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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
An Opportunity Zone fund can invest in industrial buildings, but a warehouse address alone does not make the fund or its tax benefits qualify. Evaluate who will use the building, what they will pay, and how much cash remains after leasing costs and debt. Then check the fund’s tax structure and your own investment dates.
Industrial is a broad label. A regional distribution center, a small service warehouse, and a refrigerated food facility serve different customers. Their needs for power, truck access, floor strength, and staffing may be very different. An attractive cost per square foot tells you little until you know which users can operate there.
The Office of the Comptroller of the Currency identifies labor, transportation, local taxes, population centers, and related industries as factors that influence industrial demand. That is a useful starting point for a property review. It is not evidence that a particular site will lease quickly. [1]
Ask the sponsor to name the intended customer group and explain the site’s role in that customer’s business. Is it storing goods for a national network, making products for a nearby plant, or serving local contractors? A tenant needs a workable business location, not an investment’s tax label.
I would separate the review into four questions: Does the property work? Does the lease plan work? Does the financing work? Does the tax structure work? A strong answer to one does not repair a weak answer to another.
A map showing a highway is a start. The next question is whether trucks can reach that highway from the property safely and legally. Ask about turning space, bridge limits, access rights, delivery hours, and roads under construction. A short straight-line distance can hide a slow or restricted route.
Make the review specific to the tenant. A last-mile facility may care about routes to households. A manufacturer may care about skilled workers and dependable utility service. A regional warehouse may need room for trailers and a broad customer base. These are diligence questions, not claims that every industrial property needs the same features.
Ask for the building plans and a plain explanation of each important feature. Clear height means usable vertical space. Dock doors help move goods between trucks and the building. Column spacing affects layout. Yard space, fire protection, and floor loads may limit the uses the building can support.
A feature that fits today’s tenant may not fit a replacement. Ask which improvements remain useful if the first tenant leaves. Who owns installed equipment? Who pays to remove it? Can the space be divided? The lease and approved plans should answer those questions before the investment depends on a smooth renewal.
A build-to-suit plan starts with a specific user’s requirements. A speculative building starts without a committed tenant for all its space. Neither label settles the risk. A signed lease can still depend on timely delivery, permits, or other conditions. An unsigned letter of intent does not provide the same rights as a binding lease.
Request a schedule that separates signed leases, conditional commitments, active negotiations, and empty space. Ask when rent actually starts. Building completion, tenant access, opening for business, and rent commencement may occur on different dates. Free rent can create another gap.
Review the legal entity that owes rent. A famous logo may belong to a parent company that has not guaranteed the lease. Ask whether a guaranty exists, what it covers, and when it ends. A lease summary should not turn a limited promise into full parent-company support.
Prologis’s 2025 annual filing describes tenant default, bankruptcy, vacancies, renewal risk, and spending needed to re-lease space. Those disclosures support a basic point: a lease creates rights, but collecting rent and replacing a tenant can still cost money. The filing is sector evidence, not a forecast for a QOF. [2]
Industrial rent may be quoted per square foot per year or per month. Confirm the unit before comparing properties. Also confirm whether the quote includes taxes, insurance, maintenance, and utilities. A larger gross-rent number may leave less cash than a smaller number under a different lease.
Expense reimbursements deserve a separate line. Ask what the tenant must pay, what the owner retains, and whether caps or exclusions apply. During a vacancy, the owner may have no tenant from whom to recover costs. A net lease does not remove the owner’s need for reserves.
Here is a hypothetical first-year rent check. A 100,000-square-foot building has annual base rent of $12 per square foot. At full occupancy, scheduled base rent is $1.2 million. If 90% of the space pays that rate for the full year, base rent is $1.08 million. These figures exclude reimbursements, concessions, and collection losses.
Now assume the full building is leased at $12, but the first three months are rent-free. First-year base cash rent is $900,000, not $1.2 million. A stabilized annual figure may still be useful, but it should not be presented as cash the fund receives during lease-up.
Consider a separate fictional stabilized property. After rent, reimbursements, and property operating expenses, it produces $900,000 of net operating income, or NOI. Annual debt service is $650,000. The owner also sets aside $100,000 for capital work and future leasing costs.
That leaves $150,000 before fund overhead, additional fees, and investor taxes. NOI divided by debt service is about 1.38. This debt-service coverage ratio measures one part of the cushion. It does not mean investors receive the $900,000 of NOI, and it does not guarantee the lender will refinance.
If NOI falls 20% to $720,000, the same debt service and reserve leave a $30,000 cash shortfall. The fund must cover that shortfall somehow. Possible sources include cash reserves or new capital, depending on the documents. Do not assume a sponsor must contribute its own money.
Ask which cash figure supports the advertised distribution target. Is it operating cash, loan proceeds, or unused investor capital? Review the source and the permitted use of each payment. A distribution may reduce cash available for later work even when the investor sees a steady deposit.
A tenant can pay on time for years and still choose not to renew. At that point, the owner may face empty months, broker commissions, repairs, and new tenant improvements. Prologis identifies commissions and tenant improvements as turnover costs in its leasing disclosures. [2]
For a fictional 100,000-square-foot building, assume six empty months would forgo $600,000 of base rent at $12 annually. Add $10 per square foot of improvements for a new tenant, or $1 million. That is $1.6 million before commissions, vacancy carrying costs, or other changes. Some expenses may fall during vacancy; the full cash model should reflect that.
Spread the lease expirations across a calendar. Three buildings with leases ending in the same quarter may face one large refinancing and re-leasing problem. Several addresses are not much protection if the same industry, tenant, or lender drives all of them.
Ask whether the reserve assumes renewal or replacement. A renewal case may need little work. A replacement case may need much more. See both versions, including the effect on distributions and the investor’s expected exit date.
A redevelopment site may have old industrial uses that require more work. The Environmental Protection Agency explains that environmental liability can attach to property ownership. Its All Appropriate Inquiries process examines past uses and potential contamination. [3]
Ask for the environmental professional’s report, its date, unresolved findings, and the budget for follow-up work. EPA describes a one-year timing requirement for the inquiry, with certain components updated within 180 days before acquisition. Those are environmental review rules, separate from an investor’s QOF deadline. [3]
A Phase I report is not a promise that no cleanup will be needed. Counsel should review the available liability protections and any continuing duties after purchase. The engineer should explain what further testing or remediation the plan requires. Put those costs and delays into the financial model.
Also ask who bears costs discovered after closing. A seller’s promise is only as useful as its wording, survival period, and the seller’s ability to pay. Insurance exclusions and deductibles deserve the same attention as the premium.
The QOF and the business below it may face different tests. A QOF generally measures whether at least 90% of its assets meet its qualified-asset rules. A qualifying business below the fund has separate requirements, including a 70% tangible-property test and rules for active business income. Passing one level does not prove compliance at the other. [4]
For purchased property, original use or substantial improvement can be a key issue. A new warehouse first placed in service by the qualifying business may fit differently from an occupied building bought from another owner. The acquisition, related-party, location, use, and holding requirements still need review. [5]
For a simplified used-building example, assume an allocated purchase basis of $2 million for land and $4 million for the building. Under the general improvement test, qualifying additions to building basis must exceed $4 million within the applicable 30-month period. The separate land basis is not simply added to that improvement target. [5]
Qualifying rural property has a reduced improvement threshold under the 2025 law and Notice 2025-50. Do not assume an industrial park is rural because it looks remote. The legal definition and applicable dates control. The property-level improvement rule also differs from the investor’s later rural-fund basis benefit. [6]
Meaningful property operations matter. The regulations distinguish an active rental business from merely entering into a triple-net lease. Ask tax counsel to explain the actual services, management, and operating structure. Neither the letters “NNN” nor a warehouse’s presence in a zone answers that question alone. [4]
Current law changed the program for qualifying amounts invested after 2026. A new investment can have a five-year original-gain deferral period, unless an earlier inclusion event occurs. Qualifying five-year holdings can receive the applicable basis increase. A separate benefit for later appreciation generally requires at least ten years, with a 30-year boundary under the new law. [7]
Legacy investments follow different timing, including mandatory recognition of remaining deferred gain in 2026. Notice 2026-40 addresses transition questions, including actual eligible 2026 gains timely invested in 2027. It does not let an investor roll the old mandatory inclusion into a new deferral. [8]
Notice 2026-40 announces rules Treasury and the IRS intend to include in proposed regulations. These notice-specific transition paths are not final regulations. Have tax counsel confirm their status and applicability before relying on them. [8]
The project also has its own acquisition and location rules. Notice 2026-40 includes a limited transition for certain pre-2027 development plans. The receipt and spending tests, plan timing, and other conditions must actually be met. An old zone map or a sponsor’s intent to build is not enough. [8]
A qualifying business may use a working-capital safe harbor with a written plan, schedule, and compliant use of funds. That does not excuse every construction delay or let the QOF hold cash without regard to its own tests. Ask for a dated compliance calendar that assigns responsibility for each requirement. [4]
A ten-year investor tax goal does not create a ten-year loan. Find the loan’s maturity, extension conditions, rate limits, and required paydowns. A building can be fully leased and still face a cash demand when its debt comes due.
Consider a fictional warehouse with $1.2 million of stabilized NOI. At a 6% capitalization rate, its indicated value is $20 million. At 7%, the same income implies about $17.14 million. These simple values exclude sale costs and do not replace an appraisal.
Assume an existing $13 million loan must be refinanced and a new lender allows at most 65% of value. At $20 million, that limit equals $13 million. At $17.14 million, it is about $11.14 million. The roughly $1.86 million gap must be addressed, and a cash-flow test or loan costs could make the gap larger.
The OCC’s lending guidance emphasizes repayment capacity, property cash flow, collateral, and loan structure. A projected future property value is not a financing commitment. Ask the sponsor to model lower rent, slower leasing, and a higher exit cap rate together. [1]
The construction budget should include the work needed for the tenant to open, not just an empty shell. Ask which party installs office space, loading equipment, lighting, and specialized systems. If the tenant does the work, find out whether the owner must reimburse it and when that payment is due.
Power service deserves written evidence. An expected utility connection is different from a firm delivery date and a clear price. Ask who pays for upgrades, what approvals remain, and whether a delay gives the tenant a right to postpone rent or cancel. Apply the same questions to water, road access, and permits.
A construction contract may shift some cost risk, but exclusions still matter. Review allowances, change orders, site conditions, completion tests, and the contractor’s financial capacity. A fixed headline price cannot settle who pays for a scope that the contract leaves out. Ask the project team to show that scope in the budget.
Then connect the handoff to the loan. Does the lender require a certificate of occupancy, signed tenant acceptance, a minimum rent level, or a reserve deposit before conversion to long-term financing? The project schedule should identify who confirms each condition and what happens if it arrives late.
Imagine two otherwise fictional choices. One fund plans a single building for one committed tenant. The other plans four smaller buildings with no signed tenants yet. The first may have clearer initial rent but greater exposure to one user. The second may have more room to spread leases, but more upfront leasing uncertainty.
Do not rank them by tenant count alone. Compare committed versus hoped-for rent, cash available before opening, the cost to replace a tenant, and how the loans mature. Also compare the sponsor’s power to change the plan. Four buildings financed by one cross-collateralized loan may share a financing problem.
Ask each sponsor for the same downside assumptions. A fair comparison might use six extra months to lease, a lower rent, and a higher cost to refinance. Keep the assumptions visible rather than adjusting them until one fund looks best. The result is a decision aid, not a promised outcome.
Finally, compare what you would need to contribute if the plan falls short. An investment that requires unexpected cash can affect the rest of your finances. Read whether capital calls are mandatory, optional, or unavailable and how failure to contribute affects your ownership.
Request a tenant and lease schedule, site plans, construction budget, environmental reports, loan terms, and the fund’s offering documents. Compare the dates and figures across them. If one document assumes rent starts in June and another assumes December, resolve the difference before reviewing the target return.
Track changes after your review. A different tenant, loan, contractor, or property can change the risk you agreed to take. Ask what changes require notice, whether the sponsor has discretion to substitute assets, and what rights investors have if the original plan cannot proceed.
Keep personal tax cash outside the building model. A fund may retain all operating cash while your deferred gain becomes taxable. State treatment also differs; California does not conform to the federal Opportunity Zone provisions. Have your tax adviser calculate your own schedule and reserve. [9]
Private offerings can be illiquid and can lose the full investment. Registration exemptions and QOF status are not government approval of a deal. The useful decision is whether this specific property, sponsor, financing, and holding period fit your circumstances. [10]
Potentially. The fund and any lower-tier business must satisfy their own requirements. The property’s location, acquisition, use, and original-use or improvement facts matter. “Industrial” is a property category, not a tax approval. Review the actual entity structure and documents. [4] [5]
No. Identify the legal tenant and any guarantor. Review lease conditions, credit, renewal risk, and the cost of replacing that user. A recognizable name does not guarantee rent, property value, refinancing, or the sponsor’s performance. [2]
No. The business-activity rules require more than merely entering into a triple-net lease. Tax counsel should review the actual management and operations. The lease’s expense terms also do not eliminate capital work, vacancy costs, or collection risk. [4]
NOI is generally measured before financing and other cash uses. Debt payments, capital reserves, leasing costs, and fund expenses may reduce what can reach investors. Ask for a reconciliation from property NOI to the proposed investor distribution, with each deduction shown.
It may, but vacancy alone is not proof. Original-use and substantial-improvement rules have detailed conditions, including special vacancy provisions. The sponsor should document which route applies and why. A new coat of paint or a new tenant does not automatically satisfy the test. [5]
No. The original deferred gain, later appreciation, and operating income are different tax items. The investment date affects the rules. A qualifying appreciation election does not erase every tax or guarantee a tax-free distribution. State rules need separate review. [7] [9]
One tenant can account for most or all rent. Its departure may leave the owner with a large vacancy and expensive changes for a new user. Review reserves, lease expiration, alternative uses, and how long the property could carry its debt without rent.
Ask for the base case, a vacancy case, and a refinancing stress case. Confirm the tax qualification evidence and your future tax reserve. Then compare the fund’s fees, transfer limits, sponsor powers, and capital-call terms with your own need for income and access to money.
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.
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