What will the opinion tell me about the Qualified Opportunity Fund? Are opinions common practice?
Hard to say. An opinion up front is probably so full of caveats as to be useless. Without reviewing the actual opinion, it is impossible to assess the value. The tax benefits are all a function of future actions and facts, so I doubt an opinion up front adds much weight.
There is certainly significant creditability if a Qualified Opportunity Fund can support their tax positions with a formal opinion from a law firm such as ours. We have given such opinions.
It’s not critical, but I would recommend that a third party provides a formal comfort letter.
I strongly recommend that the investor receive a formal tax opinion in a syndicated deal from counsel to the issuer. On smaller or closely held transactions involving highly sophisticated investors and family offices, then these are less common, but they should nevertheless be reviewed by the investor’s own tax counsel.
An independent assessment of a fund's operating agreement and plan for OZ compliance certainly has value. That said, I'd place even more weight on whether/how much OZ equity the fund sponsor is investing in the deal. The larger the sponsor's own personal investment of deferred capital gains, the greater his incentive to ensure compliance over the fund's life cycle.
While there may be value at having a formal opinion provided by an Opportunity Zone fund, OZ investors, businesses and developers still need to understand the issues and questions that the opinion addresses and, more importantly, what that opinion does not address. An opinion should never be a substitute for independent due diligence.
I'm not very familiar with formal opinions being issued in connection with a QOF, but it sounds like the result of a law firm doing due diligence on a fund an issuing a due-diligence opinion. As QOFs are brand new, I don't imagine there is much history on this topic. If I am understanding the assumption correctly, then the main issue in question is whether or not the investment is viable or safe, which is not my area of practice expertise. I am a tax CPA who can opine on the tax compliance, implications, etc. So you would have to elaborate further on who is issuing the opinion and what type of opinion is being issued (legal, tax, etc.). But if it's what I suspect and it's legal, then it's nothing more than due diligence. Having said that, due diligence is extremely important for any substantial investment. Otherwise, how does one know if there investment is in good (ethical) hands?
An opinion is better than no opinion, but the opinion is not a requirement to have a qualifying investment. You do need some sort of verification that the fund is in fact a QOF, though, beyond the word of the sponsor.
An opinion is not necessary and probably cannot be relied on by investors. Still, better than nothing.
This is not required by the law or the regulations. It will depend on what the investors in the fund will require as part of their due-diligence work.
An opinion of counsel reduces risk to the investor related to compliance with the law and associated regulations, but generally, it is not necessary or customary for a fund to obtain such an opinion. Due diligence on the part of the investor should enable the investor to reach a conclusion whether the fund complies with the law.
Investing where a formal opinion has been issued is helpful to give the investor confidence that her investment will meet the qualifications and eventually be eligible for the 10-year step-up in basis.
Formal opinions are not necessary. Go with people you trust and people who know what they are doing.
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