QOZB’s are required to have less than 5% of the average of the aggregate unadjusted basis of property held by the QOZB and be attributable to non-qualified financial property (“NQFP”) in a taxable year. NQFP includes debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities and other similar property. Cash and cash equivalents will also be considered NQFP if such amounts are not protected by a valid working capital safe harbor. Interestingly, the 5% NQFP is determined based upon the “average of” the aggregate unadjusted basis of property. Unfortunately, the Treasury has offered no guidance on when this “average of” computation is made. Assuming you will use a valid working capital safe harbor to protect the cash your QOZB initially receives from the QOF, you will ultimately need to comply with the 5% NQFP after the expiration of your working capital safe period. The easiest way to maximize the amount of NQFP your QOZB can hold is to acquire Qualified Opportunity Zone Business Property (“QOZBP”) and consistently reinvest the cash your QOZB generates into additional QOZBP. The more property a QOZB holds, the larger amount of property the 5% NQFP limitation is tested against. Otherwise, the QOZB will need to distribute any excess amounts of cash to the QOF, which can in turn hold up an additional 10% of its assets in other property, including NQFP, while still meeting the 90% investment standard requirements. Once the QOF holds more than 10% of its assets in NQFP, the QOF will need to invest into additional Qualified Opportunity Zone Property (Such as QOZBP, stock in a QOZB, or partnership interests in a QOZB), or it can distribute the cash out to investors. In instances when both the QOZB and QOF are taxable as a partnership, these distributions will generally not be inclusion events for investors, so long as the investor holds enough basis in their qualifying investment to offset the distribution.
