6.2% yield on cost with a 70 day clock. Talk me out of forcing it.

95 basis points is not cushion, it's a rounding error on a 42 month construction schedule. I've never seen a ground-up delivery come in exactly on budget and I only build small. If your hard costs run 6% over, your yield on cost drops to about 5.85% and your spread is 60 basis points. Then rents come in 4% under because you delivered into somebody else's lease-up and you're at par. Ask for their contingency line as a percentage of hard costs and ask whether it's already been drawn on.

Can someone define yield on cost for me? I gather it's NOI divided by total cost rather than purchase price, and the point is comparing it to the cap rate you'd sell at. Is the gap between them where the developer's profit lives?

@wren yes, that gap is the development margin in yield terms. If you build to 6.2% and the market values that income at a 5.25% cap, you've created value on day one, at least on paper. The whole argument in this thread is whether 0.95% of gap survives three and a half years of construction.

Ten years doesn't scare me, I hold things longer than that on purpose. The fee stack does. 2% of $85M is $1.7M of acquisition fee on a project that hasn't broken ground, and 1.5% a year on committed capital for a decade is 15% of your money. Sextant, at what point does the sponsor make money if the deal only returns capital?

Different angle. The 2025 law added enhanced rural incentives, which is the whole premise of Fund B. Does anyone know whether a zone business can be a service business, or does it have to be real property? I've been looking at whether a trades operation inside a designated tract could take fund capital, and the tests I've read about are at the business level and reasonably strict.

Pay the tax. I know that's not what you want to hear. You're describing a deal you don't like, at a fee load you don't like, with a manager you'll be married to for ten years, and the reason you're still looking at it is a 70 day clock. That's the definition of deadline pressure making the decision. I'd rather hand over the check and buy three things I control.

@flint that's clean logic but it ignores the size of what he's giving up. $2.4M of gain at whatever his combined rate is comes to real money, and the ten year exclusion on appreciation of the new investment is the bigger piece. Sextant, what's your actual combined rate including state? That number changes the whole comparison and nobody has asked for it.

The reporting requirements the 2025 law added on QOFs sound like a whole service line to me. Sextant, does Fund A name who does their compliance work, and is it in-house or a third party? I'd want to know that before signing something with a ten year lockup.

On the construction side, ask what the general contractor's backlog looks like and whether the GC is affiliated with the sponsor. In designated tracts I've seen the trades bid higher because access, security, and staging are harder, and that shows up in hard costs, not in the pro forma narrative. A 6% overrun assumption like @thicket used is optimistic if the GC is thin on subs.

I ran your numbers as if the tax benefit were zero. $2.4M in, 2% acquisition on your pro rata share, 1.5% a year, 0.5% admin. Over ten years you're paying roughly 20% of your capital in fees before any promote. To beat a plain index of anything you need the project to work, and the project needs the 95 basis points to hold. The tax benefit is real and it's layered on top of that, so the deal still has to be good on its own. Sextant, you know this, you wrote it in your own post.

240 units absorbing in a secondary submarket. What's their lease-up pace assumption, units per month? If it's 20 a month that's a year of lease-up and I'd want to see what else is delivering within two miles in 2027 and 2028. My 8 unit building took four months to fill and that was eight units.

No distributions until month 42 makes this a growth position with a tax wrapper. I'd have no interest, but I want income, so I'm not the reader for it. Just flagging that if any part of your reason for doing this is cash flow, the answer is no on its face.

What's a promote? I've read the word four times in this thread and I've been assuming it means the sponsor's share of profits above some threshold, but I want to check that the 8% pref means investors get 8% first.

@juniper yes, the pref is a return hurdle to investors before the sponsor shares in profits, and above it the sponsor takes 20% here.

Sextant, build the two variable grid before you decide anything. Hard cost overrun on one axis at 0, 5, 10, 15 percent. Exit cap on the other at 5.00, 5.25, 5.75, 6.25. Fill in equity multiple after fees. If the deal only works in the top left corner of that grid, the tax treatment is decoration. That takes an afternoon and it's cheaper than 70 days of circling.

Worth separating ground-up from rehab here. Fund A is building new, so substantial improvement doesn't apply the same way it does to an existing building where the fund has to roughly double the basis of the improvements. If you ever look at a rehab-focused QOF, that doubling requirement inside 30 months is where the budget pressure sits, and it's a different risk than what you're pricing on A.

Contingency is the number I'd ask for and I'd want it stated as a percentage of hard costs, held by whom, and releasable on what conditions. On a 42 month schedule I want 7% minimum and I want to know the sponsor can't sweep unused contingency into fee. Scope creep on a 240 unit build isn't dramatic, it's 40 small change orders that each look reasonable.

Two questions I'd want answered in writing before subscribing. One, can the fund sell the asset in year seven and reinvest inside the vehicle so my ten year holding period on the fund interest survives, or does a sale force a distribution and end my clock. Two, what happens if the fund needs a capital call in year four and I don't fund it. Both of those are LPA questions and both matter more than the exit cap assumption, because they decide whether you ever reach the ten year mark at all.

Is there a version of this where the fund buys something already built and leased? I understand you give up the development margin. You also skip 42 months of construction risk in exchange for a smaller spread, and it would let sextant stop doing sensitivity tables on hard costs.

How did you find these two, sextant? I'm building a list and every QOF I turn up through search is a marketing site with a video. Curious whether these came through a broker, an existing GP relationship, or something else.

Practical one since I'm going through licensing. These fund interests are securities, so who's actually allowed to solicit you for them, and does it change whether you found the fund yourself? My understanding is the offering exemption matters and it varies with how the fund is structured, which is a question for a securities attorney rather than this thread.

$354k a unit all in for a secondary sunbelt submarket is high unless there's structured parking or land came in expensive. Get the budget broken out: land, hard, soft, financing costs, fees, and reserves. If hard costs are only $210k a unit, then $144k a unit is going somewhere else, and $1.7M of that somewhere else is the acquisition fee you already flagged. That breakdown will tell you more about the sponsor than the pro forma will.

Reading this whole thread, the case for A is that you have a deadline. That's not a case.

Lease-up on 240 units in a tract that hasn't seen new construction means you're hiring a leasing team into a market with no comparable staff. I've staffed that scenario and it took two failed hires. Ask who the property manager is, whether they run anything else within 15 miles, and what the lease-up marketing budget per unit is. If that number is under $400 a unit I'd push back.

To your actual question: 95 basis points is thin, and on a 42 month build I'd want 150 or better before I priced the tax treatment at zero and still liked it. So on A, I'd pass on the spread rather than on the zone risk.

I disagree with @flint on paying the tax as the default though. You have 70 days, and there are QOFs deploying into currently designated tracts on stabilized or nearly stabilized assets with less development risk and thinner fee loads than 2% plus 1.5% plus a promote. You've looked at two funds. That's not a market survey. Spend three weeks finding four more before you decide the choice is A, B, or the tax bill.

On B, the premise that the enhanced benefits sit mainly in the new 2027 zones is a defensible read of the 2025 law, and it's also a manager asking you to hold capital idle for a year on their reading of pending guidance. Get their position in writing with the authority they're relying on, and have your own tax counsel confirm it before you let a 180 day window lapse on purpose.