Are Institutionally Managed Funds the Answer for Opportunity Zones?

Opportunity Zones were created to drive investment by America’s wealthiest individuals into areas of the country in need of private capital investment. The government’s incentive to make these Opportunity Zone investments was allowing individuals to defer taxes currently and offering a permanent exemption on any gains realized on the Opportunity Zone investment if held for more than 10 years. The government’s rationale was that private investment was more likely to drive sounder long- term investments into these areas.

Here’s how it works.

So, who was first to jump into the fray?

Institutional money managers. UBS, JP Morgan, Brookfield, RXR and Starwood, to name a few, all created Opportunity Zone offerings. Several mid-market managers have also pulled together offerings to capitalize on the opportunity. Most of these funds are typical institutional offerings with terms and fees investors are used to seeing.

So, are these funds on mission? Are they really structured to fulfill the government’s objectives or are they just asset grabs? Are their fees justified for single-asset funds with extended holding periods?

While it would be both disingenuous to castigate these funds and inappropriate to blanketly indict them, these institutional fund managers aren’t structured for transactions that are sized for impact. They are, as their name implies, structured for large, institutional projects ($250 million and up) that would likely be funded without the Opportunity Zone benefit.

Why?

These organizations have large overhead and management structures with significant revenue requirements to support their offerings. Nimble, targeted, impactful projects in the areas most in need of investment capital are generally too small to meet the revenue requirements of large financial institutions.

So, what is the result for investors who invest in these institutional offerings?

Generally speaking, taxable investors are simply swapping the taxable return for the institutional tax- exempt return while paying large management fees over extended holding periods for projects that require very little “management” once built and stabilized. Additionally, institutionally managed funds can represent blind pools of holdings where the investor has no control over the type of investment or the location of the project/business. Many Opportunity Zone investors believe these “blind pool” fund options are the only way to achieve investment diversification even those though investors prefer to self-direct their investments.

How can JMP help investors deploy capital to Opportunity Zones while avoiding layers of institutional fund management fees?

We believe the real opportunity in Opportunity Zones is focused on projects and businesses off the radar of institutional asset managers. These opportunities are off the radar primarily because the equity commitment is too small for large institutional managers. However, this isn’t a quality problem as many of these investment opportunities offer better return profiles than institutional projects.

With Opportunity Zones, investors should be able to select the type and location of the project to maximize the desired impact and after-tax return. We have identified, and continue to source, numerous opportunities for investors to find suitable OZ investments. Coupled with our reporting and compliance services, we offer investors a platform to invest directly into projects they identify or simply access projects being administered and advised by JMP.

JMP provides a solution for investors who want to:

1. 1)  Avoid institutional fee structures;

2. 2)  Find suitable Opportunity Zone investments;

3. 3)  Use their own due diligence resources to evaluate investment opportunities;

4. 4)  Co-invest with like-minded investors;

5. 5)  Identify projects and private equity opportunities with the potential to outperform

   institutional investments;

6. 6)  Consolidate their Opportunity Zone investments into a single portfolio with multiple gain

   contributions; and

7. 7)  Offload the reporting and compliance reporting requirements for the duration of the

   investment holding period.

Our structure allows investors to consolidate their Opportunity Zone investments through a single entity or through a “roll-up” of multiple investments into a single consolidated report. JMP also handles coordination with the investor’s existing professionals and manages the investor’s compliance reporting issues.

For investors looking to “club” opportunity zone investments, families looking to make deferrals of multiple trusts/entities while looking to invest through a single Opportunity Zone investment vehicle or investors looking to make targeted investments in low-income housing, emerging businesses with disruptive technologies, mixed-use developments or other types of targeted investments, JMP can assist them with achieving their investment objective.

While institutional funds will find buyers, the real Opportunity Zone opportunities are through investments in projects, businesses and markets off the radar of institutional managers. Through direct investment, investors get alignment with the key stakeholders in the project or business who, like the investor, are in for the duration. More importantly, these stakeholders are far more invested than the institutional fund managers who get paid regardless of the fund/project’s performance.

In the end, the low risk/low return solution rests with institutional products for investors who simply focus on the tax benefit. However, for investors interested in coupling the tax benefits with impactful investing, JMP provides services and solutions that fulfill the objective of the law that created Opportunity Zones – driving capital into appropriate investments in cities where the investments can result in meaningful changes for the community.

For more information on JMP’s solutions for investors, contact Sam Weiser at 312-375-8796 or sam@jmpoppzoneservices.com.

About JMP OppZone Services LLC – JMP OppZone Services (“JMP”) assists investors interested in taking advantage of the tax deferral opportunities associated with Opportunity Zone investments. JMP also assists project sponsors in creating commingled vehicles to pool assets to fund investments in Opportunity Zone locations. JMP provides investors with a platform that provides maximum flexibility to leverage the benefits of the law and corresponding regulations. We can assist with getting the clock started on the deferral and holding periods. Through our network of professionals, JMP assists with structuring and support services to form the QOF creating a structure through an underlying investment in a Qualified Opportunity Zone Business (“QOZB”) that provides the investor with time to evaluate, select and invest in appropriate Opportunity Zone investments.

This document is intended to provide information to help investors understand aspects of the relevant regulations issued by the Treasury related to Opportunity Zone investing. Nothing contained in is this document should be considered legal or tax advice and investors should consult their legal and tax advisors before making any decision to defer capital gains or make an investment in Qualified Opportunity Zone Property or a Qualified Opportunity Zone Business.