Five Questions with Cresset’s Avy Stein on Opportunity Zones

Avy Stein is co-founder and co-chairman of Cresset Capital, which he started with Eric Becker in 2017.

Cresset launched out of what Stein called a “tremendous disruption” taking place in the family office space, with increased demand for more sophisticated financial products along with the usual menu of FO services.

Cresset is eager to take advantage of opportunity zones and recently has been adding staff, launching a fund last year in partnership with Larry Levy, Jeffrey Cherner and Michael Miller, owners of Diversified Real Estate Capital, closing its first project deal in Houston in partnership with Hines, and announcing it had purchased Evanston Advisors.

Why is Cresset so interested in opportunity zones?

I think it’s the first time in my business career that I can remember a tax policy being not only good but actually dovetailing with what’s going on in the world. There are all these underinvested communities and you have a stock market with $6 trillion in embedded gains in the U.S., you have private assets including companies owned and real estate … and you have a scenario where asset values are very high and most of the private equity firms have lots of dry powder. The tax benefits are incredibly significant, so for investors like our clients who want to create impact, who have substantial and sizable capital gains from their successes, this is a terrific opportunity.

What kinds of OZ investments are you most interested in, and why?

It is our fundamental belief that not all opportunity zones are created equal, and not all things will happen in the same time frame. Our view is that it’s going to happen in stages. The first phase of this is going to be those areas which are closest to the more developed areas, places like Houston, Texas, where we have our first opportunity, downtown Portland, Oregon, where our second opportunity is, the Bay Area, and areas around New York. There are also some terrific areas in Nashville, Denver and other places. We think those are going to get done first and we’re going to be focusing on those first.

We think the second wave is going to be stepping out from those areas and deeper into the communities. That will include not only real estate development, but private equity opportunities. People talk a lot about technology and intellectual-property-type companies. I think that might be still a little ways away, but we want to participate in the migration of what the opportunity zone opportunities become over time.

Why should family offices be interested in opportunity zone investments?

First and foremost, family offices are concerned about impact, and the opportunity zone investments have measurable impact. You can look at income levels, jobs, changes in demographics and it’s very measurable.

Secondly, family offices, of course, own lots of assets, and those assets often appreciate and create capital gains. So when they are taxed, family office structures are often taxed in a way that allows them to benefit from these tax rules.

What are some of the potential drawbacks of opportunity zones?

It’s a complex set of regulations. I think there are going to be a lot of people who say that they have an opportunity zone fund and they’re doing a project or two, but aren’t really set up to follow all the rules and make sure they do everything appropriately from a tax and accounting perspective.

I think the other pitfall is the notion that you can go very deep into something that is incredibly underdeveloped with any project and make a substantial difference. I think there has to be an evolution to those projects. You have to be very careful rushing into the deepest problems initially.

The other thing I would say is you should do no investment in an opportunity zone that doesn’t make economic sense regardless of the impact, because that’s not really going to work for anybody. It won’t create the impact that you think, and it will be a bad investment.

What do you think about the latest round of QOZ regulations released last week?

I think it created more certainty as to the front end, like how long you can hold cash before it has to be invested in opportunities. I think it created more certainty in terms of the disposition of assets and how you could do that, and it created a very important certainty on the ability for you to refinance an investment so long as you have basis in that investment. Those three things were probably the biggest.

Edited for length and clarity by Justin Mitchell.