Category Archives: General

Opportunity Knocks – Treasury releases 2nd set of Opportunity Zone Regulations – Duane Morris LLP

On April 17th the Department of Treasury released a second set of proposed regulations for the Opportunity Zone legislation (the first set of regulations was released in October, 2018) which is intended to encourage economic growth and investment in designated distressed communities (qualified opportunity zones) by providing Federal income tax benefits to taxpayers who invest new capital in businesses located within qualified opportunity zones through a Qualified Opportunity Fund.

The 169 pages of proposed new regulations provide much needed guidance to encourage the future use of the opportunity zone tax benefit and specifically provide guidance for opportunity zone businesses. The following are the highlights of the proposed regulations:

1. Reinvestment of Proceeds from a sale or disposition. A qualified opportunity fund (“QOF”) has 12 months from the time of the sale or disposition of qualified opportunity zone property or the return of capital from investments in qualified opportunity zone stock or qualified opportunity zone partnership interests to reinvest the proceeds in other qualified opportunity zone property before the proceeds would not be considered qualified opportunity zone property with regards to the 90-percent asset test.

2. Real Property straddling an Opportunity Zone and a Non-Opportunity Zone. A business that purchases real property straddling multiple census tracts, where not all of the tracts are designated as a qualified opportunity zones may satisfy the opportunity zone business requirements if the unadjusted cost of the real property inside a qualified opportunity zone is greater than the unadjusted cost of real property outside of the qualified opportunity zone.

3. Safe Harbors for the Fifty Percent (50%) Income Test for Qualified Opportunity Zone Businesses (“QOZBs”). The proposed regulations provide three safe harbors and a facts and circumstances test for determining whether sufficient income is derived from a trade or business in a qualified opportunity zone for purposes of the 50-percent test.

a. The first safe harbor requires that at least fifty percent (50%) of the services performed (based on hours) for such business by its employees and independent contractors (and employees of independent contractors) are performed within the qualified opportunity zone.

b. The second safe harbor provides that if at least fifty percent (50%) of the services performed for the business by its employees and independent contractors (and employees of independent contractors) are performed in the qualified opportunity zone, based on amounts paid for the services performed, the business meets the fifty percent (50%) gross income test.

c. The third safe harbor provides that a trade or business may satisfy the fifty percent (50%) gross income requirement if: (1) the tangible property of the business that is in a qualified opportunity zone and (2) the management or operational functions performed for the business in the qualified opportunity zone are each necessary to generate fifty percent (50%) of the gross income of the trade or business.

d. Finally, taxpayers not meeting any of the other safe harbor tests may meet the 50-percent requirement based on a facts and circumstances test if, based on all the facts and circumstances, at least fifty percent (50%) of the gross income of a trade or business is derived from the active conduct of a trade or business in the qualified opportunity zone.

Note that the seventy percent (70%) tangible property test that requires that seventy percent (70%) of the tangible property of the QOZB be located within the Opportunity Zone continues to be operative for QOZBs.

4. Working Capital Plans – the 31 Month Test. The following two changes were made to the safe harbor for working capital.

a. First, the written designation for planned use of working capital now includes the development of a trade or business in the qualified opportunity zone as well as acquisition, construction, and/or substantial improvement of tangible property.

b. Second, exceeding the 31-month period does not violate the safe harbor if the delay is attributable to waiting for government action the application for which is completed during the 31-month period.

5. Measurement Periods. To help startup businesses the proposed regulations allow a qualified opportunity fund to satisfy the ninety percent (90%) without taking into account any investments received in the preceding 6 months provided those new assets being held in cash, cash equivalents, or debt instruments with term 18 months or less. This flexibility is intended to alleviate concerns with a QOF receiving additional capital gain funds right before a testing period and not being able to deploy the funds prior to the testing period.

6. Exclusion Elections. A taxpayer that is the holder of a direct qualified opportunity fund partnership interest or qualifying qualified stock of a qualified opportunity fund S corporation may make an election to exclude from gross income some or all of the capital gain from the disposition of qualified opportunity zone property reported on Schedule K-1 of such entity, provided the disposition occurs after the taxpayer’s 10-year holding period.

7. Continued OZ treatment after Death. Neither a transfer of the qualifying opportunity fund investment to the deceased owner’s estate nor the distribution by the estate to the decedent’s legatee or heir would result in the loss of the opportunity fund investment benefit.

8. Vacant Property. Where a building or other structure has been vacant for at least five (5) years prior to being purchased by a qualified opportunity zone business or qualified opportunity zone business, the purchased building or structure will satisfy the original use requirement.

9. Leased Property – QOZBs; Original Use; Related Party Permissions; Anti-Abuse Rules. Leased property may be treated a qualified opportunity zone business property if the following two general criteria are satisfied.

a. First, leased tangible property must be acquired under a lease entered into after December 31, 2017.

b. Second, substantially all of the use of the leased tangible property must be in a qualified opportunity zone during substantially all of the period for which the business leases the property.

The proposed regulations, however, do not impose an original use requirement with respect to leased tangible property and do not require leased tangible property to be acquired from a lessor that is unrelated. However, the proposed regulations provide one limitation as an alternative to imposing a related person rule or a substantial improvement rule and two further limitations that apply when the lessor and lessee are related.

a. First, the proposed regulations require in all cases, that the lease under which a qualified opportunity fund or qualified opportunity zone business acquires rights with respect to any leased tangible property must be a “market rate lease.”

b. Second, if the lessor and lessee are related, a qualified opportunity fund or qualified opportunity zone business at any time make not make a prepayment to the lessor relating to a period of use of the leased tangible property that exceeds 12 months.

c. Third, the proposed regulations do not permit leased tangible personal property to be treated as qualified opportunity zone business property unless the lessee becomes the owner of tangible property that is qualified opportunity zone business property and that has a value not less than the value of the leased personal property. This acquisition of this property must occur during a period that begins on the date that the lessee receives possession of the property under the lease and ends on the earlier of the last day of the lease or the end of the 30-month period beginning on the date that the lessee receives possession of the property under the lease.

d. Finally, the proposed regulations include an anti-abuse rule to prevent the use of leases to circumvent the substantial improvement requirement for purchases of real property (other than unimproved land). In the case of real property (other than unimproved land) that is leased by a qualified opportunity fund, if, at the time the lease is entered into, there was a plan, intent, or expectation for the real property to be purchased by the QOF for an amount of consideration other than the fair market value.

It is also worth noting that improvements made by a lessee to leased property satisfy the original use requirement and are considered purchased property. Thus, a tenant in a building can also satisfy the QOZB tests noted under the OZ Act.

10. Intangible Assets. For purposes of determining whether a substantial portion of intangible property of a qualified opportunity zone is used in the active conduct of a trade or business, the term “substantial portion” means at least 40 percent.

11. Unimproved Land. Unimproved land that is within a qualified opportunity zone and acquired by purchase is not required to be substantially improved if it is used in a trade or business of the QOF or the QOZB.

12. Investments Held by Funds. Funds have been provided with additional flexibility to hold more than one investment within a fund if they are structured appropriately.

13. Inventory. Inventory in transit to a QOZB within an OZ will be treated as tangible property that counts for purposes of the seventy percent (70%) test for QOZBs even if it is not within the OZ so long as it is on the way.

14. Debt Financed Distributions. Guidance has been provided under the new regulations regarding refinancing and distributions to partners/members which would permit appreciated portions of the property that have been refinanced to be distributed to the partners or members of the QOF on a tax free basis so long as the distribution is not in excess of the investors basis.

We will continue to review the new regulations and intend to issue additional commentary on it. In the interim, feel free to contact us to discuss any questions you have or transactions you are considering in this space.

Brad A. Molotsky and Art Momjian, Co-Heads, The Opportunity Zone Team – Duane Morris LLP

CDFI Fund Announces Historic NMTC Awards

On November 17th the CDFI Fund awarded a record $7 billion in New Markets Tax Credit allocation to 120 community development entities throughout the Country.  Based on the conditions of the awards it is anticipated that approximately $5 billion of allocation will be deployed to support businesses in low income communities and $2 billion will be deployed for the development of real estate projects in low income communities.  Also a priority is the deployment of New Markets Tax Credit authority in underserved states which in this round include Arkansas, Florida, Georgia, Idaho, Kansas, Nevada, Tennessee, Texas, West Virginia, Wyoming, Puerto Rico, American Samoa, Guam, Northern Mariana Islands, and U.S. Virgin Islands.

Duane Morris and 5 Stone Green Capital Presentation on Combining Private Equity with Tax Credits

Art Momjian, Chair of the Duane Morris Affordable Housing, Community Development, and Syndication Practice Group and Victor Brown Managing Partner at 5 Stone Green Capital, a social impact private equity firm will lead a discussion on the opportunities to combine private equity with the Federal New Markets and Federal Historic Tax Credit programs.  The presentation is timely with the historic $7 billion of New Markets Tax Credit allocation to be awarded by the Treasury in November.  This presentation will be at the Philadelphia Office of Duane Morris from noon to 1 pm  on Wednesday November 9, 2016.  For further information and to register please contact Art Momjian at ajmomjian@duanemorris.com.

 

CDFI Fund Releases Draft Allocation Agreement

The CDFI Fund has released a draft of the proposed allocation agreement for the 2015-2016 New Markets Tax Credit allocation round.  A new section added to the allocation agreement provides a limitation on QLICI proceeds which are used to repay or refinance documented reasonable expenditures.  This section ties into the guidance provided in the December 2015 FAQs which imposes on CDEs in the next round of allocation the responsibility to include covenants in financing documents imposing the restriction, confirm the reasonableness of expenses, trace the use of QLICI proceeds both and after closing  and maintain documentation to trace the use of QLICI proceeds for inspection by the CDFI Fund.

Art Momjian to Speak at NMTC Forum

Duane Morris Partner Art Momjian will be a speaker at the New Markets Tax Credit Forum sponsored by the Community First Fund on Tuesday September 13, 2016 from 7:30 am to 11:30 am at The Double Tree Hotel in Reading, PA.  The program is designed for community leaders, developers, commercial realtors, commercial lenders, attorneys, CPAs and economic and community development professionals.  Speakers will discuss the impact of the Federal New Markets Tax Credit program on  commercial development in low income communities.

HUD Announces Additional $1.5 Billion in Sandy CDBG Funds

One year after Hurricane Sandy devastated coastal communities in the Northeast, the U.S. Department of Housing and Urban Development (HUD) announced an allocation of a combined $5.1 billion through a second round of recovery funds to five states and New York City. Provided through HUD’s Communty Development Block Grant (“CDBG”) Program, these CDBG recovery funds will assist impacted communities to meet remaining housing, economic development and infrastructure needs. In this second Sandy allocation, grantees will be required to identify unmet needs for housing, economic development and infrastructure and may use this allocation to address those unmet needs. Grantees will be required to incorporate a risk assessment in their planning efforts to ensure long term resilience. The Second HUD CDBG Sandy Allocation has been made to the following: New York City – $1,447,000,000; New Jersey – $1,463,000,000; New York State – $2,097,000; Connecticut – $66,000,000; Maryland – $20,000,000; and Rhode Island – $16,000,000.

Duane Morris Helps Sandy Victims

Nicole Friant, who serves as pro bono counsel for Duane Morris, announced a commitment by the firm to help victims of Super Storm Sandy. Duane Morris has formed a Sandy Relief legal clinic with Volunteer Lawyers for Justice in Atlantic City. The clinic is staffed by Duane Morris lawyers who volunteer to provide legal assistance to victims of Super Storm Sandy who are still working to overcome the aftermath of Sandy and rebuild their lives. The clinic is located at St. Andrew By the Sea Lutheran Church, 936 Baltic Avenue, Atlantic City, NJ 08401.

New York City Announces Four Sandy Waterfront Design Semi-Finalists

Richard Dyer a partner in the New York City Office of Duane Morris reports that on July 18th, four semi-finalist teams were announced by the City of New York including Ennead Architects (formerly Polshek Partners) of New York, Lateral Office of Toronto, Seeding Office of London, and White Arkitekler of London to City sponsored competition to determine how to best design and build on the City’s waterfront areas exposed to future storms.

Continue reading New York City Announces Four Sandy Waterfront Design Semi-Finalists

Duane Morris NYC Office to Host Super Storm Sandy Conference

The New York City Office of Duane Morris will host a Super Storm Sandy Conference and Reception on September 25th. The focus of the Conference is “From Disaster to Recovery: Financing Tools for Development after Super Storm Sandy”. The panelists are Jonathan Gouveia, Senior Vice-President of the Strategic Investment Group of the New York City Economic Development Corporation, Margaret Anadu, Vice President of the Urban Investment Group of Goldman Sachs, George L. Olsen, Managing Principal of the New York City EB-5 Regional Center, and Andrew Rachlin, Vice President and Market Leader of The Reinvestment Fund. The speakers on the panel will discuss a wide range of financing tools available for development in the aftermath of Super Storm Sandy which include Sandy HUD CDBG grants, Federal New Markets Tax Credits, equity, debt, and EB-5 financing. The Conference will be from 5 pm to 6 pm followed by a cocktail reception from 6:00 pm to 7:30. For further information and to register contact Art Momjian at ajmomjian@duanemorris.com