Qualified opportunity zones were established in 2017 to incentivize family offices, high-net-worth individuals, and organizations to invest in low-income communities. Investing in commercial real estate in QOZs offers investors several tax benefits, which makes them feel important, gratifying, and distinctive. However, while selecting management to invest in a Qualified Opportunity Fund or QOF, the investors must use their business sense.
The most durable deals are typically those that make financial sense, with or without tax benefits, but dealing with reliable individuals should also be a consideration for investors. No matter how substantial the tax benefits of a QOZ investment are, any plan to renovate homes in a QOZ area would require solid and reliable implementation. Although success is not guaranteed, private real estate investors can establish the framework for a strong performance by carefully vetting prospective QOF real estate asset managers before investing in a fund.
Even if the funds are still relatively new and have no track record, the managers of qualifying opportunity zone funds should have experience, and their primary performance measures should generally be the same as those of other private real estate funds. When assessing managers of qualified opportunity zone funds, investors should take the following factors into account:
- Solid Development Experience.
Past real estate development performance is an excellent predictor of a manager’s probable success with their QOF. To take advantage of QOZ tax benefits and fees they may collect from their clients, many unskilled managers will, nevertheless, make unproven bets. Inexperience might result in a failed QOZ venture since they will be starting with complicated financial, building, and operational plans. The best place for investors to start is by going to the company website and looking for press coverage about the manager and their prior investments online. Run if the management lacks experience or if there has been bad news about previous agreements.
Investors in QOFs are relying on the fund manager’s aptitude for overcoming underwriting and due diligence difficulties on a schedule that satisfies the deadlines for federal tax incentives. Managers with real estate development expertise and a track record of accomplishment will be more likely to close transactions and perform well. Also, search for property managers who have a track record of success in developing the same kinds of assets that their QOF will be centered around. Each sort of property has certain intricacies that go along with investing in and growing it. It can make all the difference between a home run and a strikeout to have knowledge of the intricacies of that sort of property and how to address them.
- A group of experts
A successful real estate portfolio manager needs staff with depth and expertise, as well as members who have received training from reputable, institutional-quality real estate companies. A strong bench will assure resilience and success over the longer 10-year investment tenure of the QOZ Fund. A QOF manager should have access to internal legal counsel, work with a premier law firm that has in-depth QOZ understanding, or do both. Due to the serious compliance challenges QOZ Funds confront, investors may be subject to unfavorable tax consequences if the letter of the law is not followed.
If one or both of their main team members decide to leave the company, managers who depend on them can find themselves in danger. Such a risk is minimal if the manager has access to a strong pool of asset management and investment experts who are ready and able to follow the main team members above them, if necessary.
- Choosing a market
A manager who performs well will have a precise strategy for choosing markets that are supported by thorough standards and tested performance indicators. Managers must be able to prove that their investment location is not one of the more than 8,700 federal opportunity zones that have been designated for special tax treatment. Investors may enquire about the criteria the QOF management uses to assess and choose potential investment opportunities.
The most prospective markets and submarkets include traits like robust population and employment growth, a varied economy, higher predicted demand than supply for the asset class, competitive cost of living rates, and a business-friendly environment.
- Honesty
When asked, real estate fund managers must be prepared to give recommendations from their auditor, legal counsel, and existing investors and also specifics on the performance of their prior investments. Additionally, their costs should be outlined and explained in detail in the offering documentation. If they hesitate or are too complicated, it may be a sign that they are trying to conceal something.
- Interests are aligned
Has the QOF management invested anything personally? A QOZ investor shouldn’t typically provide more money than real estate fund management. Nobody else should invest in the manager’s projects if the manager’s founders are unwilling to do so.
For investors to feel at ease with the team, fund management should last more than ten years. Before investing, all acquisition, financing, legal, and lease expertise must be in place, and the principal cannot have one foot out of the door. The staff should be well-versed in the field, have systems in place to “see around the corner,” and have a strategy in place to deal with any challenges that the ensuing ten years may provide. Don’t invest if you find it difficult to interact with the manager’s staff year after year. Investors must first feel satisfied with the investment plan and management to invest; a tax advantage alone is not a sufficient justification.
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