After a slow start, managers of opportunity-zone funds have been raising capital at an accelerated rate, according to Real Estate Alert’s second-annual review of the sector.

Twenty-two sponsors working independently and 12 others acting in partnerships have collected at least $2.8 billion of equity for 34 commingled vehicles targeting multiple development and redevelopment projects in opportunity zones, which offer tax breaks to investors (see listing on Page 9). The amount raised so far represents 17% of those vehicles’ overall fund-raising goal of $16.4 billion. Nearly half of the committed capital already has been invested, the survey found.

In its inaugural review a year ago, the newsletter found commingled funds with the capacity to invest in multiple deals had raised a mere $369 million, as many investors were holding back pending IRS guidance on the program. Instructions the agency issued in December went a long way toward clarifying the qualifications for managers and investors.

While hundreds of smaller investment shops are seeking to raise money to invest in individual properties, Real Estate Alert’s review focuses on diversified commingled funds sponsored by firms with experience managing institutional capital. The universe includes Bridge Investment (four vehicles), CIM Group, Origin Investments, RXR Realty and Starwood Capital. Cantor Fitzgerald and Silverstein Properties are jointly marketing a fund, as is a partnership between SkyBridge Capital and Westport Capital. Two vehicles are being raised by the team of Cresset Capital and Diversified Real Estate.

“Better-organized and more-professionally managed multi- property funds are starting to have a well-deserved advantage over single-property vehicles,” said veteran investor Tony Barkan, founder of Allagash Opportunity Zone Partners.

Because some of the fund managers surveyed declined to disclose complete details, the review understates the total amount of equity raised so far. Novogradac, a San Francisco consulting firm that tracks opportunity-zone funds, counts 17 multi-asset vehicles targeting at least $100 million of equity. To date, those funds have raised a combined $4.7 billion — or 38% of their overall goal of $12.2 billion.

Including hundreds of smaller funds set up to invest in a single project, the sector has attracted some $10.7 billion of equity, Novogradac estimates.

The numbers “show to me that this has turned out to be a remarkable success in terms of capital raising, and it’s only going to go higher,” he said. “And the big funds are a notable percentage,” said managing partner Mike Novogradac.

Jason Kaufman, who runs the opportunity zone business for Silverstein, said his pitch to investors is that placing money with a well-established operator gives them access to a high- quality pipeline and the expertise to manage projects in-house. Cantor Silverstein Opportunity Zone Trust is seeking to raise $500 million.

“What they [investors] understand is that the developer of the World Trade Center . . . is going to be representing their dollars,” Kaufman said. “We’re going to have access to the best deals.”

Novogradac identifies more than 600 opportunity-zone funds, but many are single-asset vehicles seeking to raise well less than $50 million. The average equity-raising goal among the funds identified by Real Estate Alert’s review is $512 million.

The federal program, created by the Tax Cuts and Jobs Act President Trump signed in 2017, is designed to spur economic development in low-income areas, which have been mapped out as 8,700 opportunity zones. To take advantage of the tax incentives, investments must be made through “qualified opportunity funds.”

The target audience for such vehicles includes wealthy individuals, family offices, broker- dealers, registered investment advisors, wealth managers, the private-capital groups of large banks and hedge fund managers. Pensions, endowments, foundations and other large investors generally don’t have a need to shelter investment gains, either because they’re tax-exempt or don’t have large-scale proceeds from capital gains.

Investors in opportunity-zone funds can reap tax benefits three ways. If capital gains from the sale of any assets are invested in a qualified fund within 180 days, the investor can defer taxes on those gains until the money is withdrawn from the fund — but no later than yearend 2026. An investor holding the opportunity- fund stake for five years also would benefit from a 10% step- up in the basis of their original investment — rising to 15% if it is held for seven years.

Additionally, any appreciation in the fund is free from federal and most state taxes if the investment is held for at least 10 years.

Investor demand for the funds has increased since the IRS issued its latest guidance in December, market pros said.

“A lot of people felt like once they’re in a fund, they’re stuck for 10 years,” said Libin Zhang, a partner at law firm Fried Frank. “That’s not true. You only stay 10 years if you want the full tax benefits, and even so there are tax-efficient ways of getting out and investing in a new fund within that period.”

Julie Bauch, head of real estate investment banking at New York placement agent Mercury Capital, said some of the big- gest investment managers are taking a wait-and-see approach to opportunity-zone funds. For the moment, they’re more focused on raising capital to pursue distressed opportunities amid the pandemic.

“If you look at the tone of the market right now, a focus on dislocation is what’s happening,” Bauch said. “The attention that will get paid to [opportunity-zone funds] on a relative basis is not necessarily going to grow now.”

But others said the financial-market turmoil triggered by the coronavirus outbreak could be a boon for opportunity- zone funds. As stock prices plunged in March, many wealthy individuals and family offices liquidated portfolios built up during a 10-year bull market. Rolling those proceeds into opportunity-zone funds could help them minimize capital- gains taxes.

Michael Episcope, a principal and co-founder of Origin Investments, said investors have to be careful, however, that the funds are targeting deals that make sense. “If you’re investing in real estate, you have to be prepared to invest through cycles,” he said. “When you have a 10-20 year time horizon and you pick the right neighborhoods, even the pandemic of today will be in the rearview mirror soon enough and is a blip we will get through.”

Barkan added that given the volatility of the stock market the past few months, investors have a new appreciation for longer-term strategies.

“Without taking a side with respect to over- or under-valuation in the stock market currently, from a pure volatility and downside-risk standpoint, people see a totally different outlook for the next few years,” he said.