Origin QOZ Fund: What to Know About the Required Hold Period
Qualified Opportunity Zone (QOZ) investing has been gaining increasing attention and momentum since first being enacted in 2017 as part of the Tax Cuts and Jobs Act. While investment capital in QOZ funds has rapidly increased every year since the program started, one important point of the QOZ legislation is that the investment must be held for a minimum of 10 years and one day to receive all the program’s tax benefits.
Understandably, investment redemption is a topic we’ve discussed with nearly all our 600 Origin QOZ Fund investment partners, as prudent due diligence is essential before making a 10-year commitment in an illiquid investment. In this article, we’ll share what happens if you need to exit out of your Origin QOZ Fund investment during the mandatory 10-year hold, what happens after the required hold period, and how and when we value our Fund.
Making a Redemption
Our QOZ Fund intends to have an investment minimum hold term of ten years to not jeopardize compliance with QOZ program legislation. While we can’t change the QOZ program’s required 10-year hold period, we’ve included a provision in our QOZ Fund that allows investors to redeem prior to the end of the 10-year hold in case of emergency. Redemptions prior to the expiration of the hold period will have to be satisfied through cash flow and refinancing proceeds, as selling assets before December 31, 2031 would cause the Fund to fall out of compliance. Every investor is subject to a minimum one-year hold before they can request a redemption.
We value the QOZ Fund’s assets quarterly and any redemption that occurs between years one and 10 is priced at the prevailing net asset value (“NAV”), less a discount that burns off each year. In the first year the redemption window is open, the discount is 10% of NAV and that is reduced by 1% per year until it reaches zero. While some view this as a penalty, keep in mind that this liquidity provision is for emergency use only and is a departure from the intended hold period. Additionally, redemption prior to the expiration of a 10-year hold will eliminate certain tax benefits attributable to the QOZ program.
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Note that providing liquidity to one individual reduces cash flow to all other investors in the Fund; however, the discount to the NAV realized by the Fund inures to the benefit of the other partners in the Fund. The Fund buys the position slightly below fair market value, and this ultimately helps to compensate the other investors for the cash flow disruption.
Redeeming After 10 Years
Approximately two years prior to December 31, 2031 (10 years after the Fund’s final close), we expect to begin assessing who may be considering requesting a redemption after their 10-year mandatory hold. Understanding the demand early allows us to appropriately reserve capital, sell assets, refinance properties, or use other means to accommodate those requests.
After the 10-year hold period, redemptions will generally be limited to 5% of the Fund’s NAV per calendar quarter. This will be a best-efforts process and, in the event a tender offer is oversubscribed, payments will be made pro-rata based upon an investor’s contributed capital. However, if redemption requests exceed 20% of the Fund’s NAV for two consecutive calendar quarters, the Fund may elect to leverage, sell, or otherwise monetize assets to satisfy the redemption requests.
There’s no requirement that investors redeem their interest in the Fund after 10 years. Investors can stay in after the 10-year period to generate cash flow and take advantage of tax-free long-term appreciation. Investors have the option of exiting the Fund at any point after year 10 for as long as the Fund continues.
Origin QOZ Fund Valuation
Requests for QOZ Fund redemption will be evaluated on the first day of each calendar quarter for those who have made a request on or before this date. Once the request for liquidation has been made, we expect to redeem an investor’s interest within 90 days at the prevailing NAV as of the most recent valuation date. For example, investors looking to redeem their interest on January 1, 2032 will be redeemed at the value as of December 31, 2031 with the request finalized by April 1, 2032. Only those investors who request liquidation on or before January 1, 2032 will qualify for the first quarter 2032 redemption period.
Our asset management team will utilize best practice valuation methods to value the Fund’s assets, including the fair market value of each property owned by the Fund. The team considers broker opinions of value, appraisals, the cost of new construction and comparable sales and leases. The Fund will be audited by a third-party accounting firm each calendar year. The audit will assess both how we are performing our valuation as well as the valuation itself.
As a reminder, our return projections are net of our fee structure and do not account for any of the QOZ tax benefits. Our projects must make sense on their own grounds, regardless of any tax incentives, as we are investing in assets that we believe in and want to be in for a long-term hold. We also do not charge any sort of disposition or redemption fee. Based on our return projections, we expect a $500,000 investment in the Fund today to grow to $1.25 million after a 10-year hold.
Why the 10-Year Hold is Worth It
The QOZ program provides significant benefits for those with capital gains and, while ten years may seem lengthy, we expect the Fund’s assets, upon completion, to provide consistent cash flow as well as appreciate in value over that period. Origin Principals Michael Episcope and David Scherer have significant personal wealth invested alongside investors in the QOZ Fund. They’ve done the math and a traditional investment would have to generate a 3.7 net equity multiple to achieve the same projected after-tax return as Origin’s QOZ Fund. Institutional real estate has a consistent history of appreciating in value over a ten-year investment horizon, and not getting taxed on your way out is icing on the cake.