While there are 8,764 QOZs throughout the U.S. and American Territories, not all of them will automatically be great investments with the potential for outstanding returns. Projects that made absolutely no financial sense before being located in a Qualified Opportunity Zone are not going to suddenly become great investments, with the potential for outstanding returns.
This is why it’s essential that your targeted QOF and the fund manager have experience in the geographic regions in which it is planning to operate -- or, at the very least, has personnel on board with that experience. Because real estate -- and Qualified Opportunity Zones -- is about location, the QOF in which you are interested should understand that local market’s population, economic and demographic trends. Your targeted QOF must also understand the characteristics of each QOZ. Requirements for successful investment in rural Colorado will be vastly different than those mandated for Brooklyn, NY. And yes, there are funds that target both of these locations.
For instance, it doesn’t make sense for the fund to back a medical office building if there is no demand for that type of real estate product in a QOZ. This not only impacts a return on investment, it could also seriously impede a main factor of the QOZ, the “substantial improvement” clause, which we’ll examine in further detail, below.
Additionally, while the QOZ program is a federal initiative, it is designed to operate locally, in tandem with state and local municipalities. During the past couple of years, a plethora of state-specific rules and legislation has been passed and put into effect. Each state also handles its QOZ program differently. Some have created specially-designated governmental departments to handle QOZ-related issues, others rely on oversight through departments of commerce and economic development groups. Your due diligence should focus on whether your QOF is in regular touch with state and municipal leaders, to ensure regulatory compliance.
Finally, the Investment in Opportunity Program is, above all, a community program. This means the QOF in which you are interested must know how to communicate with community stakeholders, many of whom have not worked with developers, architects or civil engineers before.
For additional information about QOF geographic research, click here.