Given that real estate development is a risky endeavor, diversification is essential for a QOZF. Focusing nationwide, rather than on a single region, balances idiosyncratic risks that impact local economies. For similar reasons, we’re biased towards multi-asset versus single-asset funds and funds that have experience investing across multiple types of real estate (for example, multi-family, office, industrial, retail, etc.).

QOZ rules all but require real estate investments to involve ground-up development or heavy re-development, which is very different than installing new kitchen countertops or applying a fresh coat of paint. Credible sponsors of QOZFs should have substantial, relevant development experience, from planning and approvals to construction and leasing. My recent sampling of the market, however, suggests that most QOZF sponsors don’t have the requisite experience. This inexperience leaves projects—and the QOZFs that fund them—at greater risk of failure.

Desirable fund sponsors should be able to clearly articulate their unique approach for sourcing and underwriting real estate investments, especially as it relates to low-income, urban neighborhoods. Successful funds have refined strategies.

Fund sponsors should be able to provide an audited performance record, including a breakout of all development-oriented projects. Investors should scrutinize historical returns to frame the range of potential project outcomes; real estate development can deliver both tremendous successes as well as total failures. Likewise, if a firm has grown or evolved substantially, investors need to understand how this may affect future QOZF returns.

Most real estate investments involve the use of borrowed funds. Given the operational risks inherent in developing real estate, it’s wise to limit the amount of financial leverage that gets layered on top. While increased leverage can equate to higher returns, debt can ultimately wipe out underperforming projects.

Regulations give only a short window of time for capital to be put to work, making an actionable pipeline of prospective projects critical for a successful QOZF.  Larger firms with more considerable resources have an advantage in this regard.

Though most investors will be more focused on investment considerations, compliance with opportunity zone regulations is paramount. Failure to comply can potentially result in a full loss of the tax benefits. Fund sponsors should retain blue-chip legal and accounting resources that can provide the necessary assistance with the initial structuring and ongoing management of the QOZF.

To achieve full tax benefits, a QOZF must be in existence no less than 10 years. It’s critical to assess whether a fund sponsor will exist that far into the future. Smaller organizations, which may be more reliant on a few individuals, are more at risk.

In addition to asset management and performance fees that individual investors are accustomed to paying, private real estate investments can include property management fees, leasing fees, acquisition/disposition fees, financing fees, and significant development fees. It’s essential that funds provide full fee transparency to investors.

Treasury regulations place a strict time limit of 180 days between when an investor realizes a capital gain and when he can fund a QOZF investment. Investors who can’t control the timing of their respective gain realizations must confirm with a fund sponsor that their capital commitments will be called within the 180-day limit.