Chicago Skyline at dusk.Shutterstock.

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NEW YORK CITY- Out of Chicago,Illinois Cresset Partners and Diversified Real Estate Capitalhuddled together early on to best determine how they wouldcapitalize on Opportunity Zone legislation introduced in the TaxCuts and Jobs Act of 2017, a bill with a cloud of ambiguitysurrounding it. 

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Fast forward, the partnership hasnow closed its first Opportunity Zone fund the Cresset-DiversifiedQualified Opportunity Zone Fund at $465 million, which has beenallocated to seven projects, and launched its second fund theCresset-Diversified Qualified Opportunity Zone Fund II with a $750million target. " This isn't stop and restart," said Nick Parrish,head of development at Cresset. " We now have a vehicle to investin Opportunity Zones, we're going to keep itup."  

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Cresset launched its first fundin 2018 and was an early mover in qualified Opportunity Zones. Withthe collaboration between its institutional partner Hines, who wasa part of three projects in Fund I, the firm was able to leveragethe expertise of its partners who had boots on the ground in itsprospective markets and marry capital it had raised fromsingle-family offices, real estate investors, entrepreneurs, hedgefunds and proprietary investors. 

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Cresset and Diversified wentboldly into qualified Opportunity Zones when not as much capitalwas flooding into space. According to Parrish, the firm has beenable to establish itself as a strong player in the space, receivingthousands of pitches for Opportunity Zones projects. However, it islaser-focused on seven to nine projects for FundII. 

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The developments are screenedlike any other development in the real estate portfolio. On aleveraged basis, the fund is executing on a 50 to 60 percent loanto cost basis. 

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"In terms of underwriting andanalysis it is not any different than traditional real estate,"Parrish said. "The deals have to make sense, screening and sourcingare very important." 

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Cresset-Diversified anticipatespartnering with several of the same developers from Fund I andother new firms. Projects currently under consideration for Fund IIinclude mixed-use, multi-family, retail, and office investments inthe Southwest, Texas, Mid-Atlantic, Northeast and WestCoast.

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Through its businessrelationships, the firm has been able to establish a solid pipelineof ground-up developments, which is similar to other players in themarket. About 80 percent of the Opportunity Zone projects today areground-up developments, Parrish said. Investors are sticking tothese kinds of deals to avoid the complications of the substantialappreciation clause of existing buildings, where they have to besubstantially repositioned in order for investors to fullycapitalize on capital gains tax deferment after tenyears. 

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Parrish attributes the success ofFund I to its in house tax team because essentially the OpportunityZone benefits required learning a new tax code. Tax structuring thefund was one of the most important components at the outset for thefirm, which won't really know if it's been successful ten yearsfrom now. "It is critically important to find good deals and youdon't want to lose benefits because you didn't structure the taxfund right," he said. 

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Mariah Brown

Mariah Brown is the New York Bureau Chief and Real Estate Reporter for GlobeSt.com, covering the New York Metro area, Northeast region and national real estate trends. She is responsible for producing multi-media content, including articles, podcasts and video. Before joining the GlobeSt team, she served as a New York Times fellow, reported for the Associated Press in New York and Philadelphia and several other New York City-based outlets.