Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 80

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OPPORTUNITY ZONE MAGAZINE | VOLUME 1
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ISSUE 1
FUND AGREEMENTS
Uncertainties will prevail until final regulations are
published by the IRS, so the law firm engaged by the QOF
is extremely crucial. Make sure the lawyer preparing
the entity str uctures, f und documents and operating
agreements is an Opportunity Zone expert. Single project
QOF have ea sier st r uct ures since t he IRS g uida nce
provides more clarity. However, multi-asset QOF are more
complicated so more due diligence is required.
Fund agreements should clearly articulate the investment
strategy, potential exit plans, investor return calculations
and terms of the QOF during the entire investment period.
Although, the IRS has not provided specific guidelines
regarding fund agreements, investors should be able to
understand the pertinent investment matters.
SPONSOR PEDIGREE
Opportunity zones is a new playing field for veteran and
new fund sponsors. Real estate and non-real estate fund
managers are also joining the marketplace, so investors
have a lot of venture choices. As a result, a comprehensive
due diligence is vital in the selection of the right fund
sponsor. Although, opportunity zone investment falls
under impact investing, investors still have an expectation
to receive considerable investment returns commensurate
with the project risks.
of investment since it’s not yet federally-regulated. Secondly,
for a QOF to self-certify, Form 8996, Qualified Opportunity
Fund must be filed annually with its income tax return.
Lastly, if a QOF constructs or develops QOZP directly, then a
working capital reasonableness test is applicable.
The IRS has not issued the final regulations regarding
the OZP so there are many uncertainties and unanswered
questions that remain. As a consequence, tax guidelines
are still being finalized and other compliance issues are still
incomplete. Nonetheless, annual compliance reporting is
a critical provision to maintain the QOF designation, so
investors need to thoroughly scrutinize the accounting firm
that is engaged to perform this procedure.
OPPORTUNITY ZONE FUND DESIGNATION MAINTENANCE
It is imperative that a QOF designation is maintained
t hroughout t he life of t he f u nd ot her wise investors
may not f ully realize the ta x benefits projected. For
example, an investor who has held its investment in the
OZ Fund for 10 years and later determine that the fund
has a lapse in its designation may be hard pressed to
regain its investment if that designation isn’t retained
continuously. It is essential for investors to request a
copy of Form 8896, the self-certification form, on an
annual basis as proof of fund designation maintenance.
Some of the indispensable elements investors may evaluate
fund sponsors are as follows: Integrity and honesty, creativity
in the fund strategy, business and real estate experience and
execution capability.
Investors should look beyond the past track record of the
sponsor and carefully analyze the investment strategy of the
QOF. Since the designated opportunity zones are low-income
communities, these are not considered ideal and financially-
viable locations by traditional real estate sponsors so they
were mostly overlooked.
There may be new fund sponsors who may bring innovative
investment ideas, strategies and alternatives that may bring
higher investment returns and simultaneously revitalize
these underserved areas. In some cases, these emerging fund
managers may have better options since they bring creative
thinking and an agility to a rapidly changing environment.
INVESTMENT STRATEGY
A well-thought out investment strategy must be carefully
reviewed prior to investing in QOF to ensure that a sound
plan is going to be systematically executed by the fund
managers especially when it pertains to direct construction
or development projects. The OZ Program stipulates that a
property must be “substantially improved” within 30 months
of acquisition and in some cities, this requirement may not be
realistically accomplished due to a lengthy entitlement process
and development approvals.
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