Two investment firms have closed on a half billion-dollar Opportunity Zone fund with projects across the country, and have launched a second fund, with a target raise of up to $750 million.
Chicago-based Cresset Partners and Diversified Real Estate Capital raised $465 million for the first fund, just shy of the $500 million goal when it was announced in October 2018.
The joint venture’s initial investment, a 46-story apartment tower in Houston that it is building with Hines, started construction last spring. It also has projects underway in Portland, Oregon; Omaha, Nebraska; Nashville, Tennessee; Charleston, South Carolina; and Silver Spring, Maryland, according to a release.
The Cresset-Diversified Opportunity Zone fund represents something of a success amid what has become an increasingly difficult fund-raising landscape for the federal tax incentive program the Trump administration created in late 2017.
Firms like Anthony Scaramucci’s Skybridge Capital — which announced plans to raise a $3 billion Opportunity Zone fund in late 2018 before it was downsized to $300 million in October — have claimed there is not enough investor demand. Others have said it’s difficult to make deals pencil out since land prices in Opportunity Zones have skyrocketed.
The federal program is intended to kickstart development in thousands of distressed neighborhoods across the country, but to get the full tax benefit, investors must hold the asset for 10 years.
Cresset Partners managing director Nick Parrish said the first fund worked because the duo partnered with established large-scale developers like Houston-based Hines and Miami-based Lennar on ground-up projects instead of going it alone. The other strategy was getting into the program early in 2019 as other institutional investors and developers waited on the sidelines for more guidance from the federal government.
Cresset and Diversified are also working with Hines to develop an 11-story apartment building in Downtown Denver — called North Wynkoop — in that area’s only available Opportunity Zone development site.
Parrish said getting in early on deals allowed the firm to show investors that its projects would be “high-quality deals” like high-rise apartments in up-and-coming areas, rather than buying “tough car washes,” he said.
Latest fund targets $750M
For its next fund, the company is looking at multifamily, office, hospitality properties. It is also looking at industrial properties. The fund, targeting a $750 million raise, will look to mimic the first, though without the benefit of “first-mover” advantage.
In December, the government released its final set of Opportunity Zone regulations, which experts said would lead to an influx of capital from institutional investors.
Despite the rise in land prices throughout many of the 8,700 designated Opportunity Zones throughout the U.S., Parrish said, “the stuff we see is pretty darn attractive.”
It has not been all clear sailing for Opportunity Zones, whose initial rush of interest led to sky-high investment funds launching. That quickly dissipated, with funds like Skybridge and others having trouble reaching anywhere near their initial goals. And despite Hines’ collaboration with Cresset and Diversified, CEO Jeff Hines isn’t sold on the program. He recently called Opportunity Zones “really bad public policy” at an event in Miami.
“Anything you do to artificially affect the market forces for real estate is sort of a problem,” he said at the February event. While the company has projects in Opportunity Zones, “We do not go and look for Opportunity Zone deals,” he added.
And while Treasury Secretary Steven Mnuchin has said Opportunity Zones could fuel $100 billion in private investment, the program has also faced scrutiny from the Treasury Department. In January, it opened an investigation into the program, which Congressional Democrats have argued serves as a tax break for wealthy developers and politically-connected insiders looking to build luxury projects in upscale areas.
But Opportunity Zones investment has increased in recent months thanks in part to the government’s release of its final set of regulations in late December. Close to $2.3 billion was put into Opportunity Zone funds between early December and early January, according to a survey from accounting firm Novogradac. That was a 51 percent increase over the month before.