Rapid increase in funds invested in Opportunity Zone Funds

Despite the laments that I have heard of late at various conferences and read in various articles, Opportunity Zones are, in our little slice of the world, very busy, very active and, per both Novogradac and Bisnow, OZ Funds who are focused on raising third party equity have seen a marked increase in funds under management in the last few months and have raised approximately $4.5B to date. While this is indeed less than the $6T of unrealized capital gains estimated to be available to invest, it is still a very sizable sum of money.

Per Novogradac, of the 366 funds that they track which represent a targeted funding level of $65.7B if fully funded, 184 Qualified Opportunity Funds have reported back and have raised $4.46B with a funding target for those 184 QOFs of $25.17B. This level of $4.5B is up significantly from September when these same funds had raised $2.5B.

Many folks we work with are focused on the 12/31/19 deadline to invest capital gains into a QOF in order to obtain the 15% reduction in amount subject to capital gains benefit; BUT, as indicated previously, the sky does NOT fall if you miss this date, Armageddon does NOT happen – rather, the investor is eligible for a 10% reduction in 2020 and 2021 if they invest capital gains in those calendar years. So, the program is far from over, far from reaching its potential but is alive and doing well and making progress and moving in the right direction, if right is to attract equity capital in low and moderate income areas that were designated as Opportunity Zones.

My team and I are in the office and working on closing the 39 OZ deals we are currently working on for clients who have pushed forward and are moving deals towards the goal line. Kudos and thank you to those 29 clients for whom we have already closed deals for. We appreciate your business and count our blessings to have worked with you on these fun and exciting projects.

If you have questions or comments, please let us know as we are happy to chat OZs and investments and deployment or anything else you would like to discuss.

Have a wonderful holiday season!

New Federal OZ Regulations to OMB; DOE Prioritizes OZs; Proposed Federal OZ Reporting Bill; and SC adds state incentives to OZ program

On Friday, December 6th, the IRS/Treasury delivered to the White House’s Office of Management and Budget (OMB) , approximately 500+ pages of final regulations for Opportunity Zones. Hey now!

OMB has up to 30 days to review these regulations and then issue them as final regulations in the Federal Register. They will likely try to do this before year’s end but it may slip into January, we shall see. As soon as these regulations are made public we will be happy to share them, but be aware this is going on now.

Also, remember that if you have 2019 capital gains that are still within 180 days of the gain triggering event, you have until 12-31-2019 to take advantage of the 15% reduction in the amount that will be subject to capital gains tax if the capital gains are placed into a qualified Opportunity Fund (QOF) by this date. If you MISS this date, the sky does NOT fall, the program does NOT end, Armageddon does not happen, you are merely only entitled to a 10% reduction in 2020 and 2021 if you follow the rules and invest capital gains in these two years. The rough math on this works out to be $12,000.00 of savings per $1 Million of gain one puts into a QOF in 2019 vs. 2020. Thus, if you have the time and a good deal to invest in, sure, save the $12,000 per million of investment in a QOF; but this 15% should not be the ONLY reason you are doing a deal.

As this continues to be the focus of many a call and conversation – please remember that Non-Capital gains CAN be used in OZ transactions. Yes, non-capital gains CAN be used. They just get NONE of the benefits of deferral, reduction or capital gains elimination on a sale after 10 years. The investor with NON capital gains can still get typical fees that are usually ordinary income on annual revenue returns and ordinary capital gains tax treatment for sales after 10 years that are not eliminated (I.E., IF YOU START WITH NON CAPITAL GAINS YOU DO NOT GET FREE SALES TREATMENT), rather, like any other deal, non-capital gains investments are subject to normal capital gains payments on a sale.

More from the Federal Government – Department of Education Priorities – per Novogradac, the U.S. Department of Education published a rule in the Federal Register announcing that it will prioritize funding for grant applications that support students, teachers and parents in opportunity zones (OZs). The Department of Education last year encouraged projects in nine grant competitions to support students in OZs and more than half of the 238 grants awarded went to applicants proposing to serve OZs. The new priority is effective Dec. 27, 2019.

Notification and Reporting – Sen. Tim Scott, R-S.C., and seven co-sponsors–including Senate Finance Committee Chairman Chuck Grassley, R-Iowa– submitted a bill to establish reporting requirements for the opportunity zones (OZ) incentive. The Improving and Reinstating the Monitoring, Prevention, Accountability, Certification and Transparency of Opportunity Zones (IMPACT) Act would require qualified opportunity funds to report myriad information on assets and property owned and investors to report specific information on OZ investments. The legislation proposes penalties for individuals and funds that don’t accurately make timely reports; requires the Treasury Department release timely information tracking QOFs and their investments; and requires Treasury to issue a comprehensive report on economic and demographic information concerning OZs every five years. While there seems to be bi partisan support for some level of reporting requirement, there is not yet agreement on the form this report will take.

States Continuing to Incent OZ Investment Behavior – Legislation was introduced in the South Carolina which would create a state low-income housing tax credit (LIHTC) for properties in opportunity zones (OZs), create a 25% tax credit for investment in the state’s OZs and add OZs to other state incentive programs. H. 4657 in SC would automatically qualify LIHTC developments in OZs for a new state LIHTC equal to the federal credit and would also create a 25% state credit for investments in OZs, with an annual cap at $50,000 per taxpayer. The bill would also create additional value for the state jobs tax credit for jobs in OZs in lower-income Tier III or Tier IV counties, create a sales tax rebate or credit for grocery stores located in OZ food deserts, add a grant program for OZ investments in Tier III and Tier IV counties and create an OZ leadership task force. Way to go SC – good stuff.

My team and I are around for the rest of the year if you have questions or are looking to get funds invested, funds created or deals done. WE have closed 29 OZ transactions to date and are working on 37 more under signed letters of engagement. We look forward to working with you. bamolotsky@duanemorris.com

House Legislation Would Establish OZ Reporting Framework and Penalties; Senate Bill Would Limit Application of OZs

While impeachment discussions continue to garnering most of the headlines, Representatives Ron Kind, D-Wis., Mike Kelly, R-Pa., and Terri Sewell, D-Ala., introduced legislation in the House to establish a reporting framework, disclosure requirements and a penalty structure for qualified opportunity funds (QOFs).

Their Bill, the “Opportunity Zone Accountability and Transparency Act”, would mandate that QOFs annually report assets; their aggregate amount of qualified OZ stock, OZ partnership interests and OZ business property; and provide details about the types of OZ businesses for which the QOF holds business property. According to Novogradac, the legislation would also institute a $500 daily fine for failure to file correct information and would require the Treasury Department to collect and compile statistical information on each OZ, including the number of QOFs that have invested in each OZ.

Across the way in the Senate, Senator Ron Wyden, D-Ore., introduced the “Opportunity Zone Reporting and Reform Act”. Senator Wyden’s bill would require information reporting from qualified opportunity funds (QOFs), end the designation of some 200 different opportunity zones (OZs), clarify some terms used in the OZ incentive and require a report from the Government Accountability Office (GAO) on the effectiveness of the incentive.

The Senate Bill would require QOFs to report in 9 areas, including:
– providing information on the amount and composition of assets, the names and taxpayer identification numbers (TINs) of investors along with the amount and dates of their investments;
– which opportunity zones the funds have invested in;
– the value of qualified OZ stock, partnership interests and business property;
– the value of any tangible or intangible property held by the QOF;
– the NAICS code of any Qualified Opportunity Zones Businesses (QOZBs) conducted by the fund or any corporation or partnership in which the fund holds an interest; and
– for QOZBs conducted by the fund or by a controlled corporation or partnership, the value of tangible and intangible property (including cash) and the average monthly full-time employees of the QOZB.

The Senate legislation, if enacted, would also end the OZ designation for all “contiguous zones” (a change that was added in the April 2018 regulations) that were named OZs, but which are not low-income and would define the term “substantially all” to mean “not less than 90 percent.” (i.e., effectively changing the QOZB asset test from 70% to 90%). The legislation would also require QOFs to make their reports public on the Internet and would require that the IRS maintain a public list of all QOFs.

The Senate legislation would also expand the application of “sin businesses” to disallow investments in private planes, along with skyboxes and luxury boxes. Prohibited investments would also be expanded to include sports stadiums, self-storage facilities, and housing developments that are un-affordable to existing zone residents.

While the proposed legislation would remove certain zones (approximately 200) as not being within what the Bill’s author believed to be in the spirit of the OZ legislation given the incomes and demographics that now are located within these “wealthy” zones, the legislation then allows states to designate an equal number of new zones which could be added to offset the lost zones. These new zones would remain on the same timeline as the zones originally designated in 2018, with their designations expiring at the end of 2028.

The legislation would also modify the Treasury letter ruling that did not require a QOF to include the value of land for purposes of calculating “substantial improvement” and would also impose a penalty of $10,000 on funds or investors failing to comply with their respective reporting requirements, with exceptions for reasonable cause. Penalties would be doubled for taxpayers found to be intentionally disregarding their reporting requirements.

While it is clearly too early to call whether these two Bills will move forward to a debate and/or passage, at the moment Republicans in the Senate are believed to be firmly against the proposed Senate Bill.

We will keep an eye on these proposed Bills and keep you apprised as things move, if they move on this front. In the meanwhile, if you have any questions or concerns, please do not hesitate to contact us at bamolotsky@duanemorris.com.

–Brad A. Molotsky, Esq.

Climate Change viewed as a Major Problem in NJ according to a recent Stockton University poll

According to a Stockton University poll released earlier this week, 2/3 of New Jersey residents believe climate change is a crisis and almost 75% believe it is affecting New Jersey.

Per Stockton’s press release, “the results show climate change is a concern to people all over New Jersey and not just those who live along the Jersey shore,” said John Froonjian, interim director of the William J. Hughes Center for Public Policy at Stockton, who presented an overview of the results at Coast Day at Stockton Atlantic City on Oct. 13.

As reported in Bisnow, among those who believe climate change is currently affecting NJ, more than 75% cited rising sea level, earth warming, harming or changing the ocean, extreme weather, and worsening pollution as major problems they are concerned about.

Beach erosion was cited by 70% as a major problem, while harm to farming was mentioned by 68%, flooding by 66%, and health effects by 57%.

More than half of respondents (56%) believe government could or should do more, and 31% say the government response is totally inadequate.

Per the poll, views did vary along party lines. Democrats (92%) and independents (64%) were more likely to see climate change as a crisis or major problem than Republicans (35%). Women (72%) were also more likely to view it as a crisis or major problem than men (62%).

The results also showed while young people are the most concerned about the issue, concern cuts across age, racial, ethnic, economic, gender and geographic lines. Almost 80% of respondents ages 18-29 see climate changes as a crisis or a major problem. That percentage drops to under 70% for those over 65.

We will continue to monitor trends and thinking in ESG and climate change and report back. If you have any questions, please do not hesitate to contact me at bamolotsky@duanemorris.com and I will direct your question accordingly.

-Brad A. Molotsky, Esq., LEED AP – O+M

CA does NOT elect to conform to Federal Opportunity Zone program for CA property

Sept. 12, 2019—The California state legislature adjourns tomorrow for the rest of 2019 without considering opportunity zones (OZ) state conformity legislation.

While 38 other states have followed federal form and allow for the waiver/elimination of capital gains on the sale of qualified property after 10 years in those states, California is NOT one of them.

The deadline to introduce legislation for consideration in the 2019 legislature was Sept. 10.

The next chance for the California state legislature to address OZ conformity will be when it reconvenes in January 2020.

If you have any OZ questions or comments, please let us know. bamolotsky@duanemorris.com

New Markets Tax Credits – Application process and key dates announced by the CDFI

Earlier today, September 4, 2019, the Community Development Financial Institutions (CDFI) Fund announced the opening of the calendar year 2019 allocation round of the new markets tax credit (NMTC).

For those who participate in the New Markets arena, applications are due Oct. 28, 2019.

The CDFI Fund anticipates announcing 2019 NMTC awards in summer 2020.

If of interest to you, the NMTC program application, a notice of allocation availability, an introduction to the NMTC program, an Awards Management Information navigation guide, a frequently asked questions guide, and an application road map presentation are all available on line.

Copies of these materials can be found at www.newmarketscredits.com. If you have any questions, please do not hesitate to call or contact us – bamolotsky@duanemorris.com

NJEDA launches Opportunity Zone Challenge Program

On July 16th, the New Jersey Economic Development Authority (NJEDA) launched its previously announced Opportunity Zone Challenge Program. The Challenge Program is a competitive $500,000 grant program aimed at supporting community efforts to attract investments in NJ Opportunity Zones. Grants awarded through the program will fund municipal and county-level financial and technical planning around Opportunity Zone (OZ) economic development.

The OZ program is a federal incentive program which was part of the 2018 Tax Act that enables investors to re-deploy capital gains into low-income areas (which are the areas targeted by the designated Opportunity Zones) via the use of a Qualified Opportunity Zone fund (QOF). These Qualified Opportunity Zone funds or QOFs may be self-directed and self-certified. Capital gains placed into these QOFs must then be invested into real estate or a qualified business within applicable opportunity zones that exist within all 50 states in the US.

New Jersey has 169 separate Opportunity Zones which span 75 municipalities across all 21 NJ counties.

According to NJEDA, the Challenge Program is intended to encourage and assist communities in developing specific action plans to guide their pursuit of Opportunity Zone–based investments. The Challenge Program will award 5 grants of up to $100,000 each to select municipal or county governments or municipal partnerships of 2 to 5 municipalities whose applications demonstrate a clear strategic plan to build investment capacity in their applicable Opportunity Zones. The Challenge Program grants are open to all 75 NJ municipalities and 21 counties.

As part of the application process, the applicants are required to designate at least one strategic partner whose external expertise will be used to achieve the Challenge Program’s goals.

Our team is available to answer applicable questions about the Opportunity Zone program and the Challenge Program. Brad A. Molotsky, Esq. (bamolotsky@duanemorris.com)

Opportunity Zones – Additional States Continue to Join the Growing List of Places (39 States in All) Following Federal Form

Busy times continue in the Opportunity Zone world now that we have gotten past the clarion call of 2018 partnership rollovers into Qualified Opportunity Funds and Qualified Opportunity Zone Businesses that occurred on or before June 28, 2019. In our little corner of the world, deals are getting closed and new engagements happening, in particular on the business side of the ledger and some on the community impact side as well. Interesting and exciting stuff.

Based on my conversations with friends and colleagues at KPMG (thanks team for your continued excellent efforts) regarding the various states and their conformity with the federal OZ program – as of July 14th, 39 states for corporations and 33 states for individuals have elected to follow form with Pennsylvania being the latest to join the hit parade as of last week:

For Corporations:
— 39 states currently are conforming (rolling or updated state IRC conformity; AZ and MN are recent changes; AZ retroactively conforms starting TY18; HI conforms starting in TY19; IA conforms starting in TY19; MN might be retroactive but DOR guidance has not been issued yet)
— 2 states didn’t update IRC conformity
(CA, NH)
— 1 state updated IRC conformity but decoupled from IRC 1400Z (NC)

For Individuals:
— 33 states currently conforming (rolling or updated state IRC conformity; AZ and MN are recent changes; AZ retroactively conforms starting TY18; HI conforms starting in TY19; IA conforms starting in TY19; MN might be retroactive but DOR guidance has not been issued yet)
— 1 state didn’t update IRC conformity (CA)
— 1 state updated IRC conformity but decoupled from IRC 1400Z (NC)
— 6 states where IRC conformity is different for personal income tax or only have selective IRC conformity (AL, AR, MA, MS, NJ, PA) of which three do not conform (AL, MA, MS), one conforms (NJ), one will conform (PA for TYB 1/1/20), and one conforms but only with respect to QOZs located within this state (AR)

Check it out and let us know if you have any questions or need help on your various deals and transactions.

Brad A. Molotsky, Duane Morris LLP

Proposed Federal Bill targets an Additional $500 Million in NMTC Allocation for Rural Job Zones

Despite the DC gridlock and Democratic Presidential debates, the Rural Jobs Act was introduced this week in the House and Senate to authorize an additional $500 Million Dollars in annual new markets tax credit (NMTC) allocation for 2019 and 2020 that would go to rural job zones.

The rural job zones are defined as low-income communities with a population of 50,000 residents or less that are not adjacent to any urbanized area.

At least 25% of the new NMTC allocation authority would be prioritized for counties with persistent poverty and high migration.

Lead sponsors of the bicameral and bipartisan legislation are Reps. Terri Sewell, D-Ala., and Jason Smith, R-Mo., and Sens. Mark Warner, D-Va., Roger Wicker, R-Miss., Shelley Capito, R-W.V., and Ben Cardin, D-Md.

Glimmers of hope. Have a super weekend. -Brad

#DuaneMorris