Learn
A little clarity for your next decision.
Loading your learning library…
Investor WorkspaceWelcome, there!Log Out
Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
An Opportunity Zone due diligence checklist should test the investment, the tax structure, and your ability to hold it through delays or losses. For each important claim, request a document, name the person who reviewed it, and record what remains uncertain. A checklist helps you decide, but it does not promise the fund will qualify, earn money, or fit you.
Start a review log with four columns: question, evidence, finding, and open issue. Use clear status labels such as checked, incomplete, or inconsistent. Avoid marking a box complete just because someone sent a large folder. The question is whether the evidence answers the concern.
Keep each document's date and version. An old loan term sheet may not reflect the final loan. A cost estimate may predate a design change. A tax memo may address an earlier law. Save later changes beside the earlier version so the review has a clear history.
The SEC's private-placement bulletin urges investors to examine financial statements, management, claims, use of proceeds, and resale limits. It warns of limited disclosure, illiquidity, and possible total loss. Those are reasons to investigate before committing, not reasons to treat every private fund as identical. [1]
When a FINRA member recommends a private placement, it has its own investigation and customer-specific duties. An investor checklist does not replace those duties. Ask what the firm reviewed and what matters are still open. [2]
Before studying the property, identify the gain you want to invest. Ask the CPA to confirm the owner, source, character, amount, and relevant dates. Eligible gain generally means capital gain or qualified Section 1231 gain meeting the rules. Salary, gross sale proceeds, and ordinary recapture are not interchangeable with eligible gain. [10]
OZ generally has a 180-day investment period, but some gains have different starting rules. Do not assume that receiving a tax form starts the clock. Ask for the date calculation based on your gain. A fund's subscription deadline can be earlier than the legal deadline. [10]
Ask which rules apply to the amount you will invest. For investments made through 2026, remaining original deferred gain is included by the end of 2026, unless included earlier. Qualifying amounts invested after 2026 generally use the new five-year inclusion system, with earlier events possible. [3] [4]
The 2025 law also changed other investor and fund rules. A sponsor's presentation should identify its assumptions and effective dates. If it describes a regular 10% or qualified rural 30% five-year basis increase, ask how the fund and investment meet the relevant new conditions. Those percentages are not annual investment returns.
Notice 2026-40 addresses transition matters and announces future proposed regulations. It is not a completed set of new final regulations. Where a plan depends on a transition treatment, request an analysis tied to the actual facts and current authority rather than a general statement that the fund is grandfathered. [4]
Identify the issuer, QOF, manager, property or business subsidiaries, and important affiliates. Determine which entity receives your cash and which entity owns the assets. Read the operating agreement and subscription documents as well as the marketing summary.
Check the class of interest, voting rights, transfer restrictions, manager removal provisions, and amendment powers. Ask whether other classes or side arrangements can have different fees, priorities, or rights. Do not assume investors with the same headline minimum receive identical terms.
A QOF generally uses a corporation or partnership structure and must meet its asset standard. The underlying qualified business has separate requirements. Owning a building in a designated tract does not replace the required fund and investor structure. [5] [10]
Record any legal issue for counsel rather than converting it into a marketing conclusion. Examples include unclear authority to add debt, a broad right to change strategy, or terms that conflict across documents.
Obtain the property's address, legal description, tract identifier, and evidence supporting the applicable OZ designation. A neighborhood name or a colored marketing map is not enough. Check the relevant designation period and the acquisition rules for the investment's cohort. [3] [4]
The fund generally has a 90% qualified-asset standard. An underlying qualified business has a 70% tangible-property standard and other tests, including an active-business income requirement. These are different measurements at different levels. Passing one does not prove the entire structure qualifies. [5]
Ask the tax team to show which assets count, how they are valued, when they are measured, and who checks them. Also ask how cash, debt instruments, and nonqualifying property are handled. One ratio on a slide is less useful than a schedule tied to the books.
For an operating business, request the analysis of where work is performed, property is used, and income is earned. Do not apply a building-only checklist to a business with employees, equipment, or customers in several places.
For owned property, ask which route supports qualification: original use or substantial improvement, together with the other conditions. Original use has a specific tax meaning. A recently purchased building is not automatically new-use property simply because the fund is a new owner. [6]
For an improvement plan, obtain the relevant beginning basis, allocation between building and land, planned additions, and 30-month schedule. The general test requires additions exceeding the applicable beginning basis, not merely equaling it. The enacted rural change can reduce the improvement threshold to 50% for qualifying determinations, with its effective-date and rural conditions. [3] [6]
Do not compare the improvement budget with the full purchase price without checking what belongs in the test. Land and building can require different treatment. Leased property has its own rules and should not be forced into the owned-property checklist.
Ask how delays, design changes, and ineligible spending affect the plan. The amount a contractor invoices is not automatically the same as a qualifying addition to tax basis. The tax adviser and project team need to check that their records agree.
If an underlying business relies on a working-capital safe harbor, request its written plan, spending schedule, and actual-use records. The general safe harbor addresses a 31-month schedule subject to its requirements. Other provisions can affect particular cases, but there is no blanket permission to leave all investor cash idle indefinitely. [5]
Compare the tax plan with the construction or business budget. Do the same costs, dates, and activities appear in both? Who updates the records when a permit or contract changes? Ask for the process, not just confirmation that counsel prepared a document at formation.
Also distinguish the fund's cash rules from those of the underlying business. A QOF and its subsidiary are not one undivided account for every tax test. Moving money between them without checking the structure can create problems even when the project ultimately spends it.
Request a sources-and-uses schedule showing how much money is available and where it goes. Include land or acquisition costs, hard construction, professional fees, financing, reserves, operating deficits, and contingency where applicable. Identify which amounts are fixed, estimated, or tied to future events.
Consider a hypothetical $18 million total project budget funded by $11 million of debt and $7 million of equity. The sources match the uses on paper. But if costs rise by $1.2 million and the lender will not increase its commitment, someone must supply that gap or reduce the plan.
If a $700,000 contingency is already included in the original budget and fully available, it would cover part of that $1.2 million overrun. The remaining gap would be $500,000. Do not count the contingency twice, or assume it is still available after other changes have used it.
Ask who must supply extra money and under what terms. It could involve sponsor support, more debt, new investors, or requests to existing investors, depending on the agreement. Each choice can change risk, ownership, or returns. The OCC's real estate guidance highlights why construction costs, completion, leasing, and repayment need to be reviewed together. [7]
Read the final loan terms or clearly label them as pending. Record amount, interest rate, maturity, extension conditions, required reserves, guarantees, and key covenants. A plan based on a future refinance needs a stress case in which proceeds are smaller or financing is unavailable.
Ask whether the loan matures before expected completion, stable operations, or the intended sale. A fund may plan to hold for tax reasons while a lender expects repayment much sooner. That mismatch needs a funding plan, not just a longer hold period in the investor presentation.
Separate debt at the property, subsidiary, and fund levels. Ask who has priority over investor cash and whether one property's trouble can affect another. Do not assume the headline loan-to-value ratio captures every obligation or commitment.
For real estate, request the lease schedule or leasing plan, rent support, competing supply, operating costs, and vacancy assumptions. For a business, request customer demand, pricing, margins, staffing, and operating costs. Match evidence to the actual product being sold.
Distinguish signed contracts from discussions and letters of intent. Identify cancellation rights and conditions. A potential tenant or customer should not be counted as certain revenue simply because its name appears in a presentation.
Review a slower-start case. What happens if occupancy, sales, or margins take longer to improve? Which costs continue while revenue is weak? How much reserve remains, and who decides when the plan needs to change?
Do not rely on a single projected exit value to make a weak operating plan work. Ask how the future buyer would assess income, debt, required repairs, and market conditions. A target return is the output of assumptions, not independent evidence that those assumptions are reasonable.
Use a small model to see how the main assumptions interact. Suppose a hypothetical property has $2 million of yearly revenue and $800,000 of operating costs. Net operating income is $1.2 million. If annual debt service is $720,000, that income covers debt service about 1.67 times. This is a teaching example, not a target or a lender's required ratio.
Now reduce revenue by 10% to $1.8 million and raise operating costs by 10% to $880,000. Net operating income falls to $920,000. With the same $720,000 debt payment, coverage falls to about 1.28 times. Only $200,000 remains before reserves, capital work, fund fees, and other items not in this simple model.
The change in cash can be greater than the change in rent. That is why asking only whether the rent target seems reasonable is too narrow. Costs and loan payments must be tested at the same time. Ask the sponsor to explain which costs can fall if revenue weakens and which stay fixed.
Exit value can add another layer. At an assumed 6% cap rate, $1.2 million of net operating income implies a $20 million value. At 7%, the same income implies about $17.14 million. These are simple income-divided-by-rate estimates before sale costs, not appraisals or forecasts. A lower income and a higher cap rate together would reduce value further.
Keep that model separate from the tax benefit. A qualifying tax election does not hold rents, costs, or sale prices steady. Ask how the fund would handle the stressed cash result and how it would change the investor's actual payments.
List every fee, its recipient, calculation base, payment time, and any cap or offset. Check fund-level and project-level charges. Related-party fees deserve particular attention because the sponsor may influence both the charge and the decision to incur it.
The waterfall is the order in which cash is distributed. Ask for examples that show return of capital, preferred amounts, catch-up provisions, and sponsor profit sharing where those terms exist. Do not assume a preferred return is guaranteed or that every fund uses the same formula.
Run a modest result and a loss case, not just the sponsor's target. Ask what fees continue during an extension and whether a refinance can generate compensation before investors recover capital. FINRA's guidance identifies related-party payments and conflicts as important review areas. [2]
Identify the planned exit and the manager's authority to extend the hold. Check transfer consent, redemption provisions if any, sale approval, and the treatment of an investor who needs cash early. A ten-year OZ tax threshold does not create an automatic right to exit. [9] [1]
Plan for the original-gain tax while the fund may still own assets. Under the new rules, the regular five-year basis increase does not erase all original gain. Ask about tax distributions, but confirm any available-cash or loan limits and maintain a personal reserve plan. [3]
Also ask how the fund expects to handle the ten-year election and different investor entry dates. Interest sales and asset sales can have different rules. The manager should identify the planned route and open issues, not promise that all future income will be tax-free.
Request a reporting calendar and sample reports. Find the duties in the agreement: financial statements, tax forms, cost updates, asset-test records, and notice of material events. Determine who prepares, checks, and delivers each item.
Ask what happens if an asset test is missed or a compliance issue appears. The fund rules include penalties, exceptions, and anti-abuse provisions with specific conditions. A promise to fix any problem later is not a complete plan. [8]
Keep a final list of unresolved matters and who will answer them before funding. Some uncertainty is unavoidable in an investment. The task is to understand its size and whether you can accept it, not to disguise it with a green check mark.
A review log becomes useful when each open issue has an action and an owner. If the loan is not final, list the term that needs confirmation and who will provide the signed document. If a permit is pending, identify the approval, current status, and effect of a delay. If a tax analysis depends on a fact, record how that fact will be checked.
Use three decision groups. The first contains items that must be resolved before funding. The second contains risks that are understood and accepted. The third contains issues to monitor after entry. Do not move a missing critical fact into the monitoring group merely because it is hard to obtain.
For example, a signed lease may have a condition that is not yet satisfied. Mark the lease as signed, but mark the expected rent as conditional. This is more accurate than calling the space either fully leased or completely unleased without explanation. The contract and its remaining conditions should guide the cash model.
Likewise, a fixed-price construction contract may still exclude certain work or permit changes. Ask what is fixed and what can vary. A contract title alone cannot tell you the size of the remaining cost risk. Record exclusions beside the contingency so the two can be compared.
Before signing, compare the final package with the one you reviewed. Check new fees, changed dates, loan terms, and asset substitutions. Confirm the amount accepted and the exact interest issued. Keep proof of the contribution and provide it to the tax preparer. A careful early review does not cover later changes automatically.
After investment, use the same log for reports. Note whether the project met its budget, cash, and compliance milestones. Ask about gaps while the facts are fresh. Monitoring cannot undo every loss, but it can help you understand what is happening and make informed choices about any later consent or request for more money.
Keep original files and a dated note of each answer. If the answer changes, preserve both versions and the reason for the change. That record helps advisers follow the analysis without relying on anyone’s memory.
No. It organizes the evidence and questions. Actual qualification depends on the law, documents, operations, elections, and continuing facts. Professional review and ongoing monitoring still matter.
No. Check the tract, designation period, acquisition rules, and fund structure. A qualifying location is one requirement, not proof that the investor or fund meets all conditions. [3] [5]
No. They generally apply at different levels and measure different things. The fund's qualified assets and the business's tangible property each need the correct analysis. [5]
No. The safe harbor has written-plan, schedule, and use requirements, along with rules for particular cases. It is not unlimited permission to hold cash without action. [5]
Ask how much contingency remains, who must supply more money, what the lender permits, and how ownership or returns could change. Read the actual support and capital provisions.
No. It describes a contractual distribution feature whose meaning depends on the agreement. Cash must exist, and the payment may be subject to other limits or priorities.
Use it as one input, then verify material claims with documents and advisers. The scope, date, assumptions, and unresolved issues matter. A sponsor's completed form is not an independent finding.
Pause when a material tax condition, funding gap, debt term, ownership right, or key claim remains unclear. A deadline does not answer the question. Decide only after you understand the remaining uncertainty.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
Enter your approved email to explore investments, save your shortlist, and keep learning.