Opportunity Zone fund due diligence checklist

It should cover five areas, in this order: tax qualification, the sponsor, the project, the legal documents and the reporting plan. Tax qualification comes first because a fund that fails the rules can cost an investor both the deferral and the 10-year exclusion. The project comes next because the tax benefit is a multiplier on returns, not a substitute for them: the deferred gain is taxed at year five whether or not the project succeeds.¹

Ask the sponsor to show, in writing, how the fund and each operating business meet every test, and who checks them. A Qualified Opportunity Fund (QOF) self-certifies on Form 8996 and reports each year whether it held at least 90% of its assets in qualified opportunity zone property.² A Qualified Opportunity Zone Business (QOZB) must meet its own tests.⁴

The working capital safe harbor deserves extra time. A QOZB can treat cash as working capital for up to 31 months if it has a written designation, a written schedule consistent with ordinary start-up spending, and actually spends the money substantially as planned; overlapping plans can extend the period to 62 months.⁵ Government delay on a completed application can toll the period, but utility study queues are not obviously a governmental permitting delay, so do not assume relief for power delays.⁵ See the working capital safe harbor and substantial improvement guides.

Check whether the sponsor has built and operated this kind of asset before, whether it has money in the deal, and whether it has handled OZ compliance for a full cycle. Specific requests: a track record of realized projects with actual (not projected) returns; the sponsor's co-investment amount; audited financials of prior funds; key-person provisions; and regulatory history. For securities offerings, check whether the sponsor relies on Rule 506(b) or 506(c) and whether placement agents are registered broker-dealers.¹⁴ Our guide to choosing an Opportunity Zone sponsor has a full scorecard.

Underwrite the project as if there were no tax benefit, then add the benefit on top. The core items are site control, entitlements, a construction budget with contingency, the capital stack and the lease or offtake. Ask for the budget's basis (a fixed-price or maximum-price construction contract, or only an estimate), the lender's term sheet, and the sources and uses table at the QOZB level. Cushman & Wakefield's 2026 cost guide reported data center costs up an average of 21% per MW since its previous edition, which shows how quickly an old estimate can go stale.¹²

Check the capital stack against the OZ rules. Investor money must go into the fund as equity, but the QOZB can borrow, and lender covenants can restrict the distributions the fund needs to give investors cash for the five-year tax bill. Our guide to debt in Opportunity Zone projects explains how refinancing and distributions affect basis and inclusion events.

Power is the item most likely to break a data center schedule, so ask for evidence of power first. Dominion Energy said in 2024 that connecting data centers above 100 MW in Northern Virginia could take up to seven years.¹¹ For on-site or co-located generation, LBNL found the median time from interconnection request to commercial operation exceeded four years for projects built in 2018 through 2024.¹⁰ Neither timeline fits comfortably inside a single 31-month working capital plan.

• Power: executed electric service agreement or utility capacity letter, the large-load tariff terms (minimum demand charges, collateral, exit fees) and the energization date.
• Lease structure: who runs the critical facilities, who pays operating costs, and whether the QOZB's role is more than a triple-net landlord.^6,7
• Equipment ownership: whether servers belong to the tenant or the QOZB, and how equipment replacement is handled in the 70% test.
• State incentives: whether the sales and use tax exemption is still open; several states paused or narrowed data center incentives in 2026.¹³
• Water, fiber and zoning: cooling design, water rights, fiber routes, and the local approval record, including any moratorium.
• Policy exposure: bills introduced in September 2026 would exclude data centers from OZ benefits; ask how the fund would respond if one passed.¹⁵

Read the private placement memorandum, the fund operating agreement, the subscription agreement and any side letters. The SEC advises investors in private placements to get all the information they need before investing and to treat a failure to answer questions adequately as a warning sign.¹⁴ Focus on these terms:

• Fees at every level: fund, QOZB and developer, including acquisition, development, asset management and promote.
• Tax distributions: whether the fund commits to distribute cash to cover the tax on the deferred gain at year five.
• Hold period: whether the documents commit to holding assets until every investor passes 10 years.
• Transfers and redemptions: the investment is illiquid; check what happens on death, divorce or a needed sale.
• Capital calls: dates, defaults and how a late call affects your 180-day window.
• Reporting covenants: delivery dates for K-1s, Form 8997 data and annual audited statements.

Expect each year a Schedule K-1 (for a partnership fund), the information you need for Form 8997, and confirmation that the fund met the 90% test.^3,16 New statutory reporting adds weight: IRC §6039K requires an annual QOF information return, and the §6726 penalty is $500 per day, capped at $10,000 per return or $50,000 for a fund with gross assets over $10 million.^8,9 Proposed regulations published September 11, 2026 would make Form 8996 a separate information return with census-tract-level detail; they are not final.⁸ See what investors should expect in fund reporting.