Hedge Fund Set for Tax Breaks in Shift to Vegas Opportunity Zone
Hedge Fund Set for Tax Breaks in Shift to Vegas Opportunity Zone
(Bloomberg) -- James Rosenwald, a veteran Los Angeles money manager, set up shop in a low-income neighborhood in Nevada to tap a lucrative tax break considered off limits to most Wall Street firms.
Dalton Investments, the hedge fund firm he cofounded with childhood friend Steven Persky, took a series of steps to establish itself in an opportunity zone in Las Vegas, according to an October regulatory filing. Opportunity zones, created in 2017 under then-President Donald Trump’s tax overhaul, offer relief from taxes on certain capital gains to those who invest in distressed communities.
Numerous fund managers, particularly those that specialize in real estate, have sought to raise funds that would allow wealthy clients to capture the tax incentive offered through opportunity zones, which attracted about $29 billion of capital through 2019, according to the U.S. Government Accountability Office.
Yet few Wall Street firms have sought to set up shop themselves under the law, in part because of limits on the amount of financial assets an opportunity zone business can own, a restriction that could include the carried interest that fund managers receive.
“It’s not impossible for these fund managers or other types of financial companies to move into opportunity zones,” said Jessica Millett, chair of the tax practice at real estate law firm Duval & Stachenfeld. “But it takes a lot of careful planning and I don’t know if anyone has pulled it off.”
Opportunity zones have also come under criticism for failing to generate enough economic development to justify the tax breaks. That’s partly because of the limited information available on operating businesses that established themselves in those areas.
Dalton has created four jobs since re-establishing itself as a so-called qualified operating zone business, said Persky, the firm’s chief operating officer. While its Los Angeles office remains open, the Las Vegas site --housing a trader, a marketing assistant and two others -- offers business continuity and frees Dalton from California’s 8.84% corporate income tax. Nevada has none.
Dalton’s partners could also reap big benefits from the opportunity zone relocation, namely the ability to sell their initial stakes in the firm tax-free after a decade. Rosenwald, who has been investing in Japan and other parts of Asia since the early 1980s, teamed up with Persky to form Dalton -- named for the elite Manhattan prep school where they met -- shortly after the 1998 Asian financial crisis.
“When we started the business, we were all 40,” Persky said. “Now we’re all 63, plus or minus.”
The original partners, who also include Belita Ong and Gifford Combs, began setting up a succession plan before the start of the pandemic, Persky said. It calls for Dalton to give more staff an ownership stake and amass capital that it can invest alongside clients, while further aligning the firm’s interests with theirs, he said.
Dalton, which now has about $3.4 billion of assets and roughly 40 employees, converted to a corporation from a limited liability company. It then began shifting most clients and investment contracts to a new unit that the firm had established in the Las Vegas opportunity zone.
The unit was capitalized with the performance fee that Dalton’s owners received upon liquidating an existing fund the firm had created to invest in depressed real estate. Plowing this performance fee into the opportunity zone allows Dalton’s principals to defer capital gains taxes on the profits until 2026.
Moreover, any future appreciation on the capital initially invested in the Las Vegas unit will be free from capital gains taxes if held for at least a decade.
Earlier this year, the Las Vegas unit registered with the Securities and Exchange Commission as Dalton’s primary money-management unit, though most of the staff still work from other locations in Asia and the U.S., including the firm’s original headquarters near Los Angeles.
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