How the Jackson Dearborn OZ fund found success

Jackson Dearborn Partners LLC was already preparing to develop student housing in Champaign, Illinois when it discovered an opportunity—because the almost 50,000 students at the University of Illinois at Urbana-Champaign mostly had no income, that placed their development within the federal opportunity zones program.

“In the process of us being under contract on the deals that we were going to develop ourselves we realized that they happened to be in an opportunity zone,” said Sean Lyons, a partner at Jackson Dearborn. “We kind of quickly shifted strategy to ‘let’s raise a fund for these projects.’”

The firm quickly put together its first fund, the Campustown Opportunity Zone Fund I. The fund is modest by opportunity zone standards, with a $10 million target. Lyons was surprised by the surge in interest from investors, which allowed the firm to raise slightly more than target in about three weeks.

The Opportunity Zones program was created as part of the 2017 Tax Cuts & Jobs Act. It was the brainchild of the Economic Innovation Group and was spearheaded in Congress by South Carolina Republican Senator Tim Scott. It provides several tax breaks on capital gains invested in one of about 8,700 census tracts spread throughout the country. The program has drawn strong interest from family offices and high net worth investors but also concerns about whether OZ investments will be high quality and will not displace residents.

Jackson Dearborn’s success was serendipitous, a mix of realizing the firm was immersed in an OZ but also having a shovel-ready project on tap.

“There’s not a lot of that type of availability on the O-zone projects, some of them are pending approval, one thing we found is investors are teed up and ready to go,” Lyons said.

One of the first deadlines for the opportunity zones program came at the end of last month.

Lyons told Buyouts that the fund included investments from wealth managers, West Coast-based investment bankers and high-net worth individuals—though no family offices.

“The bigger the deal a lot of times the easier it is to raise the funds, particularly when it comes to family offices. They don’t want to write a $500,000 check—they would rather write a $5 million-dollar check,” he said.

Jackson Dearborn has developed a long list of family office contacts and thinks some FOs will be interested in one of their next funds, which could be in the $30 million to $50 million range, Lyons said. Jackson Dearborn has projects in the pipeline in Ann Arbor, Michigan, Madison, Wisconsin, Colorado Springs, Colorado and Iowa City, Iowa, but wants to hold off on fundraising until they are ready to go.

“I think a mistake that people are making that we’ve seen is they’re going out prematurely, before anything is approved or anything has been green-lighted,” he said. “That’s a riskier proposition than saying, hey, we’re going to start building next month.”

Lyons said that might be why investors have seemed slow to leap into the OZ program.

“It’s not a lack of interest in the program, it’s more finding a specific deal that works for their metrics,” he said. “I think that’s gotten harder than anyone anticipated it would be. It’s slim pickings among the ones that are very attractive to invest in.”

Action item: reach Sean Lyons at slyons@jacksondearborn.com.