected delays and expenses may still occur. Clearly identifying known requirements allows those risks to be considered as part of the overall development plan.
Real estate development also frequently relies on several sources of capital. These may include sponsor equity, outside equity, construction financing and other public or private funding sources.
A capital plan may address:
A projected capital structure does not guarantee that financing will be obtained or remain available. It should provide a credible explanation of how the project is expected to move from planning through construction and operation.
For communities seeking to attract Opportunity Zone investment, the work begins before a project enters the capital formation process.
Creating an environment in which projects can advance often requires coordination among:
Each participant controls a different part of the process.
Property owners control sites. Local agencies oversee zoning, entitlements and permits. Infrastructure providers influence capacity and timing. Developers assemble the plan, team and financing strategy. Capital decisions depend on the objectives, constraints and risk considerations associated with each funding source.
No single participant can independently create a construction-ready project.
That is why community readiness and project readiness are closely connected. A community may want new investment, housing or economic activity, but capital formation depends on specific opportunities supported by credible information and a practical execution plan.
Urban Catalyst’s work in downtown San Jose has required navigating many of these steps, including assembling development sites, working through entitlement processes, evaluating market demand, arranging financing and advancing projects toward construction.
That experience has reinforced the distinction between identifying an opportunity and executing a development plan.
An Opportunity Zone designation can be relevant to the financing discussion. It cannot substitute for the work required to prepare a site, obtain approvals, establish a capital plan and manage development risk.
This principle applies beyond San Jose.
Communities seeking Opportunity Zone investment may be better positioned when they can present more than a designated census tract. They need specific projects supported by credible information, clearly identified requirements and a practical path toward execution.
As Opportunity Zones 2.0 takes shape, much of the public discussion has focused on census tract selection and the program’s updated federal tax provisions.
Those issues matter, but the long-term activity associated with the program will also depend on what happens after the map is finalized.
Communities will need to identify potential sites, determine appropriate uses, understand infrastructure and approval requirements and build a pipeline of projects capable of supporting customary due diligence.
Each opportunity will still be evaluated based on its own terms, risks, fees, conflicts and underlying economics.
The Opportunity Zone incentive is one component of that analysis. It is not the investment thesis by itself.
Erik’s perspective from the Sacramento workshop can be summarized in one sentence:
Attracting capital begins with creating projects that have a credible path to being built.
For communities, that means preparing more than a map of eligible census tracts. It means creating the conditions in which specific projects can move through due diligence, approvals, financing and construction.
Urban Catalyst is an Opportunity Zone fund manager and ground-up real estate developer based in downtown San Jose, California.
Urban Catalyst and its affiliates have sponsored private real estate investment vehicles and may have economic interests in properties or projects located within current or future Opportunity Zones. Readers should consider this potential conflict when evaluating the views expressed in this article.
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