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Tuesday, Sep 26, 2023

Sunstone Management Wins by Investing in Opportunity Zones

Long Beach-based Sunstone Management Inc. has made big strides focusing on small businesses, lower middle markets and, lately, opportunity zones.

Revenue at the capital management and investment firm grew 152% from 2017 to 2019, making it one of the fastest growing private companies in Los Angeles County during that period.

Sunstone founder and Principal John Shen, who is also behind Long Beach-based American Lending Center, started Sunstone in 2015 to help manage wealth.
“We develop offerings to meet financial goals,” he said.

Shen attributes the company’s recent growth to the relationships he has built.
“From the get-go I was determined to form good partnerships to elevate the company’s product and the impact. We spent a lot of time identifying the right business partners,” he said. 

“As a small company, if you want to grow fast and organically, the best way is to find some really good partners to help you grow. I think that is the main reason Sunstone was on the right track from the very beginning,” he added.

The company started by partnering with a venture capital grou
p based in Atlanta. Shen was a limited partner with the company before forming Sunstone. Once he launched Sunstone, he brought the owner into their partnership structure and made a series of investments through their resources.

Now that Sunstone is growing, Shen said he is adding other partners, including Star Mountain Capital, a fund manager focused on the lower middle market.

“This year their performance over the Covid-19 impact has been impeccable,” Shen said.

Finding help to mitigate the pandemic’s effects has been important, according to Shen, who said Sunstone is “trying to survive this year. We take one step at a time. I think in the next few years there will be a lot of opportunities coming up.”

With everything going on now, he said, the company was not looking to take a lot of risks and is being cautious.

Opportunity knocks

Sunstone has recently gotten involved in opportunity zones, which provide tax benefits to investors, allowing them to defer capital gains taxes if they invest in an opportunity zone fund. 

The funds then invest in economically distressed areas, or opportunity zones.

“This is a pretty new program,” Shen said. “Most opportunity zone funds formed in the past couple years. Sunstone’s opportunity zone fund formed in December last year. The key for opportunity zones is you have to choose the right project to attract the capital and investors.”

Some investors are cautious about distressed areas where appreciation may not be the same as in well-off areas, he added, but Sunstone is evaluating opportunities in these areas.

Michelle Schierberl, a senior vice president of Stream Realty Partners, said opportunity zones are of interest to many people outside of traditional real estate investors. 

“If somebody’s made a large profit from a stock portfolio or a hedge fund, the opportunity zones help bring that money into real estate and into some redevelopment projects and take them into these areas that need a push,” she said.

And she thinks opportunity zones can help projects make sense financially and “help institutional money or private money feel comfortable with it.”

Shen thinks opportunity zone funds could eventually make up as much as 60% of Sunstone’s investment portfolio.

“Almost all these (opportunity zone) investors look at long-term tax benefits as their number one goal to achieve,” Shen said. “To maximize their tax benefits, the capital needs to stay in the projects for 10 years. This is a really long-term capital that everybody loves. For real estate development it’s good. For business, it’s even better.”

Capital gains have to stay in opportunity zone funds for a full 10 years to recognize the full tax benefits.

What’s cooking

Within opportunity zones, Sunstone is first focusing on ghost kitchens.

These facilities are large kitchens that are used by many restaurants, with each leasing a different workspace. Instead of having a large dining area, many of these kitchens are delivery only, working with delivery apps. Some have a small, shared seating area.

Jake Radeski of Beta Agency Inc. said throughout the Covid-19 pandemic, “ghost kitchens have continued to gain steam. We see that through the increase of virtual brands and brands pivoting to virtual kitchens.”

He added that while many of the same players as before are developing ghost kitchens now, there are some new players as well.

“They (ghost kitchens) continue to pick up speed and have been a real bright spot for a lot of landlords right now,” Radeski said.

Sunstone is working on its first ghost kitchen in a former office building in downtown Long Beach.

Shen called it a “ghost kitchen 2.0.”

“We bought a building and are turning it into a multifunctional commercial building that will host 18 different kitchen units and offers a small dining area as well as a community room, an incubator room in the same building,” Shen said. “Our goal is not only to save the struggling restaurants but also to change or improve the lifestyle of the local residents.”

He added that ghost kitchens serve more than just the immediate surrounding area, which means “you don’t have to solely depend on the buying power of your local consumers. That avoids the trap of the low-income areas,” he said, making them a great option of what to build in an opportunity zone.

The Long Beach project is expected to wrap construction by the end of next year and open in early 2022.

Shen said Sunstone is looking at other locations in Southern California to create ghost kitchens as well.

Hannah Madans Welk
Hannah Madans Welk
Hannah Madans Welk is a managing editor at the Los Angeles Business Journal and the San Fernando Valley Business Journal. She previously covered real estate for the Los Angeles Business Journal. She has done work with publications including The Orange County Register, The Real Deal and doityourself.com.

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