The number of available qualified opportunity zone fund (“QOZs”) offerings can seem overwhelming, but that’s just the beginning. Once you’ve identified opportunities that seem interesting, what metrics matter to you and where does an actual evaluation begin? Integris Real Estate Investments has prepared a simple comparison tool to help you with this important process. Please fill in the form below to access the Qualified Opportunity Fund Comparison Tool.
The Firm/Sponsor: Who you choose to do business with matters. No one has a crystal ball, but aligning yourself with a firm that has navigated multiple market cycles could potentially be to your benefit. Many sectors of the real estate market have had the wind at their backs for some time, creating an environment where skilled and unskilled sponsors had an easier time achieving results. Market cycles can span 10 years or more, so a sponsor with a five-year track record simply can’t demonstrate how well they manage in unfavorable conditions. The actions of your manager in unfavorable conditions can potentially affect the outcome as much or more than what they do when conditions are favorable.
Project type: While QOZs can encompass many types of projects, it’s important to know if your management team is outside their core expertise. A manager whose prior experience lies mostly in retail or office suddenly building apartments should be a red flag, as would a multifamily fix and flip specialist suddenly doing ground-up construction. A careful review of the sponsor’s track record should demonstrate proficiency in similar projects as they plan to execute in the QOZ fund.
Asset Class: Recent history has provided some valuable but unwelcome lessons in real estate investing and demonstrated that every asset class is unique in how these historical events affect them. From difficulties in housing in 2008 to office in 2020 and the recent growth in industrial and distribution. Business travel and leisure travel seem to have diverged and some vacation destinations have unprecedented demand. Consider what future benefits or challenges face the asset classes you are considering and if your management team has the experience to capture opportunity or, if necessary, mitigate challenges.
Sponsor-claimed Internal Rate of Return (“IRR”)/Multiple: Sadly, there is no widely accepted standard nor is there any regulated structure on how these are calculated. It’s still the wild wild west and you’ll have to make a judgment call. Less experienced investors are often drawn to the highest IRR and left wondering why their actual results fall short. Review the financials provided and review them thoroughly. Look for assumptions that don’t fit statistical norms in areas such as rent growth, RevPAR, projected lease rates. If you have no historical perspective, it’s time to perform your own diligence. Compare other similar projects based on offering documents or statistical projections. Separate the offering from it’s QOZ benefits and evaluate on the merits of the deal. Lastly, refer back to the fund sponsor; performance projections are only as good as the sponsor’s ability to execute and their ability to execute is impacted by market conditions.
Sponsor Projections: Sponsor’s proposed IRR and multiples can vary greatly from extremely aggressive to rather conservative. Note here in the tool where you believe the investments you are considering fall in that range.
Plan includes liquidity for taxes at year five: QOZ investments allow for a five-year deferral of your corresponding capital gains taxes. Do the QOZ investments you are considering have a liquidity plan in place to provide the dollars necessary to pay your tax bill or will you need to dip into your own pocket to pay the bill when the time comes? If this liquidity is important to you be sure the fund’s plan is reasonably attainable or that you have the necessary funds in place to cover the tax bill.
Potential Headwinds: All investing involves some degree of risk and multiple evaluation methods often need to be employed. Consider both micro and macro and a solid dose of common sense. Is the manager using an active or passive style? Is the outcome largely effected by the market conditions or is the sponsor actively executing a value add? Is the investment in a secondary market with the hopes of future growth? Will rent growth continue its unprecedented pace or will office occupancy even return to pre-COVID levels? Don’t let the allure of a big IRR dissuade you from reasonable thinking. Be sure the investment thesis aligns with your gut.
Diligence Materials: The diligence materials provided by your sponsor should be exhaustive and complete. While many sponsors have professionally prepared private placement memorandums (“PPM”), financials, operating agreements and written track records that clearly articulate all aspects of the deal, others barely meet their obligations and in many cases it’s difficult to distinguish their PPM from a brochure. Surprisingly, an Excel spreadsheet and 20 page PPM are all some sponsors have to offer potential investors. Ask yourself if this operator is on a shoestring budget or simply doesn’t feel obligated to do more than the bare minimum required of them. Another potential reflag is an IRR boldly displayed on page one of every document. Although it may seem overwhelming, hundreds of pages of diligence material isn’t a bad thing. Know what the preferred return and waterfalls are. Know in what order capital is returned. Know the fee structure and decide if your sponsor stands to profit more from collection of fees or a successful exit. For experienced and professional sponsors, a great deal of time and expense goes into the preparation of these documents for your benefit.
Opinions are as of the date of this posting and are subject to change. Investing involves risk including possible loss of principal. Past performance is no guarantee of future results. This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only.
Begin the process here:
- If you are a natural person and you are claiming to be an Accredited Investor on the basis of having a net worth of at least $1,000,000, you will be required to provide documentary evidence of your assets dated within three months of the date of your Purchase Agreement, including without limitation: (i) bank statements; (ii) brokerage statements and other statements of securities holdings; (iii) certificates of deposit; (iv) tax assessments of real property; and (v) independent third party appraisals of assets. You will also be required to either: (a) provide a copy of a consumer or credit report dated within three months prior to the date of your Purchase Agreement from a nationwide consumer reporting agency such as Equifax, Experian or TransUnion (a “Credit Report”); or (b) consent to the Trust’s procurement of your Credit Report. You will also be required to represent that you have no other material liabilities other than those appearing on your Credit Report.
- If you are a natural person and you are claiming to be an Accredited Investor on the basis of having individual income in excess of $200,000, or joint income with you or your spouse or spousal equivalent in excess of $300,000, in each of the two most recent years and a reasonable expectation of reaching the same income level in the current year, you will be required to provide all Internal Revenue Service forms you have received or completed with respect to your taxable income for the most recent two full calendar years, including without limitation, Forms W-2, 1099, 1040 and Schedule K-1 of Form 1065.
Visit the SEC website for more information on what is an accredited investor.