GUEST BLOG: Opportunity Zones – A Not-So-Common Point of View

Posted on Wed, Aug 28, 2019 ©2021 Drucker & Scaccetti

TERRYCUFF (2)Drucker & Scaccetti has written plenty on Qualified Opportunity Zones (QOZ) from all angles of the deal. However, today’s guest author, Terence Cuff, is an accomplished and well-respected tax attorney with quite a different take on the future of QOZs. Be prepared; his views are not mainstream!


This blog post may stomp on your marijuana-laced magic muffins.


This blog post is based on speculation and intuition, not on careful research. I have never tried to evaluate the economics of a syndicated Opportunity Zone fund investment.


I raise questions for your consideration. I reach no conclusions.


I lived through the syndicated limited partnership phase. Advisors made money. Syndicators made lots of money. Porsche, BMW, and Mercedes dealers made lots of money. Investors might make some money (or might not). Many syndicated limited partnerships did not turn out to be great investments.


I lived through the tic phase (those ticky tacky tics). Advisors made money. Syndicators made lots of money. Porsche, BMW, and Mercedes dealers made lots of money. Investors might make some money (or might not). Most tic investors did not find their tics to be great investments—or so I’ve heard. 


I lived through the era of tax strategy partnerships. Advisors made money, but a few went to prison, and many were sued. Syndicators made lots of money, but a few went to prison, and many were sued. Porsche, BMW, and Mercedes dealers made lots of money, but none got sued or went to prison. I suppose that somewhere some investor made some money, but few made much.


I hope I live through the Opportunity Zone craze. Advisors will make money. They are salivating. Syndicators always seem to make lots of money. Porsche, BMW, and Mercedes dealers will make money. Now, they must share some of the money with Tesla and perhaps Lexus and Audi dealers. Will investors make money? We will see.


I have seen graphs and tables. The syndicated Opportunity Zone investments look good on paper. Properly evaluating one may well transcend my powers of financial analysis. How much of the value of Opportunity Fund tax benefits will be kept by syndicators through fees and aggressive overpricing?


I have seen tables that compare Opportunity Zone investments to investments outside Opportunity Zones. The tables always assume you are getting into the investments at fair market value. That may not be a completely fair assumption. There may be a substantial premium on Opportunity Zone properties – or perhaps not. That premium may wither as the sunset date for the Opportunity Zone rules approaches.


The Opportunity Zone property benefits from a temporary tax advantage. Opportunity Zone benefits are time limited. The tax benefits may well affect the current honest fair market value of the property. The benefits attaching to the property, however, will completely go away when there is a sale after 10 years. This creates some interesting valuation challenges. If the property starts with a substantial Opportunity Zone value premium, we need to back out that premium in determining value at maturity. I do not know what that premium is, but I imagine it exists and that it is substantial. If the Opportunity Zone premium is large enough, then the quality of the investment could sour over time.


Then, there also is the syndication premium. Properties always seem to be much more valuable when they are in the hands of a syndicator at the beginning of a deal. That premium often evaporates by maturity of the investment.


So far, I have not represented an investor in a syndicated Opportunity Zone fund. I have not had to evaluate the investment. I am not the person to evaluate the investment. Those who evaluate Opportunity Zone funds may find that investments in the funds are more difficult to evaluate than typical investments because of the transitory tax benefits and the change in value due to the changing tax benefits. Many investors will have difficulty properly evaluating the investments.


Everyone is trying to resolve the tax characteristics of Opportunity Fund investments. That is appropriate. Just make sure that your clients also carefully consider the investment characteristics of the investments.


For me, the jury is still out on whether the Opportunity Zone investment is prime wild Alaska king salmon or three-day-old unrefrigerated mackerel. We will probably see both in the market. Is there gold in those hills – or are many just putting out the old garbage?


Some deals may be good. Some deals may be stinky. The trouble may be to discern the good deals from the bad deals among syndicated Opportunity Zone investments.


Should I advise my clients to invest in Opportunity Zone funds – or perhaps in a Porsche, BMW, or Mercedes dealership – or perhaps a Tesla, Lexus or Audi dealership?


Mr.Cuff’s principal clients include real estate investment trusts, real estate investors, large energy companies, large corporations with transactional tax problems and financial institutions. His practice centers on solving partnership and real estate tax problems.


Mr. Cuff speaks frequently on taxation at tax seminars all over the country. He is the author of several hundred articles in tax-related publications principally in the areas of partnership taxation, real estate taxation, like-kind exchanges and drafting partnership and LLC agreements.


As with any article that discusses tax treatment, the usual disclaimers apply: This is a generalized overview, does not represent advice, and may not apply to your situation. As this is a guest blog, it does not necessarily represent the thoughts or opinions of Drucker & Scaccetti. Do not use this article to make tax or investment decisions. Consult your tax expert or call us to be that expert.

Topics: Qualified Opportunity Zones, Qualified Opportunity Funds, syndicated limited partnership, TIC, tax strategy partnerships

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