According to Chinese philosopher Lao Tzu, “It is the wise man who knows what he does not know.” In other words, successful people understand that they don’t know everything. They can’t. These successful people also have experience in finding successful others who can fill in knowledge gaps. This is where fruitful partnerships come into play.
Such partnerships can be pivotal for positive outcomes within the Qualified Opportunity Zone (QOZ) program and its funding mechanisms, the Qualified Opportunity Funds (QOFs). While managers head up QOFs, they don’t work alone. The program has many moving parts, meaning the wise manager will pursue “successful others” with whom to partner when it comes to targeting, improving, holding, and eventually selling QOZ properties.
What this means for you, as a potential QOF investor, is that, while you are performing due diligence on a fund’s manager, you also must research the entities that are working for the fund.
Detangling a Partnership Structure
In previous articles, we defined a Qualified Opportunity Fund as “an investment vehicle organized for the purpose of investing at least 90 percent of its assets in a Qualified Opportunity Zone Property . . .” But “fund” could actually be considered a misnomer, as it does more than raise monies for property investments. In our experience, a reputable QOF will also be involved with the following:
- Development/rehab. Handling ground-up or ongoing construction, or renovations.
- Planning design/redesign of QOZ project.
- Looking for properties that meet the fund’s goals, negotiating on behalf of the fund for a fair price, then positioning the asset/assets for resale when the hold period ends.
- Asset management. Striving to maximize a property portfolio’s value by positioning/repositioning, reducing expenses, and increasing income.
- Property management. Focusing on the day-to-day operational aspects of individual properties, including on-site maintenance, repairs, and tenant issues.
- Including everything from legal services, to property promotions and marketing, to accounting functions.
While a QOF manager might take responsibility for some of the above, the chances are pretty good that he or she won’t have the skills, the time or even the desire, to handle everything. As such, the fund manager might take a page from the book of Lao Tzu, and set up an arrangement with other essential parties in one of two ways.
- A joint venture structure, in which developers, brokers, and other entities buy into the fund, and are partners.
- A corporate structure, in which the fund manager hires others through third-party arrangements.
Neither of the above is better than the other; both have their pros and cons. What is important, however, is that you are comfortable with the “successful others” who are tapped to work with your targeted QOF.
Vetting the Extras
How, then, do you examine these partners or third parties in the relatively new Qualified Opportunity Zone program? The first step is to be sure that the fund manager has these experts in place, to begin with. You may want to reconsider putting your capital gains into a fund with a manager who claims he/she can handle the entire process.
When you do find a QOF manager who has filled in the knowledge gaps with experts, your next steps should be as follows.
Obtain a detailed investment plan. Simply being told, “we are going to build an office building in downtown Brooklyn!” or “we are targeting properties in Boulder, CO!” isn’t enough. Learn how the fund is targeting properties, and how far along it is in doing so. Find out when construction begins; if ground has already broken on a project, ask how far along it is, and when completion is estimated to take place. Also, obtain intelligence about post-construction plans. It’s important to know whether the fund will lease up the building and sell it (with plans to invest in other QOZ projects), or if it is forming a long-term hold on the asset. Each of these projects requires different strategies.
Delve into the backgrounds of all involved parties. The issue continually stressed in this, and previous articles is that the QOZ program is still new, meaning solid information isn’t available. But “successful others” will have track records with other projects that you can, and should, research. An asset manager who is hired to oversee a portfolio of QOZ multi-family properties must have past experience with similar complexes. A QOF that is targeting medical office buildings should have someone on hand with a background in handling the ins and outs of this specialty niche.
Ensure frequent communication. Be sure to find out, up front, how the QOF manager will keep in touch with you. You shouldn’t have to beat the door down for a quarterly report -- the fund should automatically supply it to you. Furthermore, the fund’s metrics and timeline must be transparent. In addition to asking the fund’s manager about a communications plan, be sure to examine past projects, to determine how he or she kept in touch with previous investors.
Philosophy Meets Business
While “know-it-alls” pop up every so often, they have no place in a successful Qualified Opportunity Fund. As such, Lao Tzu’s words of wisdom should resonate with you, as a Qualified Opportunity Zone investor. Certainly, vetting the fund manager is important. It’s just as important to have an understanding of the partners and entities with which the fund is working. Insights into these “successful others” can help reduce your overall risk exposure, and potentially lead to a lucrative return.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
