Cresset Partners, Diversified Real Estate Capital Launch Second OZ Fund
Cresset Partners and Diversified Real Estate Capital has closed its first Opportunity Zone fund at $465 million and launched its second fund with a $750 million target.
NEW YORK CITY- Out of Chicago, Illinois Cresset Partners and Diversified Real Estate Capital huddled together early on to best determine how they would capitalize on Opportunity Zone legislation introduced in the Tax Cuts and Jobs Act of 2017, a bill with a cloud of ambiguity surrounding it.
Fast forward, the partnership has now closed its first Opportunity Zone fund the Cresset-Diversified Qualified Opportunity Zone Fund at $465 million, which has been allocated to seven projects, and launched its second fund the Cresset-Diversified Qualified Opportunity Zone Fund II with a $750 million target. “ This isn’t stop and restart,” said Nick Parrish, head of development at Cresset. “ We now have a vehicle to invest in Opportunity Zones, we’re going to keep it up.”
Cresset launched its first fund in 2018 and was an early mover in qualified Opportunity Zones. With the collaboration between its institutional partner Hines, who was a part of three projects in Fund I, the firm was able to leverage the expertise of its partners who had boots on the ground in its prospective markets and marry capital it had raised from single-family offices, real estate investors, entrepreneurs, hedge funds and proprietary investors.
Cresset and Diversified went boldly into qualified Opportunity Zones when not as much capital was flooding into space. According to Parrish, the firm has been able to establish itself as a strong player in the space, receiving thousands of pitches for Opportunity Zones projects. However, it is laser-focused on seven to nine projects for Fund II.
The developments are screened like any other development in the real estate portfolio. On a leveraged basis, the fund is executing on a 50 to 60 percent loan to cost basis.
“In terms of underwriting and analysis it is not any different than traditional real estate,” Parrish said. “The deals have to make sense, screening and sourcing are very important.”
Cresset-Diversified anticipates partnering with several of the same developers from Fund I and other new firms. Projects currently under consideration for Fund II include mixed-use, multi-family, retail, and office investments in the Southwest, Texas, Mid-Atlantic, Northeast and West Coast.
Through its business relationships, the firm has been able to establish a solid pipeline of ground-up developments, which is similar to other players in the market. About 80 percent of the Opportunity Zone projects today are ground-up developments, Parrish said. Investors are sticking to these kinds of deals to avoid the complications of the substantial appreciation clause of existing buildings, where they have to be substantially repositioned in order for investors to fully capitalize on capital gains tax deferment after ten years.
Parrish attributes the success of Fund I to its in house tax team because essentially the Opportunity Zone benefits required learning a new tax code. Tax structuring the fund was one of the most important components at the outset for the firm, which won’t really know if it’s been successful ten years from now. ”It is critically important to find good deals and you don’t want to lose benefits because you didn’t structure the tax fund right,” he said.