Cresset raises $280 mln for QOZ fund amid tough OZ market

Cresset raised $280 million for its qualified opportunity zone (QOZ) fund towards a revised target of $400 million to $450 million, with a plan to close at the end of this year, Managing Director Nick Parrish told Buyouts.

The Cresset-Diversified QOZ Fund was launched last year in partnership with Larry Levy‘s Diversified Real Estate Capital. At the time, its target was $500 million. Parrish told Buyouts that was a “loose” target, subject to change based on how deals and fundraising lined up.

“Our target has not necessarily changed, per se, but evolved,” Parrish told Buyouts in an email. “We have to have all of our projects identified by year-end…Therefore, as we approach the end of our investment period, we need to match up fundraising and available projects in the pipeline.”

The Opportunity Zones program was created as part of President Donald Trump’s 2017 Tax Cuts & Jobs Act. It provides several tax breaks to investors who put capital gains into a fund that develops projects in one of 8,700 designated census tracts.

Three tax breaks are available:

  • A temporary tax deferral for gains invested in a qualified opportunity zone;
  • A 10 percent reduction in how much of the gains are taxable for investments held for five years and another 5 percent reduction for investments held seven years, for a 15 percent total;
  • A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment held for 10 years.

Opportunity zones come with time constraints. Investors must roll their capital gains into a fund within 180 days of each year’s end. The deadline for 2018 capital gains was June 29. Investors must have their 2019 gains in a fund by Dec. 31 to get the extra 5 percent step-up, as that part of the program will sunset at the end of 2026.

Cresset has projects underway in Houston, Denver, Portland, Nashville, Washington, D.C. and Omaha, which amount to $400 million. The projects in Houston, Denver, Nashville and Omaha are in collaboration with Hines, a global real estate investment firm. Parrish said the firm could add one more project, which would bring the fund’s total to $450 million.

“We will see based on the end of the year and the projects we have and the capital we have—when those line up, we’ll close,” he said, adding Cresset plans to launch Fund II next year.

OZ fundraising appears to have been sparse overall. CoStar recently reported that funds had raised 10 cents for every dollar targeted.

“The fact that we were out early, that we had good partners, in particular Hines, and that frankly we’ve been able to raise capital and actually get deals done—which, amazingly, still seems like a bit of a rarity in this market—I think has just continued to help us maintain that momentum,” he told Buyouts.

Cresset’s fund operates differently than a traditional private equity fund. It has a “single-call feature” and no set closing date, closing on a weekly basis at minimum to accommodate investors that need to invest capital quickly.

“These are people that have a finite trigger date [when] they had to put their capital to work,” Parrish said. “They couldn’t be waiting until a close date three months out or they couldn’t be committing and then having that capital draw down. They needed capital invested and invested now.”

The fund has a 1.5 percent management fee, which steps down to 1.25 percent after five years, and a 20 percent carry over a 6 percent preferred return. Parrish said investors include entrepreneurs, experienced real estate investors and lots of large, single-family offices that have internal real estate teams.

Parrish said Cresset’s nature as a hybrid firm, including a multi-family office, has given it an edge.

“If an investor comes to us with capital, who has a complex situation where they need to understand how that investment will play into their estate plan and how that might fit within the broader context of their family governance structure, we can draw on our partners in the multi-family office to help with that,” he said.

Parrish said the underwhelming performance of opportunity zone funds overall speaks to a glut in the market which, combined with the fact that OZ investments require a wide swath of highly technical skills which few firms have, causes a “huge dispersion of quality” in the products available.

“I think the market has recognized that and has frankly approached it with a little bit of skepticism,” he said. “I think you’re starting to see the wheat separate from the chaff.”

Action Item: read Cresset’s form ADV here.