The wealth management firm talked to this publication about its QOZ investment strategies.

Whatever else can be said about recently-launched Qualified Opportunity Zones, Cresset Capital Management is determined to be a prominent, if not the biggest, player in these areas benefiting from tax incentives. 

Introduced in the 2017 package of tax changes under the Trump administration, the zones are designed to spur economic development and job creation in what are deemed to be distressed communities in the US. Taxpayers may defer tax on eligible capital gains by putting money into a zone and by meeting other tests. A taxpayer must realize capital gain income, invest it in a Qualified Opportunity Fund within 180-days of realizing the gain, and elect to defer the gain on his or her tax return.

Cresset was among the first wealth firms to launch such a fund, called the Cresset-Diversified QOZ Fund, and another is planned. This form of investing straddles traditional investment and a style increasingly familiar to the wealth management space - impact investing. This approach seeks to put money to work toward achieving a certain goal, such as alleviating poverty, reducing crime or improving education – while earning a monetary return. Investments cover areas such as affordable housing, infrastructure, parking, senior housing, sports stadiums and student accommodation.

“Our Qualified Opportunity Zone investment philosophy is no different than our general philosophy of investment,” Stein said. “We are creating institutional quality investment opportunities for high net worth families and family offices,” Avy Stein, one of the founders of Cresset Capital Management, told Family Wealth Report recently. “The tax benefit is very significant adding as much as 500 basis points to the annual return for the project.”

The tax benefits from QOZs are an attraction, although Stein argues that the affected areas would have lured capital at some point anyway. “They would all have been properties that I would have been interested in acquiring at some point in time,” he said. 

In total across the US, about $2.5 billion is held in QOZ investments; Cresset accounts for more than $300 million of it. Dozens of QOZ funds have been launched; readers can scan some of them via websites such as www.opportunitydb.com, for example. That site lists funds with names such as The Berenda Opportunity Fund (run by William B Pitman); Fundrise Opportunity Fund (Fundrise Advisors); Palace Way Fund (Palace Way Management LLC); Affordable Housing Opportunity Fund (LIHTC Development), and HeroHomes.com Opportunity Zone Fund I (HeroHomes.com). There are more than 8,700 opportunity zones in the US.
 

Coast to coast
Cities in which Cresset is investing via zones include Portland, Oregon; Denver; Houston; Nashville, areas around DC, Omaha, Nebraska and Charleston, South Carolina. The census data on which the QOZ designations were based dates from 2010 so in some cases, such as Portland, the population has subsequently grown considerably, Stein said. 

“There are opportunities that present themselves because of infrastructure that is put in place around them as well," he said. “What the [QOZ] law does in these areas is that they pull development forward a bit.”

The deferred gain is recognized on the earlier of (i) the date the QOF investment is sold or exchanged; or (ii) December 31, 2026. The deferred gain is cut by 10 per cent if the taxpayer has held the QOF investment for five years from the recognition date and by 15 per cent if the taxpayer has held the QOF investment for seven years.

Asked if the QOZ played to the recent trend towards more direct investment from family offices, Stein agreed, but said because of the complexity involved in being able to achieve the tax benefits, many large families are investing in funds like Cresset-Diversified QOZ.

“You have to create substantial capital gains and you need to build a substantial structure for a QOZ fund and that is not a simple matter. We find many family offices invest with us in our funds because monitoring and structuring that goes on in the process is very complex,” Stein said. “Many rules have to be followed…..business plans are needed, there is a need for reporting...there is a lot to do here.” 

“We structure our investments with an eye to the old Hippocratic Oath to `do no harm’...our properties are leveraged no more than 60 per cent. We are building projects that yield 5-8 per cent returns on cost before any leverage, before the 500bps after benefits are added, and double-digit investor returns,” Stein said. 

An investor must put in at least $250,000 into the Cresset fund; about a dozen people at the firm, plus Cresset’s partners at Diversified Real Estate Capital, run the portfolio.

Recent controversy
The tax status of the Zones has caused political controversy. A few days ago, news service ProPublica reported that HNW figure Count Dan Gilbert, chairman of Quicken Loans and owner of the Cleveland Cavaliers, among others, had been identified as someone who will benefit from parts of Detroit being designated as a QOZ. Gilbert’s firm has hit back at the report (source: Forbes, Oct 25).

Gilbert’s Rock Family of Companies published the website OppZoneFacts.com, which accuses ProPublica of pursuing a “biased narrative” and says that “economic development groups, private investors and municipalities answered the call for feedback into the Opportunity Zone selection process - at the State’s request” (Forbes). The site added that Gilbert’s entity had had “already purchased its assets well before the Opportunity Zones were even designated (as of October 14)”.

As wealth managers in the past have said, don't let the tax tail wag the investment dog. Some - if not all - of the areas targeted by the zones would probably attract investment in any event, so the QOZ model accelerates what is happening. Even so, with so much focus on impact investing, the QOZ model appears to be congruent with it in certain respects.