USG Realty Capital and OZI Group to Launch Investor-Directed Opportunity Zone Fund Platform

USG Realty Capital, a new alternative investment company founded by 30-year industry veteran Greg Genovese, and OZI Group, a sponsor of three opportunity zone funds, have partnered to launch an investor-directed, multi-asset opportunity zone investment platform dubbed the USG/OZI Opportunity Zone Investment Platform. The platform plans to debut their first opportunity zone fund this month.

Genovese previously headed Sound West Realty Capital as principal and president, and created their first qualified opportunity zone program, Sound West OZ Fund I, back in 2018.

According to the companies, the new platform will allow accredited investors “to choose as much diversification or project concentration as they please.”

“The platform provides quantitatively aligned asset management with the fund’s investors, delivers stricter oversight of developers, and honors the spirit and intent of the opportunity zone initiative with individual and ongoing social impact reporting on each of the projects,” the companies said.

The USG/OZI Opportunity Zone Platform has several projects and developer partners identified for the rollout and expects between five and 10 projects in total, each needing approximately $10-15 million in investment equity, the companies said. The platform will focus on “recession resilient” asset classes with growing demographics, including multifamily, senior living, storage and manufactured housing.

“We aim to deliver better asset manager alignment with opportunity zone investors, versus the more common developer-driven funds, in which the developers also serve as the asset manager and therefore create a dynamic that is ripe for conflicts of interest,” said Greg Genovese, chief executive officer of USG/OZI Opportunity Zone Investment Platform. “During the heart of the COVID-19 pandemic, these conflicts of interest became all too evident. We’ve developed an investment platform that allows the sponsor and asset manager to work amicably and collegially with the various developer partners, and puts us, the sponsor, squarely on the side of the investor as the asset manager, to serve as their advocate.”

The companies indicated that candidate opportunity zone projects will be run through a “screening process and due diligence filter,” which includes, among other factors, studying asset class and demographic recession resiliency, as well as long-term profitability.

“Our platform is specifically designed to lead with top quality project due diligence focused on four key interconnected dynamics: asset class demand; area demographic trends and recession resiliency; public/private partnership with the local communities; and developer reputation and history of project deliverability and budget management,” said Kyle Wiese, president and co-manager of USG/OZI, and founder and managing member of OZI Group.

USG/OZI is headquartered in Silverdale, Washington, with divisional headquarters for development and financial analysis in Olympia, Washington and asset management and capital markets in Santa Barbara, California.

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Non-traded Alternative Fundraising Down, But Rebounding Despite Headwinds

Despite the turbulence and unprecedented headwinds that have blown throughout most of 2020, IPAVision 2020, the Institute for Portfolio Alternative’s flagship conference, kicked-off online yesterday with optimism from many of its presenters.

Kevin Gannon, managing director of R.A. Stanger & Co., the investment bank that specializes in the non-traded alternative investment industry, delivered a keynote address centered on industry performance through the third quarter that demonstrated a significant decline in equity raise throughout the industry, but a hopeful outlook as a significant rebound during the second half of the year appears to be growing.

“The future is bright for our industry, which I think is very apparent when you look at the resilience demonstrated throughout this challenging year,” said Tony Chereso, IPA president and chief executive officer. “Despite the global pandemic and resulting economic shutdowns, we continue to experience a strong flow of equity into the various alternative investment programs offered by IPA members. This resilience is due largely to the attractive results recorded and the ongoing evolution of investment structures that are increasingly expanding the universe of active participants among wealth advisors and investors.”

In terms of fundraising among the various segments of the non-traded alternative investment industry, Gannon reported that non-traded real estate investment trusts have attracted nearly $8.2 billion in investor equity through Sept. 31, 2020, putting them on pace to raise more than $11 billion by year end. In 2019, non-traded REITs raised $11.9 billion. Global private equity giant Blackstone continued its dominance with 71.8 percent of all equity raised, followed by Black Creek Group and Starwood Capital with 11.0 percent and 7.9 percent, respectively. Lasalle Investment Management and Hines rounded out the top five sponsors in terms of equity raise.

Interval funds, which have enjoyed exponential growth in recent years, raised $4.7 billion through the third quarter and are on pace to raise $6.3 billion for the full year vs. $6.9 billion in 2019. The top sponsors include Versus Capital Advisors, with 17.1 percent market share, followed by SilverBay Capital (14.4 percent), PIMCO (12.6 percent), Griffin Capital (10.3 percent) and Bluerock (7.4 percent).

Delaware statutory trust programs, popular among investors seeking the tax-advantages provided via 1031 exchanges, are on pace to raise nearly $3 billion in 2020, having raised $2.2 billion at the close of the third quarter. Perennial industry leader Inland Private Capital Corporation raised $458.2 million through September, accounting for a dominant market share of 21.1 percent. ExchangeRight (12.3 percent), Capital Square (9.2 percent), Black Creek Group (9.2 percent) and Passco Companies (6.1 percent) rounded out the top five DST sponsors.

According to Gannon, fundraising among non-traded business development companies has largely evaporated, with the notable exception of Owl Rock Capital Advisors, which has raised more than $265 million of the $277.6 million raised by non-traded BDCs through the end of September. Owl Rock accounts for nearly 96 percent of all equity raised for BDCs, which are on pace to raise approximately $370 million for all of 2020 vs. $543.7 million raised in 2019.

Opportunity zone offerings, which raised more than $1.6 billion of investor capital last year, are on pace to raise just over $820 million in 2020. Through the third quarter, the economic development funds raised $614 million, led by Bridge Investment Group ($350 million) and Griffin Capital ($127.7 million). Other notable sponsors, including Inland ($10.9 million) and Capital Square ($6.3 million) were joined by dozens of others to account for the remaining opportunity zone fund capital raise.

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Decennial Group Launches $1 Billion Opportunity Zones Platform

A group of Chicago-based real estate developers have launched Decennial Group, an investment and development platform that focuses on commercial, industrial, multifamily, and energy projects located in qualified opportunity zones.

The platform is targeting investment of $1 billion in development projects and is designed to leverage the opportunity zone tax incentives created through the 2017 tax reform legislation.

The team behind Decennial has experience in real estate and energy investment, development and construction, and regulatory matters. The joint venture was launched by Scott Goodman, founding principal of Farpoint Development; Bob Clark, founder and CEO of Clayco; and Shawn Clark, president of CRG, Clayco’s real estate development and investment company.

“Few opportunity zone investment platforms have the ability to manage all aspects of the investment and development lifecycle from deploying private equity capital to underwriting strong deals to developing and managing the projects in these communities. CRG provides both development and site selection expertise as well as a full-service design-build group able to act quickly on great OZ opportunities around the country,” said Bob Clark.

Decennial’s renewable energy strategy is led by David Pavlik, co-founder and principal of 11 Million Acres, which has structured more than $2 billion in renewable energy and infrastructure projects.

Steve Glickman, founder and CEO of Develop LLC in Washington, D.C., will serve as senior advisor to the management team. Glickman is also the co-founder and former CEO of the Economic Innovation Group, the architect of the opportunity zones program.

Decennial noted that Glickman’s experience in structuring opportunity zone funds and transactions, as well as his relationships in the marketplace, will help the joint venture navigate the rules and regulations associated with the program.

Decennial’s team also includes Dan Gilman in New York, a private equity veteran who heads investments for Decennial’s funds, as well as John Krappman in Los Angeles, a real estate investor who heads underwriting and acquisitions.

Decennial said that it has also built a “best-in-class advisory board.”

CRG has developed more than 8,000 acres of land and 187 million square feet of industrial warehouse, corporate headquarters, research & development facilities, and multi-family real estate projects valued at more than $11 billion. The firm has offices in Chicago, St. Louis, Columbus, Philadelphia, Atlanta, and Newport Beach.

Clayco is a full-service real estate development, master planning, architecture, engineering and construction firm that had $2.6 billion in revenue for 2018.

Farpoint is a real estate development company with experience in managing large scale development and redevelopment projects.

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Sortis Holdings Launches $100 Million Opportunity Zone Fund

Sortis Holdings Inc., a Portland, Oregon-based private investment firm, has launched the Sortis Opportunity Zone Fund, a $100 million Reg D fund created to invest in qualified opportunity zones.

Sortis noted that its opportunity zone fund will invest in the Western U.S. with a focus on the Northwest, following the same footprint of its lending fund, the Sortis Income Fund. Investments may include retail, office, hospitality and multifamily developments and re-developments, as well as qualified businesses located in opportunity zones.

The federal government’s Tax Cuts and Jobs Act of 2017 established the opportunity zone program to stimulate economic development in distressed low-income communities across the country by offering potentially significant tax benefits to investors that make long-term investments in these areas. There are currently more than 8,700 designated opportunity zones across the U.S. and its territories.

“We pride ourselves on providing wealth-building private investments through both lending and direct real estate investments,” said Paul Brenneke, Sortis founder. “The Sortis Opportunity Zone Fund will allow accredited investors to take advantage of our unique investment strategies while postponing, reducing and eliminating expensive capital gains tax they would otherwise have to pay.”

Capital gains from a sale of any property, stock or business assets will qualify for beneficial treatment under the new law as long as the gains are invested within 180 days of the gain being realized.

Sortis Holdings is a private investment firm with a primary focus on real estate, both as a lender and direct investor. With its roots as a former bank holding company, Sortis has evolved into a diversified firm that both lends and opportunistically invests in real estate with a focus on the Western U.S.

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FCP to Invest in Opportunity Zone Funds

FCP, a private real estate investment firm based in Chevy Chase, Maryland, plans to offer development capital for assets in federally designated opportunity zones throughout the East Coast and Texas. The company is seeking deals with asset values at $25 million and up.

Established by Congress in the Tax Cuts and Jobs Act of 2017, the opportunity zone program provides tax benefits for taxpayers that invest certain assets in certified qualified opportunity funds. The opportunity zone program encourages long-term investments in distressed areas of the country, primarily those with high poverty and low economic growth.

“We believe the opportunity zone program is a catalytic tax initiative that will drive development and provide a benefit to the greater community,” said FCP senior vice president, Jason Ward. “We want to provide capital and development expertise to help execute these investments.”

The firm said that it will offer bridge capital to option, entitle, buy, renovate and/or build multifamily, commercial, or mixed-use assets. Credit support, development expertise, mezzanine/preferred equity and long-term capital will also be available.

FCP has invested in or financed more than $6 billion in assets since its founding in 1999. The firm invests directly and with operating partners in commercial and residential assets.

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Guest Article: Welcome to the Land of OZ

By: Greg Genovese

There’s not nearly enough business in Kansas anymore – and at least 46 other states and Puerto Rico. With 75% of venture capital going to California, New York, and Texas, U.S. business has become more concentrated than ever. In recent years, venture capitalists have been hyper-focused on highly innovative, high-risk, high reward, rapid-growth investments.

Now there’s something for the rest of us – the majority of the investment community. With the creation of the Tax Cuts and Jobs Act of 2017, Qualified Opportunity Funds are now poised to change this disparity. Born out of a perfect storm of sorts; a confluence of the severe negative economic impact of the Great Recession (when there were fewer resources for aspiring entrepreneurs to turn for start-up capital with fewer community banks and also a consolidation of big banks), and a visionary entrepreneur who created the Economic Innovative Group (who conceived the first iterations of the plan), and the championing of the plan by two U.S. senators from both sides of the aisle with a desire to make a positive change. Qualified Opportunity Funds could not only be the investment vehicle many investors with unrealized gains have been waiting for, but also the shot in the arm many communities around the country have been hoping for.

A New Bipartisan Solution

Leaders on both sides of the aisle stepped up to create tax-incentivized Opportunity Zones, and by 2016 the Opportunity Zone initiative won support from both parties with the promise of delivering a market-based, tax-incentive strategy, favored by the right, and a plan to influence funding into areas with the need for incentives to foster greater economic progress favored by the left. It quickly became a political version of pay-dirt for both Republicans and Democrats, but most importantly, a true win for all Americans. This new investment vehicle is poised to unleash what may be the biggest economic development program ever created in the U.S.

Tax Reform for America’s Emerging Markets

Qualified Opportunity Funds can help move trillions of dollars in unrealized capital gains from almost any source including stocks, mutual funds, and real estate, off the sidelines through generous tax incentives and into communities designated as “Opportunity Zones.”

How do the funds work? When people invest in them, they will be able to roll over 100% (or any portion) of their gains from investments and into a Qualified Opportunity Fund. In five years, they’ll be able to reduce the tax on their original capital gains with a 10% step-up in cost basis. In seven years, the tax on the original gains is reduced with a 15% step-up in cost basis. In the tenth year, all capital gains taxes are permanently eliminated on the gains produced from the investment made into a Qualified Opportunity Fund, also known as OZ Funds.

What Investors Should Look for in OZ Funds

Make sure you have a good idea of where you want to place your money. Investors must be accredited and meet the 180-day transaction requirement from the sale date of their gains producing investment which is to be used to invest into an OZ Fund. Choose a firm that can execute the trade in a timely manner in order to ensure you will be able to defer or eliminate your capital gains taxes.

Look for project-oriented programs. You want to be able to see exactly where your money is going and into what investment and evaluate the demographics and the project itself for suitability, as well as evaluate the risk adjusted return potential. It’s important to remember that not all Opportunity Zones are created equal. The demographics of the deal must make sense with a strong upside potential for a valuation and property price that portends well for an eventual exit strategy. A multi-asset class investment will certainly offer more diversification as well.

Considering the OZ Fund’s composition. Is it a well thought out project, first and foremost, without the benefits afforded by the opportunity zone initiative? Regardless of tax advantages, deals must stand on their own. Will it offer distributions for a steady income for those looking for an active cash distribution component? Are the return projections conservative with the best opportunity to deliver your return goals? Does the fund have a realistic exit strategy for the 5-, 7-, and 10-year marks associated with opportunity zone benefits? Does the fund have a favorable tax opinion associated with the offering? And finally, is the offering investor-centric and designed to put the investor first at all times? Undoubtedly, OZ Funds will fall into niche categories and locations to attract more investors as well.

The Ripple Effect of Renewal and Revitalization

Though our first OZ Fund is still in development, we can see what a profound difference it is making in the community, creating a positive social impact, and measurable economic progress. There’s a continued growing sense of optimism derived from seeing more people working and the realization that more businesses, jobs, residents, and visitors will be arriving soon. It’s empowering to be able to connect investors’ capital with our local community.

This new investment vehicle will not be a short-term fix. The likelihood is great that OZ Funds will be around for a long time to engage more private investment and catalyze a wide range of activities on a large scale. I believe OZ Funds will empower us to do well while doing good for our country.

The author, Greg Genovese, is a 30-year veteran of the real estate securities industry and leads Sound West Realty Capital as principal and president.

The views and opinions expressed in the article are those of the author and do not necessarily reflect the views of The DI Wire.

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