Distressed America is Wall Street's hottest new investment vehicle.
Hedge funds, investment banks and money managers are trying to raise tens of billions of dollars this year for so-called opportunity funds, a creation of President Donald Trump's 2017 tax package meant to steer money to poor areas by offering potentially large tax breaks.
Little noticed at first, the provision has unleashed a flurry of investment activity by wealthy families, some of Wall Street's biggest investors and others who want to put money into projects ostensibly meant to help struggling Americans. The ranks of those starting such funds include Anthony Scaramucci, the New York hedge-fund executive who served briefly as Trump's communications director.
More than 80 of the funds have sprung up since January 2018, even though the Trump administration has not finalized regulations governing them. Managers of the funds are seeking to raise huge sums of money by pitching investors on a combination of outsize returns and a feel-good role in fighting poverty.
The flood of capital is raising hopes as well as concerns. Those who championed the provision, which provides for a hefty tax break on long-term investments, believe the money can help distressed towns and neighborhoods that are still feeling the effects of the financial crisis and have barely benefited from the nine-year economic expansion. Skeptics worry that the funds will mostly target real estate and other projects that probably would have attracted investment even without the tax break, and may not deliver the returns being dangled.
"I don't think these are going to have the impact that people think they are," said Lawrin Van Keuren, who oversees real estate investments for the money management firm controlled by the family of Fred Hayman, a founder of the luxury retailer Giorgio Beverly Hills. "We are in a wait-and-see mode."
The provision that created the funds was added to the tax law by Sen. Tim Scott, R-S.C., and had been supported by Democrats and Republicans in previous legislation. It lowers capital-gains taxes -- potentially dramatically -- for investors who finance projects in about 8,700 so-called opportunity zones spread across the 50 states, the District of Columbia and Puerto Rico. Arkansas has 85 opportunity zones.
Local officials selected the zones from areas deemed eligible for the designation under a federal formula that factors in income and poverty levels. The federal government has not finished setting guidelines for what types of projects qualify or what information fund managers must provide to investors and to the government.
The designated areas include heavily distressed tracts in cities like Detroit and Gary, Ind. But some zones are in gentrifying areas like the old downtown section of Las Vegas and parts of Long Island City in New York City where Amazon said it would build a huge corporate campus before reversing course last week.
The advent of the funds has spawned conferences around the country and has drawn interest from a variety of financial players. So far, most of the funds have focused on real estate investments. Many of the Wall Street funds are geared toward major metropolitan areas on the East and West Coasts, particularly New York City. That has fueled concern that the tax break could help regions that already enjoy substantial investment.
Some impact investors -- whose aim is to make money while funding projects that bring about social or economic benefits -- are targeting their funds toward areas in the Southeast and industrial Midwest. And several impact investors are working with philanthropists to try to establish accountability standards for the funds that the federal government does not yet require, to address issues like the quality of jobs created in poor areas. The goal for impact investors in opportunity funds is to steer money to small businesses and other development that communities actually need, and not just to finance things that provide wealthy investors with the highest returns, like high-end hotels or condos.
"I believe it really can be a great model to demonstrate the holistic, community-informed investments that can transform these distressed communities, while earning returns," said Jim Sorenson, a Utah entrepreneur. Sorenson, who hosts an annual gathering of impact investors in Salt Lake City, devoted much of this year's meeting, in February, to discussing the potential benefits of the zones. He joined several groups in announcing an effort to create a "guiding set of principles" for making such investments.
The law permits an investor to roll over capital gains -- proceeds from the sale of stocks or a home, for instance -- into an opportunity-zone fund. The fund can then put the money in a zone by investing in, say, a condo project or affordable-housing units.
An investor who keeps money in a such a fund for 10 years is able to exclude 15 percent of the original capital gain from taxation. And -- potentially much more lucratively -- the investor would not owe taxes on any gains that accrued if the investment increased in value in that time.
One investor who has seized on the opportunity-zone-fund provision is Scaramucci, well known on Wall Street as a self-promoter who holds a glitzy annual hedge-fund conference in Las Vegas. SkyBridge Capital, his investment firm, is aggressively pitching what it has billed as a $3 billion portfolio that will invest across the country.
The fund, organized as a real estate investment trust, has gotten off to a rocky start. Just weeks after it was formally started in late December, it lost one of its partners, EJF Capital. Scaramucci then brought in Westport Capital Advisors, a real estate investing firm, to manage the fund. Despite the turmoil, dozens of potential investors attended a forum this month at the Manhattan offices of the law firm K&L Gates to hear Scaramucci discuss the benefits of opportunity zones.
An initial marketing document for Scaramucci's fund advertises the prospect of "meaningful social benefits" from investing in opportunity zones, including job creation and reduced poverty. It also details how a hypothetical investor could earn a return over 10 years that is triple what the investor would get from a similar fund that did not offer the new tax advantage.
Brett Messing, SkyBridge's president, said the projected return was "just math" that was not unique to the SkyBridge fund. He said the key to achieving numbers was finding the right projects to invest in.
"You've got to make money," Messing said. "You have to generate gains and you have to preserve the tax benefits."
SundayMonday Business on 02/24/2019