Though our OZ Funds generally mirror “standard” real estate investment funds, a number of special considerations are required in order to safely maximize OZ incentives:
Not all projects are well suited for OZ investing. Real estate investments make up the vast majority of OZ dollars, but even within that realm, the projects must lend themselves to a 10 year hold. Opportunity Zones favor patient capital that doesn’t require strict market timing, which also means OZ investments should be well positioned to weather a downturn.
Timing the realization of capital gains can be challenging. So, OZ funds will typically raise all of the required equity up front. This means there are no capital calls during the 10 year holding period. Because Four Points Funding is opening a series of funds throughout the life of the OZ program, investors can place additional investments into new funds as gains are realized. Investors will not be subject to planned capital calls, however.
Given the desire to avoid capital calls and to limit the hold period as much as possible, Four Points Funding decided to create a series of funds with investment windows throughout the life of the OZ program. This means there is always an investment available when cap gains are realized and that investments aren’t tied up for any longer than necessary.
Income passed through to investors is a critical ingredient for providing a strong IRR from real estate investments held for long periods. Four Points Funding targets investments capable of producing 7-9% cash on cash to pass through to investors upon project stabilization.
Opportunity Zones offer the ability to avoid depreciation recapture. In order to realize this benefit, funds must assume non-recourse loans. In doing so, however, income received during the hold period can be significantly protected. In fact, in our recent post on evaluating OZ benefits, we break down a simple example of multi-family housing that indicates how depreciation passed through to the investor very closely matches expected income.
At the end of the 10 year hold period, appreciated real estate assets within the fund are sold. This is where fund investors can receive tax free capital gains. Selecting investments which have a clear market of buyers is essential. Additionally, Four Points Funding is focusing on investment themes that can bring synergies between investments to boost returns.
Typical fees for shorter term real estate funds would be prohibitively high if collected for a 10+ year hold. Though a few OZ Funds have launched with high fees throughout the life of the fund, Four Points Funding has opted to reduce fees after the expected stabilization period to maintain a low effective rate. This provides adequate income to ensure proper management of stabilized assets without overburdening the investor.
In order to weather any downturn that may come over the life of an OZ investment, stress testing worst case scenarios is a must. Most investors know assuming higher debt ratios can improve returns, but this also increases risk. Four Points Funding seeks the middle ground, with relatively low debt ratios, to ensure debt coverage during any potential downturn.
By offering a series of funds we avoid keeping investor’s funds tied up for any substantial period longer than the required minimum 10 year hold. Each of our funds uses debt conservatively and is structured to provide investor returns via income and ultimately sale of assets. Tax liability for income earned during the holding period can be offset by depreciation which does not need to be recaptured, resulting in higher net returns.
With cash flow income and the appreciation of assets we’re projecting a 2.5X Multiple of Invested Capital over the lifetime of our funds and an IRR of 12%.*
*The above projected returns are for illustration purposes only. Future projections are based on pro-formas and are not a guarantee of future results. This presentation is not an offer to sell securities of any investment fund or a solicitation of offers to buy any such securities.