Opportunity Zone LLC Structure

6 Replies

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!

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.


 

 

@Ashish Acharya - that's a great and thorough response.  I was simply going to chime in on the re-investing aspect was a no-go as capital gains had to be within 180 days, but you covered that and way more.  

@John Perry Earlier this month I set-up a separate LLC for Opportunity Zones and used Lavelle Law, but they are local to Chicago. DM if you'd still like an introduction.

@Ashish Acharya thank you for the detailed response.     In my case I am putting qualified capital gains (from sale of stock) within the 180 day window into the Qualified Opportunity Fund.   Good to know that I need to have a plan up front to invest the funds.    In this case my plan would be to invest the entire amount into the 160 unit apartment complex.  I am not clear on whether or not I can cash out once we build the apartment complex to reinvest in other OZ qualified investments.   

In the chart you attached, the QOF would have filed 8896.    Is there anything special in the chart about "opportunity zone business" or "opportunity zone partnership" other than the fact that they would be geographically located in an opportunity zone?

@Tom Shallcross thank you for you input.    I will give it a couple of days to find out if there are any recommendations for OZ attorneys in Nevada or Cali.   If not will ping you for an intro to your attorney.    

@John Perry yes, that structure works. There are a number of qualifications requirements for QOZBs, but it sounds like your investment will be a ground up development in an OZ which should be easy to qualify. 

Your point about investing all or just some of your QOF into construction of the complex could have implications about treatment of depreciation recapture if you hold the investment for 10+ years, so that should factor into your planning. 

With regard to ‘cashing out’, the current regulations allow for a leveraged distribution at/after 2 years for most OZ development deals. Or if you sell the asset, you have 12 months to reinvest the proceeds in other OZ property or businesses in order to keep your deferral and continue progressing toward a tax-free sale after 10+ years. 

Originally posted by @John Perry :

@Ashish Acharya thank you for the detailed response.     In my case I am putting qualified capital gains (from sale of stock) within the 180 day window into the Qualified Opportunity Fund.   Good to know that I need to have a plan up front to invest the funds.    In this case my plan would be to invest the entire amount into the 160 unit apartment complex.  I am not clear on whether or not I can cash out once we build the apartment complex to reinvest in other OZ qualified investments.   

In the chart you attached, the QOF would have filed 8896.    Is there anything special in the chart about "opportunity zone business" or "opportunity zone partnership" other than the fact that they would be geographically located in an opportunity zone?

@Tom Shallcross thank you for you input.    I will give it a couple of days to find out if there are any recommendations for OZ attorneys in Nevada or Cali.   If not will ping you for an intro to your attorney.    

Yes, the business has to operate/ employ certain percentage in the zone. The business asset also have similar requirements.   And there are exceptions and safe harbor. 

Yes, there is special rule on distribution as well. 

There are so many parts to this. That is why I am saying this isn’t not DYI project.

@John Perry I agree with @Scott McIntosh that this structure generally works and this type of deal is usually a pretty easy fit within the OZ rules. Aside from making sure you meet the various funding deadlines and get your written development plans in place, my biggest question would be why would you do an S-Corp for the OZ Fund rather than admit another member in the LLC and be taxed as a partnership. Using an S-Corp may hinder your ability to take losses or distributions depending on the circumstances. Even if you make distributions after 2 years, distributions could accelerate your gain deferral from the initial investment. The difference lies in how debt is attributed for basis purposes.

Also, given the waiver (for the first 90% test date) under the April Prop. Regs for the OZ Fund if it holds cash, you could set up your OZ Fund this year and hold the cash until June of 2020 and then make the investment from the OZ Fund to Partners LLC, at which point you would need a written plan to spend within 31 months. It sounds like the extra time could be helpful in this case. You also may be able to get more time depending on the origin of your capital gains.

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