USING POOLED INVESTMENT VEHICLES FOR OPPORTUNITY ZONE PORTFOLIOS
Investors and their professional advisers are fervently awaiting clarification of the initial proposed regulations and the release of further regulations related to Opportunity Zone investing in mid-January 2019. Meanwhile, professionals continue to advise their clients to create single investment Qualified Opportunity Funds (“QOFs”) when a suitable investment arises to mitigate risk. This approach leaves significant capital on the sidelines when adequate investments cannot be identified. Investors with 2018 capital gains taxes they would like to defer and invest in Opportunity Zones will lose the deferral opportunity given this narrow, yet pragmatic approach. A strategy built around a series of single investment QOFs will, over time, become increasingly cumbersome and create recordkeeping nightmares for investors and their service providers.
At Foxdale, we are constantly looking for innovative solutions to solve for these types of potentially damaging problems. The ability to develop a single structure for the investment of qualified capital gains into a similarly structured entity situated in an Opportunity Zone can provide investors with flexibility to invest over multiple years in multiple investments. Holding a diversified portfolio of Opportunity Zone investments in a single entity not only improves the recordkeeping but significantly reduces the cost of Opportunity Zone investing.
Through our affiliate entity, JMP Investments Shared Services LLC, we provide investors with a solution to the multiple entity conundrum. Our solution allows investors to continually add to their Opportunity Zone investments as gains are realized with the benefit of time to make informed, appropriate investment decisions. Since the holding period for investments to achieve both the maximum tax deferral and the 10-year gain exclusion, the sooner capital gains are invested in the Investor’s QOF, the sooner the clock starts on the 10-year holding period.
While there remains some uncertainty on how the regulations will ultimately shake out, government policy is being shaped by the desire to drive appropriate capital investments into these distressed areas of the country that create economic activity, new jobs and additional collateral business opportunities. Investors who invest on a path that meets these objectives are less likely to encounter difficulties with any investments they make in advance of final regulations being issued. The likelihood of adverse tax consequences from a modest restructuring of investment structure to comply with final regulations when issued are minimal and unlikely to meet resistance from governmental authorities when the intent of the investment and its structure are consistent with the intent of the law.
More importantly, delays in investing means both a delay in initiating the holding period and potentially missing out on attractive investments at attractive prices. Already prices of real estate in many Opportunity Zones are escalating and real estate brokers are fielding inquiries about properties that are not listed for sale simply based on their location within a designated Opportunity Zone.
For investors with 2018 capital gains they would like to defer, even for investors whose capital gains will not carryover to 2019, solutions do exist. The key is understanding your long-term Opportunity Zone investment objectives and developing an investment plan that conforms with the objectives of the law. The biggest advantage of deferring 2018 capital gains is that capital gains realized in 2019 can be added to the asset pool to provide more opportunities to capitalize on appropriate Opportunity Zone investments.
If you would like more information on our Opportunity Zone solutions, please contact Samuel Weiser at [email protected].
About Foxdale Management LLC – Foxdale Management LLC (“Foxdale”) is an operational consulting firm assisting public and private businesses, investors and fund managers seeking solutions to operational, regulatory and compliance issues. JMP Investments Shared Services (“JMP”) is an extension Foxdale’s work assisting investors interested in taking advantage of the tax deferral opportunities associated with Opportunity Zone investments and sponsors in creating commingled vehicles to pool assets to fund investments in Opportunity Zone locations.
Nothing in this document is, or should be relied upon, as a promise or representation of the future. In all cases, interested parties should conduct their own investigation and analysis with their designated professional advisers. No representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein is made and the authors shall not be liable for the information contained in, or any omissions from, this document, nor for any of the written, electronic, or oral communications transmitted to the recipient. Neither the receipt of this document by any person, nor any information contained herein or supplied herewith or subsequently communicated in written, electronic, or oral form to any person shall be relied upon as constituting the giving of investment or tax advice by the Company to any such recipient. Each recipient should make his own independent assessment of the merits of investing in Opportunity Zones and should consult his or her own professional advisors. This document contains certain statements, estimates, assumptions and projections which were prepared based upon the best information available at the time this document was prepared and may or may not prove to be correct. There is no representation, warranty, or assurance of any kind, express or implied, and actual results could vary from the conclusions expressed herein, and such variations that may arise could be material.