Yet despite the new clarity, investing in businesses remains more complicated than investing in real estate.
Buildings, by definition, stay put. And while 10 years is a long time to own a building, a property that's delivering good returns after five years likely will still be a good investment in 10, said Michael Kressig, an opportunity zones expert and partner at Novogradac, an accounting and consulting firm.
Businesses, on the other hand, can change a lot in 10 years. They might fail, get acquired, go public, move or radically change their business model. "It is contrary to your normal kind of private equity, or venture capital, investment-hold periods to think about holding something for 10 years," Kressig said.
There's not much fund managers can do to control the business cycle, and it's difficult to delay business decisions -- such as whether to relocate -- until the 10-year mark.
Many fund managers have "sort of landed on the understanding that this is a best-efforts proposition," Kressig said, "and so I can't -- and I'm not going to -- promise an investor that they're going to get 100% of these tax benefits."
Investors could still make money if a growing company leaves a zone, said Chris Schultz, CEO of LaunchPad, a chain of coworking spaces that also makes venture investments. "If a company is moving out of a zone, presumably it's because something very good is happening," he said. LaunchPad is setting up a $20 million opportunity zone fund focused on startups in mid-sized cities.
Business-focused funds also may face more technical difficulties than real estate funds do. For instance, while a real estate fund can be set up to focus on a single project, Phillips' fund has to spread investments over several companies to soften the blow to investors in case any of the companies fails.
"The real estate (opportunity) fund is not that much different from what these real estate companies have been doing for a long, long time," said Phillips, now managing partner of an opportunity fund called the Pearl Fund L.P. For him, however, setting up a fund was uncharted territory.
Phillips worked with Kressig and a lawyer to come up with a workable structure. "It's challenging, but I tell everyone to please note, it is doable," he said. He hopes this year to raise $25 million and spend it on up to 25 early-stage companies either in or willing to relocate to zones within a three-hour drive of New York City. Once the money is spent, he'll raise another fund.
Making it Work