What would be the benefits of investing in a multi-zone/multi-project fund versus a single-zone/single-project fund?

Answers

• 

  Peter McNeil

  Comprehensive Financial Solutions and Tax

  March 28, 2019

  This is the core question that each investor should ask. Long-term development projects, by their nature, are riskier that an investment in a project that is already profitably generating cash flow. Long-term development projects also tend to have higher full-cycle profits. As a general rule diversifying into multiple projects will reduce risk versus being in just one project. If you only have enough of a capital gain to invest in just one project, it would be better to just invest in the multi-project fund. If you have enough cash to invest into multiple funds, investing into multiple single venture funds will likely be safer. The tax law appears to be settled on how to properly set up a single project fund. However, we are still waiting on regulations to answer questions on multiple-project perpetual funds. So the multi-project funds do have extra risk due to legal uncertainty. The other question an investor should be asking related to quality of manager. Does the fund operator have a good tract record in creating profitable development projects. Look at the fund managers trac record. If the manager has never done development or has a poor record of generating profitable returns, you will have extra risk.

• 

  Matthew Peurach

  Morris, Manning, & Martin, LLP

  March 29, 2019

  The clear benefit of investing in a multi-asset fund is diversification. That is, with an investor's capital pooled across multiple projects, the conventional wisdom is that capital preservation is quite attainable. However, given the current gaps in guidance surrounding the operation of a multi-asset fund (e.g., whether reinvestment of capital in replacement OZ projects, achieving the 10-year exclusion benefit through a portfolio sale, and effective cash management for compliance with the 90% asset test are possible), many investors have preferred single-asset funds. My prediction is that this preference will shift upon receipt of the next round of regulations.

• 

  Kostas Poulakidas

  Taft Stettinius & Hollister

  April 01, 2019

  Each of the investment fund strategies have its own business structures that you should consider. A single fund will allow you to assess the project on its own merits while a multi-project fund may have you investing in multiple projects without being able to analyze each investment on its own. This is true regardless of whether or not your investment is in an Opportunity Zone fund. Keep in mind that Opportunity Zone investment also requires specific compliance requirements and various testing and return periods; those who manage the OZ funds need to understand these requirements and have the capacity to manage these requirements. OZ investors who plan to invest in an OZ fund, regardless of whether the OZ fund is a single or multi-project fund, should ask OZ fund managers how these compliance requirements are being managed.

• 

  Brian Keida

  Crowe LLP

  April 03, 2019

  In my opinion it is always better to be more diversified, but as the proposed regulations are currently written, you need to be careful how the structure is set up for tax purposes. Currently, I think the ideal structure is to have single-project funds because if you had multiple projects within one fund and sold one project, the gain isn't expected to be non-taxable. This is because the gain will pass up through to the investors on their K-1s rather than selling the investment as a whole. Hopefully there is more clarity on this point in the final regulations. The single-asset fund seems to be the way to go right now. You could potentially get more diversification by investing in multiple single-asset funds.

• 

  Valerie Grunduski

  Plante & Moran, PLLC

  April 03, 2019

  Portfolio and risk diversification are both benefits of a multi-asset/multi-zone fund. That said, there are still some questions as to whether the tax benefits will be completely realized in this format. We are hoping that the next tranche of proposed regulations will provide us comfort on how property sales will be treated in multi-asset funds!

• 

  Chris Moyer

  Cecil County Office of Economic Development

  April 16, 2019

  While you would be diversifying risk and one would think it's like buying a mutual fund vs. buying an individual stock, there are downside risks to investing in a fund of multiple properties. The biggest is that it is difficult for the fund to exit a property cleanly. I'd strongly encourage you to talk to a tax attorney who is well-versed in Opportunity Zones.

• 

  Elizabeth Humphreys

  Zephyr OZ GP LLC

  March 29, 2019

  There are pros and cons to both. Larger, broader, focused funds typically are managed by large institutions with impressive track records. Investing in these funds is investing in the reputation of those fund managers as investors usually do not get to view the projects within the fund before making an investment. There is security in that track record and reputation. However, there is risk in the opaque nature of the investment. Smaller, more local funds may not have the lengthy track records that larger institutions have. However, in these funds you should be able to view projects and get a detailed explanation of the fund's action plan. Smaller funds can also offer better returns because their operating costs are lower. Diversification is an important tool to manage risk. However, that does not necessarily mean investing in a fund that is diversified without seeing its assets. One option would be to invest in a small local fund and also put some money in a large, institutional fund. As with any investment it is important to consult your tax advisor and do all of the necessary due diligence.

DISCLAIMER: 

the information found on this website is intended to be general information; it is not legal or financial advice. Specific legal or financial advice can only be given by a licensed professional with full knowledge of all the facts and circumstances of your particular situation. You should seek consultation with legal and financial experts prior to participating in any aspect relating to Opportunity Zones. Posting a question on this website does not create an attorney-client relationship. All questions you post will be available to the public; do not include confidential information in your question.