Creating Qualified Opportunity Funds (“QOF”) and Qualified Opportunity Zone Businesses (“QOZB”) and Issuing Equity

What does creating QOFs and QOZBs and issuing equity encompass?

Qualified Opportunity Funds (QOFs) are investment vehicles designed to promote economic development in economically distressed areas known as Opportunity Zones. A Qualified Opportunity Zone Business (QOZB) is an active trade or business within an Opportunity Zone.

Florida investors can create QOFs by investing capital gains in eligible properties or businesses in designated Opportunity Zones. Once established, a QOF can issue equity to investors, who may benefit from tax incentives, including deferral of capital gains, reduction of tax liability, and potential tax-free appreciation.

For example, a group of investors could create a QOF to invest in a real estate development project within an Opportunity Zone in Miami. They would first form a legal entity, such as a corporation or limited liability company, and ensure investment of at least 90% of the QOF’s assets in the QOZB. After meeting all requirements, the QOF can issue equity to its investors, providing them with tax benefits associated with investing in Opportunity Zones.

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Which laws and regulations apply to creating QOFs and QOZBs and issuing equity in Florida?

In Florida, the laws and regulations governing the creation of QOFs, QOZBs, and equity issuance primarily stem from federal sources. The Tax Cuts and Jobs Act of 2017 introduced the Opportunity Zones program, codified in the IRC § 1400Z-1 and § 1400Z-2. The IRS has also issued regulations, including 26 CFR § 1.1400Z2, to provide additional guidance on the program’s implementation and requirements.

While the federal government oversees the Opportunity Zone program, the State of Florida has taken steps to support and facilitate investments in Opportunity Zones. For example, the Florida Department of Economic Opportunity (DEO) provides resources and assistance to investors and businesses interested in Opportunity Zones. In addition, state and local economic development agencies may also offer additional incentives to encourage investment in Florida’s Opportunity Zones.

What are the strategic benefits of creating a qualified opportunity fund and qualified opportunity zone business and issuing equity?

Investors may benefit from the following:

• Tax deferral: Investing capital gains in a Qualified Opportunity Fund (QOF) allows investors to defer taxes on those gains until the end of 2026 or when the investment is sold, whichever comes first. This benefit, outlined in IRC § 1400Z-2, can free up capital for further investments and enhance cash flow.
• Tax reduction: If an investor holds their QOF investment for at least five years, they are eligible for a 10% reduction in the original deferred capital gains tax liability. After seven years, the tax reduction increases to 15%, providing substantial tax savings per IRC § 1400Z-2(b)(2)(B).
• Tax-free appreciation: The investor can benefit from tax-free appreciation on the investment after holding the QOF investment for at least ten years, as stated in IRC § 1400Z-2(c). This incentive encourages long-term investments in economically distressed areas, which can lead to substantial financial returns.
• Economic development: Creating Qualified Opportunity Zone Businesses (QOZBs) and issuing equity promotes economic growth in designated Opportunity Zones. Investing in these areas can foster job creation, enhance local infrastructure, and support community revitalization.
• Diversification: Opportunity Zone investments provide investors with another avenue for portfolio diversification. A well-rounded portfolio can help mitigate risks and maximize returns across various asset classes.

Please contact our office to set up your initial consultation to determine whether Opportunity Zone investment services may be available for your unique situation.

What steps should counsel take to facilitate creating a qualified opportunity fund and qualified opportunity zone business and issuing equity?

Counsel should consider the following to protect their clients:

• Identify eligible investments: Counsel should assess potential investments to determine if they meet the requirements for a Qualified Opportunity Fund (QOF) and Qualified Opportunity Zone Business (QOZB), per IRC § 1400Z-2(d)(3) and the corresponding regulations.
• Establish the QOF: Attorneys should guide clients in forming a legal entity, such as a corporation or limited liability company, and ensure it meets the QOF requirements, including investing at least 90% of its assets in QOZBs or eligible property.
• Comply with tax requirements: Counsel should advise clients on tax-related compliance, including filing Form 8996 with the IRS to self-certify as a QOF and tracking compliance with the 90% asset requirement.
• Structure the equity issuance: Attorneys must assist in structuring the equity issuance to comply with securities regulations, including the Securities Act of 1933, the Securities Exchange Act of 1934, and relevant state securities laws.
• Monitor ongoing compliance: Legal counsel should ensure that clients maintain compliance with QOF and QOZB requirements and inform them of any relevant laws and regulations changes. Opportunity Zone compliance includes monitoring the substantial improvement requirement for properties held by QOZBs and ensuring that the QOF meets the 90% asset requirement during each taxable year.

When a set of facts is appropriate for legal intervention, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path to seek appropriate remedies.

To determine whether your unique situation may necessitate litigation or another form of specialized advocacy, please contact our office to set up your initial consultation.

Frequently Asked Questions

1. How do I identify an Opportunity Zone in Florida?

To identify an Opportunity Zone in Florida, you can consult the Opportunity Zone Map provided by the federal government. This tool allows you to locate Opportunity Zones within the state and helps determine if a specific property or area is within an Opportunity Zone.

2. Can a single Qualified Opportunity Fund (QOF) invest in multiple Qualified Opportunity Zone Businesses (QOZBs)?

Yes, a single QOF can invest in multiple QOZBs. According to the IRC § 1400Z-2, a QOF must invest at least 90% of its assets in eligible property or QOZBs. If the QOF meets this requirement, it can invest in multiple businesses to diversify its portfolio and spread the risk.

3. How do I ensure that my Qualified Opportunity Zone Business (QOZB) meets the “substantial improvement” requirement?

The substantial improvement requirement, defined in the Treasury Regulations § 1.1400Z2(d)-1(d)(4), mandates that the QOZB must double the basis of the tangible property it acquires within 30 months. To ensure compliance, maintain detailed records of property improvements and investments, and consult a qualified attorney or tax professional to verify that your QOZB meets the requirement.

Have more questions about how Opportunity Zone investing could impact you?

Crucially, this overview of creating QOFs and QOZBs and issuing equity does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain tireless advocates at every step. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to schedule a consultation.