Anastasios Kastrinakis – Opportunity Zones – Insights From the Land of OZ

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.

December 17, 2020 by Brad A. Molotsky

New Markets Tax Credits and Opportunity Zones – Bill Proposed in the US Senate to make NMTC Permanent and prioritize grant funding in OZs

Earlier this week, 4 Senators introduced legislation that would make the new markets tax credit (NMTC) permanent and would seek to encourage further investment in opportunity zones (OZs).

Senators Marco Rubio, R-Florida, Mike Crapo, R-Idaho, Kelly Loeffler, R-Georgia, and Thom Tillis, R-North Carolina, cosponsored the Economic Empowerment for Underserved Communities Act.

The bill, a summary of which is attached, makes the NMTC permanent with a $5 Billion annual allocation adjusted for inflation.

Per Novogradac and the Senator’s office announcement, the legislation also encourages investment in Opportunity Zones (“OZs) by establishing representatives to facilitate participation in the OZ program, prioritizes grant assistance in OZs through the Health Resource and Services Administration, allocates $7 Billion to Community Development Financial Institutions (CDFIs), establishes a Small Business Investment Company facility to enhance access to venture capital for underserved groups and businesses affected by COVID-19, and extends Small Business Administration debt relief provisions from the CARES Act.

The NMTC is authorized only through the calendar-year 2020 round.

Senator Loeffler’s office released a summary of the bill.

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 61 OZ deals since their inception and are actively working on over 38 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.

December 15, 2020 by Brad A. Molotsky

New Markets Tax Credits – Expansion and Extension of $3.5 Billion proposed over the next 4 years – WOW!

Earlier this week on December 14, 2020, Reps. Terri Sewell, D-Alabama, and Tom Reed, R-New York, introduced legislation to extend and increase the new markets tax credit (NMTC).

The New Markets Stabilization Act would increase the NMTC allocation by $3.5 billion over four years, allow investors to carry back those credits for five years, exempt the NMTC from the 75% general business credit limitation, permanently exempt the NMTC from the alternative minimum tax and provide relief from certain debt modification rules for NMTC issuers and borrowers.

Per Novogradac, Sewell and Reed previously introduced legislation to make the NMTC permanent.

The NMTC expires at the end of this year, although the calendar-year 2020 round will be allocated next summer.

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

December 10, 2020December 10, 2020 by Brad A. Molotsky

New Markets Tax Credits – Record Number of 2020 Applications; $5B in credits to be awarded

The U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) announced earlier this week that it received 208 applications under the calendar year (CY) 2020 round of the New Markets Tax Credit Program (NMTC Program).

Per Treasury, the NMTC Program advances economic development in economically distressed communities by making tax credit allocations available to Community Development Entities (CDEs) for targeted investments in eligible areas.

The CDEs that applied under the CY 2020 round are headquartered in 44 states, the District of Columbia, and Puerto Rico. These applicants requested an aggregate total of $15.1 billion in NMTC allocation authority, over 3x the $5.0 billion in authority available for the 2020 round.

Created by Congress in December of 2000, the NMTC Program permits individual and corporate taxpayers to receive a credit against federal income taxes for making qualified equity investments in CDEs. The investor is provided a tax credit that equals 39% of the cost of the investment and is claimed over a seven-year period. Substantially all of the taxpayer’s investment must be used by the CDE to make qualified investments in low-income communities.

According to Treasury statistics, through the first 16 rounds of the NMTC Program, the CDFI Fund has made 1,254 awards totaling $61 billion in tax credit allocation authority. This $61 billion includes $3 billion in Recovery Act Awards and $1 billion of special allocation authority to be used for the recovery and redevelopment of the Gulf Opportunity Zone.

Duane Morris has an active Tax Credits and Opportunity Zone Team to help CDCs and other organizations and individuals plan, respond to, and invest in typical deals as well as Opportunity Zones and low income areas throughout the USA, including the US Virgin Islands and Puerto Rico. We have closed over 61 OZ deals since their inception and are actively working on over 38 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.

January 9, 2020 by Duane Morris

Webinar Series – Doing Deals in the Land of OZ: The Final Regulations and What They Mean for Your Deal

Duane Morris will hold the first in a new webinar series, “Doing Deals in the Land of OZ: The Final Regulations and What They Mean for Your Deal,” on Wednesday, January 15, 2020, from 4:00 p.m. to 5:00 p.m. Eastern time.

Now that Opportunity Zones have been around for two years and numerous deals have been completed as part of the program, this webinar series discusses the impact on investments and real estate, lessons learned, and strategies and solutions going forward.

Please visit the event page for more information and to register.