THE ROLE OF A QUALIFIED OPPORTUNITY FUND IN YOUR CAPITAL STACK FOR DEVELOPERS AND BUSINESS OWNERS
A project in an OZ has a competitive advantage in the marketplace of investors due to the tax incentives .
to use a QOF to set up for their project to attract investors . This can be done before or after the sponsor closes on the land , although investment from the fund into the project should be made before breaking ground or at the very least early in the development process in order to meet the QOZ significant improvement test .
CHARACTERISTICS OF OPPORTUNITY ZONE INVESTORS
OZ investors offer several benefits to sponsors . A project in an OZ has a competitive advantage in the marketplace of investors due to the tax incentives ; there are investors specifically looking for OZ projects , therefore , they naturally have fewer options available to them . However , the tax benefits are not so significant that being in a QOZ can save a bad deal : if the project doesn ’ t make money then there are no gains to exclude in 10 years . An OZ investor also offers patient equity , as they will want to maintain their interest in the fund for 10 years or more . A project can still be sold in this time period as long as the fund then rolls the proceeds from the sale into another OZ project under the QOZ regulations .
HOW OZ INVESTORS ARE INVOLVED IN THE PROJECT
A sponsor can either set up their own fund specifically for their QOZ project or they can take investment from an outside QOF . The primary difference is the amount of control that the sponsor will maintain over the project ; outside funds will typically require a degree of control over the project or will want to own the project outright . Importantly , while there are related party rules dealing with property transferred to the QOF ( or QOZB ) there are no other “ control ” type rules in the QOZ provisions . In other words , the sponsor can control the QOF which invests in the sponsor ’ s project or the QOF can be controlled by a third party , e . g ., the QOF ’ s general partner . In either situation the investors will be limited partners only . Their interest in the fund must be equity only ( a debt investment in the fund does not qualify for QOZ tax benefits ). When the fund is unrelated to the sponsor , it will act primarily as a “ silent ” partner ; however , it will typically have some veto rights to protect the interests of the LPs . These rights are negotiated but would typically include a veto over any sale or other disposition of the Qualified Opportunity Zone Business ( QOZB ) or its assets . The fund makes an investment into a QOZB that holds the project , and other non-OZ investors can also invest side-by-side in the QOZB , which allows the sponsor to seek other equity and not affect the tax advantages of the QOZ investors .
Putting this altogether , if structured properly , a QOF can provide long-term patient capital for a sponsor . That capital , in turn , can serve as the foundation for other necessary capital providers , including non-QOF investors and construction and permanent lenders .
STRUCTURE OF A QUALIFIED OPPORTUNITY FUND
The structure of a QOF will vary depending on the project , particularly if there is a large business component as opposed to a real estate only investment ; however , there are several fundamental structural elements to a QOF and a QOZB that should be universal .
The first structural element is that there is both a QOF and a QOZB . This is often referred to as the “ two tiered ” approach and it offers significant benefits over having solely a QOF .
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