A direct investment are those in which investors own the particular assets themselves and indirect investing. Or in joint venture investing in real estate, it describes investment positions across a continuum of investor control, ranging from passive stakes in a commingled funds to separate accounts (e.g., family office or corporation allows an investment manager to invest its capital into a QOZB alongside a developer subject to control over key decisions). In either case, the investment manager is placing joint venture equity into a QOZ business entity that is formed to invest in QOZBP. Indirect investing code introduces several additional instances of additional statutory restrictions. Assuming it meets the “substantially all” test of 90%, how is compliance measured across owned and leased assets? Are leased assets valued on a present value basis per GAAP capital lease accounting rules? Using what discount rate? Are owned assets to be compared based on fair market value or tax basis? How frequently? Additionally, what does it mean for a leased asset to be QOZBP? For example, does the IRS really intend that QOZBs only lease property from QOF-owned buildings? What might this mean for lease rates that QOZBs pay relative to market rates, even those paid by non-QOZB tenants within the same buildings? While requiring QOZBs to lease from QOZBPs could catalyze the development or renovation of real estate to serve it, such a requirement could also severely restrict a QOZB’s growth. If rents don’t support new development or deep renovation, a non-real estate focused QOZB must either misallocate its capital toward investing in real estate to satisfy its space needs, or agree to pay a developer above-market rents along with credit enhancement and lease term sufficient to justify developing despite market conditions. The QOZB’s expansion would also be delayed by the building acquisition or development process.
