By Opportunity Zone Expo Staff
A windfall of investors are pursuing Qualified Opportunity Fund (QOF) investments following the release of IRS guidelines that clarify requirements.
“It is like a gold rush from Wall Street and real estate investors, to small-time mom-and pop investors such as doctors and lawyers,” says Lance Growth, chief executive and co-founder of Growth 1031 Inc. “Honestly, I’m seeing all types of investors.”
The companies creating opportunity funds are mostly developers or private money managers, says Jonathan McGuire, an Aldrich certified personal accountant.
“As most of the dollars being invested so far are made with private equity, it is difficult to know whom the investors are inside of each fund,” McGuire says. “There will be many cases that we will not know who these investors are as these funds, as I understand from a legal perspective, are able to protect the identities of others.”
A number of sizeable QOF investments have been established. For instance, the Florida-based Sikari Luxe Qualified Opportunity Funds was among the first QOF to open to investors. It has more than $1.5 billion in planned or active investments throughout five different funds. Meanwhile in Portland, Sturgeon Development Partners is in the process of creating a QOF. Other funds include the Caliber Tax Advantaged Opportunity Zone Fund LP, which is targeting to raise $500 million in the hospitality and real estate industries; OPZ Capital Opportunity Zone Fund, aiming to raise $500 million in commercial real estate; and the Sixty West Crescent Fund, which is targeting $200 million for multi-family and mixed use.
The individuals investing in QOFs are often doing so as a way to shelter a capital gain, says Pamela Westhoff, partner at Sheppard Mullin Richter & Hampton LLP.
“I think the law is saying ‘OK, you’ve got this gain, and I’m going to incentivize to put that money to work in an area that you might not otherwise put your money,’” Westhoff says. “The whole idea is bringing capital into underserved neighborhoods.”
A boom in QOZ interest came last October, when the IRS released new guidelines that spell out the rules and requirements.”
“Sophisticated investors have known about this for months,” Growth says. “They’ve just been sitting on the sidelines, waiting for the IRS to release their guidelines. Even general investors and smaller investors are jumping at the opportunity because it really does seem to be as good as it seems, and everybody wants the ability to avoid capital gains tax.”
Anyone can participate in utilizing the QOF investment program by creating a fund or using an institutionalized fund.
McGuire says he expects to see in increase in the amount of investors looking to invest in a QOZ.
“This is one of the greatest tax benefits to ever be created as you can get a permanent tax exclusion after sale of the investment,” McGuire says. “This allows people to essentially pursue a tax-free investment, aside from operating profits that are generated.”
He added: “The caveat is if you can make a business or asset perform well in these communities. So there is a greater risk of failure due to the economic condition of the area you are investing in, but the tax free bonus you could receive is what mitigates risk should you succeed.”