Top 3 Questions for Qualified Opportunity Fund Investing
by Michael Hubert, on Jan 2, 2020 10:35:00 AM
Considering investing into an Opportunity Fund? After navigating through all of the marketing hype, make sure you get down to brass tacks. You may understand all of the tax benefits around opportunity zones, but do you know how to distinguish a good Opportunity Zone Fund investment from another? Before going any further in the investment process, there are three critical questions you should be asking a Qualified Opportunity Fund (QOF).
- Is the fund a single-asset or multi-asset?
While both types of funds offer investors the same tax advantages, there are important differences. Single-asset funds are one and done. Basically, the fund invests in one project and all returns are based off that. The benefit is you can choose a specific project you want to support and put your money directly into it. The downside? All your eggs are in one basket so if that investment doesn’t do well, there’s no backup. Multi-asset funds, on the other hand, are just what they sound like, funds that invest in multiple projects. The main advantage here is diversification. You can have a greater impact and reduce your risk by spreading your investment over more than one project and project type. For example, as a multi-asset fund, the Urban Catalyst business plan involves a diverse development pipeline—a mix of offices, shopping, restaurants, arts & entertainment, and community.
- What projects do you have in the pipeline?
It’s important to find out a funds’ underlying investments and not just the tax advantages they offer. For a fund to be successful, they must have solid fundamentals and a solid investment pipeline. Have they just identified properties in Qualified Opportunity Zones (QOZ), or do they have an actual strategy? Being in a QOZ doesn’t automatically make something a good project. Is their geographic area defined? Do they have experience in real estate development in that area? If not, larger developers with better connections could swoop in and buy up the choice properties, or city process—permitting, planning, approvals—could grind their projects to a halt. Founded in 2018, Urban Catalyst is a group of developers that have lined up amazing projects in downtown San Jose and are now raising money to finance those projects with an experienced team that knows the process, markets, and politicians.
- How do you plan on being compliant with the 31-month deployment timeline?
Once money comes into a QOF, the Fund only has 31 months to buy property or invest in a QOZ so it’s imperative they have an intensive plan in place. Having already closed on its first project in San Jose’s downtown QOZ and with more projects in the acquisition pipeline, Urban Catalyst is already effectively navigating available properties and making strategic decisions to most benefit investors. And by focusing on downtown San Jose, where the city of San Jose has streamlined the process with infrastructure paperwork meant to keep ground-up development moving smoothly, it will continue to be easier for Urban Catalyst to meet the QOZ timing hurdles as they come up.