Understanding Key OZ Terms
Dec 30, 2023
When it comes to understanding the world of OZ terms, it can be overwhelming to navigate through the various terms and acronyms. However, having a solid grasp of these key OZ terms is essential for anyone looking to delve into this field.
Qualified Opportunity Zone (QOZ)
A Qualified Opportunity Zone is a federally recognized low-income community nominated by its state or territory. There are 8,700+ of these census tracts in the US which were designated by each states governor in 2018 based on 2010 census data. This designation, certified by the CDFI Fund, supports the IRS in identifying areas eligible for specific investment benefits under the Opportunity Zone program.
Qualified Opportunity Fund (QOF)
A Qualified Opportunity Fund is a specialized investment vehicle designed to invest in assets within Opportunity Zones. Investors can either create their own QOFs or invest through third-party funds. A critical requirement is that 90% of a QOF's assets must be invested in QOZ businesses or QOZ business property.
90% Investment Standard
This standard is a fundamental compliance measure for QOFs. It mandates that at least 90% of the QOF’s asset value must be invested in QOZ property, such as QOZ business property, stock, or partnership interests.
Qualified Opportunity Zone Property (QOZ Property)
This umbrella term covers three types of investments in Opportunity Zones: QOZ stock, QOZ partnership interests, and QOZ business property. These are subject to specific eligibility tests based on their use and acquisition.
Qualified Opportunity Zone Business (QOZ Business)
A QOZ Business is a trade or business operating in a QOZ, with at least 70% of its tangible property being QOZ business property. Additionally, it should generate at least 50% of its gross income from business activities within the QOZ and adhere to certain restrictions on nonqualified financial property and "sin businesses."
Qualified Opportunity Zone Business Property (QOZ Business Property)
This term refers to tangible property that a QOF invests in or is used by a QOZ business. The property must be acquired after December 31, 2017, and meet the criteria of original use or substantial improvement by the QOF.
Substantial Improvement Test For a property or business to qualify as a QOZ investment, if its original use did not start with the QOF, it must be substantially improved. This generally means doubling the investment in the asset over 30 months.
Substantially All Test
This test requires that at least 70% of the use of QOZ business property must be within a QOZ for a minimum of 90% of the time the QOF or QOZ business holds the asset.
50% Gross Income Test
A QOZ business must derive at least 50% of its gross income from active business operations within a QOZ. This can be determined based on service hours, location of property, or other relevant factors.
Active Trade or Business
QOZ regulations stipulate that businesses in a QOZ must be actively conducted. This criterion is crucial for maintaining the eligibility of businesses as part of QOF investments.
Working Capital Safe Harbor
While QOZ businesses are limited to holding a small percentage of nonqualified financial property, this safe harbor provision allows them to maintain reasonable amounts of working capital. This facilitates QOFs in channeling assets into QOZ businesses for development and operational purposes under specific conditions.