Posted on 28 May 2019

Opportunity Zones: Time is Running Out to Establish Maximum-Benefit Funds

Investors have always looked for ways to reinvest or defer capital gains, and fund managers who establish Qualified Opportunity Zones (QOZs) will be able to offer them an unprecedented means to reduce, defer, and exempt capital gains liabilities.

But time is short for investors who want to take full advantage of QOZs benefits: 2019 marks the cutoff for investors to reap maximum benefits of investing in QOZs. That’s why fund managers are rushing to get in on the program, as they expect greater allocations to their funds if they're set up before year-end. As for investors, they’re expressing a keen interest in the benefits, meaning the market is primed for the establishment of qualified funds.

Consider this:  At an opportunity zone conference in April, President Donald Trump highlighted just how many investors are looking for funds.

“Secretary Mnuchin estimates that private businesses will invest $100 billion in Opportunity Zones, and that’s going to be in a fairly short period of time,” he said.

Real Estate Niche, Evolving Regulations

Currently, there are about 8,700 QOZs in the U.S., which are low-income census tracts certified by the U.S. Department of the Treasury. The requirement that a minimum of 90 percent of a fund’s assets must be invested in new real estate development or substantial rehabilitation projects in these struggling communities can be daunting for fund managers with limited real estate experience. Add to that the fact that the U.S. Treasury continues to issue complex regulations surrounding these funds, and the need for administration support—someone who can follow the rules so fund management can concentrate on what it does best—becomes clear.

For example, in April, the U.S. Department of the Treasury issued its second set of proposed regulations about QOZs. As Stephanie Golden, Managing Director at Alter Domus said, they are unlikely to be the last.

“Although the most recent regulations somewhat clarify the reporting requirements with the working capital safe harbor amendment, more clarifications are expected,” Stephanie explains. “Fund managers can benefit from working with administrators who stay on top of the reporting guidelines.”

While most of the new regulations center around offering guidance to investors about how to set up business arrangements within the QOZs, there are some key takeaways for managers.

For example, the proposed regulations eliminate the need for funds to take assets into account unless those assets have been in the fund for at least six months. And once a fund sells an asset, it has up to a year to reinvest the funds. The new regulations also allow people to invest in a fund directly or to purchase an interest in a fund from an existing investor.

With All Due Speed

There are several advantages to establishing QOZs, including offering investors a temporary deferral of capital gains, a step-up basis from five to 15 percent, depending on how long the fund is held, tax exclusion if the fund is held for at least ten years, and the ability to use gains from various asset classes.

According to Preqin, 51% of investors are considering investing in Opportunity Zone Funds within the next 12 months and a further 12% would be interested in investing after this timeframe, underlying the interest in this nascent strategy.

But with a year-end deadline for investors to receive the full 15 percent step-up basis just seven months away, time is of the essence for money managers who want to ramp up new QOZ funds—but it’s not too late to begin if the right administrative support is in place.

Managers need to be aware that their clients have to act before the end of this year. The tax will be triggered at year’s end in 2026, and those who invested this year will have held the investment for the full seven years and qualify for the 15 percent increase in tax basis.

Time is running out for managers to reap the biggest allocations on these funds. But by outsourcing the administration, they won’t have to try to quickly put together an in-house team and get them up to speed before the end of the year.

Maximilien Dambax, Head of Fund Services North America at Alter Domus, says many fund managers use Alter Domus to help navigate the evolving QOZ landscape. “Fund managers understand that when they outsource fund administration, they will have more time to grow their business. Managers use our services to help them set up funds in various jurisdictions, find service providers in every market where we operate, establish systems and processes, and help launch the fund on time and budget. Our extensive experience in setting up and administering all types of investment vehicles for real estate managers and navigating the regulations associated with them, makes us an ideal partner for managers who intend to become active in this rapidly-evolving marketplace.”

Maximilien Dambax
Head of Fund Services North America
+1 312 809 9031

Stephanie Golden
Managing Director
+1 212 796 1684
 
 

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