--- title: How Can Debt Impact Your Qualified Opportunity Zone (QOZ) Investment? description: QOZ Funds may use financing to help maximize returns. Debt or leverage has its pros & cons; all else equal, more debt offers a higher risk/return ratio. image: https://www.realized1031.com/hubfs/Images/photo/abstract/skyscraper-construction-opportunity-zones-AS-295828909.png --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # How Can Debt Impact Your Qualified Opportunity Zone (QOZ) Investment? Posted Dec 5, 2022 ![skyscraper-construction-opportunity-zones-AS-295828909](https://www.realized1031.com/hs-fs/hubfs/Images/photo/abstract/skyscraper-construction-opportunity-zones-AS-295828909.png?width=650&name=skyscraper-construction-opportunity-zones-AS-295828909.png) Like traditional real estate investment vehicles, Qualified Opportunity Zone Funds (QOZF) may strategically use financing to help maximize returns. Using debt or leverage has its pros and cons; it has the first priority of payment, it magnifies returns in both directions, and it also provides income tax shelter. All else equal, more debt offers a higher risk/return ratio for investors. QOFs will be financed similarly to traditional development or redevelopment projects. Any previous experience that you may have with commercial real estate financing will be applicable here. Most QOFs focusing on ground-up development projects and plan to use debt are expected to obtain short-term financing for the construction period and refinance into longer-term debt once the property is stabilized. As we will explain later in the article, the refinancing presents QOZF investors an interesting opportunity.  ### Expect Similar Terms While many local communities provide incentives to attract investments into their QOZs, lenders do not. Lenders still must evaluate the risks of the investment. Lenders will evaluate the QOZF’s investment strategy and business plan as they would any investment opportunity; the QOZ designation is not expected to impact the financing terms.  ### Second Round of Regulations and Debt **Debt Financed Distributions — **The [second round of QOZ regulations](https://www.realized1031.com/blog/key-takeaways-from-second-round-qoz-regulations), released on April 17, 2019, allow for debt-financed distributions from refinancing or recapitalization events. To avoid recognizing taxable income, any fund that is taxable as a partnership can distribute loan proceeds to investors but cannot exceed the investor’s partnership interest cost basis. Two conditions can trigger recognition of deferred gains: - Debt-financed distributions occurring in the first two years after an investment in the Fund. - Any debt-financed distributions considered as a disguised sale as defined under Internal Revenue Code Section 707. In other words, once the QOZF Sponsor refinances the initial short term debt on the property, they can distribute the proceeds to investors, up to a certain threshold. Investors could potentially receive a sizable portion of their initial investment in the first couple of years of the investment. Those funds may come in handy to investors when the capital gains tax deferral ends in December 2026, and investors need to pay the tax bill while maintaining their investment in the QOZF. ### How PNC Is Taking Advantage Of QOZs Through Loans The QOZ program provides advantages for lenders, as well. The program has increased commercial real estate loan activity. Besides providing debt financing, some banks are getting involved by injecting equity directly into QOZs through bank-created funds. QOZ loans are feasible for banks because of the associated [CRA credit](https://www.fdic.gov/regulations/resources/director/presentations/cra.pdf). One bank that is taking advantage of QOZ loan opportunities is PNC. It is involved in both QOZ equity and loan deals. Last year, PNC allocated $75 million to QOZ loans, [according to American Banker](https://www.americanbanker.com/news/banks-explore-ways-to-capitalize-on-tax-laws-opportunity-zones).  To receive QOZ credit for their loans, banks have to ensure they fully qualify. This is not such a straight-forward process for banks. However, PNC is confident that each of its deals so far will receive the credit. For smaller banks, QOZ loans may present more risk than they are willing to take on. However, more transparency into QOZ deals will help smaller banks to evaluate better how these deals are performing. “Greater transparency will help so we can learn who’s doing what,” Jeannine Jacokes, CEO of the Community Development Bankers Association, [told American Banker](https://www.americanbanker.com/news/banks-explore-ways-to-capitalize-on-tax-laws-opportunity-zones). ### The Bottom Line Even with the second round of QOZ regulation updates earlier this year, lenders are cautious about QOZ opportunities. At the end of the day, QOZFs are more likely to obtain financing from larger lenders. This isn’t to say that smaller lenders should be completely ruled out, as we are likely to see them get more involved as the number of QOZ debt-financed deals increases.  Download The Guide To Opportunity Zones [![Download The Guidebook to QOZ's](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/QOZ-eBook-250.png?width=250&height=250&name=QOZ-eBook-250.png "Learn More About Qualified ...") ](https://www.realized1031.com/blog/how-can-debt-impact-your-qoz-investment#blogform) Download eBook ---   --- ### Download The Guidebook to QOZ's ![Download The Guide To Opportunity Zones](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/QOZ-eBook-550.jpg?width=550&height=650&name=QOZ-eBook-550.jpg) Learn More About Qualified Opportunity Zones Investments. By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. Search ### [Why Realized](https://www.realized1031.com/why-realized) - [Wealth Management](https://www.realized1031.com/the-wealth-management-gap) - [Why Realized](https://www.realized1031.com/why-realized) - [Our Process](https://www.realized1031.com/how-realized-works) - [Scenarios](https://www.realized1031.com/scenarios) - [Private Client Program](https://www.realized1031.com/private-client) - [Realized Exchange Services](https://www.realized1031.com/realized-exchange-services) ### [The Company](https://www.realized1031.com/about-us) - [The Team](https://www.realized1031.com/about-us) - [FAQ](https://www.realized1031.com/frequently-asked-questions) - [Testimonials](https://www.realized1031.com/testimonials) - [Press](https://www.realized1031.com/press) - [Careers](https://www.realized1031.com/careers) ### [Partners](https://www.realized1031.com/partners) - [Financial Advisors](https://www.realized1031.com/advisor) - [Broker Dealers](https://www.realized1031.com/partners/broker-dealers) - [Real Estate Agents](https://www.realized1031.com/partners/real-estate-agents) - [Certified Public Accountants](https://www.realized1031.com/partners/certified-public-accountants) ### [Resources](https://www.realized1031.com/resources) - #### Learn - [Articles](https://www.realized1031.com/blog) - [Glossary of Terms](https://www.realized1031.com/glossary) - [Capital Gains Tax Rates](https://www.realized1031.com/capital-gains-tax-rate) - #### Watch - [Video Library](https://www.realized1031.com/videos) - [Webinar Archive](https://www.realized1031.com/webinars) - #### Read - [Delaware Statutory Trust](https://www.realized1031.com/delaware-statutory-trust) - [Tenants-In-Common](https://www.realized1031.com/tenants-in-common-tic) - [1031 Exchange](https://www.realized1031.com/1031-exchange) - [Qualified Intermediary](https://www.realized1031.com/qualified-intermediary) - [Qualified Opportunity Zones](https://www.realized1031.com/opportunity-zones) #### Realized - 500 W 13th Street Austin, TX 78701 - (877) 797-1031 ##### [Contact Us](https://www.realized1031.com/contact-us) - [![Realized on Facebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-facebook-whiterev.png?width=60&height=60&name=social-facebook-whiterev.png)](https://www.facebook.com/Realized/) - [![Realized on LinkedIn](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-linkedin-whiterev.png?width=60&height=60&name=social-linkedin-whiterev.png)](https://www.linkedin.com/company/realized/) - [![Realized on YouTube](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-youtube-whiterev.png?width=60&height=60&name=social-youtube-whiterev.png)](https://www.youtube.com/c/Realized1031?sub_confirmation=1) - [![Realized Holdings, Inc. BBB Business Review](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/bbb/RZH2-bbb-seal.png?width=40&height=65&name=RZH2-bbb-seal.png)](http://www.bbb.org/central-texas/business-reviews/real-estate-investors/realized-holdings-llc-in-austin-tx-1000112948/#bbbonlineclick) - [![FEA Logo](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/fea/RZH2-fea-logo.png?width=82&height=65&name=RZH2-fea-logo.png "FEA Logo")](https://www.1031.org) SECURITIES DISCLOSURE Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member [FINRA](https://www.finra.org)/[SIPC](https://www.sipc.org/), and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on [FINRA's BrokerCheck](https://brokercheck.finra.org/firm/summary/22333). Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "Like traditional real estate investment vehicles, Qualified Opportunity Zone Funds (QOZF) may strategically use financing to help maximize returns. Using debt or leverage has its pros and cons; it has the first priority of payment, it magnifies returns in both directions, and it also provides income tax shelter. All else equal, more debt offers a higher risk/return ratio for investors. QOFs will be financed similarly to traditional development or redevelopment projects. Any previous experience that you may have with commercial real estate financing will be applicable here. Most QOFs focusing on ground-up development projects and plan to use debt are expected to obtain short-term financing for the construction period and refinance into longer-term debt once the property is stabilized. As we will explain later in the article, the refinancing presents QOZF investors an interesting opportunity. Expect Similar Terms While many local communities provide incentives to attract investments into their QOZs, lenders do not. Lenders still must evaluate the risks of the investment. Lenders will evaluate the QOZF’s investment strategy and business plan as they would any investment opportunity; the QOZ designation is not expected to impact the financing terms. Second Round of Regulations and Debt Debt Financed Distributions — The second round of QOZ regulations, released on April 17, 2019, allow for debt-financed distributions from refinancing or recapitalization events. To avoid recognizing taxable income, any fund that is taxable as a partnership can distribute loan proceeds to investors but cannot exceed the investor’s partnership interest cost basis. Two conditions can trigger recognition of deferred gains: Debt-financed distributions occurring in the first two years after an investment in the Fund. Any debt-financed distributions considered as a disguised sale as defined under Internal Revenue Code Section 707. In other words, once the QOZF Sponsor refinances the initial short term debt on the property, they can distribute the proceeds to investors, up to a certain threshold. Investors could potentially receive a sizable portion of their initial investment in the first couple of years of the investment. Those funds may come in handy to investors when the capital gains tax deferral ends in December 2026, and investors need to pay the tax bill while maintaining their investment in the QOZF. How PNC Is Taking Advantage Of QOZs Through Loans The QOZ program provides advantages for lenders, as well. The program has increased commercial real estate loan activity. Besides providing debt financing, some banks are getting involved by injecting equity directly into QOZs through bank-created funds. QOZ loans are feasible for banks because of the associated CRA credit. One bank that is taking advantage of QOZ loan opportunities is PNC. It is involved in both QOZ equity and loan deals. Last year, PNC allocated $75 million to QOZ loans, according to American Banker. To receive QOZ credit for their loans, banks have to ensure they fully qualify. This is not such a straight-forward process for banks. However, PNC is confident that each of its deals so far will receive the credit. For smaller banks, QOZ loans may present more risk than they are willing to take on. However, more transparency into QOZ deals will help smaller banks to evaluate better how these deals are performing. “Greater transparency will help so we can learn who’s doing what,” Jeannine Jacokes, CEO of the Community Development Bankers Association, told American Banker. The Bottom Line Even with the second round of QOZ regulation updates earlier this year, lenders are cautious about QOZ opportunities. At the end of the day, QOZFs are more likely to obtain financing from larger lenders. This isn’t to say that smaller lenders should be completely ruled out, as we are likely to see them get more involved as the number of QOZ debt-financed deals increases.", "articleSection" : [ "Qualified Opportunity Zones" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2022-12-05T15:45:08+0000", "datePublished" : "2022-12-05T15:45:08+0000", "description" : "QOZ Funds may use financing to help maximize returns. Debt or leverage has its pros & cons; all else equal, more debt offers a higher risk/return ratio.", "headline" : "How Can Debt Impact Your Qualified Opportunity Zone (QOZ) Investment?", "image" : { "@type" : "ImageObject", "height" : 316, "url" : "https://cdn2.hubspot.net/hubfs/733513/Images/photo/abstract/skyscraper-construction-opportunity-zones-AS-295828909.png", "width" : 650 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/how-can-debt-impact-your-qoz-investment", "name" : "How Can Debt Impact Your Qualified Opportunity Zone (QOZ) Investment?", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://cdn2.hubspot.net/hubfs/733513/Images/photo/abstract/skyscraper-construction-opportunity-zones-AS-295828909.png" } ```