Opportunity Funds

All investments in qualified opportunity zones need to go through such a fund, which is subject to a penalty if not holding 90% or more of its assets in the form of qualified opportunity zone property. The recently issued rulemaking by the IRS is pivotal in facilitating operation of qualified opportunity funds and clarifying the investments they can make going forward. Further IRS rulings and guidance are still to come.

What Are Opportunity Funds?

Any number of organizations, persons, financial institutions, etc., can set up qualified opportunity funds, with various objectives or specialties. Some may be formed for a single purpose such as a particular real estate development, while others might adopt more of a venture capital model with a portfolio of shares in entrepreneurial companies. The larger qualified opportunity funds could cater to many investors as a vehicle for diversified financial strategies. There are likely to be funds that are sponsored by nonprofits or foundations, or that focus on certain commercial or industrial sectors or types of communities, including rural ones.

What Can Opportunity Funds Invest In?

These funds do not lend money. They invest by taking an ownership stake—equity financing rather than debt financing. A qualified opportunity fund can do this in one of two ways:

  1. By directly holding what is called qualified opportunity zone business property that is used in a trade or business of the qualified opportunity fund itself. Qualified opportunity zone business property is:
    • Tangible property—land, structures, facilities, equipment, vehicles, furniture, etc.,
    • Acquired after December 31, 2017, by purchase from an unrelated party,
    • Used for the first time in the qualified opportunity zone, or substantially improved such that the investment effectively doubles over a 30-month period after acquisition, for example, in the case of an existing building, and
    • Located in a qualified opportunity zone for substantially all of its use during substantially all of the time it is held.
  2. By acquiring all or part of a business solely in exchange for cash, after December 31, 2017—either through originally issued stock of a business organized as a domestic corporation or by way of a capital or profits interest in a domestic partnership. A key policy objective of this federal tax incentive is the creation of a major source of capital for newer, growing enterprises that will prosper and create economic opportunities in low income communities. For a business to qualify in these respects:
    • Substantially all (70%) of the business's tangible property needs to be qualified opportunity zone business property, as described above.
    • 50% or more of its gross income needs to be derived from active conduct of the business in an opportunity zone or zone(s).
    • A substantial portion of its intangible property must be used in active conduct of the business in an opportunity zone or zone(s).
    • Less than 5% of its general value must be attributable to financial property or assets, and
    • The business cannot be that of a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other type of gambling facility, or a store principally selling alcoholic beverages for off-premise consumption.