Opportunity Zone Magazine Volume 1, Issue 3 | Page 62

62 OPPORTUNITY ZONE MAGAZINE | VOLUME 1 • ISSUE 3 While many QOFs are taking an effort when they enter a community to speak with those within to help better determine the needs of the area, this ultimately doesn’t ensure the project will be successful. Some PE groups may believe the risk compared to the tax benefits are too significant to warrant the possible change in their time-proven investment models. On the other hand, there are over 8,700 zones covering approximately 12% of the U.S. and touching all major metropolitan areas, so there are definitely good opportunities out there for savvy investors. CHALLENGE TWO: CARRIED INTEREST IN PE FIRMS Another issue facing many PE firms is how to structure deals within the integrity of the proposed regulations while still satisfying the fund managers. Typically, most PE deals are structured with a general partner (GP) and limited partner (LP) structure, where the GPs get a carried interest for managing the overall fund assets and the rest of the investors are the LPs. Under current regulations, one of the most common structures of a QOF is a partnership that invests in another partnership interest that is considered qualified opportunity zone property (QOZP). For this to be a qualified investment, the QOZP must be obtained for cash, which could be a predicament since the carried interest is typically not exchanged for cash. Depending upon the value that could be assigned to this interest, it’s possible for the QOF to no longer hold 90% of its assets as QOZP, which might create issues for the QOF. Failure of an entity to meet the requirements described below to be a QOZB would result in the QOF owning an asset (i.e. equity in the entity that failed to qualify as a QOZB) that does not qualify as OZP. This brings us to how the value of the asset is going to be measured. In the final regulations, The Treasury Department and the IRS determined that applying the alternative valuation method to partnership interests with a tax basis not based on cost, would be inconsistent with the intent and purpose of the statute. As a result, the final regulations provide that the alternative valuation method may be used to value only assets owned by a QOF that are acquired by purchase or constructed for fair market value. In such instances, the QOF’s unadjusted cost basis of the asset is determined under section 1012 or section 1013. The final regulations also provide that the value of each asset owned by a QOF that is not purchased or constructed for fair market value equals the asset’s fair market value. Thus, this would include any partnership interested owned by a QOF. A QOF determines that fair market value on the last day of the first six-month period of the taxable year and on the last day of the taxable year. OPPORTUNITYZONE.COM