The opportunity zones (OZ) investment marketplace is moving quickly to organize the participants for investment activities. The key participants are investors with capital available for investment, and viable businesses ready to accept OZ capital in the execution of specific business plans. In between is the Opportunity Zone Fund, serving an intermediary function between investors and business investments. The time is ripe for new and existing businesses to assess the potential to inject OZ capital to finance start-ups, venture and development phases, high growth and relocation expansion plans, and special situation buyouts.

The new tax law passed in December 2017 inaugurated a creative and unique incentive program for all U.S. taxpayers to pool their capital for investment into business start-ups, and emerging and growth businesses located in, or relocating into, specific census tracts designated as OZ throughout the United States and its territories. This powerful capital investment program has the realistic potential to create long-term jobs and to spur targeted economic growth and development. While the OZ capital marketplace is in its infancy, now is the time for business owners and entrepreneurs, and their advisors and bankers, to evaluate the structure of this marketplace, and to consider the benefits and consequences of including OZ investment capital in the company's options for capital raising.


It is worth repeating that in business, it is always imperative to know about your investors, partners and buyout counterparties. Accordingly, the key participants in the OZ capital marketplace can be simplified as follows:



QOFs currently in formation feature a variety of investment strategies, including: real property development and substantial renovation and/or investment in operating businesses, industry-specific businesses (e.g. solar energy), and specified geographic locations. The QOF formation process may be triggered in tandem with a specified investment, such as a new senior care facility, or a drone manufacturing plant seeking capital for relocation and expansion of manufacturing capacity, and then raising OZ capital through a QOF special purpose entity followed by a structured equity capital investment into the specified QOZB. Alternatively, QOFs are currently in formation to gather OZ capital into blind pool funds and then scour the markets to seek investments pursuant to specified investment strategies. So, either seek deals first and then seek OZ capital or raise OZ capital first and then seek deals.


Business principals/entrepreneurs will interface with QOF managers/advisors in negotiating the investment terms and the conduct of due diligence processes for the direct injection of equity capital into their businesses. The capital providers may be known or unknown to the business principals, depending on the reverse transparency from the business investee to the QOF investors.


The OZ capital providers investing into QOFs are required to hold their QOF investment interest for at least ten years to be relieved of federal income tax liabilities on realized profits associated with the eventual sale or liquidation of their QOF investment interests. In other words, business principals and entrepreneurs can expect investment capital to be seeking durable and profitable investments with long-term horizons. However, it is common for private equity investment strategies to face a host of significant events, like recapitalizations, buyouts, mergers, workouts, and leverage that will need to be accommodated in the "normal" course of private equity investments. QOF investment and tax compliance rules will accommodate significant changes related to the QOFs’ investee businesses without jeopardizing the QOF investors’ anticipated tax benefits.


OZ capital is neither a federal subsidy nor supported by federal guarantees. The program is created in the Internal Revenue Code (IRC) and U.S. taxpayers are in effect “supporting” the program by accepting the delayed collection of federal tax liabilities on short- and long-term capital gains and the forgiveness of federal taxes on capital gains for QOF investments held by QOF investors for more than 10 years. The OZ investment program features a rigorous federal tax compliance program to attach the tax benefits to private investment capital, and intersect with the investment deals between QOFs and the businesses receiving OZ capital to ensure the achievement of positive economic development benefits.


The OZ capital is sourced from the private capital markets, and yet the Internal Revenue Service has imposed some minimal requirements on the businesses that are positioning to access this long-term equity capital and to qualify as QOZBs. The minimal IRS requirements are summarized as follows:

• American businesses: Domestic corporations or domestic partnerships.

• In the zone: Headquarter location in OZ and “in situ” residency represented by real property ownership or market-rate leases employed in the QOZBs active trade or business after Dec. 31, 2017.

• Prohibited business activities: Not in the business of, or the provision of (including the provision of land for) any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store where the principal business is the sale of alcoholic beverages for consumption off premises.

• Demonstrated commitment to conduct business within the OZ: With respect to initial qualification and all subsequent years that the business is capitalized with OZ capital, then:

a. more than 70% of the business’ tangible property will be Qualified Opportunity Zone Business Property as defined in IRC Section 1400Z-2, and this 70% requirement is satisfied more than 90% of the ti