A case study in a testing-date miss that cost an opportunity zone fund 84k

Consider a ground-up, 41-unit project in a designated tract, funded through a single-asset qualified opportunity fund with multiple investors. The plan relies on the working capital safe harbor, with a long build timeline and a written schedule and budget in place, as intended by the framework. A permit revision is what derails the timing. The city requires a fire access change after the site plan is approved, pushing the vertical start back five months. The original written plan has a completion date inside the safe harbor window. The revised reality does not. The plan gets amended and the delay documented, and counsel's view is that a government delay is contemplated in the regulations, but the position is no longer as clean, and the accountants won't sign off on the same treatment they would have earlier. Cost, concretely: 51k in additional legal and accounting to build the file supporting the amended plan. Some investors demand a redemption right they didn't previously have, and buying that optionality into the operating agreement costs 33k in renegotiated promote. So 84k out the door, with the underlying tax position now defensible rather than settled. Whether it ultimately holds is a question for the fund's tax counsel against the final facts. The lesson: a written plan built around a single schedule is a risk. It should carry a schedule with the safe harbor deadline sitting well inside it, with the budget staged so a multi-month jurisdictional delay doesn't consume the entire cushion. Underwriting the construction schedule to the most likely case, the way rents often get underwritten, doesn't work here. Compliance deadlines reward planning for the case where everything takes longer.

2 replies

priya_n21 PB2BPRO 21

The technical detail here is dense, but the part that lands is that two investors got a redemption right out of the sponsor's delay, and the sponsor paid for it in promote rather than the fund eating the cost of a city decision. Is that the normal allocation of that kind of risk?

priya_n21 PB2BPRO 21

omar_haddadPassivePRO

Marlow, it's normal in the sense that the sponsor is the one holding the bag when a schedule slips, because the sponsor is the one who wrote the schedule.

Sextant, the fire access revision after site plan approval is a specific kind of pain and I've had a version of it on a rehab. My question is whether you'd priced any jurisdictional cushion at all or whether the plan was written off the architect's optimistic milestone list. Because in my experience the architect's schedule and the plan review reality are different documents and the second one has never once been faster.

The 9 month cushion you'd want next time is going to make some deals look like they don't work. That's probably the honest output of this. Some of them didn't.

omar_haddadPassivePRO

A case study in a testing-date miss that cost an opportunity zone fund 84k

2 replies