Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 79

INVESTOR CONSIDERATIONS WHEN INVESTING IN QUALIFIED OPPORTUNITY FUNDS
Investor
Considerations
when Investing in
Qualified
Opportunity Funds
By Kevin McDowell & Joyce Soriano-McDowell
Learn how investors can minimize potential mistakes by considering compliance reporting,
designation maintenance, fund agreements, sponsor pedigree, investment strategy,
exit considerations and risk tolerance.
T
he Opportunity Zone Program is bringing considerable
excitement to the commercial real estate market. This
tax advantage could result in significant proceeds to
investors. Not since the creation of 1031 Exchanges, REITs
and crowdfunding has the U.S. real estate market been
inundated with anticipation and enthusiastic expectation.
Qualified Opportunity Funds are new investment vehicles
that have been created based on the Opportunity Zone
program included in the 2017 Tax Cuts and Job Act. Due
to the expected tax incentives and community impact this
novel investment program is expected to bring, the real estate
industry is rushing to this new frontier, much like the gold
rush era of the 19th century.
Due to the significant tax benefits that investors may
potentially obtain, investing in OZ funds will most likely be
popular until the program expires in December 2026. Multi-
billions are expected to be deployed by the end of this year
to fully take advantage of the tax benefits. However, since
this is a new field for everyone, savvy and new fund sponsors
will be entering the market. Analogous to the overall real
estate industry sentiment of “cautiously optimistic” as it
pertains to the status of the real estate market, investors
should also approach investing in OZ Funds in a “cautiously
optimistic” manner. Be cautious in fund sponsor choices but
be optimistic with the expected profits.
How can investors minimize the potential mistakes they
may make in OZ Fund investments? Let’s highlight the
pertinent issues that must be the focus of due diligence. The
main factors that investors should consider while evaluating
an investment in OZ Funds are compliance reporting,
designation maintenance, fund agreements, sponsor pedigree,
investment strategy, exit considerations and risk tolerance.
The goal is to educate, communicate and encourage
investments in opportunity zones since there are numerous
advantages and incentives for all participants - seasoned and
inexperienced investors, fund sponsors, government officials,
and the designated low-income, underserved communities.
COMPLIANCE REPORTING
The IRS requires a significant compliance reporting
component that must be performed annually in order to fulfill
the conditions for a Qualified Opportunity Fund (QOF).
Some of the requirements are: satisfaction of the 90 percent
Asset Test, self-certification, and working capital.
One of the most important
prerequisites for a QOF is
that 90 percent of fund assets
must be held in a Qualified
Opportunity Zone Property...
One of the most important prerequisites for a QOF is
that 90 percent of fund assets must be held in a Qualified
Opportunity Zone Property (QOZP). A QOZP is one of
the 8,761 census tracts in the country and U.S. territories
that were certified as Opportunity Zones. In addition, QOF
must not invest in ineligible Qualified Opportunity Zone
Businesses (QOZB) meaning businesses that fall under the
categories of golf courses, country clubs, massage parlors,
hot tub or suntan facilities, racetracks, gambling and liquor.
Although, cannabis hasn’t been specifically excluded in the
list of “sin businesses” as defined by the IRS, it would be
advisable to err on the side of caution and eliminate this type
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