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What is the difference between a direct and indirect Opportunity Zone investment?

I heard that the indirect investments come with additional statutory restrictions. What are those?

  • Joseph Smith
    April 28, 2019

    The difference between a direct and indirect investment involves whether a Qualified Opportunity Fund (QOF) invests directly in Opportunity Zone business property directly by owning such property through the QOF, or whether the QOF invests in a qualified Opportunity Zone business (QOZB) that, in turn, owns such property. Our firm is seeing most folks use the indirect method at the present time because it is clear that QOZBs (but not necessarily QOFs) can avail themselves of the 31-month working capital safe harbor rule included in the October 2018 proposed regulations. You are, however, correct to point out that QOZBs are subject to additional statutory requirements, including rules related to revenue and assets and rules related to certain "sin" businesses.

  • Peter McNeil
    March 26, 2019

    Since Opportunity Zone assets or Opportunity Zone businesses must be owned by a Qualified Opportunity Fund, any investment would be indirect. You would invest in the fund and then the fund would invest in an asset or an Opportunity Zone business. If there is a management agreement in place, the investment would be considered a security. The security must be registered. Initially, most funds will register under regulation D. A reg D investor is an accredited investor. That is, a person must have $1 million net worth or have had $200,000 of income in the prior two years. A married couple must have $300,000 of income in the last two years. It is possible for an fund to register as a REIT. The larger REITs may be able avoid reg D, but the smaller REITs will still be subject to reg D restrictions.

  • Paul Wassgren
    April 16, 2019

    A direct investment is where the Opportunity Zone fund directly holds the target property. An indirect investment is where the fund invests in a QOZ business, which in turn owns the target property. There are different requirements for each, and certain structures work better for certain developments.

  • Kostas Poulakidas
    March 22, 2019

    Indirect is when an opportunity fund is an investment vehicle and owns a partnership interest in the project owner, while direct is simply when the opportunity fund owns and develops the tangible property.

  • Ed Mofrad
    March 21, 2019

    You are perhaps referring to investing via a QOF (Qualified Opportunity Fund) or developing one yourself. You are correct, in that there are different requirements for each.

  • Stephen Vlasak
    April 16, 2019

    A direct investment are those in whic