10 OPPORTUNITY ZONE MAGAZINE | ISSUE 2 • VOLUME 2
Using a QOZB as a vehicle means that the threshold for the percentage of property held that must be “ opportunity zone business property ” is 70 % as opposed to 90 %, and it allows for equity to be held as working capital for up to 30 months if certain requirements are met . This has several strategic implications for the sponsor , including having capital ready for future stages of development . Having a QOZB between the sponsor and the QOF also is a much cleaner relationship and allows for other investors and parties at the QOZB level .
The second structural element is that there are two parties to the QOZB : the QOF and the sponsor . There may be other parties to the QOZB if other non-OZ investors come into the project and it is simplest to have those other parties invest at the QOZB level , or they can invest into the QOF but if they do so without qualified capital gains , they will not get any favorable tax treatment on that investment . In this structure , the sponsor will contribute the land or business to the QOZB as part of their investment in the QOZB vehicle .
The third universal structural element is protection for the investors , particularly for the LP ’ s if the QOF fails to qualify as an opportunity zone fund . As one might imagine , the LPs and the sponsor have different perspectives . From the sponsor ’ s standpoint , it does not want to be liable if the fund fails to qualify through no fault of the sponsor . From the LP ’ s
A sponsor can use a Qualified Opportunity Fund as a valuable part of their capital stack provided that the correct structure is in place , and that the limitations and risks of OZ investments are understood by both the sponsor and the limited partners .
Elizabeth Humphreys is the founder and CEO of Zephyr OZ , a company specializing in the formation and management of Qualified
Opportunity Funds . Humphreys earned a bachelor ’ s from the University of St . Andrews , Scotland , and a law degree from BPP in London , England . She worked in the legal department of Materialize , NV , in Leuven , Belgium , before moving to Los Angeles , California , and becoming a commercial real estate broker . Humphreys founded Zephyr OZ GP LLC in June , 2019 to consult on opportunity zone legislation with her developer clients in Los Angeles . She has since set up QOFs in California and Texas .
A sponsor can use a Qualified Opportunity Fund as a valuable part of their capital stack provided that the correct structure is in place .
standpoint , they do not want to lose a huge sum of money ( in the form of tax benefits ) if the fund fails to qualify as a QOF , e . g ., because the sponsor-run QOZB fails to qualify as a qualified opportunity zone business . The sponsor also does not want to have the fund GP have to OK every decision that they make in relation to the project as that would be cumbersome to administer and would likely slow down the project . There are a range of solutions to these competing interests , ranging from an outright sponsor indemnity to the sponsor ’ s “ best efforts ” undertaking to ensure that the QOZB ( and , therefore , the QOF ) will qualify under the statute . Accompanying this overall risk allocation will also be sponsor undertakings to provide periodic information to the fund , particularly with regard to the QOZB ’ s assets , income and qualification under the various QOZB tests set forth in the QOF regulations . The exact solution in a given QOF will depend on the relative complexity of the proposed business and each party ’ s negotiating leverage . Of course , whatever solution is negotiated , it is in each party ’ s interest to do everything in their power to have the fund qualify under the statute .
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Marc L . Schultz | 602.382.6358 | mschultz @ swlaw . com
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