Investors work to find true benefit of opportunity zone deals

Active LPs

By Justin Mitchell

June 14, 2019

Why this is important: as the first big OZ deadline approaches, it is important for family offices to invest wisely.

Despite the buzz, some investment professionals remain cautious on opportunity zones, even as the first major deadline for investors to drop their capital gains into a fund looms.

“We have looked at a lot of opportunity zone funds, and we haven’t been compelled by most of them,” Kevin Philip, a managing director at Bel Air Investment Advisers, recently told Active LPs.

Philip said his firm has identified “a couple” OZ investments that seemed useful for their clients, but “it’s very selective.”

“They will from time-to-time have a role to play, but on the edges of an investment plan, not as the central thesis,” he said.

The concern comes down to whether an OZ investment would make sense on its own, even without the tax benefits that are part of the program.

“To do something that generates a subpar investment return, simply to have a delay in taxes—it’s a simple math calculation and it just doesn’t make a whole lot of sense,” Philip said.

Philip said he sought out more predictable real estate investments in established locations and added more risky investments in up and coming areas to enhance the overall return. Opportunity zones are by definition less developed, and therefore more risky.

“A lot of people believe we’re going to face a recession sometime in the next five years, so if you’re investing in a property in a location that you believe is gentrifying, that gentrification might get stalled and recessed if we have a recession three or four years from now,” he said.

Philip went on: “I have a feeling the real estate people specifically love opportunity zone funds because it’s helping them raise more money for projects they otherwise would have a problem raising funds for. The outcomes sometimes don’t matter as much to them as long as they’ve raised a fund they can charge fees on.”

Opportunity zones were created as part of the 2017 Tax Cuts and Jobs Act, and were spearheaded in congress by South Carolina Republican Senator Tim Scott. They provide a series of tax breaks to investors who roll their capital gains into a qualified opportunity zone fund for investment in one of 8,700 designated census tracts across the city.

Benefits include a 10 percent tax break for an investment carried for five years and an additional 5 percent if it is held for seven years. That part of the program sunsets in 2026, meaning investors have until June 29 to apply their 2018 capital gains to a QOZ to get the 7-year carry and the end of this year to apply that carry to their 2019 capital gains.

Profit or impact

Fund managers and real estate investors focusing on OZs for the most part seemed to agree with Phillip that OZ investments need to be able to stand on their own.

Avy Stein, chairman and co-founder of Cresset Capital, which is making a big OZ push, stressed that his firm does not expect clients to invest only in OZs.

“I would never tell anybody to put all their eggs in any one basket,” he told Active LPs. “I absolutely agree that this has a role in a portfolio, it is not a portfolio.”

Stein also said his firm is taking a possible recession into account.

“I don’t think anybody does a set of numbers on a real estate deal without pricing in a recession,” he said.

“If you buy and/or build quality real estate in quality locations, it stands the test of time,” Craig Bernstein of OPZ Bernstein, a QOZ fund that is part of Bernstein Cos, told Active LPs in an email.

“If you can find attractive investments, and they also happen to be located in opportunity zones, we view that as a win-win opportunity for us,” said Frank McGrew of McNally Capital.

Some investors do not even see OZ investments as being primarily about profit.

Kamil Homsi, founder and CEO of Global Realty Capital, the onshore arm of a Dubai-based family office, told Active LPs OZs are, for him, “all about impact.”

“You’re not going to make more money than you’re going to make in regular investments,” Homsi said, stressing that he felt investors needed to work closely with communities.

Kunal Merchant, president and co-founder of CalOZ, a nonprofit trade organization that seeks to facilitate OZ investments in California, told Active LPs that he hoped family offices would look beyond the “low-hanging fruit” of easy profits.

“I ask them to try to push a little bit out of their comfort zone for the benefit of the state and the country and all of the people in these opportunity zones that are counting on us to help them,” he said.

But most investment advisers and fund managers still stress deals must make sense on their own.

“Under no circumstances can you allow the tail to way the dog, as it relates to making sound investment decisions,” Bernstein wrote Active LPs. “The program has the ability to make a good deal great but will not make a bad deal good.”

Investors explore crucial aspect of OZ investments: gaining community buy-in

Active LPs


By Justin Mitchell

June 10, 2019

Why this is important: experts and investors agree community engagement is critical to making the OZ program work.

When Grey Dodge and Erin Gillespie were working in the Florida state government, it was their job to select which of the state’s census tracts would become opportunity zones, offering a series of tax breaks to investors who put their money into real estate or businesses within those zones.

As Governor Rick Scott’s time as governor wound down, Dodge and Gillespie noticed something.

“We spent the last half of the year, I guess, the last six or seven months advocating for zones, talking about local governments and how they can get engaged, kind of answering questions and being a resource to communities that were getting their understanding of it,” Dodge told Active LPs.

After leaving the government, Dodge and Gillespie formed Madison Street Strategies, an economic development consulting firm helping Florida communities link up with the right investors.

“We feel the most successful opportunity zones are going to be those where the investments and communities are partnered together to bring in what makes a community successful, and that’s different in every community,” Gillespie told Active LPs.

Among the firms they have worked with are OPZ Bernstein, which Active LPs covered before.

They are not alone. Across the U.S., organizations are popping up to help address one of the core concerns about opportunity zones–that they will do little more than supercharge gentrification.

Alexander Flachsbart started the non-profit Opportunity Alabama to help build community capacity to understand how the program could work for them. He told Active LPs he has been able to “bridge the gap” between developers and local projects quickly, and does not necessarily believe the split between investors and projects is all that stark in Alabama.

“I think maybe in really large urban areas where a lot of the thinking about this program goes on, in places like New York and Chicago and the Bay Area, I think maybe that’s a problem,” he said. “But I think in places like Alabama, communities know what’s happening in their back yard by and large, and it’s a lot easier to build consensus.”

Flachsbart told Active LPs the biggest disconnect seemed to be between the bigger national OZ funds and the more rural parts of Alabama, and that is where most of his work is happening. He encouraged family offices—whom he said “own” the OZ space, at least in Alabama—to work with organizations like his, which have also sprouted up in Baltimore, Colorado, Washington and Oregon, among other places.

Flachsbart said these organizations can save potential investors time due to their knowledge of the space in their local areas.

“The deal flow that we’re looking at is probably four dozen projects, and the ones we’re marketing are probably half of those,” he said. “Ultimately, it’s a good way to show that you’re trying to engage and give back…trying to accomplish the ultimate aims of the program.”

One of the family offices Flachsbart has worked with is McNally Capital. Managing partner Frank McGrew recently told Active LPs that McNally does try to work with local communities.

“I think the community has to be very much engaged as to what types of development will take place,” he said.

Avy Stein, co-founder and chairman of Cresset Capital, who is making its own big OZ push, agreed.

“There is nothing that we would ever do that wouldn’t involve understanding and commitment from the local communities,” he said.

Another way to ensure community buy-in is to seek out communities that have somehow codified what they are looking for from OZ investors. An organization called Accelerator for America has helped cities across the country develop their own OZ prospectusesHouston, TexasLouisville, Kentucky and South Bend, Indiana have theirs posted online for anyone to read.

You can also be more hands-on. Kamil Homsi, founder and chief executive officer of Global Realty Capital, the onshore arm of a Dubai-based family office, told Active LPs he requires anyone he invests with to be in touch with local communities.

“For the funds we are creating for our properties that we designated and we purchased, the sponsors have a guideline from me that they have to follow,” he said. “Have you spoken to the mayor? Have you been with the board of education? Have you spoken to the social workers?…The general involvement in the community.”

Kunal Merchant, who runs California-based CalOZ, which works with developers, communities and government officials, said he felt like all of this is necessary.

“Passing federal legislation, having some incentives here and there, that’s just not going to be enough, you really do have to stitch together an ecosystem to make this work,” he said.

Former Kings executive launches opportunity zone group

Former Kings executive launches opportunity zone group

The prospect of opportunity zones has generated excitement over the last year, but some developers, funds and communities aren’t sure how to leverage the new tax incentive program. hat’s why Kunal Merchant, a former Sacramento Kings executive and aide to former Mayor Kevin Johnson, says he’s launching CalOZ, a new group dedicated to navigating the complicated framework around opportunity zones.

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