How to Evaluate an OZ Fund

Q: Question 6: What are all the fees and the promote structure?

I want the complete picture: - Management fee (% of committed or invested capital, per year) - Acquisition fee - Disposition fee - Promote / carried interest structure and hurdle rate - Whether the promote is at the fund level, the project level, or both Fee stacking is common in OZ funds. Some sponsors charge at both levels. Ask for a simple waterfall chart showing how a dollar of profit flows from the project to you. ---

Q: Question 8: Who handles compliance and reporting?

OZ compliance is technical and ongoing: - Semi-annual 90% asset testing on **June 30 and December 31** - Annual QOZB tests (70% tangible property, 50% income, 40% intangible) - Working Capital Safe Harbor documentation - OZ 2.0 mandatory reporting under OBBBA I ask which law firm handles OZ compliance, which CPA firm prepares Form 8996, and who is responsible for the OBBBA reporting. Penalties for non-compliance start at **$500 per day** (up to **$50,000** for large funds). This is not an area w

Last updated: March 2026

How to Evaluate an Opportunity Zone Fund: 9 Questions

I have structured and operated OZ real estate projects since 2020. I have also reviewed dozens of other sponsors' offering documents. These are the nine questions I would ask before putting a dollar into any OZ fund, including one of my own.

Question 1: Does the deal work on a pre-tax basis?

This is the single most important question. I ask to see the projected IRR and return profile without factoring in the OZ tax benefits. The investment must make sense on its own real estate or business fundamentals.

OZ is a tax structure, not an asset class. A deal that only works because of the tax benefits is a bad deal. I have seen funds where the projected pre-tax return was below the risk-free rate. Those funds exist because the sponsor knows investors will be blinded by the tax pitch. Do not be that investor.

Question 2: How is the capital stack structured to survive a 10-year hold?

The OZ benefit requires a 10-year hold. The capital stack must be built to survive that full duration without a forced sale or refinancing crisis.

I look for red flags here first:

Short-duration bridge loans with a maturity of 2-3 years
Mezzanine debt or preferred equity with fixed returns that create refinancing pressure at exactly the wrong time
High loan-to-cost ratios that leave no room for value fluctuation

What I want to see: 55-65% senior construction debt refinanced into long-term agency financing (Fannie, Freddie, FHA) upon stabilization, with no subordinate debt creating payoff pressure. That is a capital stack that can survive a full cycle.

Why the capital stack matters more than most investors realize

Question 3: What is the plan for the phantom tax?

Investors will owe federal capital gains tax on their original deferred gain at the end of the deferral period. Under OZ 1.0, that bill is due April 2027. Under OZ 2.0, it comes five years from the investment date. The fund almost certainly will not distribute cash to cover it.

I ask every sponsor:

Will the fund execute a refinance before the deferral date?
Will distributions be made to help investors fund the tax bill?
What liquidity should investors set aside independently?

If the sponsor has not thought about this, I walk. This is not a minor planning detail. It is a material liquidity event that every investor needs to prepare for.

Full phantom tax explainer

Question 4: Is the sponsor vertically integrated?

Many institutional OZ funds raise capital and then allocate it to third-party developers, adding a fee layer at the fund level on top of fees at the project level. I call this "margin on margin." It reduces investor returns and adds execution risk.

I ask directly: Does the sponsor serve as its own general contractor? Does the sponsor manage its own properties? Vertically integrated operators control their execution timeline, their construction costs, and their operating performance. They do not share upside with a third-party developer who has no OZ compliance obligation.

Question 5: Does the GP co-invest alongside LPs?

I ask what percentage of the sponsor's own capital is invested in this specific fund or project. A GP who has real money at risk alongside investors has aligned incentives. A GP collecting a management fee on other people's capital while investing none of their own does not.

Question 6: What are all the fees and the promote structure?

I want the complete picture:

Management fee (% of committed or invested capital, per year)
Acquisition fee
Disposition fee
Promote / carried interest structure and hurdle rate
Whether the promote is at the fund level, the project level, or both

Fee stacking is common in OZ funds. Some sponsors charge at both levels. Ask for a simple waterfall chart showing how a dollar of profit flows from the project to you.

Question 7: Does the fund use a QOF-to-QOZB two-tier structure?

Most development-oriented OZ funds should. A QOF that holds real estate directly cannot access the Working Capital Safe Harbor, meaning the fund will fail the 90% asset test during construction. I have seen single-tier structures in the wild. They are almost always a sign that the sponsor's OZ counsel was not experienced enough.

Ask for a plain-English explanation of the legal structure and how compliance testing is managed.

QOF vs. QOZB explained

Question 8: Who handles compliance and reporting?

OZ compliance is technical and ongoing:

Semi-annual 90% asset testing on June 30 and December 31
Annual QOZB tests (70% tangible property, 50% income, 40% intangible)
Working Capital Safe Harbor documentation
OZ 2.0 mandatory reporting under OBBBA

I ask which law firm handles OZ compliance, which CPA firm prepares Form 8996, and who is responsible for the OBBBA reporting. Penalties for non-compliance start at $500 per day (up to $50,000 for large funds). This is not an area where casual documentation is acceptable.

Question 9: What is the exit strategy?

To capture the 10-year exclusion, the QOF interest must eventually be sold. I ask:

What is the projected exit timeline?
What extension periods exist if the market is down at year 10?
Can investors receive a tax-free FMV basis election at the time of sale?
Is there a GP option or preferred buyout structure that could trigger an early inclusion event?

The worst version of this: a GP with a buy-sell option that can force a sale at year 7 or 8, killing the investor's 10-year exclusion. Read the operating agreement.