Yes. Do you mean multiple tiers of investors or multiple tiers of investments?
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How can a Qualified Opportunity Fund have multiple tiers of structures?
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You can have a direct structure (where the fund investments directly into the asset) or an indirect structure where the fund invests into a partnership or corporation and then that said partnership or corporation then purchases the underlying asset.
Just set up an entity owned by the fund.
You are permitted to have two tiers of entities (although disregarded entities are ignored for this purpose).
A Qualified Opportunity Fund cannot invest in another Qualified Opportunity Fund. That said, a Qualified Opportunity Fund may have multiple tiers of subsidiaries and, in fact, would typically utilized at least one lower tier entity in order take advantage of the working capital safe harbor and other advantages.
A QOF may acquire the Qualified Opportunity Zone business property directly or through subs (partnerships or corporations) that are Qualified Opportunity Zone businesses.
Most qualified attorneys familiar with Opportunity Zone funds would prefer to set up using a multi-tier structure. Essentially you form the QOF as the top entity (often as an LLC) and have this entity own an equity interest in either a subsidiary LLC or corporation. The subsidiary LLC or corporation would generally be a single operating entity (i.e., a business) or real estate holding company with the business or property being located within the Opportunity Zone boundaries. There are advantages to this structure that can be complex and should be analyzed by an attorney and/or CPA specific to your exact situation.
There is very limited flexibility in that regard. A QOF can invest in a lower-tier partnership or corporation, but that lower-tier partnership or corporation must own the QOZ business property and operate the trade or business directly (or through a disregarded entity). If the lower-tier partnership in which the QOF has invested (Partnership 1) owns an interest in another partnership (Partnership 2), the interest in Partnership 2 is a nonqualified financial investment, and if that exceeds 5% of the total assets of Partnership 1, the QOF’s interest in Partnership 1 is no longer a good asset for purposes of the 90% test.
Technically, a QOF can only have one other level of subsidiary entities. They can have multiple first-tier subsidiaries. However, a fund can have a disregarded entity under a subsidiary entity without violating the structuring rules.
Typically, the Opportunity Zone fund is structured as a limited partnership which then invests in one or more QBIZ entities. Each entity can have a different structure. At the fund level, the limited partners get 100% of distributions after the manager fees. So the QBiz entities are where the structuring opportunities are found.
Qualified Opportunity Funds must maintain at least a 90% investment in Qualified Opportunity Zone property at each bi-annual testing date to avoid penalties and ensure investors receive the OZ tax incentives. QOFs can meet that threshold by investing in one or more of the following: Qualified Opportunity Zone stock; Qualified Opportunity Zone partnership interest; or Qualified Opportunity Zone business property. When a QOF purchases Opportunity Zone Business Property directly, that is commonly referred to as a "single-tier" structure. Some people select this route for the simplicity of creating and managing compliance for that structure, particularly if they are contemplating a single-asset fund that does not have a long development horizon. Alternately, an investor can employ a two-tier structure by creating a QOF which owns stock or partnership interest in a Qualified Opportunity Zone Business (QOZB). OZ legislation and regulations provide additional flexibility to QOZBs, including a lower requirement (70%) for the proportion of assets that must be invested in Qualified Opportunity Zone Business property, and a 31-month "working capital safe harbor" for creating a new business or planning for a larger OZ property development. The two-tier structure can also be a useful way to bifurcate investments where there is a mix of deferred capital gain equity and other equity not eligible for the OZ benefits.
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