HealthSouth redevelopment likely headed back to drawing board

The unraveling of a deal with Aspen Heights Partners LP to redevelop the old HealthSouth rehabilitation hospital has leaders at Austin City Hall looking ahead to what else might be done with the site.

Next steps for the redevelopment of 1215 Red River St. and 606 East 12th St. are scheduled be discussed during Austin City Council’s July 20 meeting, according to a public agenda, and Council could vote on a resolution calling on city staffers to develop a plan.

The proposed resolution would give city staff about 60 days to prepare a “comprehensive report” on the development feasibility of the city-owned site, using prior negotiations as a guide, and recommend next steps, including possibly tapping the Austin Economic Development Corp. or Austin Housing Finance Corp. to take the lead.

It became clear earlier this month that the city’s exclusive negotiating agreement with Aspen Heights to redevelop the HealthSouth site had expired at the end of June and city staff had no intention of moving forward with the project.

Austin-based Aspen Heights had proposed a plan to build two apartment towers on the land, which is just south of the old Brackenrige hospital and near Waterloo Park. Of the 921 apartments proposed, 232, or about 25%, were to be reserved as affordable housing for people with low incomes.

But as market conditions worsened, Aspen Heights sought to reduce the number of affordable units, possibly to 7%, with the goal of keeping the project financially feasible, Assistant City Manager Veronica Briseño stated.

That was confirmed by Fayez Kazi, CEO of Hexah, a real estate group that had worked with Aspen Heights on the HealthSouth deal structure and financial model.

“Changing financial markets pushed the strained model over the edge into non-viability,” Kazi told Austin Business Journal. “Aspen Heights tried to make it work under much worse capital markets than existed during the original proposal, but ultimately not in a way or a timeframe that worked for the city.”

Representatives for Aspen Heights declined to comment.

Aspen Heights’ plans were last year cheered as an innovative deal that balanced development needs with a huge community benefit in the form of hundreds of affordable downtown apartments, not to mention a music venue and child care facility on site.

Capital A Housing, an affordable housing development firm under the Hexah umbrella, and the nonprofit NHP Foundation were set to partner with Aspen Heights. Civilitude, a civil engineering company under Hexah, was also assisting in the early design process.

Kazi said the development team was planning to take advantage of EB-5 financing, which provides foreign investors looking to immigrate to the U.S. with visas in exchange for capital and has become a popular tool in real estate deals. The EB-5 program typically provides access to lower interest rates than traditional financing as well as more flexible repayment structures and tax incentives, such as the ability to defer capital gains taxes.

“It’s a great site and the development team’s tools like EB-5 financing and the FFA site addition will be hard for anyone to beat,” Fayez said, referring to the adjacent quarter-acre tract at 614 E. 12th St. owned by the Texas FFA Association, which Aspen Heights had aimed to incorporate into its development.

Aspen Heights had been working on the proposal for years. In May 2021, it signed an exclusive negotiating agreement with the city. That deal was revised and extended in September 2022, according to Council documents.

Kazi remains confident a new project will meet the city’s needs, even though the deal with Aspen Heights appears unlikely to come to pass.

“Something great is going to go up there, and hopefully the people of Austin won’t have to wait too long to see it go up,” he said.