Forty-six percent of QOF projections in one review assumed a ten-year exit at a cap rate 150 basis points tighter than entry.

The cap rate compression assumption is the single biggest lever in a QOF waterfall model, and you have identified the right place to look. A 150-basis-point compression baked into a ten-year exit is not conservative underwriting, it is a return-engineering choice, and you are correct that it does double duty: it lifts the projected sale price and it obscures how much of the headline IRR is coming from that spread versus actual net operating income growth.

The number I would push on first is not just the exit cap rate but the implied NOI trajectory that sits underneath it. A fund can show a plausible exit cap rate and still bury aggressive rent growth or occupancy assumptions in the operating pro forma that inflate the NOI the compressed cap rate gets applied to. Both levers compound. Ask for the year-ten NOI in the model, then back-calculate what occupancy and rent growth rates produced it, and compare those to the market comps for the submarket and asset class in the fund's target zone.

The risk you did not mention is liquidity structure inside the fund. QOFs are typically closed-end, LP interests with no secondary market to speak of, and the ten-year hold is a floor that the sponsor controls the ceiling on. If the market turns and the sponsor has no sale incentive because their promote only triggers on a strong exit, you can be inside a fund that holds past year ten while your gains deferral has already crystallized and been recognized. Confirm what the fund documents say about the sponsor's carry structure and whether it creates any alignment around exit timing, not just asset selection.

On the tax mechanics, the deferral and exclusion treatment under the One Big Beautiful Bill Act's permanent regime is now a rolling framework, but confirm how your specific fund documents interact with the 2026 zone transition, in writing, with a tax advisor who works on QOF structures. That is a licensed-professional question and worth the cost before you commit.

What does the fund's sensitivity table show for IRR at flat cap rates and at a 75-basis-point expansion from entry?

If the fund projects compression but the exit waterfall gives the sponsor a promote on gross proceeds, they will sell at the wrong time for you rather than wait for the right cap rate.

@dcarmichael_ti here, and there is a document question sitting underneath the cap rate question that matters just as much: what the private placement memorandum says about the exit assumption versus what the model shows. Sponsors sometimes disclose a range in the risk factors section, something like "cap rates may expand materially," while the base case projection in the financial model uses the tighter number without flagging the contradiction. If those two things do not reconcile, that is a drafting tell. I would also ask whether the projected exit cap rate is applied to in-place NOI at year ten or to a stabilized NOI figure the sponsor is projecting, because a fund can make the denominator do the same work the cap rate does, and the two assumptions compound each other rather than offset. Confirm the exit assumption in writing with the fund's IR contact, get the GP to state the basis for it, and have a securities attorney review the PPM before you wire anything. What does the subscription document say about how the base case projection was prepared, and is there an audited track record attached or only a pro forma?