15 Jun 2019

How to Choose a Qualified Opportunity Fund: What You Need to Consider

How to Choose a Qualified Opportunity Fund: What You Need to Consider

With the second set of regulations landing in April, investors, advisors and fund managers have a bit more clarity on Opportunity Zones and how they can produce both profit and positive impact. However, before choosing a Qualified Opportunity Zone Fund, it’s imperative that you first consider your long-term investment goals and then select a Qualified Opportunity Fund that also aligns with those goals. If you have immersed yourself in QOFs since the 2017 tax bill that created them, you’re likely already aware of their complexities. When the first round of regulations was made public in October, many felt they brought more questions than answers to the legislation. As much as the new regulations were able to sort out, they haven’t allayed all investors’ concerns. Rightfully so. They still left at least one wide-open question unanswered: where to invest.

If you think that QOF regs so far have been obtuse and complicated, you’re not alone. Even long-term financial advisors are treading softly. So should you.

Look to a Firm’s History

It’s impossible to look to a fund manager’s history with QOFs. They simply didn’t exist before the 2017 legislation. However, you can look to a firm’s track record in their area of expertise. Because so many of the QOFs will concentrate on real estate, researching qualified real estate development firms is a wise starting point. What have they done in the past? What kind of yield have they netted investors? And have they demonstrated the capabilities necessary to pivot to new forms of opportunities and investment?

Consider their Track Record in the Region

Given the 8700+ development tracts that qualify under the federal regulation Opportunity Zones, there’s virtually no state in the country that will not offer you an opportunity zone in which to invest. However, the reality check will be whether funds in the zones can adequately deliver. Will they meet the specifications of the QOFs—even as they continue to evolve—and deliver a potential profit to investors, while also meeting the more altruistic goals of economic equitability in the neighborhoods where they grow? Only you and your qualified financial advisor can truly assess the individual merits of any QOF, however, a proven real estate development presence in a particular area is one measure of likely success. A development firm with shovel-ready properties may be more likely to fit all QOF parameters in the area where it already operates. Conversely, a real estate developer, say, in Washington, D.C. may be well-versed in its local ordinances, but be ill-equipped to deliver in the 130+ opportunity zones in Washington State.

Innate Ability to Pivot

Because the regulations surrounding QOFs continue to evolve, it’s important to invest in a firm with an ability to move with the vagaries of the market. A firm’s track record in funding and development of large-scale real estate projects is telling. Have they proven their merit in the past and have they demonstrated innovative strategies that deliver to their investors?

Do They Measure Up?

Less imperative, but nonetheless telling, is whether or not new QOFs have been given the green light by nonprofit organizations looking to ensure the success of OZs to the betterment of society. As such, a review of the National Council of State Housing Agencies (NCSHA) Opportunity Zone Fund Directory will provide you with a nonpartisan list of who’s who in the industry. Consider the funds listed on their site and conduct due diligence. The site doesn’t endorse QOFs but it does offer a comprehensive list.

 

Although the tax incentives can be significant, investing in Opportunity Zones is not a decision that should be taken lightly, nor without consulting your financial advisor. However, as you begin your research, we’d be happy to provide information on the Shorewood Opportunity Zone Fund, a Qualified Opportunity Fund based in New York City, that focuses on single asset, mixed-use and multifamily residential development in high-growth submarkets.

  1. Lawrence Davis