Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 11

GET IN THE ZONE: A PRIMER ON FORMING QUALIFIED OPPORTUNITY FUNDS
important timing considerations. First, the QOF may have
as much as a six-month window to deploy its investors’ funds
into a QOZB in order to remain compliant with the 90
percent-asset reporting test to the IRS. Second, to address
the 5 percent non-qualified financial property limitation,
the proposed regulations provide a 31-month safe harbor
period commencing when the QOF contributes cash to a
QOZB. The QOZB, which must have at least 70 percent of
its tangible property (owned or leased) is QOZB property, can
treat the contributions as working capital for disbursement
during a 31-month period provided it designates the amounts
in writing, maintains reasonable written schedule to deploy
the funds, and uses the funds in a manner that is substantially
consistent with the schedule. Additional regulatory guidance
is expected regarding a QOF’s investment in a QOZ business
property including with regards to the substantially all test to
qualify as a QOZ business.
...to address the 5%
non-qualified financial
property limitation, the
proposed regulations provide
a 31-month safe harbor period
commencing when the QOF
contributes cash to a QOZB.
in §1.475(a)-4(h)(1) of the Regulations), and it must use
the asset values contained therein. Without an applicable
financial statement, its asset values must be measured using
the cost of each asset. At the Internal Revenue Service’s (IRS)
open hearing on the proposed regulations on Feb. 14, 2019,
witnesses testified that GAAP-based financial statements
are too burdensome and may lead to unforeseen results such
as a decline in an asset’s value over time due to depreciation
required under GAAP. The testimony included suggestions
that the final regulations permit QOZBs and QOFs to rely
on a tangible asset’s unadjusted costs basis for the asset’s
value despite the presence of the asset’s value in a financial
statement.
QOF TIMING CONSIDERATIONS
The third timing issue concerns exiting investments; for
example, the proposed regulations did not address the
mechanics of exiting investments in 2026 when the initial
capital gains invested in OZFs are due or when a QOF sells
an asset before 2026 but reinvests the proceeds in QOZ. A
stampede of liquidations by countless QOFs could occur in
2026, as investors struggle for funds to pay their deferred tax
(perhaps an opportune time to acquire assets?) Uncertainty
sur rou nds a QOF ’s sale of a n a sset to accommodate
redemption of an investor who desires to exit early, as to
whether only the investor faces tax if the QOF reinvests
nearly all of the proceeds in a QOZ except the funds used to
redeem the investor. To avoid the sale of assets, the QOF can
permit the investor to sell her interest to one or more fellow
investors, assuming the partnership agreement authorizes the
sale. Without a buyer to acquire the partner’s interest, the
QOF’s likely options are to refinance or sell the asset.  
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One option is to form the QOF as a corporation with the
stock linked to one of the emerging SEC-regulated secondary
private equity index markets. Investors acquire an equity
interest in the corporation structured as a QOF but can
sell the stock if needed through the secondary market.
Additional guidance is expected soon, which may address the
timing, exit, reinvestment, compliance, and other issues of
concern to QOFs sponsors.
QOFs, and the QOZB in which the QOFs invest, have
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