Opportunity Zone LLC Structure

[John Perry]

I am struggling with the structure for an opportunity zone fund so want to get your thoughts on this structure. I have personal funds that I will invest in an opportunity zone fund. I also have a parcel under contract where in an OZ where my business partners will build 160 apartments. Since I may not invest all my OZ money in this one deal my plan is to create an OZ LLC to park my qualified money (e.g. JP-OZ LLC). I will also create a separate LLC for the apartment deal (e.g. 160APT LLC). JP-OZ LLC will be a limited partner in 160APT LLC. My existing LLC with my partners (e.g Partners LLC) will be the general partner.

To summarize:

OZ Fund - JP LLC - Me (taxed as S corp)

160APT LLC will be the entity that builds and operates the apartments in the OZ fund.

It will be owned by Partners LLC (where I am a GP along with 2 other partners) and the OZ fund, JP LLC will be limited partner. We will also have other limited partners in 160APT LLC.

Hopefully I am clear and not making the post too complex.    My thought process for this structure is that if for any reason we sell or cash out of the apartments I can then return the money to my OZ fund and reinvest in another qualified investment.   

Would love to get your thoughts on this.   I know some will say I need an attorney.    I agree...and would be keen to get your recommendations for an attorney with experience with OZ.  Preferably in CA or NV, but will talk to anyone at this point as hard to find experts.     Feel free to DM me if you cannot post it in the response.   Thank You!

[Ashish Acharya]

Originally posted by @John Perry:

I am struggling with the structure for an opportunity zone fund so want to get your thoughts on this structure. I have personal funds that I will invest in an opportunity zone fund. I also have a parcel under contract where in an OZ where my business partners will build 160 apartments. Since I may not invest all my OZ money in this one deal my plan is to create an OZ LLC to park my qualified money (e.g. JP-OZ LLC). I will also create a separate LLC for the apartment deal (e.g. 160APT LLC). JP-OZ LLC will be a limited partner in 160APT LLC. My existing LLC with my partners (e.g Partners LLC) will be the general partner.

To summarize:

OZ Fund - JP LLC - Me (taxed as S corp)

160APT LLC will be the entity that builds and operates the apartments in the OZ fund.

It will be owned by Partners LLC (where I am a GP along with 2 other partners) and the OZ fund, JP LLC will be limited partner. We will also have other limited partners in 160APT LLC.

Hopefully I am clear and not making the post too complex.    My thought process for this structure is that if for any reason we sell or cash out of the apartments I can then return the money to my OZ fund and reinvest in another qualified investment.   

Would love to get your thoughts on this.   I know some will say I need an attorney.    I agree...and would be keen to get your recommendations for an attorney with experience with OZ.  Preferably in CA or NV, but will talk to anyone at this point as hard to find experts.     Feel free to DM me if you cannot post it in the response.   Thank You!

First of all, the benefit of the OPZ are applicable only on the capital gain that is invested within 180 days. You cannot benefit from the tax deferral or permanent avoidance if you invest your normal fund(cash in your bank that is not a cap gain) that is not a capital gain. 

If the intention was just to invest in the Zone because you are optimistic of future appreciation but not the tax incentive,  then the structure planning becomes just another entity planning, not specific to OPZ structure planning. 

If you are actually investing your cap gain in this deal and want to benefit from the tax saving, there are so many rules, and you should plan on speaking with professional. This can't be DYI projects. 

You cannot park you money. If you do, you have to have a clear plan to invest the working capital within certain time ( 31 months) . Also, a QOF that invests directly into qualified opportunity zone business property cannot use the working capital safe harbor (31 months Working capital safe harbor)

Since you asked here is an overview:

As shown above, a QOF can meet the 90% asset requirement through three different types of investments.

The "substantially all" requirement for qualified opportunity zone businesses is satisfied if at least 70% of the tangible property owned or leased by the business is qualified opportunity zone business property. This "substantially all" qualifier reduces the overall deferred gain that must be invested in the QOZ from 90% to 63%. As shown in Exhibit 2, where a taxpayer rolls $10 million of deferred gain into a QOF, and that QOF invests $9 million into a qualified opportunity zone business, only $6.3 million of the original gain needs to be invested in the QOZ; the balance can be invested outside the QOZ.