Allagash targets $500 mln for debut OZ fund

Even amid apparently sparse investor interest in opportunity zones so far, Tony Barkan, founder, co-managing principal and chief executive officer at Allagash Opportunity Zone Partners, is not worried. Allagash is in the market with its first opportunity zone fund targeting $500 million.

“I actually applaud the investor base for being slow here,” he told Buyouts.

Allagash submitted paperwork for the Allagash Opportunity Zone CRE Fund I LP in February. Barkan told Buyouts that due to the long delay on government regulations for the program, Allagash did not actually launch the fund until the last week of June. Allagash was already planning on starting a firm focused on low-income housing when the OZ program was announced and decided it fit with their plans, Barkan said.

The firm has raised less than $10 million of a $500 million target. Barkan said the firm is taking its time and he thinks investors are doing the same.

“I think the fact that investors have been slower to come is as much a reflection of the fact that the structures and the product hasn’t been necessarily appropriate,” he said.

Last week, CoStar reported that, out of 160 Qualified Opportunity Zones it examined, 130 reported combined fundraising goals of $15.46 billion. But all told the 160 funds have raised just $1.59 billion, less than 10 percent of their reported goal. Other investment professionals have also said they have not seen many dollars invested in OZs, despite a great deal of interest.

The OZ program was part of the 2017 Tax Cuts & Jobs Act and gives investors several tax breaks on capital gains invested in one of about 8,700 census tracts. Investors who put their capital gains into a Qualified Opportunity Zone fund can get a temporary deferral of taxes on the gains.

The rules allow for a step-up in basis of the capital gains to 10 percent if the investment is held for five years and 5 percent more if it is held for seven years, for a total of 15 percent. Also, if investors hold the investment for 10 years, they get a permanent exclusion from taxation of those capital gains.

The deadline to invest 2018 capital gains to get the full seven-year step-up in basis passed at the end of June. But Barkan said there is plenty of time to profit from the permanent exclusion, which provides greater potential profits.

“The benefit is in owning the fund over the long term, generating the capital gains over the long term that are tax free. That is a pure advantage, and that advantage is very significant,” he told Buyouts.

To that end, Allagash’s fund is structured to last for 10 years. The fund has a 1.5 percent management fee structured as a share of income, with an 11 percent carry over a 7 percent preferred return. The fund is projected to have a net 14 percent return. If it does better than that, the carry goes up to 22 percent.

Barkan said many OZ funds are not locked up for the full 10 years, which could lead to the underlying assets being sold. Investors would get their money back—but would also have to pay their taxes or roll their gains into a new fund, which would start the 10-year clock over again.

“[Funds like that] aren’t necessarily structured in a way that give investors the same type of security as they would have from the management of what they would classically call a fund,” he told Buyouts.

Allagash hopes to close its fund by the end of this year or the first quarter of 2020. Barkan said most of the interest Allagash has seen has come from wealth management platforms and insurance companies, but also some family offices and high net worth individuals who do not specialize in real estate.

Allagash hopes to offer more OZ funds in the future, and Barkan said the firm may adjust the structure in the future.

“If you have capital gains, there are enough funds that investors should be able to find something that will allow them to take advantage of the program,” he said.

Bridge Investment Group announced last week that they were deploying over $500 million from their OZ fund.

Action item: contact Tony Barkan at tbarkan@allagashoz.com.