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Common Questions for QOF (Qualified Opportunity Funds)

June 24, 2019 / Financing, General
 
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  1. My 180 days to invest are almost up.  How can I invest in your fund and meet the QOF requirements if you haven't purchased any property yet?  First of all, the fund has a minimum of 6 months from receipt of investor’s QOF cash to deploy into qualified property.  Then the QOF must show that 90% of the investment capital is invested in QOZ property every 6 months.  There is a safe harbor for the renovation capital that will be used for substantially improving the property.  But this capital must be used within 31 months of receipt. 
  2. How are you able to "substantially improve" a mobile home park enough to meet the criteria for doubling the cost basis?  Saratoga Group conservatively assumed that each asset would need to meet the substantial improvement test individually.  In April, the IRS guidance confirmed that qualification for a QOF would be on an “asset by asset” basis.  There are two important facets of the substantial improvement requirement.  First, “substantial improvement” only applies to tangible property and not the underlying land.  Saratoga Group will be using competitive sale analysis for similar land to set land value and attribute the remaining value to improvements.  Secondarily, in consultation with our CPA firm, we have concluded that bringing in brand new homes to a community and then leasing them out to new residents also qualifies as “substantial improvement”.  For example, let’s suppose we purchase a neglected MHC for $3M.  Because it has been neglected, half of the value is the land and the remaining $1.5M would be tangible property (roads, water lines, sewer lines).  The CAPEX budget is $800k for brand new asphalt overlay, replacing/repairing some old water lines, replacing electric pedestals at half the units and so on.  That leaves a $700k shortfall to meet the substantial improvements criteria.  However, because the community was neglected it had 50 empty lots.  It costs us around $40k to buy a brand-new single-wide home, ship it, and set it up with skirting, porches and steps.  If we bring in 50 new homes, that would be an additional $2M in substantial improvement.  Our total substantial improvement into the community would be $2.8M vs a required $1.5M. 
  3. How will distributions of equity be handled with a recapitalization of debt during the life of the fund?  What we know so far is that a debt-financed distribution within two years of investors contribution would disqualify that investor from QOZ benefits.  Further IRS clarification is needed beyond that, but we anticipate that once investment capital has been held 2 years our investors will be eligible to receive equity distributions resulting from debt recapitalization. 

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