How to Time an Investment in an Opportunity Zone Fund

Investors will need their ducks in a row before taking the plunge into a qualified opportunity zone fund investment. With a 180-day window to invest in an opportunity zone fund before triggering a gain, timing is everything. Investors should certainly consider timing issues and exchange timing, and this will likely be one of the biggest hurdles getting into an opportunity zone investment.

“Timing issues are key. An investor needs to time any investment with the sale or exchange that triggered the gain, since there is only a 180-day period from the qualifying sale or exchange in which to invest in a qualified opportunity fund,” Kristin DeKuiper, a transactional attorney at Holland & Knight, tells GlobeSt.com.

Partnerships and other entities, on the other hand, will have more flexibility than investors. “Partnerships and other pass-through entities have more flexibility on timing: if the partnership itself does not elect to defer the gain, any partner can defer its allocable share of the gain,” says DeKuiper. “The beginning of that partner’s 180-day period is the end of the partnership’s tax year, even if the gain triggering event occurred towards the beginning of the partnership’s tax year. Effectively, this can significantly extend the 180-day period for a partner.”

Investors aren’t along in fielding timing challenges. Funds and businesses will also have to comply with tight timelines to invest in projects. “Qualified opportunity funds and the qualified opportunity zone businesses in which they invest also have timing issues. Under current guidance, the market is pushed towards having a project pipeline first and seeking investors second, because the fund has only about six months to invest its money in qualifying projects,” explains DeKuiper. “On the other hand, once the funds are invested in a qualified opportunity zone business, the funds can be treated as working capital and disbursed to fund project costs over a 31-month period as long as there is a written plan and schedule for the use of the funds and the business substantially complies with the schedule without compromising the business’ qualification as a qualified opportunity zone business.”

Guidance continues to come out regarding opportunity zone funds, and a lack of clarity has only exacerbated the timing challenges. “Besides timing issues, investors should make sure the project qualifies under all of the rules and the known guidance, and understand and be prepared for the risks associated with the rules that are not yet fully clear,” says DeKuiper. “And investors or the funds in which they invest should underwrite the business itself, which should make sense as a standalone project.”