How To Start Your Own Qualified Opportunity Zone Fund (As An Active GP) - OpportunityDb (2024)

Updated January 22, 2024

Qualified Opportunity Funds (QOFs) were created under the Investing in Opportunity Act, a version of which was passed as part of President Trump’s Tax Cuts & Jobs Act of 2017. These new Opportunity Zone funds provide massive tax incentives for re-investing capital gains in some of America’s most economically distressed communities.

Starting a Qualified Opportunity Fund is easy. Ongoing maintenance of the fund (including administration, compliance, and accounting) will usually require professional guidance.

There is no approval process to start a Qualified Opportunity Fund. A QOF is simply a regarded entity (typically a partnership LLC, S-corp, or C-corp) that elects to be taxed as a Qualified Opportunity Fund by filing IRS Form 8996 annually. If you are interested in setting up and managing your own Qualified Opportunity Fund, you will be responsible for creating the entity, filing form 8996, and ensuring that your QOF meets the various compliance requirements at regular intervals.

Practical Considerations For Starting A QOF

Starting a QOF to manage your own deals can be appropriate for any individual with eligible gains of at least $250,000. For investors with gains under this amount, it probably makes more sense to look into investing as an LP, rather than starting your own fund.

Initial QOF formation and structuring by an attorney can cost at least $10,000. Ongoing compliance and accounting can cost $5,000 or more annually. So a QOF with a 10-year holding period is going to cost at least $60,000 in administrative expenses. This is for a very simple, self-managed (“captive”) QOF with no outside investors.

QOFs that need to raise capital from outside investors will spend much more in set-up costs and ongoing administrative and marketing or brokerage fees. A Private Placement Memorandum (PPM) can cost $25,000 or more to prepare with a securities attorney.

Qualified Opportunity Fund Compliance Requirements

QOFs must comply with a number of requirements in order to adhere to the legislative intent of the OZ tax policy.

The U.S. tax code defines a Qualified Opportunity Fund as an investment vehicle that invests in Qualified Opportunity Zone Property. Specifically as follows:

The term “qualified opportunity fund” means any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another qualified opportunity fund) that holds at least 90 percent of its assets in qualified opportunity zone property, determined by the average of the percentage of qualified opportunity zone property held in the fund as measured—(A) on the last day of the first 6-month period of the taxable year of the fund, and (B) on the last day of the taxable year of the fund.

Opportunity Zone property can be either an Opportunity Zone business or Opportunity Zone business property. Put another way, a Qualified Opportunity Fund has two options:

1. It can invest in Opportunity Zone businesses that hold tangible property located within Opportunity Zones.
2. It can essentially become an Opportunity Zone business by investing directly in tangible property located within Opportunity Zones.

In practice, most Qualified Opportunity Funds opt for the first option, structuring such that the fund holds an underlying QOZB (or multiple QOZBs). The QOZB then holds the actual assets (the QOZB property, or QOZBP).

Let’s now define these two terms — Qualified Opportunity Zone Business (QOZB) and Qualified Opportunity Zone Business Property (QOZBP).

Qualified Opportunity Zone Business (QOZB)

A QOZB can be either a corporation or partnership. In general, a QOZB is a trade or business in which substantially all of the tangible property of the business qualifies as follows:

• Such property was acquired by the business by purchase after December 31, 2017.
• The original use of such property in the Opportunity Zone commences with the QOZB, or the QOZB substantially improves the property.
• During substantially all of the QOZB’s holding period for such property, substantially all of the use of such property was in an Opportunity Zone.

Furthermore, the QOZB must also adhere to the following criteria:

• At least 50 percent of the total gross income of the QOZB is derived from the active conduct of such business.
• A substantial portion of the intangible property of the QOZB is used in the active conduct of such business.
• Less than 5 percent of the average of the aggregate unadjusted bases of the property of a QOZB is attributable to nonqualified financial property.

And finally, the following types of “sin” businesses are ineligible to be deemed as a Qualified Opportunity Zone Business, per the Opportunity Zones statute Section 1400Z-2 — private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or liquor stores.

Qualified Opportunity Zone Business Property (QOZBP)

QOZBP is tangible property used in a trade or business of a Qualified Opportunity Fund, so long as it meets the following three conditions:

• Such property was acquired by the Qualified Opportunity Fund by purchase after December 31, 2017.
• The original use of such property in the Opportunity Zone commences with the Qualified Opportunity Fund, or the fund substantially improves the property.
• During substantially all of the Qualified Opportunity Fund’s holding period for such property, substantially all of the use of such property was in an Opportunity Zone.

Summary Of QOF Compliance Requirements

To summarize the key requirements of Qualified Opportunity Funds:

• 90% Asset Test. QOFs must invest at least 90% of their assets in qualified opportunity zone property.
• Original Use or Substantial Improvement. Opportunity zone property must be either original use (e.g., new construction of a building) or substantial improvement of existing property. Typically, this requirement is met when the basis of a property is doubled (e.g., an investor purchases a building for $1 million and invests at least $1 million additionally in improvements).

There are additional requirements around the date of purchase (must be after December 31, 2017) and prohibitions on “related party” acquisitions (i.e., you can’t sell a property to yourself or a family member).

Questions About Creating Your Own QOF?

If you’re interested in setting up your own QOF but aren’t sure exactly where to start, join the OZ Insiders community to connect with leading experts in the OZ industry who can guide you through the process.

About The Author

Jimmy Atkinson is a renowned Opportunity Zones industry leader. He founded OpportunityDb in 2018 as the leading OZ educational platform and investment marketplace. He is also founder of OZ Insiders, the premier private community for Opportunity Zone professionals and investors. And he hosts The Opportunity Zones Podcast.