Structuring the Capital: OZ Funds vs. Project-Level Joint Ventures
Many developers understand the basic benefits of Opportunity Zones (deferral, reduction, exclusion). Fewer understand the mechanics of the fund structure. Getting this wrong can lead to penalties or disqualification of the tax benefits.
The Two-Tier Structure: QOF and QOZB
While it is possible for a Qualified Opportunity Fund (QOF) to own a property directly, almost no one does it that way. The industry standard is a two-tier structure:
- Tier 1: The Fund (QOF). This is the entity that investors put their capital gains into.
- Tier 2: The Project (QOZB). The Qualified Opportunity Zone Business. This is the LLC that actually owns the property and develops it. The QOF owns the QOZB (often in a JV with the developer).
Why Use Two Tiers?
The primary reason is the Asset Test and the Working Capital Safe Harbor.
- 90% vs. 70% Test: A QOF must hold 90% of its assets in QOZ Property. A QOZB only needs to hold 70%. This gives you more wiggle room.
- Working Capital Safe Harbor: A QOZB can hold cash (working capital) for up to 31 months as long as it has a written plan to deploy it. A QOF generally cannot hold significant cash without penalty. This is critical for construction projects where you draw down funds over time.
Single-Asset Funds vs. Blind Pools
Developers typically raise capital in one of two ways:
1. Single-Asset QOF
You create a specific QOF for one specific project. You go to investors and say, "Invest in this building in Newark."
- Pros: Investors know exactly what they are buying. Easier to underwrite.
- Cons: You have to set up a new fund for every deal. Administrative burden.
2. Multi-Asset Blind Pool
You raise a large fund to invest in multiple unidentified projects.
- Pros: Scale. You have committed capital ready to deploy.
- Cons: Harder to raise if you don't have a track record. Investors are betting on the manager, not the asset.
The "Drop-Down" JV Structure
In many cases, the developer doesn't run the QOF. Instead, a third-party QOF (like a large institutional fund) invests equity into the developer's project.
In this scenario, the Developer forms the QOZB (the project entity). The QOF comes in as a majority member (e.g., 90% equity) and the Developer puts in their own equity (10%). The QOF gets the tax benefits on their 90%; the Developer gets standard returns (unless they also have capital gains to invest).
Compliance is Not Optional
Structuring OZ deals requires precise legal and accounting coordination. I help developers set up the right entities to attract capital and stay compliant.
About the Author
Ryan Goldfarb is a real estate development advisor. He helps developers raise capital and structure joint ventures for Opportunity Zone projects across New Jersey.