Understanding The Opportunity Zone Program

Ways to Invest–Opportunity Zone Funds

Opportunity Zone Funds, or Qualified Opportunity Funds (QOFs), are partnerships or corporations with the sole purpose of investing in Opportunity Zones. Rather than putting your money directly onto QOZs, you invest in the funds, which then funnel your capital gains into QOZ projects.

QOFs typically fall into one of two categories:

Identified funds have specific QOZ projects already in the works, or under contract. The advantage to this fund structure is that you know upfront what project or projects are being financed and developed. These funds are more transparent, and you can actually visit the development sites.

Semi-blind funds focus on raising capital first, then finding likely projects on which to spend that money. While these funds aren’t as transparent as their identified counterparts (and can be riskier), they have a higher level of liquidity. This can help lead to a quick acquisition and closing.

As is the case with other finances or funds, it’s essential to perform due diligence on QOFs prior to investing. Some of the details to examine include the following:

Track record. Because the Opportunity Zone program is still relatively new, complete information about a QOF’s performance might not be immediately available. In this situation, you can examine the Sponsor’s previous projects, risk mitigation efforts, returns, and other pertinent information.

Targeted property/properties. Whether the fund is investing in business property, stock, or a partnership interest, it’s important to understand where your money will be going and how it will be used. For instance, if the QOF is focused on real estate development, be sure to understand the viability of the asset type and where it is in the real estate cycle. If the focus is on stock or a QOZ company, ask to see a business plan and cash flow estimates. However, if you are investing in semi-blind funds, this information may not be available to you.

Geography. While there are more than 8,700 designated Opportunity Zones, not all of them may be a fit depending on each individual’s investment preferences and risk tolerances. Be sure to examine demographics, market data, location (both part of the country and where, within the actual QOZ), and competition.

Personnel. It’s also a good idea to know with whom you are investing. Reach out to the QOZ Sponsors and managers, and take some time to learn about the team (including how long it has worked together). This is also the time to get answers you might have concerning income distribution or tax preparation requirements.

You want to come away from the due diligence process knowing that the investment makes sense for you and your goals. Just because an investment is labeled “Opportunity Zone” doesn’t make it a viable or workable investment opportunity for you.

Investment Targets – Opportunity Zone Property

The main requirement for QOFs is that at least 90% of their assets must consist of qualified opportunity zone property (QOZP). QOZP falls into three asset classes: Qualified Opportunity Zone Partnership Interests, Qualified Opportunity Zone Stock, and Qualified Opportunity Zone Business Property.

Qualified Opportunity Zone Business Property (QOZBP)

The IRS defines QOZBP as that which:

• Is used in the trade or business of the Qualified Opportunity Fund or in a Qualified Opportunity Zone Business
• Is placed in service in the QOZ for the first time
• Was acquired after December 31, 2017

Meanwhile, a Qualified Opportunity Zone Business (QOZB) entity must observe at least one of the following requirements:

• Earns at least 50% of its income from business activities conducted within a QOZ
• Performs at least half of its aggregate hours of service in a QOZ or
• Pays at least half of the aggregate amounts for services performed in a QOZ
• Has substantially all of its necessary tangible property and business functions in a QOZ

Qualified Opportunity Zone Partnership Interest (QOZPI)

The QOZPI refers to a QOF that has a stake in a domestic partnership as long as:

• The QOF acquired the interest after December 31, 2017
• The interest is acquired solely in exchange for cash
• The partnership operates as a QOZB, or if new, the partnership is set up to operate as a QOZB
• During the holding period, the partnership qualifies as a QOZB

Through this structure, the Qualified Opportunity Fund becomes an actual partner of a Qualified Opportunity Zone Business by acquiring a stake in that business for cash (generated from QOF investors).

Qualified Opportunity Zone Stock (QOZS)

The concept behind QOZS isn’t too different from that of investing in a mutual fund which, in turn, channels that money into a company. In this scenario, the QOF buys into a Qualified Opportunity Zone Business by providing equity directly to that entity.

This structure differs from Qualified Opportunity Zone Business Property. QOZBPs consist of tangible assets (such as real estate or equipment operating within QOZs). Stock, on the other hand, focuses on liquidity and equity. 

QOZP Requirements

Whether the QOZP assets consist of business property, partnership, or stocks, the QOF must meet the following requirements so you can take advantage of tax deferral strategies :

• At least 90% of all assets must be Qualified Opportunity Zone Property
• At least 70% of total use of tangible property must take place within the QOZ
• The QOF must substantially improve the Opportunity Zone property by doubling the property’s adjusted basis within 30 months after purchase