Opportunity Zones have the investment world buzzing with interest and excitement by providing the opportunity to provide investors the ability to defer and reduce the rate at which they will be taxed on any of their capital gains and provide tax exemptions on gains made from investments held longer than 10 years in an Opportunity Zone.
When it comes to the practical logistics of actually investing in Opportunity Zone Funds, which are required to maintain 90% of their investments within Opportunity Zones, the path to success can be quite risky if invested with the wrong fund manager. While these funds have the potential to reinvigorate depressed areas with an influx of new capital, the investor must be careful to ensure his/her investment will be appropriately placed and managed to leverage financial returns in a socially conscious manner.
To guarantee these investments meet technical IRS/Treasury standards, there a few important questions that every investor should inquire about to their potential fund manager/sponsor before choosing to invest.
Does the fund manager have extensive market reach and a pipeline in order to place your capital in viable deals in the time frames required under the Regs? Within six months from receipt by the fund manager, the capital gain must be committed to a specific transaction. Vague promises should not be acceptable to investors but instead a true pipeline should be produced to prove your investment dollars will have a home.
Does the potential fund manager have extensive experience with construction oversight and management of institutional fund development? This can be a huge potential for a “miss” on delivering financial returns to the investor.
Does the fund manager have comprehensive knowledge in dealing with complicated tax structures and have a strong track record reflecting no recaptures of tax benefits to investors? A key component to maintaining the tax benefits lies in proper stewardship of compliance and reporting standards to Treasury.
Is the fund manager well versed in operating within IRS guidelines and working with IRS auditors to ensure compliance? This will likely be something that novice fund managers will be blindsided by when the IRS shows up at their collective doorsteps.
Will the developer be able to effectively manage the asset once fund money is invested? Make sure your fund manager has a solid track record with a large portfolio of assets that are the same type as you are investing in. It is better to invest in specialists in a certain asset type (ie. multi-family, industrial, venture capital) only and not mixed asset funds. Avoid investing with a “Jack of all Trades…Master of None.”
Can the advisor ensure that construction will be substantially completed within the time frames required to meet compliance of complicated Opportunity Zones regulation? This safe harbor is 31 months for new construction including entitlement risk.
Does the advisor have the proper team, including legal and accounting council, to ensure positive implementation of the business plan for each asset? Again…track record, track record, track record is imperative before you invest your dollars with a potential manager.
Does your potential fund manager have direct experience investing in these designated Opportunity Zones? Be certain your investment is handled by people with direct experience investing in these areas not only to ensure the proper impact is achieved but more important these projects will reach
the goal line – proper execution of each business plan.
These Opportunity Zone Funds, in particular, require a fund manager who has extensive experience in development and tax issue compliance. Choosing the wrong fund to invest in can have dire consequences relative to the performance of your investment. To reiterate the risks, if the fund fails to place or identify an asset for your invested capital within 180 days of your investment in the fund, these gains will be susceptible to normal capital gains taxes while your invested funds are tied up in the wrong “illiquid” Opportunity Zone Fund you invested in. Additionally, if the property falls out of long term compliance with Opportunity Zone regulations, all potential tax benefits could be lost. Any allotted tax exemptions, even those used prior to the failure in compliance could also subject to recapture. Lastly, you the investor may have little recourse for your investment in the event of noncompliance and could be stuck in the fund with the
To mitigate these risks, proper due diligence in choosing an Opportunity Zone Fund will prove to be invaluable. Opportunity Zones are another effective strategy for which an investor can strengthen his/her portfolio in a diversified and tax efficient manner. Choosing the right fund and manager can make or break this valuable new investment vehicle and ensure all the benefits will successfully inure to the investor.
Eddie Lorin is Co-Founder of Alliant Strategic Investments and is a member of the Novogradac and Economic Innovation Group’s (the originators of the OZ Regulations) Coalitions. Alliant Strategic is a division of Alliant Capital and is one of the largest privately held tax credit syndicators in the country with over 90 institutional funds covering over 99,000 units encompassing over $7.5 billion in tax credit equity under management. Over one third of these assets are in designated Opportunity Zones built and rehab over the last 21 years. Learn more at AlliantStrategic.com.
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