OZ Investing: IRS Guidance Dramatically Alters Expected Investment Strategy

Friday’s IRS release of 80 pages of guidance is a step toward clarity and reduced compliance risk if not the final word on topics covered. While the IRS presumably crafted its proposed changes to optimize on its key program objectives subject to the input of the myriad of market participants who have lobbied, market participants have 60 days to provide additional feedback. That said, the IRS states that the proposed rules may be relied upon if the taxpayer applies them “…in their entirety and in a consistent manner.”

Several of the topics covered in these documents have come up in conversations I’ve had with family office clients and below, I attempt to distill the voluminous official documents down to key points and implications.

Opportunity ZonesMatt HolmesOctober 24, 2018Opportunity Zone InvestingComment

OZ Investing: Does Capital Flow Downhill? Implications of Disparate State Tax Rates

Discerning where one should invest, even with geographically-focused OZ capital, requires a multi-layered analysis that begins with understanding pre-OZ capital flows, how OZ capital is incentivized to behave, how conventional capital sources may respond and ultimately where the market might find equilibrium. In this post and the next we will discuss the directional impacts of OZ capital flows and where related alpha may persist when markets return to equilibrium.

Opportunity Zone Investing: Indirect Questions

Having described program strictures related to direct investing in Qualified Opportunity Zone Business Property (“QOZBP”), in this post we describe the constraints to indirect, or joint venture investing in real estate, which describes investment positions across a continuum of investor control, ranging from passive stakes in a commingled fund, to separate accounts (e.g. family office or corporation allows investment manager to invest its capital into a QOZB alongside a developer subject to control over key decisions). In either case, the investment manager is placing joint venture equity into a QOZ business entity that is formed to invest in QOZBP. We begin with a line-by-line exploration of the relevant constraints before shifting to a more holistic discussion of investment strategy implications.

Opportunity Zone Investing Series: Investment Strategy Prerequisites—Coloring within the Lines (part 2)

In this posting we address investment constraints that derive from the definition of Qualified Opportunity Zone Business Property (“QOZBP”), building on the list of conditions developed in the last posting on the interwoven topic of vehicle structure. Note that to date we have only covered the implications of direct investing (from a QOF directly into real estate). After this post we will have set the stage for a discussion of the implications of indirect investing through a Qualified Opportunity Zone Business. Collectively, these three postings will serve as a basis for our review of investment geographies and ultimately the development of a coherent investment strategy.

Opportunity Zone Investing Series: Investment Strategy Prerequisites—Coloring within the Lines (part 1)

Before discussing investment strategy, we will first discuss its vital inputs, program constraints and the manner in which we might expect the Qualified Opportunity Fund (“QOF”) after-tax return premium to map unevenly to identical deals executed across geographies. As the primary lens through which we will evaluate geographies and investment strategies, we begin with a two-part discussion of the constraints that the tax code imposes upon investment selection, starting with those that derive from fund structure in the context of direct QOF investments.

Opportunity Zone Investing Series: Heads I Win, Tails We (the US Treasury & me) Lose

The evolving Qualified Opportunity Zone (QOZ) program, legislated into existence by way of the 2017 Tax Cuts and Jobs Act, provides powerful tax incentives aimed at drawing capital gains into investment positions in low income (and low income adjacent) census tracts. Today we discuss the structure of the incentives and what it means for investors.

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