These zones were created in 2017 national legislation and are designed to funnel capital into distressed parts of the US. A number of wealth managers have piled in; the zones come with a number of tax advantages. Debate remains on whether they encourage investment that would have eventually taken place anyway.

Cresset, the US wealth management group, and Diversified Real Estate Capital, have closed their first Qualified Opportunity Zone fund, a portfolio that taps into the tax-advantaged investment structures created by tax legislation three years ago. QOZs are areas designated as needing infusion of capital to tackle poverty, crime and other problems. 

Called the Cresset-Diversified Fund, or Fund I, it raised the $465 million in capital needed for the portfolio and the seven underlying projects. Cresset-Diversified has also launched a follow-on fund, the Cresset-Diversified Qualified Opportunity Zone Fund II, or Fund II.

Fund I invests in institutional-quality, core real estate development projects across the US. Fund I focused specifically on urban neighborhoods in markets such as Nashville, Denver, Houston, and Portland, among others. The Fund I portfolio includes investments in multi-family, office, and ground-floor retail. Investments are structured conservatively with low leverage to generate an attractive return and to allow for potential refinancing of the project once the development is completed and leased.

Cresset-Diversified has partnered with development firms, including Hines, Lennar, Gerding Edlen, and Washington Property Co, and has already started construction on its flagship project in Houston, The Preston.

Introduced in the 2017 package of tax changes under the Trump administration, the zones are designed to spur economic development and job creation in what are deemed to be distressed communities in the US. Taxpayers may defer tax on eligible capital gains by putting money into a zone and by meeting other tests. A taxpayer must realize capital gain income, invest it in a Qualified Opportunity Fund within 180-days of realizing the gain, and elect to defer the gain on his or her tax return.

Cresset was among the first wealth firms to launch such a fund. This form of investing straddles traditional investment and a style increasingly familiar to the wealth management space - impact investing. This approach seeks to put money to work toward achieving a certain goal, such as alleviating poverty, reducing crime or improving education – while earning a monetary return. Investments cover areas such as affordable housing, infrastructure, parking, senior housing, sports stadiums and student accommodation.

In total across the US, about $2.5 billion is held in QOZ investments, (as reported in October last year, so the number is now likely to be higher). Dozens of QOZ funds have been launched; readers can scan some of them via websites such as www.opportunitydb.com, for example. That site lists funds with names such as The Berenda Opportunity Fund (run by William B Pitman); Fundrise Opportunity Fund (Fundrise Advisors); Palace Way Fund (Palace Way Management LLC); Affordable Housing Opportunity Fund (LIHTC Development), and HeroHomes.com Opportunity Zone Fund I. There are more than 8,700 opportunity zones in the US.

The tax status of the zones has caused political controversy. Last fall, news service ProPublica reported that HNW figure Count Dan Gilbert, chairman of Quicken Loans and owner of the Cleveland Cavaliers, among others, had been identified as someone who will benefit from parts of Detroit being designated as a QOZ. Gilbert’s firm has hit back at the report (source: Forbes, October 25).