3 Red Flags When Weighing Opportunity Zone Investments

Opportunity Zones (OZs) are designated areas (census tracts) around the country that provide preferential tax treatment for investors in order to stimulate the flow or private capital. Since being created in 2017, opportunity zones have become a more widely used investment vehicle and tax optimization tool that also delivers measurable social impact. Currently, there are more than 8,700 opportunity zones across all 50 states and over 1000 qualified opportunity zone funds (QOFs) currently open for investment. With such a wide variety of OZ investment products to choose from, knowing some of the warning signs can be helpful as you work through your due diligence.

 Red Flag #1: An Inexperienced Fund Management Team

Opportunity zone investments are available through Qualified Opportunity Funds (QOFs). Not all OZFs are the same. While all QOFs qualify for the federal tax incentives, no two funds are exactly the same. One of the most important differences to consider when weighing options is the management team in place that will operate the fund. 

Given the complexity and variety of (QOFs out there, you’ll want to make sure you partner with an experienced management team. As you survey the OZ market, be aware that management teams raising money for Qualified Opportunity Funds (QOFs) represent a wide spectrum of talent. Lower your risk by investing with a team that has significant experience working together, particularly within the market where their current offerings are located.

Better fund managers will demonstrate transparency in their dealings with you. That means they should be able to provide references from third party sources such as auditors, vendors and current investors. That also means they should communicate the terms of your investment clearly and directly. Hesitancy or unnecessary complexity on these things should be interpreted as a clear red flag. 

Red Flag #2: Unspecified Developers of the OZ “Product”

 Opportunity zone investment “product types” include real estate, businesses, and renewable energy. A great question to ask as you go through your due diligence is whether or not the team developing the “product” being financed by your investment is the same team that is raising the capital.

Why? Some Qualified Opportunity Funds are financed by investment institutions outsourced to a different development team. Sometimes, investors prefer this as it gives them access to a wider range of products. However, it can also create another layer of developer fees that are not always available to the investor during the due diligence process. Additionally, outsourcing development can prevent investors from being able to speak to or assess the quality of the development team as they are not always identified before the fundraising process has been completed.

Red Flag #3:  Projected Returns Based On Tax INCENTIVES

Since the Opportunity Zone Program contains tax incentives for investors, some funds attempt to incorporate these tax calculations into their return projections. While this makes returns look more appealing, it seldom provides more clarity. In fact, many investors find this confusing because even with uniform tax incentives for all investors within a given time window, everyone’s personal tax situation is unique and subject to numerous variables including capital gain amount, the opportunity zone compliance status of the state where their gain occurred as well as the state where their prospective OZ investments are located, tax rates in 2027 when the deferred taxes on your initial gain are owed, and more. 

Opportunity Zones Require Some Homework

Like any other investment class, opportunity zone investments should only be made after you have done ample research. Given that opportunity zones are relatively new and investor awareness of OZs is generally low, we are committed to providing useful, actionable information for interested investors. You can visit our blog or learning center for more information. 

 *Important Notice: OZ FundHub is not a licensed tax, accounting, or financial firm. All Information contained is for educational purposes only.*