Without getting too deep into the weeds about Opportunity Zones (OZs), they represent an amazing tax-preferred investing strategy to reduce existing capital gains and then exempting long-term gains from a new investment attached to traditionally economically disadvantaged areas. This was the result of federal law passed as part of the 2017 Tax Cuts & Jobs Act (TCJA).
What has happened subsequent to the passage of the law is a massive shift in investment capital into Qualified Opportunity Zone property and business assets through Qualified Opportunity Zone Funds (QOZFs).
OZ funds are typically traditional GP/LP fund structures to do traditional investing while passing along these wonderful incentives to investors.
The downside to OZ investments is the timeline horizon requirement of 10 years to realize the long-term gains exemption for investments in OZ assets.
This will invariably force a thriving secondary market to last for the next couple of decades based on the law. The LP units associated with these funds will be traded and swapped in and out of investor portfolios to meet the individual investor’s needs.
So where does blockchain distributed ledger come into play?
XDEX and Opportunity Zone LPs
As a global, distributed financial record network, XDEX becomes a financial asset information governance platform for capital markets participants like opportunity zone partners.
XDEX connects real-world document data to the blockchain transaction ledger to become the secure source of information about related entities, assets, & transactions.
Documents and information metadata are indexed, secured, permissioned, & governed in a mathematically provable system of truth between participants.
We have entered into a pilot with Opp Zone GP, a self-directed opportunity zone fund as a service for investors to leverage the tax advantages under the law without being subject to a fund management team’s portfolio picks.
Because of the compliance requirements and the timeline horizon under the law, XDEX becomes the perfect solution to programmatically encode trust by maintaining the entire iterative body of legal information about the limited partnership units and underlying assets for the next couple of decades as partners may swap or exchange units in secondary market trading.
While XDEX doesn’t particularly care about the distinction of OZ funds vs. other types of traditional PE or VC funds, we think the timeline requirements create an interesting and unique market for the platform.
LP units are launched as assets recorded onto the blockchain distributed ledger, and then we connect all the legal documentation in a highly secured, encrypted environment to help automate compliance, reporting, and tracking of future data like secondary market price discovery without exposing the underlying details without explicit permission granted by the fund partners.
If you are an opportunity zone general partner or investor interested in learning more about fractional liquidity for opportunity zone partnerships, please contact us today for a chat.
