In 2018, Donald Trump granted real estate a boon: The developer-turned-POTUS, as part of the Tax Cuts and Jobs Act, created “opportunity zones,” which gave tax forgiveness to real estate investors for projects in economically disadvantaged areas.
CIM Group, a real estate investment firm led by co-founders Shaul Kuba, Richard Ressler and Avi Shemesh, was already making big bets in these areas — about $3 billion worth of assets, or 10 percent of its portfolio, it boasted in marketing materials. In Los Angeles, it had amassed small commercial properties in West Adams, a low-income neighborhood in South L.A. that was designated as an opportunity zone.
But there was a catch. Only “new investments” in opportunity zones are eligible for tax breaks, according to the Internal Revenue Service. Anything CIM bought before Trump enacted the legislation was not eligible. So, in 2019, at least in part to have these properties qualify as new investments, CIM launched its own opportunity zone fund. The fund would be able to purchase properties the firm already owned, plus acquire new sites for redevelopment.
“The Act offers the potential to qualify for added tax benefits,” CIM said at the time.
Over the past year, CIM has sold at least four of its own properties in West Adams to its opportunity zone fund, according to an analysis of L.A. County property records by The Real Deal. At each property, the firm has scored entitlements — and in some cases even finished development — and then sold them to the fund at a healthy premium. A couple of the deeds on the properties are linked to LLCs managed by the three co-founders. These deals mean the sites can qualify as new investments, enabling them to avail of opportunity-zone benefits.
CIM, which is notoriously press-shy, said that the appropriate disclosures were made to investors before any deals.
“From time to time, an asset or investment opportunity is sold or transferred from one CIM Group affiliate to another if such transfer or sale is beneficial to both affiliates,” the company said in a statement to TRD. In each case, the properties were “highlighted to potential investors as properties controlled by CIM Group and owned by CIM Group affiliates that could be acquired.”
More than 1,700 investors have poured about $1.1 billion into CIM’s opportunity zone fund since inception, according to a March SEC filing.
Musical chairs
Just two weeks after Trump’s November 2016 election, CIM paid $700,000 for a 4,300-square-foot vacant site at 5223 West Adams Boulevard. It owned at least four other properties in West Adams already — at 4291, 5103, 5359 and 5561 West Adams Boulevard — but had not yet pursued redevelopment.
The firm sat on the vacant site, which corners South Redondo Boulevard, without filing any permit applications or seeking refinancings.
In December 2017, Trump signed the Tax Cuts and Jobs Act into law. By April 2018, 8,700 neighborhoods across the U.S. were designated by states and federal agencies as qualified opportunity zones. Under the program, investors can defer taxes on both capital gains and gains from real property held for more than a year through 2026. With tax deferral, investment earnings can add up tax-free.
In 2019, CIM jumped into the mix with its own opportunity fund, targeting $5 billion in investment. It was not the only player to do so. Bridge Investment Group raised $1.3 billion for its own opportunity zone fund. RXR, the New York-based developer headed by Scott Rechler, launched a $500 million fund to invest in opportunity zones.
CIM’s fund required a minimum investment of $500,000. In the first year, it raised about $226 million from 325 investors, according to an SEC disclosure filed at the end of 2019. By then, the fund had “two existing investments” and was in an advanced stage of due diligence for acquiring two additional, CIM-controlled assets,” according to marketing materials for the fund obtained by TRD.
CIM, in essence, was looking to buy from itself.
“Merchandising” West Adams
CIM has long been interested in what Kuba calls “merchandising” the neighborhood of West Adams. Critics might describe it as gentrification.
West Adams was Los Angeles’ first suburb — complete with Victorian mansions adorned with lush gardens — but in the 1920s and 30s, it saw an exodus of its wealthy residents to enclaves like Beverly Hills. Over time, West Adams slipped into decline and became a candidate for federal anti-poverty funding, and eventually, opportunity zone designation.
Once CIM established its opportunity zone fund, it started assembling land around 5223 West Adams Boulevard — the vacant corner site it had paid $700,000 for in 2016.
In 2019, it bought the site next door at 5217 West Adams Boulevard for $1.6 million, records show. In July of last year, it bought the site next door, at 5213 West Adams Boulevard, for $2.6 million.
With its assemblage in hand, CIM got to planning. Selling a property within an opportunity zone does not automatically guarantee eligibility for the program. The property has to be “substantially improved,” the IRS states.
CIM filed an application in October 2021 to build a six-story residential property on the site, with 74 units and about 9,800 square feet of commercial space. Only six of the units — less than 10 percent — would be reserved for extremely low-income residents.
According to the IRS, a property will be considered “substantially improved” if the fund spends just as much on renovations over the next 30 months as it did buying the property.
For CIM to sell the site to its opportunity zone fund, the firm could not develop it. It could, however, get it development-ready by securing entitlements.
This June, CIM sold 5223 West Adams Boulevard to 5223 W Adams LA Oz LLC, an entity managed by the general partner of CIM Opportunity Zone Fund, records show.
The sale triggered a transfer tax, meaning there was a material change in ownership, according to attorneys familiar with California’s transfer tax laws.
About a month later, the L.A. Department of City Planning approved the plans for the property. The site was now fully entitled for development, making it ripe for an opportunity zone tax break.
The entitlements came with a price tag. CIM sold the property to the fund for $6.4 million, records show, about $1.5 million, or 32 percent more, than what CIM paid for the three sites over the course of five years.
Gravy train
Down the street, at 5211 West Adams Boulevard, CIM used the same playbook. In 2018, the firm bought a 13,300-square-foot building for $2.5 million, records show.
“It was a dilapidated building in need of significant improvement,” a CIM spokesperson said. The company says it then spent $9 million on converting the property into an office building.
The firm also scored approvals from the city to add retail space and a 6,300-square-foot restaurant and bar with live entertainment. CIM has had success leasing out some of its West Adams spaces to trendy eateries, including San Francisco-based bakery Tartine and one of the city’s highly regarded pasta joints, Cento.
In June, CIM sold the building at 5211 West Adams Boulevard to an entity managed by the opportunity zone fund for $12.5 million, records show,
CIM said it used an independent valuation firm to determine a sale price for the property, as well as for all the other West Adams assets it has sold to affiliated entities. In each case, the firm said the assets were sold at or below fair market value. The company has 35 properties in West Adams, all slated for redevelopment, though only a handful have been sold to the firm’s opportunity zone fund.
“The reuse of some of these buildings makes it very romantic and sexy,” Kuba told Bloomberg in April, talking about his bet on the area. “People just want to be part of it.”