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.

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.

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.

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, AK Kastrinakis, or the attorney in the firm with whom you are regularly in contact.

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.

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.

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.