Qualified Opportunity Zone (QOZ) Funds
A QOZ fund is an LP, LLC or REIT that invests in properties located in Qualified Opportunity Zones (QOZs). Per the “Invest in Opportunities Act” of 2017, a QOZ is a neighborhood designated by the government to offer certain federal tax incentives for development or revitalization. As of April 2022, there are over 8,700 QOZs in the United States. 8 7
Most of these funds include multiple projects across different zones. Some funds have contractually secured their projects before commencing their offering, while other funds have not “tied up” all projects in advance of raising capital
QOZ funds are offered as private placements (see page 15 regarding private vs. public offerings) QOZ funds aggregate capital from investors to acquire and complete development/revitalization projects in these zones
To designate specific zones, government officials applied QOZ criteria in 2018 to census data from 2010—when many census tracts had not yet bounced back from the Great Recession. It is likely that many of these zones would have exceeded the maximum income thresholds if the boundary-drawers had been required to use 2018 data. As a result, many QOZ projects likely would be built regardless of the zone boundaries, on the basis that economic and demographic conditions already supported the demand for the proposed apartment building or hotel or self-storage facility.
Most QOZ funds generate no income during the first several years of the fund. However, because construction is at the far end of the real estate risk-reward spectrum, the potential total return from a QOZ fund may be higher than other non-traded alternative investments. Typical offerings range from $100 to $500 million of equity raised. Some programs include a plan to refinance the project and provide partial liquidity to investors for the purpose of paying deferred capital gains taxes.
7. https://www.irs.gov/credits-deductions/businesses/opportunity-zones 8. https://opportunityzones.hud.gov/resources/map
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