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Q&A’s from NES Financial’s “How Opportunity Zones Can Work For You” Webinar

If you couldn’t make it to NES Financial’s free Insider Insights webinar “How Opportunity Zones Can Work For You,” you not only missed out on how your business can benefit from the latest OZ market insights, but you missed out on some great questions from webinar participants.

Fortunately, we’ve collected four of those questions — and more importantly, industry experts’ answers to those questions — so that you can catch up on some of the discussion and Q&As you missed.

Here they are:

Question 1: Given the 90 percent threshold, how is the fund management usually paid (i.e., how is that typically structured for the originators)?

Answered by Michael Richards, SVP of Fund Administration:

Fund management earns fees via the following:

  1. Annual asset management fees, which range from 1 percent to 2 percent of either aggregate investor contributions to the fund or the fund’s net asset value. All of the funds we see are charging an asset management fee.
  2. Various origination, transaction, or development fees. These vary widely across funds, in both amount and instances when incurred, with about half of the funds we see electing to charge these. These fees range from 0.33 percent to up to 5 percent. Instances where funds are charging these fees include: a one-time fee of 1.5 percent on the gross amount invested in each project company, a 5 percent development fee when the manager also acts as project company developer, and 1 percent of the sale price when the manager also acts as the marketing agent for the project company.

Question 2: Opportunity Zones offer federal capital gains tax benefits. Do any states offer parallel state capital gains tax benefits to encourage investment in their states?

Answered by Erin Gillespie, founder of Madison Street Strategies:

Most states offer comparable tax benefits for Opportunity Zone capital gains. In Florida and other states without income tax, the parallel benefits are automatic. Other states have updated their tax laws to ensure investors have incentives on both state and federal capital gains.

California is one notable example that has not updated its tax laws to have a parallel tax structure; there are currently debates underway there on how to treat the incentive, but nothing has been finalized. The best resource I have found to look at state tax structures is Novogradac’s OZ Resource Center. 

Question 3: Are funds structuring annual payment of interest or other cash flow distributions during the term of the investment? Or will they hold all payments to investors until the end (10+ years) so the tax-exempt gain is maximized?

Answered by Michael Richards, SVP of Fund Administration:

There are three broad themes we’ve seen in funds’ initial strategies:

  1. Fund managers are allowed to make recurring income distributions in accordance with their offering docs, but aren’t necessarily intending to do so, and are intending to reinvest capital transaction proceeds to maintain QOF status.
  2. Funds that are electing REIT status will have to make distributions of taxable income to maintain their REIT status.
  3. Funds explicitly state in their offering docs that they’re intending to make periodic income distributions from cash-flow-generating assets. An example of the terms we’ve seen is a fund that won’t make distributions for the first three years as assets stabilize, but thereafter will make current income distributions as long as doing so doesn’t cause it to lose QOF status.

Question 4: How can a developer’s model to build and sell ASAP be made to work with the OZ program’s 10-year hold imperative?

Answered by Erin Gillespie, founder of Madison Street Strategies:

There are a variety of ways a developer could use the Opportunity Zone program for the incentive. The 10-year hold concerns the Opportunity Zone funding, not each individual investment. There are guidelines published in regard to selling off Opportunity Fund investments and then reinvesting within certain time frames. This would be possible for developers, although the fund administration would be more complicated, and they would likely need very clear guidance on regulations, timeframes and investments to accomplish the buying and selling of certain assets within the fund. 

If you missed NES Financial’s free “How Opportunity Zones Can Work For You” webinar, don’t miss the next one in November. NES Financial maintains an events calendar where we post upcoming webinars, conferences and forums.