GTIS launches opportunity zone strategy – Exclusive

Additional guidance issued by the IRS and Treasury Department gave the New York-based firm the clarity it needed to move forward with the initiative, senior executives said.

GTIS Partners has entered the opportunity zone space and lined up distribution partners, PERE has learned.

The New York-based firm plans to invest a minimum of $250 million a year into its new strategy, which seeks to take advantage of the opportunity zone program established as part of the Tax Cuts and Jobs Act of 2017, according to a source familiar with the matter.

The federal program encourages real estate businesses to build, or substantially invest in, properties located in underserved communities designated as opportunity zones in the US. As a financial incentive, the program offers tax benefits to investors that re-invest their capital gains into real estate or businesses in the zones. With the new guidance issued by the Treasury Department and Internal Revenue Service clarifying key details of the legislation in late October, the firm has decided to move forward with the strategy.

Though nothing has been signed yet, GTIS has been in communication with distribution partners and has lined up tentative agreements, according to the source. These distribution partners include wirehouses, wealth managers and large banks that act on behalf of high-net-worth individuals and accredited investors. These investor types, along with family offices, are best positioned to benefit from the capital gains tax benefits offered by the opportunity zone investment program.

“I believe this is the most significant tax regulatory change in real estate since the 1986 tax reform,” GTIS president Tom Shapiro said. “It’s going to demonstratively change the way real estate investors structure deals and we expect a lot of capital inflows into this area as the regulatory structure matures.”

Like many of its peers, GTIS found that some previous real estate investments were in areas now designated as opportunity zones by the US federal government. Because the legislation does not specify property type, and opportunity zones cover many areas of the country, the firm can pursue a wide range of investments including residential rental properties and necessity retail projects in both urban and suburban locations, GTIS managing director Peter Ciganik said. Necessity retail refers to retailers, such as grocery stores, that provide staple goods or services that cannot be obtained online.

Some of GTIS’s existing for-sale housing projects in Phoenix, Arizona now fall into the opportunity zones, according to Shapiro. However, because the legislation is written to reward long-term capital appreciation, he said the firm would be encouraged to develop build-to-rent single-family housing in the area instead. There are no tax benefits for ordinary income generated by for-sale housing, GTIS co-founder and senior managing director Josh Pristaw explained.

The program will push firms like GTIS to hold investments for up to around 12 years, which includes the 10-year hold period to qualify for full tax benefits and two years of flexibility for the exit, versus the traditional 7-to-10-year hold for opportunistic investments, according to Ciganik. While firms generally look to reach a 20 percent internal rate of return for opportunistic development projects, one can expect a lower IRR but higher equity multiple for opportunity zone investments due to the longer hold period, Shapiro noted.

While tax benefits and investment performance have been key focuses for investors and firms alike, the legislation was originally passed with bipartisan support to help underserved communities. Despite the original intention, Ciganik said that to date, GTIS has not seen many firms talk about measuring the community impact of the program. He believes keeping close track of economic, social and environmental-indicators such as job creation and affordable housing production can help analyze whether communities are showing broad-based economic improvement.

Investors should choose opportunity zone fund managers carefully, as correctly timing capital calls and keeping close investment records will be necessary to reap the tax benefits of the program, Shapiro said.

He believes managers that have development expertise are better suited to take on the challenge than pure fund management platforms or developers, because they tend to have experience with more stringent reporting standards. The barriers to participating in the program are low because firms can self-certify their qualified opportunity zone funds by filing a form with their annual federal income tax return for the year. A firm does not have to go through an application process and wait for approval before launching an opportunity zone fund. However, opportunity zone vehicles can be complex, especially if they are commingled and diversified, and investment managers will want to keep detailed reports in case of an audit, according to Shapiro.

Since their introduction, many real estate investment firms, developers and hedge funds have expressed interest in opportunity zone investments or have actively begun to raise opportunity zone funds, giving investors a large pool of options. Salt Lake City-based Bridge Investment Group launched its own opportunity zone initiative in October, PERE previously reported. Virtua Partners, a private equity real estate firm based in Phoenix, Arizona, launched its Vitua Opportunity Zone Fund I in June. Even one-time White House aid and hedge fund founder Anthony Scaramucci said he will be pursuing opportunity zone investments through his global alternative investment firm SkyBridge Capital.