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The Opportunity Zone Program was passed into law as part of the 2017 Tax Cuts and Jobs Acts. Since then, investment in these Funds has accelerated, and there are now hundreds of Funds investing in over 8,700 federally designated Opportunity Zone tracts across the U.S. 1

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Right now, the investment community is paying attention to Opportunity Zone Funds, anticipating that they could be part of a longer-term investment strategy during volatile market conditions. Opportunity Zone Funds may also be a welcome alternative for 1031 investors seeking to defer gains especially when those investors, for various reasons, find themselves frustrated by an inability to complete their exchange. But, the appeal for Opportunity Zone Funds is not limited to investors in real estate.

Indeed, Opportunity Zone Fund investing offers potential tax benefits to investors experiencing capital gains events for the sale of a business, stock, or real estate. In some cases, like the sale of stock, these potential tax benefits have not been available before and, thus, can appear particularly attractive to the investor sitting on a large amount of unrealized gains. But, potential tax benefits are not a substitute for due diligence and ascertaining the quality of the underlying investment remains critical.

I’ve been in this industry a long time. I was raised in a family office my father started in 1964 and worked in that office starting at age 13. With my 10-year hiatus to pursue my legal career, I have about 20 years total experience, the last 10 of which I’ve spent managing the portfolio, and I bring that experience with me while serving as Partner and Chief Administrative Officer of Urban Catalyst, an Opportunity Zone Fund focused on ground-up real estate development in Downtown San Jose. I’ve also been admitted as a member of The Opportunity Zones Working Group, which advises the U.S. Department of the Treasury, Internal Revenue Service, the Community Development Financial Institutions (CDFI) Fund, members of Congress and other federal and state agencies on best practices and practical applications for the Opportunity Zone Program.

From my own experience, I know how important it is for investors to find the Opportunity Zone Fund best suited for their investment objectives. And, there are many factors that go into choosing the right one. For some, investing in real estate instruments may be all together new, or at least different, from the types of investments they’ve made in the past. In addition to tax and investment management considerations, investors should also look closely at the Fund manager and the real estate projects in the Fund’s portfolio.

I believe a careful examination of three key areas can help you or your clients make more informed decisions about choosing the right Opportunity Zone Fund.

Let’s explore each of these three key areas:

Key #1: Where Are the Assets Located?

When it comes to real estate, good projects in great locations will typically generate higher demand. When looking at an Opportunity Zone Fund that invests in real estate projects, it’s important to understand clearly the underlying market fundamentals that could make a particular location a good long-term investment. The first goal is to acquire a position in a market where there is high demand and limited supply. Scarcity of particular types of real estate assets, or even the land itself, could present a meaningful opportunity. An important question to ask in this regard is whether the location would support long-term demand for any particular product, such as housing, office space, or retail.

San Jose, California, is a good example. San Jose is the 10th largest city in the U.S. and lies at the heart of Silicon Valley, the engine behind the long-term economic growth for the entire region.2 Large technology companies like Google, Apple, Cisco, LinkedIn, and Facebook have a large presence in the region and continue to attract tech workers from around the world. As these companies continue to grow, more and more of them are moving their offices or opening new offices in downtown San Jose, as there is limited space in San Francisco and the Peninsula. The combination of more available space and more affordable housing make San Jose a natural choice for the multitude of companies that continue to compete for employees that prefer housing close to their jobs or near mass transit hubs.

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In fact, companies like Google and Apple are already planning for long-term growth in downtown San Jose for precisely these reasons. Over the past three years, developers, investors, and tech companies have spent over $3 billion buying downtown San Jose properties.3 Google plans to build a 6-million square foot campus 4 near downtown San Jose’s Diridon station, with thousands of apartments, shops, and community spaces.

In addition, understanding the relative ease of the development process in a particular area is an important factor when determining the strength of the underlying assets in a fund’s portfolio. Local government policies and sentiment toward new development are crucial considerations as funds for Opportunity Zone projects must be deployed within stated Opportunity Zone timeframes. In San Jose, for instance, the city government is actively involved in urban planning initiatives and is streamlining processes and policies to encourage more development in downtown.

Key #2: What About the Fund’s Portfolio of Properties?

Investors should look closely at the Fund’s projects. Do they actually have any? Has the Fund already acquired properties, or just identified some? If the Fund has assets, what are the projects? And at what stage are the projects? Have they been approved and permitted?

All of these questions, and many just like them, are important to ask so the potential investor can make a more informed assessment of relative risk. For instance, blind pool Funds—those without specifically defined projects—may present investors with more risk.

For Opportunity Zone Funds, a diversified portfolio of projects and property types can lead to better outcomes for investors, while simultaneously benefiting the surrounding communities. A portfolio that presents diversity among asset classes may also help to reduce risk.

Ultimately, investors should have a clear understanding of the different properties and asset classes in the Fund, why the Fund managers chose them, how they tie together, and whether competitors are developing projects nearby. For example, when compared to a Fund with a number of smaller projects, a Fund with a single, larger project may have inherently more risk associated with finding a tenant and competing with other projects in the area.

At Urban Catalyst, we have a portfolio of seven projects which includes mixed-used office and retail space, multi-family housing, student housing, hotel, and one of the first senior living projects in the downtown San Jose area in years. The projects are designed to create a synergistic urban environment that fits within the existing and future planned development around downtown San Jose.

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Besides the location and the projects, there is a common denominator for success when it comes to real estate investments: a team with deep expertise and first-hand real estate development experience in the local market. Which brings us to my next point.

Key #3: Who is the Team Behind the Fund?

Savvy commercial real estate investors look for experienced developers with a consistent track record of building projects with a reasonable risk-adjusted rate of return. For this, investors should focus their attention on the team that is managing the Opportunity Zone Fund.

Fund managers who are also developers have a distinct advantage, and local experience is often the determinative factor for success. Funds that are managed by reputable developers don’t have to worry about finding reputable commercial real estate developers for their projects. Likewise, investors will not have to spend their time looking beyond the fund’s management team to see whether the developers they might hire possess the requisite skill sets necessary to reliably develop projects in any particular area. Moreover, investors should be careful to ask whether the funds that partner with outside developers are charging extra fees or providing a double promote structure for the developer’s benefit. Indeed, the team that serves the Fund as both developers and Fund managers may be in a unique position to better control costs and curate projects that are truly transformational for the community while generating prospective returns for their investors.

In this regard, it is important to ask whether the management team has completed prior projects in the particular Opportunity Zone. Experienced local developers may be better able to acquire properties at the right price and understand the myriad of variables that go into what projects can be financed, permitted, and built on a particular site. They oftentimes have first-hand knowledge of the market and regional economic trends, including local demand for different types of properties, what is appropriate for the site, and what the city will allow to be built. Each locale has its own politics, regulatory governance, and processes, and having the right relationships with key community leaders really matters.

Investors should take the time to learn more about the team’s track record developing projects in the Opportunity Zone. How deep are their ties to the communities? Do they have relationships with key local constituents and the experience in overcoming hurdles involved in ground-up development projects? Have they worked with neighborhood leaders and other stakeholders, from local elected officials to business leaders to community activists?

And that brings us to my final point: Partnership Structure

Opportunity Zone rules are complicated. Understanding these rules is important so that one may carefully select the appropriate vehicle to structure an investment that can maximize the potential tax advantages. Aside from understanding the Opportunity Zone rules, however, another key factor in determining the right structure is understanding the real estate development investment cycle.

Those familiar with real estate development might know that much of the returns in the standard development deal may be generated typically within the first five years. But, Opportunity Zone rules require an investor to hold their money in a qualified Opportunity Zone Fund for a minimum of ten years to qualify for the federal capital gains tax benefits associated with the appreciation of that investment.5 The question, then, becomes how to structure the Fund in a way that allows the investor to maximize the tax benefits for potential returns within that initial five-year period.

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This is precisely the analysis we conducted at the time we were forming Urban Catalyst. With the aid of our legal and tax consultants, we were able to structure ourselves to provide potential benefits for qualified Opportunity Zone investment while simultaneously increasing our ability to pass through potentially tax-free distributions within the first five years of development. Unfortunately, it appears many others in this space are not similarly structured. And, while the details of how this is accomplished are beyond the scope of this article, the mechanisms are nevertheless quite interesting and worthy of discussion. I encourage anyone curious to contact me to discuss this in more detail and I look forward to those conversations.

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About the Author
Sean Raft is Chief Administrative Office and Partner at Urban Catalyst, an Opportunity Zone Fund based in Silicon Valley. A seasoned professional with substantial experience in real estate, law, and securities, Sean provides senior fund management through supervision, analysis, and advice on company structure, compliance, accounting, finance, and legal strategies and oversight of relationships with Urban Catalyst’s outside third party consultants specializing in those practice areas. Prior to joining Urban Catalyst, he served as portfolio manager of a real estate trust with more than $100 million in assets. Sean earned his juris doctorate after graduating summa cum laude from Santa Clara University of Law and holds a Bachelor’s degree in Biology from Georgetown University. He was recently admitted as a member of The Opportunity Zones Working Group, which advises the U.S. Department of the Treasury, Internal Revenue Service, the Community Development Financial Institutions (CDFI) Fund, members of Congress and other federal and state agencies on best practices and practical applications for the Opportunity Zone Program.

1 Source: Opportunity Now - https://opportunityzones.hud.gov/resources

2 Source: World Population Review - https://worldpopulationreview.com/us-cities/san-jose-population/

3 Source: The Mercury News - https://www.mercurynews.com/2019/12/01/3-billion-three-years-downtown-san-jose-investments-soar-google-adobe/

4 Source: Wall Street Journal - https://www.wsj.com/articles/google-wants-to-pour-money-into-san-jose-the-city-has-a-fewdemands-11580234667

5Source: See 26 U.S.C. 1400Z-2(c)

6 Payment of distributions is not guaranteed. The Fund is not restricted from paying distributions from any particular source, which means the Fund could use an unlimited amount of offering proceeds and borrowings, as well as proceeds from the sale of assets to pay distributions. Any of these distributions may reduce the amount of capital the Fund ultimately invests in properties, and negatively impact the value of your investment, especially if a substantial portion of distributions is paid from offering proceeds.

7 There can be no assurance that there will be a liquidity event at all or that it will occur within the intended time frame. Please refer to the Risk Factors section of the PPM.

The information contained in this article is provided for informational purposes only and is not intended to be, nor should it be construed or used as financial, legal, tax or investment advice, nor should this information be used or considered as an offer to sell or a solicitation of any offer to buy any interest in Urban Catalyst Opportunity Fund I LLC (the “Fund”), an investment sponsored by Urban Catalyst LLC (the “Sponsor”). The offer and sale of interests in the Fund is being made only by delivery of the Fund’s private placement memorandum, certain organizational documents, subscription agreement, and certain other information to be made available to investors by the Sponsor (the “Operative Documents”). You may only invest in the Fund if you are an accredited investor as defined in Rule 501 of Regulation D. Investing in the Fund will involve significant risks, including possible loss of your entire investment. Prospective investors should make their own investigations and evaluations of the information contained in this article and the other Operative Documents. Each prospective investor should consult its own attorneys, business advisors and tax advisors as to legal, business, tax and related matters concerning the information contained in this [article] and the Operative Documents. This article does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. An investment in the Fund is not suitable for all investors. No representation is made that the Fund will, or is likely to, achieve its objectives or that any investor will avoid incurring substantial losses. Past performance is no guarantee of future results.

Risk Factors
Investing in Urban’s common units is speculative and involves substantial risks. You should purchase these securities only if you can afford a complete loss of your investment. See the section entitled “Risk Factors” of Urban’s PPM to read about the more significant risks you should consider before buying our common units. These risks include the following:

•This Initial Offering is being made to allow investors to take advantage of recently adopted rules and regulations under the TCJA. The legal and compliance requirements of this legislation, including with regard to Opportunity Funds like us, are relatively untested.

•An investment in us will be illiquid, as there is no secondary market for our interests and none is expected to develop; and there will be substantial restrictions on transferring such interests. Accordingly, an investor may be required to maintain its interest in us for an indefinite period of time. The interests in the real property to be acquired by us are subject to leverage and their investment performance may be volatile. Investors should have the financial ability and willingness to accept the risk characteristics of us.

•If we fail to qualify as an Opportunity Fund for U.S. federal income tax purposes for any period and no relief provisions apply, we would be subject to penalties which could be significant. As a result, returns to investors could be materially reduced.

•We depend on our Manager to select our investments and conduct our operations. We will pay fees and expenses to our Manager and its affiliates that were not determined on an arm’s length basis, and therefore we do not have the benefit of arm’s length negotiations of the type normally conducted between unrelated parties. These fees increase your risk of loss.

•We have a limited operating history. The prior performance of our Sponsor and its affiliated entities may not predict our future results. Therefore, there is no assurance that we will achieve our investment objectives.

•Other than the properties discussed in Urban’s PPM, we have not identified any other investments to acquire with the net proceeds of this Initial Offering. You will not be able to evaluate our future investments prior to purchasing units.

•We determined to hold the initial closing of this Initial Offering without regard to the number of commitments received or amount of proceeds raised. The failure to successfully raise additional operating capital and sufficient additional investor purchase commitments could result in our bankruptcy or other event which would have a material adverse effect on us and our unitholders.

•Mr. Erik Hayden, our Manager’s President, is also the President, manager and key professional of our Sponsor and its affiliates. As a result, he faces conflicts of interest, including time constraints, allocation of investment opportunities and significant conflicts created by our Manager’s compensation arrangements with us and other affiliates of our Sponsor.

•Our Sponsor may in the future sponsor other companies that compete with us, and our Sponsor does not have an exclusive management arrangement with us.

•We may not be able to acquire a diverse portfolio of investments and the value of your units may vary more widely with the performance of specific assets.

•We may change our investment guidelines without unitholder consent, which could result in investments that are different from those described in Urban’s PPM.

•Our organization documents permit us to pay distributions from any source, including cash flow from operations, offering proceeds, borrowings, or sales of assets. Until the proceeds from the Initial Offering are fully invested and from time to time during the operational stage, we may not generate sufficient cash flow from operations to fund distributions. If we pay distributions from financings, the net proceeds from this or future offerings or other sources other than our cash flow from operations, we will have less funds available for investments in real estate properties and other real estate-related assets and the number of real estate properties that we invest in and the overall return to our unitholders may be reduced. If we fund distributions from borrowings, our interest expense and other financing costs, as well as the repayment of such borrowings, will reduce our earnings and cash flow from operations available for distribution in future periods, and accordingly your overall return may be reduced. If we fund distributions from the sale of assets or the maturity, payoff or settlement of debt investments, this will affect our ability to generate cash flows from operations in future periods.

•Our limited liability company agreement does not require our Manager to seek unitholder approval to liquidate our assets by a specified date, nor does our limited liability company agreement require our Manager to list our units for trading by a specified date. No public market currently exists for our units. Until our units are listed, if ever, you may not sell your units. If you are able to sell your units, you may have to sell them at a substantial loss.

•Our Manager intends for us to be classified as a partnership for U.S. federal income tax purposes. As a result, it is expected that you will include your allocable share of income, deductions, gains, losses and other tax items from us on your U.S. income tax return, regardless of whether or not cash is distributed to you by us.

•Real estate investments, including our intended investments in Opportunity Zones, are subject to general downturns in the industry. We cannot predict what the occupancy level will be in a particular building or that any tenant or mortgage or other real estate-related loan borrower will remain solvent. We also cannot predict the future value of our properties. Accordingly, we cannot guarantee that you will receive cash distributions or appreciation of your investment.

•Our intended investments in commercial real estate and other select real estate-related assets located in Opportunity Zones will be subject to risks relating to the volatility in the value of the underlying real estate, default on underlying income streams, fluctuations in interest rates, and other risks associated with real estate investment generally. These investments are only suitable for sophisticated investors with a high-risk investment profile.

•We expect to invest primarily in our Target Properties, which are comprised of real estate assets located in the west coast of the United States, with a focus on Northern California, primarily downtown San Jose. Investing in a limited number of regions carries the risks associated with significant geographical concentration. Geographic concentration of properties exposes our projects to adverse conditions in the areas where the properties are located, including general economic downturns and natural disasters occurring in such markets. Such major, localized events in our target investment areas could adversely affect our business and revenues, which would adversely affect our results of operations and financial condition.


The QOZ Program, created by the 2017 Tax Act, is a tax-incentive program designed to encourage long-term private sector investments in Qualified Opportunity Zones through investment vehicles called Qualified Opportunity Funds. Qualified Opportunity Funds seek to promote real estate development, job creation and overall economic growth in lower income communities through the use of substantial potential tax incentives to investors.


The U.S. Department of the Treasury has designated over 8,700 Qualified Opportunity Zones1 located across all 50 states, territories and the District of Columbia. Qualified Opportunity Zones are designated census tracts that have been nominated by state governors and certified by the U.S. Department of the Treasury for inclusion in the QOZ Program.


Qualified Opportunity Funds can be structured as a partnership or corporation and must invest at least 90% of their assets in Qualified Opportunity Zone Property located in Qualified Opportunity Zones (which includes real estate or new or existing businesses), including commercial real estate, housing, infrastructure and start-up businesses. Qualified Opportunity Funds may hold single or multiple assets.


Qualified Opportunity Funds offer an attractive tax-advantaged investment solution that may be used as a force for social impact and economic growth.