US-based Cresset Partners and Diversified Real Estate Capital closed their first Qualified Opportunity Zone (QOZ) fund – the Cresset-Diversified QOZ Fund (“Fund I”) – on March 2nd. It raised $465m in capital needed for the portfolio and the seven underlying projects.
QOZs are areas in the United States that have been classified as ‘economically depressed or underserved’, in which private investors can make long-term investments and enjoy tax breaks, while driving socio-economic development at the same time.
Capitalising on the success of Fund I, and the strength of its investment pipeline, Cresset-Diversified has announced the launch of a follow-on fund, the Cresset-Diversified Qualified Opportunity Zone Fund II (Fund II)
While it is imperative for QOZ Funds to invest in operating businesses or real estate located within one of the QOZs, there is a benefit for art collectors.
With the demise of Section 1031 Exchanges (‘Like-Kind’ exchanges), art collectors who are either citizens of the US or foreign investors who are US taxpayers lost the opportunity to sell and re-invest the proceeds from art sales without creating tax liabilities.
The introduction of Qualified Opportunity Funds (QOFs) – such as Cresset’s: Cresset-Diversified QOZ Fund (I and II) back in 2018 – gives art collectors a chance to diversify their financial portfolios while investing logically and with tax benefits.
Let’s assume, for argument’s sake, that you own a Gerhard Richter purchased at $12 million, which sells for $14 million some years later. Instead of immediately paying taxes on that gain of $2 million, you can now invest all or part of the gain in a QOZ fund and delay paying the taxes on that gain until at least 2027. At that point the taxable amount would be reduced by 15%, to $1.7 million. Finally, if you hold the QOZ investment for at least 10 years, you escape capital gains tax on the $2 million entirely.
Investing in galleries and warehouses in the QOZs is also a possibility, given that they are frequently in “trendier, cutting edge” parts of most cities, according to Nick Parrish, MD Cresset Partners.
“And so, while it’s not adding to art lovers’ collections or causing them to buy more art, it is allowing them to diversify into other asset classes in a way that’s beneficial to them,” said Parrish.
Fund I focused specifically on well-positioned urban neighbourhoods in high-growth markets such as Nashville, Denver, Houston, and Portland, among others. The Fund I portfolio includes investments in multi-family, office, and ground-floor retail.
Cresset-Diversified expects to target many of the same groups as it looks to raise capital for Fund II, with a target of $750m in equity.