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.
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 380 OZ deals since their inception and are actively working on over 13 OZ projects for owner/developers, investors and business owners at the moment. We would be happy to discussion your proposed project with you.
Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.
If you have any questions about this post, please contact Brad A. Molotsky, Robert Montejo, Lee Potter, Parthiv Patel, Anastasios Kastrinakis, Shiwei Wu or the attorney in the firm with whom you are regularly in contact.