Opportunity Zones – Insights From the Land of OZ

July 7, 2025July 11, 2025 by Brad A. Molotsky

Opportunity Zones – Senate Version of the Big Beautiful Bill Passes and Is Signed into Law by the President – Contains a Permanent OZ Program

On July 1, 2025, the Senate voted on and passed a newer version of the Big Beautiful Tax Bill. This version of over 1,000 pages long was passed along party lines and sent to the President for signature which occurred on July 4, 2025.

Focusing on the Opportunity Zone sections of the Bill, there is a lot to digest (especially given how the Bill was presented without a redline to the original OZ Act but rather as line by line modification, making it a bit more difficult than need be to decipher).

Initially, of note, is the draft does NOT extend the original OZ Act, rather, it creates a framework to create new zones that would be in effect from 1-1-27 and thereafter as the Bill makes the OZ program permanent. The zones that originally were created under the original OZ Act will continue to remain in place per the original OZ Act but additional OZ capital gain eligible investment (i.e., gain eligible investments) in these original zones would cease and not be permitted after on 12-31-26. Moreover, per the Bill and the original OZ Act, original investments in the OZ Act prior to 12-31-26 would NOT be extended and would become inclusion events as of 1-1-27 (meaning tax would be due on investors’ original OZ investments).

Some key OZ takeaways in the new draft Bill:

New Zones – There will be a new set of Opportunity Zones that would be selected by the governors of each state, the USVI, Guam and Puerto Rico, all of which will take effect on January 1, 2027. Treasury and HUD will coordinate every ten years to evaluate new zones for review and acceptance by the governors of all 50 states.
Rural Zones – Additional incentives for rural Opportunity Zones have been created, including a basis step-up of 30% (i.e., a reduction in the amount subject to tax), and a reduction in the substantial improvement requirement to 50% (from 100%).
Deferral Benefit – the deferral benefit would be available to investments made in these new zones from and after 1-1-27 on a rolling 5-year basis (i.e., these investments would not have to pay tax on their investment until 5 years after their initial investment).
10% Reduction Benefit – the reduction benefit that had become no longer applicable under the original OZ Act would become relevant again for applicable investments in newly designated OZ projects made from and after 1-1-27 and which are held for at least 5-years. Note, for rural zones (think towns of under 50,000) this reduction is 30% not 10% – a big thing.
Ordinary Income is NOT Eligible – as many readers will be aware, only capital gains eligible dollars were eligible for benefits under the original OZ Act. Under the initial draft of the Bill, the type of investment would have been broadened to permit ordinary income to be eligible for investment, but the amount of investment has been capped at $10,000 per taxable year. The final Bill did NOT include the permission to include ordinary income so this is NOT a part of the program.
NO CAPITAL GAIN ON SALE AFTER TEN YEARS – per the original program, the new program enables investors to buy/build and hold property (both real estate and businesses) for 10 years and sell thereafter and not pay capital gains to the federal government on the sale and in most states (other than California) not pay state capital gains as well on sale.
NO DEPRECIATION RECAPTURE – per the original program, the new program does NOT recapture accelerated depreciation on sale. As such, and in tandem with the Bill which reauthorizes bonus depreciation, the OZ program when combined with the bonus depreciation will appropriately allow for the sheltering of ordinary income during operations for multiple years and then on sale NOT recapture this depreciation.
Reporting – much of the bi-partisan reporting contained in various bills sitting in the House and Senate since 2022 have been included in the Bill, including required QOF annual reporting on various key performance indicators as well as Treasury reporting on the efficacy and progress of the OZ Program.

Follow the Yellow Brick Road – this new program is separate from but builds upon the original OZ Act. Projects being developed under the original OZ Act will be subject to the original rules with deferral ending on 12-31-2026 (as drafted now). New zones would be created under the Bill and would be operational as of 1-1-2027 and thereafter and have a rolling 5-year period for deferring capital gains if such gains are invested after 1-1-2027. 10% basis step up/reduction is back in play for investments held for 5 years or more. Some will view this draft Bill as NOT being enough or not allowing existing zones to continue to defer for a longer period to take into account the loss of time during COVID (i.e., the half empty crowd). Others will view the draft Bill as a starting place for negotiations of a different more wholly rounded out Bill that provides certainty and clarity to the OZ Act and program that was due to expire for all new investment on 12-31-2026. My personal view is that the new OZ Act will re-energize investors to look at OZ deals and drive behavior as we get closer to 1-1-2027 and likely drive additional and significant OZ investments on top of the $90 Billion of equity already invested in OZ since 2018. A huge win for the OZ program and a gift that will keep giving to the real estate and business community.

Duane Morris has an active Tax Credits and Opportunity Zone Team to help organizations and individuals plan, respond to, and invest in Opportunity Zones and low-income and rural areas throughout the USA, including the US Virgin Islands and Puerto Rico using tax credit equity and standard equity. We have closed over 403 OZ deals since their inception and are actively working on over 15 OZ projects for owner/developers, investors and business owners at the moment. We would be happy to discussion your proposed project or investment with you.

Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

If you have any questions about this post, please contact Brad A. Molotsky, Robert Montejo, Lee Potter, Anastasios Kastrinakis, Cristina Sanchez or the attorney in the firm with whom you are regularly in contact.

July 1, 2025 by Brad A. Molotsky

A Permanent Opportunity Zone Program clears the Senate as part of the Big Beautiful Bill passage earlier today – now, back to the House for reconciliation!

Earlier today, on 7-1-25, the Senate passed its version 2 of the Big Beautiful Bill by a vote of 51-50 with Vice President Vance casting the tie breaking vote. Senators voted along party lines with the exception of Republicans Rand Paul, Susan Collins and Thom Tillis who voted to oppose the Bill. The Bill addressed many tax topics but the focus of this post is on the OZ portion of the Bill. See attached for the actual text of the over 1,000 page Bill https://www.budget.senate.gov/imo/media/doc/the_one_big_beautiful_bill_act.pdf

Focusing on the Opportunity Zone sections of the Bill, there is a lot to digest (especially given how the Bill is presented without a redline to the original OZ Act but rather as line by line modification, making it a bit more difficult than need be to decipher).

Initially, of note, is the draft does NOT extend the original OZ Act, rather, it creates a perpetual framework for opportunity zones with the ability to add new zones every ten (10) years to take into account changes in demographics. This is very different from the House version that sought to create new zones that would be in effect from 1-1-27 through 12-31-33. Like the House version, the Senate version maintained that the zones that originally were created under the original OZ Act will continue to remain in place per the original OZ Act but additional OZ capital gain eligible investment (i.e., gain eligible investments) in these original zones would cease and not be permitted after on 12-31-26. Moreover, per the Bill and the original OZ Act, original investments in the OZ Act prior to 12-31-26 would NOT be extended and would become inclusion events as of 1-1-27 (meaning tax would be due on investors’ original OZ investments).

Some key OZ takeaways in the new draft Bill:

New Zones – There will be a new set of Opportunity Zones that would be selected by the governors of each state, the USVI, Guam and Puerto Rico, every ten years. Whether zones that had already been designated can be re-designated is not clear but it appears that so long as the definitions of what a zone is are met then re-designations could occur effective as of January 1, 2027.
Rural Zones – Additional incentives for rural Opportunity Zones have been created, including a basis step-up of 30% (i.e., a reduction in the amount subject to tax), and a reduction in the substantial improvement requirement to 50% (from 100%).
Deferral Benefit – the deferral benefit would be available to investments made in newly designated zones from and after 1-1-27 for new investments for a five year period from the investment into a QOF.
10% Reduction Benefit – the reduction benefit that had become no longer applicable under the original OZ Act would become relevant again for applicable investments in newly designated OZ projects made after 1-1-27 and held for a five year period.
Ordinary Income Eligibility – as many readers will be aware, only capital gains eligible dollars were eligible for benefits under the original OZ Act. Under the Senate version of the Bill, unlike the House’s version – no form of ordinary income are permitted to qualify for OZ treatment.
Reporting – much of the bi-partisan reporting contained in various bills sitting in the House and Senate since 2022 have been included in the Senate (and House) version of the Bill, including required QOF annual reporting on various key performance indicators as well as Treasury reporting on the efficacy and progress of the OZ Program.

Follow the Yellow Brick Road – this perpetual program is separate from but builds upon the original OZ Act. Projects being developed under the original OZ Act will be subject to the original rules with deferral ending on 12-31-2026 (as drafted now). New zones would be created under the Bill and would likely be operational as of 1-1-2027 for a ten-year period and have this period for deferring capital gains if such gains are invested after 1-1-2027. Some view the Senate version as creating a “dead zone” which will drive investment into the post 1-1-2027 program. Personally, I don’t see that as many 2025 and early 2026 gains will be under a 180 day investment requirement so will not be able to wait for a “better result” from the 2027 version of the OZ program. Moreover, while fund to fund investments have NOT made it into the Senate version of the Bill, my sense is that given that the IRS and Treasury were not opposed to them previously, this will end up being codified in the rules and regulations as being permissible. Today was indeed a big day for OZs and other programs contained in the Bill (and a bad day for others – e.g., renewable energy and Section 179D). Given the perpetual approach provided by the Senate, if it holds in the final approved reconciled Bill, the OZ provisions will provide much appreciated clarity to the marketplace regarding OZs and likely lead to additional significant OZ investments on top of the $90 Billion of equity already invested in OZ since 2018. Not the full package some had hoped for but a very BIG step in the right direction.

Duane Morris has an active Tax Credits and Opportunity Zone Team to help organizations and individuals plan, respond to, and invest in Opportunity Zones and low-income and rural areas throughout the USA, including the US Virgin Islands and Puerto Rico using tax credit equity and standard equity. We have closed over 408 OZ deals since their inception and are actively working on over 13 OZ projects for owner/developers, investors and business owners at the moment. We would be happy to discussion your proposed project or investment with you.

Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

May 13, 2025 by Brad A. Molotsky

A “One, Big Beautiful” Tax Bill is released — Its Implications for the OZ Program – A Longer Yellow Brick Road!

Earlier this week, on 5-12-25, the House Ways and Means Committee released its draft One, Big Beautiful Tax Bill. The draft Bill hits on many topics, including Opportunity Zones, and will likely be actively debated in the House and be subject to further modification in the US Senate. https://waysandmeans.house.gov/wp-content/uploads/2025/05/The-One-Big-Beautiful-Bill-Section-by-Section.pdf

Initially, of note, is the draft does NOT extend the original OZ Act, rather, it creates a framework to create new zones that would be in effect from 1-1-27 through 12-31-33. The zones that originally were created under the original OZ Act will continue to remain in place per the original OZ Act but additional OZ capital gain eligible investment (i.e., gain eligible investments) in these original zones would cease and not be permitted after on 12-31-26. Moreover, per the Bill and the original OZ Act, original investments in the OZ Act prior to 12-31-26 would NOT be extended and would become inclusion events as of 1-1-27 (meaning tax would be due on investors’ original OZ investments).

Some key OZ takeaways in the new draft Bill:

New Zones – There will be a new set of Opportunity Zones that would be selected by the governors of each state, the USVI, Guam and Puerto Rico, all of which will take effect on January 1, 2027.
Rural Zones – Additional incentives for rural Opportunity Zones have been created, including a basis step-up of 30% (i.e., a reduction in the amount subject to tax), and a reduction in the substantial improvement requirement to 50% (from 100%).
Deferral Benefit – the deferral benefit would be available to investments made in these new zones from and after 1-1-27 through 12-31-33 (i.e., these investments would not have to pay tax on their investment until 1-1-34).
10% Reduction Benefit – the reduction benefit that had become no longer applicable under the original OZ Act would become relevant again for applicable investments in newly designated OZ projects made from 1-1-27 through 12-31-28.
Ordinary Income Eligibility – as many readers will be aware, only capital gains eligible dollars were eligible for benefits under the original OZ Act. Under the Bill, the type of investment has been broadened to permit ordinary income to be eligible for investment, but the amount of investment has been capped at $10,000 per taxable year. Many will likely bristle at this cap as most deals to date have required over $100,000 of investment in an OZ deal which would make this provision not relevant. My sense is that the per year amount will be actively debated, and we will likely see some pressure to increase this amount. Allowing ordinary income to be eligible to participate was based on the idea of allowing local smaller investors who may not have capital gains a means to participate in the program.
Reporting – much of the bi-partisan reporting contained in various bills sitting in the House and Senate since 2022 have been included in the Bill, including required QOF annual reporting on various key performance indicators as well as Treasury reporting on the efficacy and progress of the OZ Program.

Follow the Yellow Brick Road – this new program is separate from but builds upon the original OZ Act. Projects being developed under the original OZ Act will be subject to the original rules with deferral ending on 12-31-2026 (as drafted now). New zones would be created under the Bill and would be operational as of 1-1-2027 through 12-31-2033 and have this period for deferring capital gains if such gains are invested after 1-1-2027. Some will view this draft Bill as NOT being enough or not allowing existing zones to continue to defer for a longer period to take into account the loss of time during COVID (i.e., the half empty crowd). Others will view the draft Bill as a starting place for negotiations of a different more wholly rounded out Bill that provides certainty and clarity to the OZ Act and program that was due to expire for all new investment on 12-31-2026. I my view it is a good first step and will help provide clarity to the marketplace regarding OZs and likely lead to additional significant OZ investments on top of the $90 Billion of equity already invested in OZ since 2018. Not the full package some had hoped for but a good step in the right direction.

Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

November 25, 2023 by Brad A. Molotsky

NJEDA Creates Emerging Developer Fund – makes grants of up to $200,000 for pre-development costs available for small scale developers

Last week, the New Jersey Economic Development Authority (NJEDA) Board approved a new $20 million pilot program to support “rising real estate developers”. The Emerging Developer Fund is designed to help developers gain access to capital and build additional capacity to expand their existing portfolio.

Access to capital for “small-scale developers” in the real estate development industry continues to be a challenge according to the NJEDA. These barriers include predatory lending, excessive carrying costs, and predevelopment expenses a developer may encounter. These pre-development costs are incurred by the developer before they can seek short-term construction financing. Often times, new developers lack the resources to cover these types of costs which they are pursuing projects – including design costs, environmental due diligence, site work diligence, permitting costs and the costs to prepare a financial model for a particular project.

The Emerging Developer Fund will provide grants of up to $200,000 to assist small-scale developers with up to 50% of their pre-development soft costs. The program will support “small-scale developers” that have completed at least two – but no more than five – commercial and/or mixed-use properties of similar scope. The creation of the program is intended by NJEDA to address various difficulties that continue to be a constant burden to emerging developers, which limit opportunities to expand their portfolios.

“As we work to revitalize communities across the state, we must ensure new, emerging developers have access to the same opportunities and advantages in order to create an inclusive economy,” said NJEDA Chief Executive Officer Tim Sullivan. “The Emerging Developer Fund will better position small-scale developers to grow and succeed, which will ultimately help build stronger communities. The program’s focus on developers in underserved communities underscore’s Governor Murphy and Lieutenant Governor Way’s commitment to creating a stronger, fairer economy and improving the lives of hardworking New Jerseyans.”

“Projects located in Opportunity Zones or in a Government Restricted Municipality (GRM) will receive an additional $50,000 bonus, increasing its award to $250,000. There are 169 designated Opportunity Zones and three GRM’s, including Atlantic City, Paterson, and Trenton.

According to the NJEDA press release, “soft costs eligible to be covered by the program include, insurance costs, legal fees, utilities, property taxes, construction drawings, and design fees. Costs associated with purchase of property or construction are not eligible.”

Follow the Yellow Brick Road – this program is a nice supplement to the NJ approved federal Opportunity Zone program and recognizes that smaller developers (as well as others) often times have trouble cobbling together the initial costs to pursue change in the various neighborhoods where Opportunity Zones exist in NJ (and beyond). NJEDA’s program will help address some of these issue by providing assistance to help with various soft costs and assist in getting a project moving from ideation to reality. While this may not be sufficient to get a large scale project off the ground, $250,000 can indeed go a long way to helping with environmental review, site review, planning and contracting to get control of a site and help move it to a more likely ability to execute.

Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

If you have any questions about this post, please contact Brad A. Molotsky, Robert Montejo, Lee Potter, Parthiv Patel, Anastasios Kastrinakis, Cristina Sanchez or the attorney in the firm with whom you are regularly in contact.

October 2, 2023 by Brad A. Molotsky

Bi-Partisan Opportunity Zone Extension Legislation Introduced – Again!

During the high brow discussions the last few weeks in Washington regarding the potential shut down of the Federal Government, it would have been very easy to miss one little legislative tidbit that happened last week. Yes, you have read it correctly, the Bi-Partisan Opportunity Zones Transparency, Extension, and Improvement Act (H.R. 5761) was again introduced on Wednesday, September 30th by Representatives Mike Kelly (R-PA), Dan Kildee (D-MI), Carol Miller (R-WV), and Terri Sewell (D-AL).

For you non-Beltway folks, Rep. Kelly is a very senior member of the committee and chairs the Ways and Means Subcommittee on Tax Policy. Per the Real Estate Roundtable, the cosponsors also represent a very diverse group of lawmakers, geographically and politically. By introducing the Bill now, the topic of Opportunity Zones should be able to be included in any end-of-year tax discussions, if tax extender discussions materialize between the parties – a big if, but a possible/likely scenario.

The bill is similar to legislation that was previously introduced in the last Congress and includes the following key sections:

Extension of Capital Gain Deferral; 10% Reduction Benefit Applicable Once Again. The bill extends the deferral of gain invested in an Opportunity Zone for 2 years, from December 31, 2026 until December 31, 2028. The provision also would have the effect of allowing investments made through the end of 2023 to qualify for the 10% basis increase when the gain is recognized. The 10% basis increase applies to amounts invested by a taxpayer in a Qualified Opportunity Fund (“QOF”) and held for at least 5 years in the QOF prior to gain recognition.

OZ Expansion to Zero-Population Census Tracts. The bill authorizes States to designate zero population census tracts as OZs if the tract is adjacent to an existing OZ, was previously used for industrial purposes, and is a brownfield site. This could prove to be a very interesting addition to the OZ Act given the number of tracts that will likely fall into this definition. This will also answer the oft asked question of “can we add new zones to the OZ list” – if the definition is met, then YES!

Sunsetting of High-Income Census Tracts. The bill eliminates OZ benefits for future investments in certain high-income census tracts (median family income exceeds 130% of the national median). The bill also includes a mechanism for States to obtain a waiver, as well as a process for States to replace a census tract that has been sunsetted. Moreover, if an investor has purchased property in one of these areas and has met a minimum investment threshold, such investment cannot be removed from the ambit of the OZ program.

Information Reporting and Transparency Rules. The bill establishes annual information reporting requirements for QOFs, opportunity fund investors, and OZ businesses. The reporting requirements include: identifying, descriptive, and quantitative information regarding the fund’s investors, assets, investments, activities, employment levels, and residential rental units. The bill also includes financial penalties for noncompliance and annual public reporting of aggregated OZ data by the Treasury Department.

Fund to Fund Feeder Funds Permitted. The bill expands the definition of a QOF to include feeder funds. The feeder fund must be organized as a partnership, capitalized with cash only, and fully invested (95% of its assets) in opportunity funds. The consequence of this provision is to allow a QOF to function similar to a traditional, multi-asset real estate fund that can sell a property and reinvest the proceeds without triggering a taxable event for the fund’s underlying investors.

State and Community Dynamism Fund. The bill establishes a $1 billion State-allocated fund to support public and private investment in OZs through economic development programs that assist with capacity building, technical assistance, predevelopment costs, and other priorities.

Follow the Yellow Brick Road – this bi-partisan bill would breathe new life into the OZ program that has life left in it but is due to stop taking investments at the end of 2026. The extension would make investments in 2023 eligible for the 10% reductions benefit and provide 2 more years of on ramp for additional investments in the Opportunity Zone – a bit of defying gravity for sure and something many investors are likely to take advantage of. Moreover, my expectation is that if and when this legislation is passed, many industrial properties that were not included in the OZ program previously, will now be on the table for inclusion given the broader definition of zero population census tracts.

Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

If you have any questions about this post, please contact Brad A. Molotsky, Robert Montejo, Lee Potter, Parthiv Patel, Anastasios Kastrinakis, Shiwei Wu or the attorney in the firm with whom you are regularly in contact.

April 11, 2022 by Brad A. Molotsky

From the Land of OZ: Bi-Partisan OZ Bill Introduced in the House and the Senate – Wait, Whaaaattttt?

Yes, indeed, you have read it correctly. A bi-partisan (both Ds and Rs) and a bi cameral (dating us back to grade school – both the House and Senate) have announced an OZ bill that is intended to address multiple perceived issues in the OZ Act. Wow – both D’s and R’s and both branches of government – that has a nice sound to it doesn’t it?

The Bill is entitled the “Opportunity Zones Transparency, Extension and Improvement Act” was put forth late last week in both the House and Senate.

The Bill seeks to address a host of items including:

1. Reporting – it will require investors to file an annual report with the IRS. In my view not a big deal; QOZBs (qualified opportunity zone businesses) will be required to provide relevant reporting to their QOFs (the Fund) to enable the QOF to do its annual reporting. QOFs will be required to file their forms electronically with the IRS.

2. Penalties – the Bill includes penalties of $500/day for the QOF not filing a return that is complete and correct and up to $10,000 for a fund valued at up to $10M or less or $50,000 if $10M or more. The Bill also includes personal penalties on the individual investor for failure to file required forms under the OZ Act.

3. Treasury Reporting Out – the Secretary of the Treasury will be required to make publicly available a report on QOFs that includes various attributes of the QOFs like the dollar aggregate held in assets, the percentage of QOZ tracts that have investments; average Full Time Employees in each census tract; percentage of total investment in Real Estate and Other Property; aggregate residential units created and held by QOFs, aggregate dollar amounts of investments in each census tract. The secretary will also be required to report after the 6th year on various features of the OZ Act including job creation, poverty reduction, new business starts and other key performance indicators. Furthe reporting from Treasury will be required to compare five year incremental periods (years 1-5; 6-10; 11-15) with each other regarding features such as the rate of home ownership in the census tract, the number of business starts; employment creation; rate of home ownership; median family income; percentage of income spent on rent; etc.

4. Extension of Investment Period – the Bill is enacted, it would move back the expiration of the required investment end period from 12-31-2026 to 12-31-2028, a 2 year extension. This would enable an additional 2 year period to invest funds into a QOF and be eligible to participate in the OZ program.

5. 15% Basis Step Up – the 7 year holding period would be reduced to 6 years under the Bill.

6. Effect of the Extension and the Basis Step up Modification – if passed, the Bill would enable investments made in 2021 and 2022 to receive the 15% basis step up (as these investment would be held presumably for 6 years or more on 12-31-28; moreover, investments made in 2023 would be eligible for the 10% basis step up given the new ability to show a 5 year holding period.

7. Feeder Funds or Fund of Funds – the Bill would correct a technical glitch that prohibited QOFs from investing in other QOFs. If passed QOFs will be permitted to invest in other QOFs.

8. Dynamism Fund – the Bill will create a $1B state and community fund that presumably could be used as grant funds to kick start some OZ investments in various municipalities.

9. Removal of Certain High Income OZ Tracts – the Bill will require the “early sunset” of certain census tracts with high median family income statistics (i.e., tracts that should not have been placed into the OZ in the first place) . If a tract has a median family income (“MFI”) that exceed 130% of the national MFI would NOT retain their OZ status. The Bill provides for an appeal and ability of state officials to petition to have such tracts NOT sunset and allows state officials to replace retired zones with new eligible ones. Note, early stage investments that have already been made into these tracts to be retired, will KEEP their OZ status. That said, the QOF may NOT undertake new projects or enter into new trades or businesses if not already commenced. Treasury will be required to publish a list of affected tracts within 12 months of the passage of the Bill.

10. Inclusion of Certain Brownfield OZ Tracts – the Bill allows for the limited inclusion of new tracts if the tracts are industrial, are adjacent to OZs, have zero population and which are considered to be “brownfields” as defined by the EPA. This addition is intended to allow for the limited expansion of OZs onto adjacent brownfields that may not have been included to incentivize brownfield clean up and revitalization.

On balance, the Bill gives MUCH more than it potentially takes away via the 130% of MFI tracts that may be disqualified. A 2 year extension on the time period to invest additional capital gains AND the ability to get 15% and 10% basis step up eligibility is a HUGE win for the OZ community and will likely drive more capital into the OZ marketplace given the basis step up and the additional 2 year period to garner and invest capital gains. The additional reporting obligations while seemingly a lot, really do not add much more substantive work for the QOF Manager and the Treasury required reporting out will allow Funds and Managers to show the value of their work and their key performance indicators when it comes to job growth and income and alleviating or reducing poverty in various census tracts. Necessary reporting and helpful data for future decisions on the efficacy of the program and how successful it will be!

Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

If you have any questions about this post, please contact Brad A. Molotsky, Robert Montejo, Scott Gluck, Lee Potter, Anastasios Kastrinakis, or the attorney in the firm with whom you are regularly in contact.

February 19, 2022 by Brad A. Molotsky

From the Land of OZ: Equity Investments into QOFs Up Sharply in the last 6 months of 2021!

According to reporting this week from Novogradac, Qualified Opportunity Fund (“QOFs”) investments were sharply up in final 6 Months of 2021. While this is not overly shocking given the expiration of the 10% reduction benefit under the OZ Act on 12-31-21, the amount of deal flow and capital investment continues into 2022 at a fast and furious pace (and we are not talking cars here).

Per the report, Qualified Opportunity Funds raised a eye-popping $6.88 Billion in equity in the final six months of 2021, the largest quarterly amount raised in any period since the inception of the OZ program in 2018.

As of 12-31-21, total OZ equity from these QOF funds increased to approximately $24.4 Billion. Note, this equity is often leveraged with debt in order to build or buy projects which likely results in total project costs of these investments being at least $100 Billion.

Novogradac collects data from Qualified Opportunity Funds that voluntarily provide information to them on an ongoing basis. One of the features of the OZ Act that we often hear criticism of is the lack of required reporting on key performance indicators like funds flow, job creation, total project cost, etc. As such, while the volume of investment from Qualified Opportunity Funds that have been tracked is impressive, the totals do not represent the total market share of investments given the voluntary nature of the disclosure.

We are often asked, where is all the investment going on?

Per the report, the states with the most OZ investment to date have been California ($2.4 Billion); Arizona ($1.35 Billion); Texas ($1.12 Billion), New York ($1.05 Billion) and Florida ($784 Million). Moreover, there are 20 cities that have at least $200 million in planned or on-going Qualified Opportunity Fund investments, including Washington, DC ($740 Million); Los Angeles, CA ($679 Million); New York, NY ($642 Million); Nashville, TN ($521 Million), and Austin, TX ($455 Million) as the top five cities for OZ investments.

If you would like to review a copy of the report – a link is attached : https://www.novoco.com/notes-from-novogradac/novogradac-report-qof-investment-sharply-final-six-months-2021-20-cities-have-200-million-or-more

Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

If you have any questions about this post, please contact Brad A. Molotsky, Art Momjian, Scott Gluck, Lee Potter, Anastasios Kastrinakis, or the attorney in the firm with whom you are regularly in contact.

February 15, 2022 by Brad A. Molotsky

OZ Filing Deadlines Approaching – Make sure to connect with your tax filer on who is doing what!

Friends and colleagues, a quick reminder which you are likely aware of, but in the “let’s be sure” category:

2021 QOFs – If you created a QOF (a Qualified Opportunity Zone fund) in 2021, your first tax return will be due in 2022, likely next month on March 15^th . Reminder that it is critical to file the Form 8996 with your filing or the IRS will NOT treat you as a fund and the OZ will not work for your project or your business. IMPORTANT to review with your tax filer.

2018, 2019 and 2020 QOFs – for QOFs formed in 2018, 2019 and 2020, you will have your normal annual compliance filing with the IRS for the QOF; please again make sure you have clarity with your tax filer on who is filing this required piece of paper.

Personal Tax Filings for the Investor – if you have invested in a QOF in 2021, then you need to file with the IRS a Form 8997 that advises the IRS that you have invested in a QOF along with a deferral election form which will effectively defer your tax on your OZ eligible investment until 12-31-2026. These forms should be filed with your personal tax return on April 15, 2022.

Note, if you are involved in deals with lower tiered QOZBs (Qualified Opportunity Zone Businesses), the QOZB does not need to file anything with the IRS but (and a big BUT), they do need to do compliance testing on June 30th and December 31st of each year and report such testing to their QOF. Please make sure this is occurring for your investments.

Apologies for being slightly over protective of you here but a few QOFs and investors in the past have missed these deadlines or their accountant was not aware that they were supposed to be filing the relevant form. As such, we wanted to make sure you all get your signals straight and that we avoid any crossed OZ wires.

April 19, 2021 by Brad A. Molotsky

OZ: NY moves to reduce certain state Opportunity Zone benefits for NY deals – Smart, Necessary or Something Else?

New York legislators have moved forward in their 2021 budget process to limit some of the state Opportunity Zone benefits that had previously applied in New York. Some commentators have pointed to the budget process reduction of benefits as a “left wing” reaction to former President Trump’s support of the federal OZ program (which applies in all 50 states and the US Virgin Islands and Puerto Rico). Others have stated that it is a necessary move to reduce benefits for deals that should not be receiving federal and state benefits.

If the budget is approved, and the provisions become operative, New York will no longer offer some of the state tax benefits to real estate investors funding Opportunity Zone projects in New York, placing New York deals at a disadvantage to New Jersey, Connecticut, Ohio and other adjacent states that have approved and will retain their state benefits.

The OZ program is a Federal program that was enacted in 2017 and which became operative in 2018. Governors of all 50 states, including New York, were asked to review census data provided by the federal government which focused the Opportunity Zone program on low income areas throughout the US as identified in HUD census data from 2010. The Governors of all 50 states were then given 3 months to choose from within the potential applicable opportunity zones in their state which zones should become Opportunity Zones. Thereafter, once these zones were selected by the various governors, they were sent to Treasury for final approval, all of which selected zones were ultimately approved.

This process occurred during early 2018. Thereafter, the majority of states also “followed form” and permitted zones that the states had previously selected to be OZs to also be eligible for state benefits which would be the same as the federal benefits that existed under the program (i.e., (1) deferral of capital gains until 12-31-2026 (the “Deferral Benefit“); (2) potential reduction of the amount that is subject to tax by 15% if gain eligible dollars were invested into a qualified opportunity zone fund in 2018 or 2019, or 10% if gain eligible dollars were invested into a qualified opportunity zone fund in 2020 or 2021 (the “Reduction Benefit“); and, (3) if the investor followed the rules of the OZ Program and invested an amount of gain eligible dollars into a QOF (the “fund”) and left its investment in the QOF for 10 years or more, and, thereafter the QOF sold the property or the business it owned after the 10 year period but before 12-31-2047, then all gain on the sale of the business or real estate would NOT be subject to federal capital gains tax (the “Exclusion Benefit”). By electing to follow form, the states that did so, elected to have the Deferral Benefit, the Reduction Benefit and the Exclusion Benefit also apply at the state level on gains that would have otherwise been payable to the state; meaning the applicable states would also permit investments in their applicable OZ areas to obtain a state level Deferral Benefit, Reduction Benefit and the Exclusion Benefit.

New York, like all of its adjacent neighboring states, was one of the states that enacted legislation to incent Opportunity Zone investments by permitted such OZ benefits at the state level (i.e., the Deferral Benefit, the Reduction Benefit and the Exclusion Benefit at the New York level).

Under the 2021 New York budget proposal, the New York Deferral Benefit and the New York Reduction Benefits at the New York level would NO LONGER be applicable. The result of this change is that investors in New York businesses in the New York OZs and in real estate in the New York OZ, will no longer receive the same benefits as neighboring states, which could result in investors looking at these other adjacent states first or in a more meaningful way, given that the state level OZ incentives exist there rather than in New York.

While some commentators have stated this will “deal[] another blow to the program and developers taking advantage of it”, my personal view is that the benefits being eliminated in the budget process (i.e., deferral of capital gains payments until 12-31-2026 and reduction of the amount subject to tax by 10% if investment was made in 2020 or 2021), are not the real driver of the OZ program and the massive amount of investment that has occurred in the low and moderate income opportunity zones nationally since the enactment of the OZ program – rather, it is the Exclusion Benefit, which is NOT being eliminated in New York, that is the main driver of behavior in the OZs.

Even with the New York budget modifications, New York’s 514 census tracts included in the program will still qualify for federal tax incentives for investing in these distressed areas and the New York Exclusion Benefit will still apply.

Follow The Yellow Brick Road: So, has New York cut off its nose to spite its face? Slightly, as some investors who are seeking both federal and state benefits to justify a more difficult project will likely look elsewhere. That said, the real driver of transactions in the OZ space as noted above is the Exclusion Benefit which applies once one has been invested in the applicable opportunity zone for 10 years or more, and this benefit, notwithstanding the New York change, will still exist at BOTH the federal and New York state level. On balance, while the budget change sounds like a big move and strikes a blow for anti-Trump sentiment, in reality, the real opportunity of the OZ program in hopefully creating jobs for local residents will remain and the Exclusion Benefit driver will remain in tact and continue to provide a reinforcer for this type of behavior.

Duane Morris has an active Tax Credits and Opportunity Zone Team to help organizations and individuals plan, respond to, and invest in Opportunity Zones and low income areas throughout the USA, including the US Virgin Islands and Puerto Rico using tax credit equity and standard equity. We have closed over 73 OZ deals since their inception and are actively working on over 33 OZ projects for owner/developers, investors and business owners. We would be happy to discussion your proposed project with you. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

If you have any questions about this post, please contact Brad A. Molotsky, Art Momjian, Scott Gluck, Lee Potter, Keli Isaacson Whitlock, Anastasios Kastrinakis, or the attorney in the firm with whom you are regularly in contact.

Take care and stay safe.

February 18, 2021 by Brad A. Molotsky

OZ: Bi-Partisan Legislation introduced to extend OZ investment period to 2028

Who says our Congress is not interested in bi-partisan legislation?

U.S. Representatives Tim Burchett (TN-02) and Henry Cuellar (TX-28) introduced a bi-partisan piece of legislation entitled the Opportunity Zone Extension Act of 2021. This bipartisan legislation would extend the Opportunity Zones program until the end of 2028.

“The Opportunity Zones program was making a difference in East Tennessee communities and underserved areas around the country before the COVID-19 pandemic rocked our economy,” Rep. Burchett said. “Extending this program would give investors additional time to provide meaningful financial support to businesses and create quality, good paying jobs in Opportunity Zones.”

According to Congressman Henry Cuellar. “This critical legislation will help stimulate economic growth, job creation, and provide support to underdeveloped communities. Through this legislation we will be able to help accelerate our economy’s recovery from the pandemic. I am committed to making sure everyone has access to opportunity and can achieve the American dream.”

Currently, the Opportunity Zones program allows participating investors to defer taxes on capital gains that are invested in designated Opportunity Zones until the end of 2026. Rep. Burchett’s and Rep. Cuellar’s bill would extend this date and allows capital gains to be deferred until the end of 2028.

Opportunity Zones are located in economically distressed areas across the United States.

According to the sponsors, extending the Opportunity Zones program by 2 years is intended to attract private sector investment in underserved communities, building on pre-pandemic success and helping them come back stronger than before.

While it is too early to tell if this piece of OZ extension legislation is likely to get any legs given the current pressures on Congress, its bi-partisan support puts it in good stead for future conversation and, potentially for action, once Congress deals with the current Covid bill and likely an infrastructure bill. We will keep our eyes and ears open and report back on developments on this front.

Duane Morris has an active Tax Credits and Opportunity Zone Team to help organizations and individuals plan, respond to, and invest in Opportunity Zones and low income areas throughout the USA, including the US Virgin Islands and Puerto Rico using tax credit equity and standard equity. We have closed over 63 OZ deals since their inception and are actively working on over 33 OZ projects for owner/developers, investors and business owners. We would be happy to discussion your proposed project with you. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

If you have any questions about this post, please contact Brad A. Molotsky, Art Momjian, Scott Gluck, Lee Potter, Keli Isaacson Whitlock, Anastasios Kastrinakis, or the attorney in the firm with whom you are regularly in contact.

Take care and stay safe.