QOFs are required to hold at least 90% of their assets in Qualified Opportunity Zone Property (QOZP). QOZP means property which is: (i) qualified opportunity zone stock, (ii) qualified opportunity zone partnership interest, or (iii) qualified opportunity zone business property (QOZBP). Thus, QOFs can only hold 10% of its assets in “bad assets” which includes any other type of asset that is not QOZP. Meanwhile QOZBs have two core types of “bad asset” to worry about. The first “bad asset” relates to tangible property, as substantially all (at least 70%) of the tangible property owned or leased by the QOZB must be QOZBP. Thus, a QOZB can only have up to 30% of its tangible property be tangible property that does not qualify as QOZBP. The second “bad asset” relates to Nonqualified Financial Property (NQFP), and no more than 5% of the average of the aggregate unadjusted basis of property held by the QOZB may be attributable to NQFP. NQFP includes debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities and other similar property. Cash and cash equivalents will also be considered NQFP if such amounts are not protected by a reasonable working capital safe harbor. Thus, cash can be a “bad asset” for a QOZB if not covered by a working capital safe harbor, and QOZB’s can only hold up to 5% of its average of the aggregate unadjusted basis of property in cash following the conclusion of the working capital safe harbor period.
