A qualified opportunity zone fund is “an investment vehicle organized as a company or partnership to invest in an eligible opportunity zone property.” A Qualified Opportunity Zone fund is similar to a private equity fund that complies with the provisions of Section 1400Z-2 of the Internal Revenue Code 1986, as amended (the “Code”). The typical legal form of a private equity fund provides for the use of a national limited partnership or a limited liability company established under local law to process profits and losses for tax purposes. The actors involved in a fund are often an investment manager who oversees the fund`s assets, a general partner or manager who manages day-to-day operations and limited partners or members as investors. To certify a fund as an eligible opportunity zone fund with the Internal Revenue Service, the fund simply submits a Form 8996 with its original federal tax return in a timely manner. While the self-certification process is simple, there are a number of issues and considerations that require a fund`s attention in order for it to achieve its status as an eligible opportunity zone fund. Here`s a look at some of the most important conditions of a private equity fund and how they`re affected by the Opportunity Zone program rules. A company in the Opportunity Zone (QOZB) must pass 5 tests for qualifying opportunity fund (QOF) investment in the QOZB to qualify as a QOZP if compliance with the 90% investment standard is tested. Compliance with the 5 tests is determined each year at the end of the QOZB tax year. However, a QOZB with a valid working capital safe harbor allows a QOZB to automatically comply with QOZB 1-4 tests for up to 31 months or up to 62 months with sequential and overlapping safety rules. However, keep in mind that one of the 5 QOZB compliance tests requires that 70% of all tangible capital assets owned or leased by QOZB be Eligible Opportunity Zone Commercial Property (QOZBP). Although the audit of compliance with this requirement is suspended when a valid safe haven for working capital is in effect, QOZBs will ultimately have to meet this standard of 70% for property, plant and equipment each year for the rest of the investment in the opportunity area. DURATION OF THE FUND. Private equity funds are usually set up for a fixed period of time.
The duration of a fund is usually 10 years with an investment period of five years. In principle, investors are not allowed to make withdrawals or additional capital contributions during the term of the fund. Eligible Opportunity Zone funds are likely to operate for a period of 10 years, as their investors will receive the ultimate tax benefit by holding their investment in an Eligible Opportunity Zone Fund for at least 10 years. Investors are unlikely to attempt to withdraw from the Fund from the Qualifying Opportunity Zone for the term term, as the tax benefits are intended to maintain their shares for the 10-year period. RESTRICTIONS FOR INVESTORS. Investors who invest in qualifying opportunity zone funds are subject to certain important restrictions imposed by market and opportunity zone rules. First, investors are generally not allowed to withdraw from the fund or transfer their shares for the duration. Secondly, due to their legal status, investors are not allowed to participate in the management of the fund and therefore do not have a veto over individual investment decisions. Third, investors can only invest capital gains that must be invested in a relatively short period of time and maintain their investment in the fund during the 10-year holding period. REMUNERATION OF THE GENERAL PARTNER/MANAGER. The remuneration of a private equity fund sponsor generally includes a management fee of 2% per year of assets under management as well as an accounting participation of 20%.
Funds often pay the developer additional remuneration in the form of investment management, property management, financing and management fees, the amount of which depends on the fund`s negotiating position vis-à-vis investors. Management fees are usually paid to the investment manager, while the transferred shares are allocated to the general partner. PURPOSE OF THE FUND. Usually, private equity funds identify themselves by defining a business strategy – whether it`s a specific sector, a defined market, a single sector, or a specific region of the country. For a qualified opportunity zone fund, this differs slightly in that its business strategy is largely dictated by law. By law, a Qualified Opportunity Zone fund must make capital investments directly in the ownership of the Qualified Opportunity Zone in the Opportunity Zones, with at least 90% of its assets invested in the ownership of the Qualified Opportunity Zone. It is also clear that an Opportunity Zone fund cannot invest in another fund. Investments in opportunity areas are as complex as they are lucrative and require a specific investment structure. To structure an investment in the Qualified Opportunity Zone (QOZ) that is eligible for tax incentives, investors in the Opportunity Zone must set up an investment vehicle called the Qualified Opportunity Fund (QOF), in which they will invest their capital gains within 180 days.
After a capital contribution to the Qualified Opportunity Fund, investors in the Opportunity Zone must make a deferral choice. Investors in the opportunity zone make a valid deferral choice by completing a Form 8997. A deferral choice discloses the investment in the opportunity zone to the IRS and only covers qualified interests in a QOF. By choosing a deferral, a legitimate interest in the QOF becomes an eligible interest to which the tax benefits of the Opportunity Zone apply. In addition, investors in the Opportunity Zone must file a Form 8949 during the taxation year if capital gains are initially included if they are not carried forward. After contributing to the Qualified Opportunities Fund (QOF), the QOF must establish a Qualified Opportunity Zone (QOZB) company. The QOF must begin verifying compliance with the 90% investment standard at the end of its first tax year. The 90% investment standard requires that at least 90% of a QOF`s assets be Eligible Opportunity Zone (QOZP) properties. Compliance with the 90% investment standard is tested twice a year throughout the investment in the opportunity area.
Failure to comply will result in severe penalties. INTEREST OF THE FUND. A Qualified Opportunity Zone fund, similar to a private equity fund, must issue equity and no debt to its investors. Therefore, limited partnerships or equity interests are the equity investments offered to investors. It may issue preferred shares that include preferred shares or interests in partnerships with special allowances. This is in line with most private equity funds, which often offer their investors a preferred return on investment. As a rule, preferential returns are between 6% and 12% of the initial capital contribution, depending on the type of investment. Preferred returns are accumulated and compounded annually and are generally distributed in accordance with the distribution rules upon the occurrence of a capital event Investors in the Opportunity Zone are required to bring money or other property to the Eligible Opportunity Fund (OFQ) in exchange for an eligible interest (interest) in the OFQ. While investors in opportunity zones are free to invest an unlimited amount of capital in a qualifying opportunity fund, only the portion that equals their capital gains is eligible for tax-free growth.
The portion of an investor`s eligible interest that is eligible for tax incentives is called eligible interest. To be eligible for opportunity zone tax incentives, contributions to the Eligible Opportunity Fund must be made within 180 days of the date the capital gain is recognized for federal income tax purposes (sale date or distribution date). MANAGEMENT AND CONFLICTS OF INTEREST. The Limited Partner, in its capacity as General Partner of a Limited Partnership or Manager of a Limited Liability Company, retains full management and control and assumes full personal responsibility for the Liabilities of the Corporation, including the right to decide on the investments that make up the Fund and to establish compliance, risk and valuation policies for the Fund. Limited partners or partners, on the other hand, have no personal liability beyond their investment; in return, however, do not participate in the acquisition of the fund`s assets or accept the acquisition of the fund`s assets. As a result of this division of responsibilities, additional shareholders or managers will raise capital from investors, invest in holding companies or sell their assets, which can lead to conflicts of interest. Because general partners and managers provide wealth management services, they often manage various aspects of the fund by entering into contracts with affiliates, ensuring that the sponsor fulfills its fiduciary duty to act in the best interests of the fund and its investors. A word of warning: Regardless of the size of the fund or the type of investors, the sale of limited partnership shares or LLC membership is generally a securities transaction under federal and state law.
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