Introduction:
Where can you find the best Qualified Opportunity Zone Investments? Is it online? Through advertisements? Check this article to know where. I’ll give you the best tips!
What exactly are “Opportunity Zones?”
An Opportunity Zone is a town designated by the state and approved by the Treasury Department as eligible for participation in this program. All 50 states, Washington, D.C., and the U.S. territories have been designated as safe zones by the Treasury Department. 1
The United States has roughly 8,700 Opportunity Zones. The U.S. Department of Housing and Urban Development maintains a list.
Do you know how to use this program? It’s possible to postpone capital gains on appreciated assets by putting them into a Qualified Opportunity Fund within 180 days of selling or exchanging them. This includes net 1231 gains. Afterward, the fund purchases Qualified Opportunity Zone real estate.
Investments made by taxpayers in Opportunity Zones may include the return of principal and capital gains. Still, only capital gains are eligible for the tax exemption on subsequent appreciation of the Opportunity Zone investments, as stated in the following paragraphs. In the Opportunity Zones program, reinvestment of the gain from selling any valued assets, such as stocks, is permitted. There is no urgency to invest in a similar property to delay the gain.
Regardless of when the flow-through entity realized its gain, a taxpayer who receives a reported capital gain from one of these entities has 180 days from the end of the calendar year to invest in a Qualified Opportunity Fund. The 180-day triggering date for each partner is December 31 of the same year; for example, if the partnership earned a capital gain in March, each partner has until approximately June 28 of the following year to make their Qualified Opportunity Zone investment.
Qualified Opportunity Zone investments are intended to be long-term in nature. However, due to the program’s timetable, they are on a fast track thanks to the tax reform act that created them. Participants must harvest their capital gains and reinvest them in a Qualified Opportunity Zone Fund by the end of 2019 to qualify for the maximum tax cut offered by Qualified Opportunity Zone investments. Though the savings on capital gains will be slightly reduced after this deadline, investors can still profit from the program in the future, but they must invest capital gains in a QOF within 180 days of realizing them.
As a result of this new rule, dozens of Qualified Opportunity Funds have been formed to raise cash for commercial real estate investments in Qualified Opportunity Zones. Investors must decide quickly whether the program is right for them and then select to join in one (or more) Qualified Opportunity Funds. However, given the program’s speed and competition, fund managers are racing to locate transactions with strong fundamentals.
To complicate matters further, asset managers, broker-dealers, and investment advisers can all market funds that invest in Qualified Opportunity Zones. And Qualified Opportunity Zone funds can be structured as direct real estate investments or as real estate enterprises such as private equity real estate partnerships or real estate investment trusts (REITs)—all of which offer distinct advantages in a portfolio.
So, how does a potential investor find the most attractive Qualified Opportunity Zone funds?
OpportunityDb, an opportunity zone database launched last year, is a growing Opportunity Zone Fund Directory that now lists 108 Qualified Opportunity Funds.
Finding Qualified Opportunity Funds, however, is merely the beginning of the process for investors. Because of the nature of the federal opportunity zone tax laws and standards for qualified properties, each has its distinct characteristics. To narrow the field, the investor must undertake careful due diligence on the Qualified Opportunity Funds.
Consider the following five variables when deciding which Qualified Opportunity Funds to add to your investment portfolio:
1. Funding Strategy.
Investors should look for Qualified Opportunity Funds with clear, established plans that the manager can easily articulate. Funds with hazy or unfocused strategies may take on excessive risks, such as investing in property kinds and markets with little understanding or prior experience. Given that these investments can span ten or more years, understanding the strategy underlying a QOF will assist Qualified Opportunity Zone investors in avoiding unpleasant shocks.
A QOF that seeks to invest everywhere in the United States and any property type is an example of a hazy or unfocused approach. Certain property kinds have different risk and return characteristics by definition. Today’s strongest property types are multifamily dwellings and industrial and creative office space. They are run by a fund focused on constructing hotels from the ground up in the Arizona desert. Ground-up development is risky and should be balanced with less dangerous development methods.
Keep an eye out for funds that may recycle investment resources. Recycling capital entails creating properties, selling them when finished, and reinvesting the proceeds in new Qualified Opportunity Zone ventures. This method includes reinvestment risk not included in a “build-to-core” plan, which involves constructing properties and then holding the stabilized, cash-flow-generating assets for several years after construction is completed.
Clear-cut and proven strategies include clear and practical data such as how long the QOF intends to keep the assets, the sorts of properties that will be targeted, and the specific markets in which the QOF intends to invest. Information, facts, and stories support these techniques. Investing in ground-up development of multifamily properties in Atlanta, Austin, Charlotte, Dallas, Denver, Houston, Nashville, Orlando, Phoenix, and Raleigh is an example of a clear plan.
2. Multiplication.
QOF plans can range from investing in the development of a single property to assembling a portfolio of investments in ten or more distinct properties in various geographical areas. Diversity, in general, mitigates risk. Thus investors should pay close attention to the extent of diversification that the QOF plans to achieve across various investments and geographical markets.
Because the roughly 8,700 federally designated opportunity zones represent locations in desperate need of investor resources, they are intended to be riskier than other types of investment. Furthermore, not all opportunity zones contain the finest investment prospects. For example, Georgia, Texas, and other large states include economic opportunity zones in urban markets such as Atlanta and Houston, which are developing faster than tiny rural communities.
Similarly, some markets begin with less difference in overall income. Charlotte, North Carolina, and Phoenix, Arizona, are both seeing rapid growth, with low-income areas coexisting alongside middle-income areas. Managers on the ground in markets with qualified opportunity zones primed for rapid expansion will be best positioned to fund the limited number of available projects and construct Qualified Opportunity Funds with attractive ventures.
Investors wishing to optimize diversification in their Qualified Opportunity Zone investment(s) should select Qualified Opportunity Funds that intend to invest in, or have already invested in, at least five different properties dispersed throughout diverse neighborhoods, opportunity zones, and geographical markets.
3. Appetite for Risk.
A QOF requires more than a defined strategy and diverse portfolio to mitigate risk. Investors seeking to reduce the risk of Qualified Opportunity Zone investments should also look for the prudent use of debt at the property level.
For purchasing existing real estate, judicious use of debt would involve a maximum loan-to-value ratio of 75 percent. However, most bank lenders will only lend up to 65 percent of the development cost for ground-up developments. In many circumstances, Qualified Opportunity Funds can only obtain ground-up development funding over 65 percent by combining mezzanine and preferred stock. Both sorts of “debt” have higher interest rates than conventional bank funding and a higher payback priority than an investor’s equity stake in the enterprise.
Qualified Opportunity Funds that use debt cautiously may have lower goal returns than those that do not, but those that use more debt will be in much more danger if any component of the development fails and the property does not generate enough income to service the loan. Investment profits should be earned primarily from the performance of real estate rather than through excessive loan use.
4. Fees.
Fee structures for mutual funds should be fair and clear, not hidden in the fine print. Acquisition and other fees that are related to particular agreements rather than the overall QOF are examples of fees that are frequently hidden from investors. It should not be necessary for passive investors to look for hidden fees.
A fundraising commission of more than 5% or a performance charge of more than 20-25% is outrageous. An annual asset management cost of more than 2.0 percent is also unacceptable. An asset manager should not earn more from annual management fees than they intend to earn from performance payouts over a decade or more.
5. The Funding Mechanism.
The 180-day deadline for capital gains sheltering applies only to invested funds, not obligations. If 180 days pass without the investor’s capital being called by the QOF, the investor loses the Qualified Opportunity Zone tax benefits. As a result, timing is crucial.
A QOF must either accept the entire investment on a single day or have defined dates and amounts specified for capital calls so that investors may be confident that they will be able to make their Qualified Opportunity Zone investment within the 180-day window. That means Qualified Opportunity Funds must keep projects in the pipeline that will conclude before the deadline. Look for Qualified Opportunity Funds with deals under contract, due diligence review, and evidence of manager ties that can deliver a consistent deal flow to the fund.
U.S. Securities and Exchange Commission advises that Qualified Opportunity Zone funds are subject to federal and state securities laws. All the information needed to test these five characteristics should be included in the offering materials. Vetting the finalists also necessitates a detailed examination of how finances will be administered, which I discuss in this essay.
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