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

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

Opportunity Knocks – 2nd Set of Of Opportunity Zone Regulations Issued by Treasury

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

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

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

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

3. Safe Harbors for the Fifty Percent (50%) Income Test for Qualified Opportunity Zone Businesses (“QOZBs”).

The proposed regulations provide three safe harbors and a facts and circumstances test for determining whether sufficient income is derived from a trade or business in a qualified opportunity zone for purposes of the 50-percent test.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

14. Debt Financed Distributions. Guidance has been provided under the new regulations regarding refinancing and distributions to partners/members which would permit appreciated portions of the property that have been refinanced to be distributed to the partners or members of the QOF on a tax free basis so long as the distribution is not in excess of the investors basis.
We will continue to review the new regulations and intend to issue additional commentary on it. In the interim, feel free to contact us to discuss any questions you have or transactions you are considering in this space.

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

Smart Growth – New Jersey – Awards Announced

New Jersey Future (“NJF”) announced the winners of its 2019 Smart Growth Awards earlier this week according to Joshua Burd of Real Estate New Jersey.

Founded in 1987, New Jersey Future is a nonprofit, nonpartisan organization that promotes sensible growth, redevelopment and infrastructure investments to foster vibrant cities and towns, protect natural lands and waterways, enhance transportation choices, provide access to safe, affordable and aging-friendly neighborhoods and fuel a strong economy.

The seven projects that NJF will showcase at its annual awards celebration on June 5 at the Newark Museum include:

1. Walker House, Newark
• A landmarked Art Deco office building repurposed to bring new mixed-income housing to the heart of downtown
• Primary partners: L+M Development Partners, Prudential Financial, Goldman Sachs Urban Investment Group, Citi Community Capital

2. Mercer County Community College, Trenton
• Reactivation of a group of long-dormant buildings in an overlooked part of the city, with amenities to serve both students and residents
• Primary partners: Clarke Caton Hintz, Mercer County Community College, City of Trenton, Mercer County

3. Second Street Youth Center, Plainfield
• The first new facility of its kind in more than a decade, constructed on formerly blighted land to provide services and support to families in a historically underserved neighborhood
• Primary partners: J.G. Petrucci Co., TD+Partners, City of Plainfield, Second Street Youth Center

4. Lawrence-Hopewell Trail
• A 22-mile walking and cycling trail connecting a variety of destinations, the result of a broad volunteer collaboration among community leaders, area employers, and local residents
• Primary partners: Mercer County, Township of Lawrence, Township of Hopewell, Bristol Myers Squibb, Lawrence-Hopewell Trail

5. People’s Bank Building, Passaic
• Repurposing of a vacant Art Deco building into an office and retail anchor to catalyze job creation in a central location in a revitalizing urban downtown
• Primary partners: New Jersey Community Capital, The Hanini Group LLC, City of Passaic

6. Hoboken Master Plan Re-examination Report and Land Use Element
• The culmination of a year-long process to update the city’s guiding land-use documents to support growth, preservation and resilience initiatives over the next decade
• Primary partners: City of Hoboken Department of Community Development, City of Hoboken Planning Board, BFJ Planning

7. Ironside Newark
• Transformation of a long-vacant warehouse into a 21st-century office and retail destination with direct connections to transit, open space and nearby attractions
• Primary partners: Edison Properties LLC, City of Newark, Newark Community Economic Development Corporation, Perkins Eastman

Congratulations to the winners and well done on their fine smart growth work!
– Brad A. Molotsky, Duane Morris, LLP

Washington DC – Opportunity Zone March Madness

Earlier this week, DC Mayor Muriel Bowser announced 3 new initiatives intended to maximize opportunity zones (OZ) benefits in the nation’s capital.

The city committed $24 million to properties that support affordable housing, workforce development and the growth of small businesses in the district’s 25 OZs.

Mayor Bowser also announced the OZ Community Corps to provide free legal and other advice, as well as an online OZ marketplace for sponsors, fund managers, investors and community members.

For more information about Washington, DC’s Opportunity Zones, visit oppzones.dc.gov

While this will not help my brackets at all, it is a super step forward for DC’s 25 OZ’s, well done Mayor!

-Brad A. Molotsky, Esq.

Opportunity Zone Update – OMB Guidance Expected and Some State Follow On

Continued high interest and activity on the Opportunity Zone fronts on many levels this past week. Conversations, closings and connections continue at a torrid pace – including a packed IMN conference in NYC this past week with many of the national and regional luminaries in attendance. By way of a quick update on a few fronts, courtesy of our friends at Novogradac for their recon:

Federal – On March 12th, the Office of Information and Regulatory Affairs (OIRA) received the 2nd tranche of regulatory guidance for review from the Internal Revenue Service (IRS) concerning the opportunity zones (OZ) incentive. OIRA is a division of the White House Office Management of the Budget. The proposed IRS rule is expected to address what types of property qualify as qualified OZ business property, steps an OZ business must take to be qualified, the penalty for a qualified opportunity fund’s failure to meet the 90% investment standard and more. After a mandated review of at least 10 days, the OMB is expected to release the guidance to be published in the Federal Register. The first tranche of guidance was reviewed for 36 days before it was published.

Vermont – H 442 introduced in the Vermont Legislature would make investments made in Opportunity Zones eligible to apply annually for the state Downtown and Village Center Tax Credit, which is twice as often as other projects are allowed to apply and would expand eligibility under the program only for OZ investments. The Downtown and Village Center Tax Credit covers between 10 percent and 50 percent of eligible rehabilitation expenses and has a $2.4 million statewide annual cap. If enacted, the bill would go into effect July 1.

Ohio – Gov. Mike DeWine said that his proposed 2020-2021 budget will call for a 10% state income tax credit to attract investment to opportunity zones. DeWine will propose a nonrefundable credit using existing tax credit availability to create the new credit.

At this point 31 states have “followed form” and are offering some level of state capital gains relief to those who follow the federal opportunity zone rules and invest in businesses or real estate pursuant to the federal OZ rules and regulations. New Jersey is moving ahead with a bill to become the 32nd state.

I look forward to seeing some of you on the 25th at our discussion in Baltimore on OZs. If of interest, drop me an email as space is limited. Best regards.
– Brad A. Molotsky, Esq.

P-3s and Opportunity Zones – An Update on a Few Fronts

Infrastructure and P-3s – The Move America Act of 2019 (H.R. 1508) was re-introduced again yesterday by Reps. Jackie Walorski, R-Ind. and Earl Blumenauer, D-Ore. The Bill attempts to spur investment in infrastructure improvements through the issuance of Move America Bonds and Move America Credits.

The proposed bill would expand tax-exempt private activity bonds for infrastructure and create a federal infrastructure tax credit to fund infrastructure projects through public-private partnerships (P-3s). Sens. John Hoeven, R-N.D., and Ron Wyden, D-Ore., introduced the Senate companion bill (S. 146) in January.

Previous versions of the Move America Act were introduced in the Senate in 2015 and in the Senate and House in 2017.

According to the team at Novogradac, the House Ways and Means Committee is holding a hearing today on infrastructure reform and House leadership has tentatively targeted late spring for major infrastructure legislation on the House floor, which could include the Move America Act and other tax credit provisions from the Affordable Housing Credit Improvement Act and the New Markets Tax Credit Extension Act.

States incentivizing investments in their designated Federal Opportunity Zones.

Maryland – The Maryland legislature introduced HB 1141 this past week according to our sources at Novogradac. This bill would enable the creation of a state affordable housing tax credit effective in 2020. It would also create a “Qualified Maryland Housing Tax Credit” for properties that qualify for the federal low-income housing tax credit (LIHTC) and are in areas designated as “community revitalization areas”. These community revitalization areas are areas that include Opportunity Zones. The bill sets an annual statewide cap of $10 Million and no requirement that the development also receive federal LIHTCs.

Rhode Island – A bill in the Rhode Island House of Representatives (HB 5808) would create a tax credit for 10% of a taxpayer’s opportunity zones (OZ) investment in Pawtucket and Central Falls, R.I. Per the draft bill, a qualified opportunity fund would be required to invest at least $250,000 in the OZ for the participants to receive the credit. The tax credit could be taken in the year in which a qualified OZ business is placed in service.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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