Opportunity Zone Magazine Volume 1, Issue 3 - Page 62

62 OPPORTUNITY ZONE MAGAZINE | VOLUME 1 • ISSUE 3
While many QOFs are taking an effort when they enter
a community to speak with those within to help better
determine the needs of the area, this ultimately doesn’t ensure
the project will be successful.
Some PE groups may believe the risk compared to the tax
benefits are too significant to warrant the possible change in
their time-proven investment models.
On the other hand, there are over 8,700 zones covering
approximately 12% of the U.S. and touching all major
metropolitan areas, so there are definitely good opportunities
out there for savvy investors.
CHALLENGE TWO: CARRIED INTEREST IN PE FIRMS
Another issue facing many PE firms is how to structure deals
within the integrity of the proposed regulations while still
satisfying the fund managers.
Typically, most PE deals are structured with a general partner
(GP) and limited partner (LP) structure, where the GPs get a
carried interest for managing the overall fund assets and the
rest of the investors are the LPs. Under current regulations,
one of the most common structures of a QOF is a partnership
that invests in another partnership interest that is considered
qualified opportunity zone property (QOZP).
For this to be a qualified investment, the QOZP must be
obtained for cash, which could be a predicament since the
carried interest is typically not exchanged for cash. Depending
upon the value that could be assigned to this interest, it’s
possible for the QOF to no longer hold 90% of its assets as
QOZP, which might create issues for the QOF.
Failure of an entity to meet
the requirements described
below to be a QOZB would
result in the QOF owning an
asset (i.e. equity in the entity
that failed to qualify as a
QOZB) that does not qualify
as OZP.
This brings us to how the value of the asset is going to be
measured.
In the final regulations, The Treasury Department and the
IRS determined that applying the alternative valuation
method to partnership interests with a tax basis not based on
cost, would be inconsistent with the intent and purpose of
the statute. As a result, the final regulations provide that the
alternative valuation method may be used to value only assets
owned by a QOF that are acquired by purchase or constructed
for fair market value. In such instances, the QOF’s unadjusted
cost basis of the asset is determined under section 1012 or
section 1013. The final regulations also provide that the
value of each asset owned by a QOF that is not purchased or
constructed for fair market value equals the asset’s fair market
value. Thus, this would include any partnership interested
owned by a QOF. A QOF determines that fair market value
on the last day of the first six-month period of the taxable year
and on the last day of the taxable year.
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