Tag Archives: Opportunity Zones

IRS issues new Opportunity Zone Guidance and Provides Additional Time and Flexibility

Thanks to the urging of Senator Tim Scott (R-SC), the IRS issued revised guidance in Notice 2020-39 and provided some additional flexibility for Opportunity Zone investors and Qualified Opportunity Zone Funds.

The key take aways are as follows:

1. EXTENSION OF 180-DAY INVESTMENT PERIOD: Under the OZ regulations, an individual who realizes a gain, is required to invest that gain into a QOF within 180-days of realizing the gain (or such other date as outlined in the regulations). The new relief provides for the 180-day investment period to be automatically extended until December 31st, 2020 if it would have originally expired after April 1st, 2020 and before December 31st, 2020. Example: If any individual realized a gain on 12/15/2019, their investment period would have expired in May, 2020. That date is now automatically extended to December 31st, 2020.

2. EXTENSION OF 90% TEST FOR QOF: Under the OZ regulations, a QOF in required to invested 90% of its assets into qualifying opportunity zone property within 6 months and at the end of the taxable year (i.e., December 31st for a calendar year QOF). If the 90% test is not met, then the QOF is subject to penalties on a portion of the funds in the QOF. The new relief provides that if either the first 6 month testing date or the final year end testing date occurred between April 1st, 2020 and December 31st, 2020, then the failure to satisfy the 90% test is deemed to be due to reasonable cause and, as such, no penalties will be levied.

3. EXTENSION OF 30 MONTH SUBSTANTIAL IMPROVEMENT TEST: Under the final OZ regulations, one of the way tangible property qualifies as qualified opportunity zone business property is to meet the “substantially improved” test within 30 months of acquisition. The new relief provides for a tolling of the 30-month period beginning April 1st, 2020 and ending December 31st, 2020. In other words, properties that are acquired during or that have previously been acquired within an opportunity zone after 1-1-18 and which are under construction will be provided with an additional 9 months to satisfy the substantial improvement test.

The Notice also discusses the 12 month reinvestment requirement upon a sale and the up to 24 months of additional time under a “working capital plan” for properties located within federal declared disaster areas (note, all 50 states and Puerto Rico, the US Virgin Islands and Guam have been declared federal disaster areas in connection with COVID-19).

If you have any questions or thoughts, please do not hesitate to reach out via email or text to my cell.  Best regards and be well. 

A copy of the IRS Notice can be found here – IRS Notice 20-39

Over and out from the Land of OZ.  -Brad

From the Land of OZ – 24 pages of clarifying OZ regulations from Treasury

Good morning/afternoon friends and hope you and yours are doing well and staying healthy in these trying times.

A potential ray of sunshine – which is still being reviewed. Yesterday, without a lot of fanfare or warning for that matter, the Treasury Department issued 24 pages of clarifying regulations to the Opportunity Zone Program.

Unfortunately, rather than state what the impact of the changes were intending to do, the release replaces this word with that word and this time period with that time period. Our team is working on the import of the language changes and will have an explanatory Alert put together in the coming days but wanted folks to be aware in case they want to read it for themselves in the interim.

For you industrious types (I know who you are :)) – https://s3.amazonaws.com/public-inspection.federalregister.gov/2020-07013.pdf.

Happy to discuss any questions or concerns on this or other topics or just to catch up and see that you are doing ok, just email at bamolotsky@duanemorris.com.

Stay safe. Be vigilant.

From the Land of OZ – Timing for Filing Forms 8996 and 8997 and the 180 day investment period – Spring Forward!

Good morning/afternoon friends. As we draw close to March 15th, a magic day for partnerships and S corps. for required tax filings, if you have invested in a QOF or a QOZB, I wanted to politely reach out and remind you all of something your accountant is likely to have already covered but, just in case:

1. Individuals – have 180 days from their gain event to put as much or as little capital gains as they want into a QOF. The individual needs to file a Form 8997 for his/her individual OZ investments. This form is available on line at www.irs.gov and is due with your individual return in April.

2. Partners in Partnerships; Shareholders in S Corps. – as you likely know, the final regulations issued in December 2019 allow partners and shareholders to invest capital gains 180 days from when the return for the relevant entity is due. This due date, WITHOUT EXTENSION, is March 15th. 180 days from March 15th takes one to September 11th. Thus, if you are a shareholder in an S corp or a partner in a partnership that had 2019 gain that is distributed to you in your individual capacity, you have until September 11, 2020 (this year) to place your gain into an QOF and still qualify. That is for you in your individual capacity friends.

The entity that is the QOF (the qualified Opportunity Zone Fund) is required to file form 8996 with its tax return to tell the IRS it wants to be treated as a QOF. If the QOF files an extension, this form would be due with the extension. Note, the September date for the individual is NOT extended regarding the timing for their investments into a QOF and the individual is required to make a decisions 180 days from when the return was originally due (i.e., March 15th).

3. QOZBs – as discussed, if relevant to you, QOZBs do NOT need to file any forms with the IRS. That said, they still need to meet the 70% test, the 50% test and 5% tests in order for the QOF that has invested in them to qualify; so their paperwork is very very relevant, they just don’t need to file anything with the IRS. Please note that the QOZB’s information will still be needed for the QOF to file its form 8996 as there are specific questions about the QOZB contained in the QOF’s filing paperwork.

I know, clear as mud! Just note, I did not make up the rules just trying to keep friends and clients from running afoul of them. If you have any questions or concerns, please reach out via email. I am traveling with my family (yes, I know, wash my hands) the rest of this week through Monday but will have access to email, just please be patient as out with my family. Best regards.

Over and out from the Land of OZ. -Brad

From the Land of OZ – States continue to add benefits to their OZ sites!

Good morning from the Land of OZ, it’s been a busy and interesting start to the new week with conversations about deals in all kinds of neat places – from Philly to Orlando, Ohio to Pennsylvania, the NJ shore to California and even to Alaska where I had a lovely chat with a business owner with capital gains yesterday who wanted to discuss how best to create a QOF. Fun stuff and the hectic pace of play continues – meaning, there is a lot going on despite what you may read elsewhere.

According to Novogradac, over $7.57 Billion dollars has been raised in QOFs in the funds they track (513 funds- 308 of which have raised equity) and these funds will be used to build and rehab buildings and businesses with an goal of $68.75 Billion of investment capacity.

State Updates:

Connecticut – Workforce Housing and OZs – Legislation that was recently introduced in the Connecticut General Assembly would expand the state’s workforce housing tax credit program to include properties in opportunity zones (OZs) and would change definitions for workforce housing in other parts of the state. S.B. 184 would add properties in OZs to the definition of “eligible workforce housing development projects.” According to Novogradac, the bill would also redefine workforce housing as a property where 10% of units are for low-income renters, 40% are available at 20% of the area’s prevailing rent, and the remainder are available at market rate. The legislation would double the statewide annual cap for the workforce housing tax credit to $20 Million.

Utah – HB 299 has been approved by the House in Utah. It enables added incentives for electric vehicle charging stations in Opportunity Zones, provides priority of review of OZ projects, allows for low income housing tax credits to be issued to projects in Utah OZs, provides preference for qualified opportunity zone. The bill also allows for 25% tax credits for certain parking lot construction projects located in OZs located within Utah.

Wisconsin – A bill to conform Wisconsin’s tax code to the federal Internal Revenue Code concerning opportunity zones (OZs) and to double the exclusion for capital gains invested in Wisconsin-based OZs passed the state Senate and is on the desk of Gov. Tony Evers for approval according to Novogradac. AB 532 would allow an additional 10% capital gains tax reduction for investors who hold investments in a Wisconsin-centered qualified opportunity fund (QOF) – defined as a QOF that holds at least 90% of its assets in Wisconsin OZ projects for 5 years and an additional 15% reduction for investors who hold their investment for 7 years.

Miscellaneous – we are hosting our monthly OZ webinar on March 4th at 1 pm EST. Guests for this upcoming month are Jill Homan of Javelin Investments and James Solomon of Ravinia Capital and we will be focusing on the OZ deals they have funded and what they are looking at and seeing in the OZ space. If interested, drop me an email and happy to have you join us.

Around on line if you want to discuss anything OZ or otherwise. Best regards – Brad

From the Land of OZ – Federal and State Updates and some annoying news from the IRS on the 70% Test

A quick thank you shout out to Craig Bernstein of OPZ Bernstein for being my guest on this month’s webinar installment of “From the Land of OZ”, our monthly Duane Morris Opportunity Zones webinar. If of interest, it is on tape and you can listen in at your convenience – we discussed the final regulations, fund deployment, fund creation and social impact investing.

First, the annoying News From the IRS involving QOZBs and the 70% test – prior to last week there was no written (or spoken) prohibitions on cash from a QOF being placed into a QOZB per a working capital plan counting for the 70% test at the QOZB level. As such, it was widely accepted by tax practitioners that cash in the QOZB bank account on the applicable testing date would be eligible to count for the 70% test. That is, until last week when an IRS official advised the working group at the RE Roundtable that cash that is not invested yet in the QOZB in real property or in a business does NOT count for the 70% test.

As such, please be very careful when planning for and dealing with the 70% test to make sure that the cash that ends up in that account is invested and actually buys inventory or good or materials that will be used in the business or real estate on or before the testing date.

Again, this is very new news and came out late last week from the IRS and you will NOT find it in writing anywhere. We will be confirming this in writing but, for the moment, I would assume this is the direction the IRS intends to go even though it’s not in writing anywhere in the regs.

In separate news, thanks to our pal Emily Lavery (rockstar policy person working with Senator Scott):

On the State level:

• In Colorado, a Montrose, CO-based co-working software company, received its third OZ investment through funding from the Center on Rural Innovation’s Innovation Fund, an Opportunity Fund that invests in high-growth technology companies supporting job creation and revenue generation in rural communities. (EIG). Nice!

• In Georgia, Vision unveiled for West End Mall’s rebirth as mixed-use ‘opportunity zone’: West End’s aging mall will be redeveloped into a bustling hub of offices, hotel rooms, and affordable housing that would set a national example for how federal opportunity zones could prosper is moving forward was unveiled, and investors with clout are buying in, according to project leaders. #Visionary

• In California, Catalyst Opportunity Funds Invests in SoLa Impact Opportunity Zone Projects to Reenergize South Los Angeles Communities. The SoLa projects aim to revitalize underserved LA neighborhoods such as Compton, Watts and South Central through real estate development, with additional services like job training, financial literacy, and homelessness prevention. #impactinvesting

• Also in California, a $250 Million Senior Living Facility is in the Works thanks to OZ’s: The facility will be outfitted with 52 assisted living units and 32 memory care units. It will be the first senior living community built in San Jose in 35 years. #seniorliving

• In Florida, an old Sears and mall property will become an “Innovation Community”: The project will have a focus on academic, scientific and technology uses thanks to Opportunity Zones. Preliminary plans for the former Sears store includes up to one million square feet of new office space; capacity for up to 400 hotel rooms, 1,000 apartment units and 100,000 square feet of street-level restaurants, shops, fitness and experiential concepts. #adaptivereuse

• In Rhode Island, Opportunity Zones will Give Rise to Largest Economic Development Project in Pawtucket’s History. This $400 million economic development project will transform Pawtucket’s riverfront with extensive development, including a new United Soccer League (USL) Championship soccer team and stadium. The state’s Democratic Governor, Gina Raimondo, was thrilled to see a $400M economic development project that will transform Pawtucket’s riverfront with extensive development, including a new United Soccer League (USL) Championship soccer team and stadium – all made possible because of Opportunity Zones. This project will add more than $130 million annually to the state’s GDP, and create more than 3,500 jobs. The Tidewater Landing project will include key infrastructure upgrades, a new multi-use stadium, a new indoor sports complex, market-rate and workforce housing, a hotel, and commercial office space. #OZSoccer #$400M

• In Kentucky, a $22.5M renovation coming to former YMCA building in Covington, KY: The former YMCA building and Gateway Bookstore in Covington, Kentucky have sat vacant since 2015. Now, with the help of Opportunity Zone financing, the two historic buildings will undergo a $22.5 million renovation. The mixed-use project, which expects to create over 100 new jobs, will include office space, 60 hotel units from the nearby Hotel Covington, and will serve as a northern trailhead for the Kentucky bourbon industry. #YMCAOZ

• In Alabama, the City of Opelika announced a new 105-acre Innovation and Technology Park to be built in an Opportunity Zone. the OTIP has Easy access to East Alabama Medical Center, Tiger Town, Historic Downtown Opelika, Southern State Community College and Auburn University. “Opelika has been incredibly proactive about harnessing the power of its Opportunity Zone. Its vision for building a place where innovation and technology can co-exist matches perfectly with the spirit of the Opportunity Zone incentive, which facilitates investment in both buildings and the companies that occupy them,” said Alexander Flachsbart, CEO of Opportunity Alabama. #RollTide

On the Federal Level:

• Treasury has FINALIZED the 2019 versions of OZ tax forms! This includes form 8996 (funds) and the new form 8997 (investors) for the 2019 tax year.

• the Opportunity Zone Catalyst Grand Prize winners of the of the Forbes OZ 20 were announced at Sorenson Impact Center’s Winter Innovation Summit in Salt Lake City, UT. The City of Erie and Opportunity Alabama emerged as the top two Community Organizations. The SoLa Impact Fund and Four Points Funding were named the top two Opportunity Zone Funds.

• Recently, Novogradac has reported that the 513 Qualified Opportunity Funds they are tracking now represent $68.75 billion in community development investment capacity. Novogradac is also now reporting that the 308 funds reporting equity raised, are now reporting a total $7.57 billion in equity raised! That’s near a one billion dollar increase over the last month and a ~50% increase since December. However, per Emily, as Tax Notes recently noted, these numbers may just be the tip of the iceberg. “Most of our transactions and most of the money we’re seeing flow through these qualified Opportunity Zones is through proprietary or private funds — funds that would not be reporting to any of these fund listing agencies or databases.

Over and out from the Land of OZ – if you have questions, comments, thoughts or want to appear on our monthly webinar – please do not hesitate to contact me at your convenience – email finds me fastest – bamolotsky@duanemorris.com. Have a super weekend.

-Brad A. Molotsky, Esq., Duane Morris, LLP

From the Land of OZ: Menino Survey of Mayors 2019 – OZ Observations Unveiled!

According to Boston University – Initiative on Cities – affectionately referred to as the Menino Survey – “Mayors generally believe the new federal Opportunity Zones program has targeted the right areas, nationally and in their own communities.

Community government is starting to take the lead in organizing their communities to take advantage of their tract designations and are confident in their ability to capitalize on the program. Mayors believe dedicated senior staff and an Opportunity Zone Investment program will be a key factor in making a census tract attractive and interesting.

– Roughly three quarters of cities in the survey sample had eligible census tracts, and two-thirds now have at least one designated opportunity zone, with an average of six per city

– 51% of mayors believe the Opportunity Zone program has effectively targeted areas of true economic need nationally

– 29% are unsure, suggesting a large minority are unaware or not yet confident the program is working as intended. [Figure 28]

– 65% of mayors agree that the tracts selected by their governor were either based on their own advice, or are comparable to what the mayor would have picked if they had been given the choice. [Figure 29]

– Mayors generally believe (79% of Democratic Mayors and 65% of Republican Mayors) that designations were driven by a desire on the part of governors to spread them across the state, and were responsive to mayors’ input. [Figure 33]

– Generally their degree of satisfaction with their own designations does not vary substantially by city size, partisanship of the mayor, or affluence of the community. [Figures 31-32]

– Mayors are generally NOT concerned that the program will lead to gentrification or residential displacement, including those leading more expensive cities, or that limited funds will ultimately be invested in their OZs. [Figure 35]

More than 50% believe the OZ program will have a large and positive impact on their local economy, with the greatest benefits conferred on outside investors but that small businesses and residents currently located in the zones will also greatly benefit. [Figures 36 and 39]

– The vast majority (75%) of mayors believe they have the capacity and power to maximize the benefits of their zones. Mayors believe the main mechanisms to maximize the benefits are: dedicated senior staff in city hall (54%) and an Opportunity Zone Investment brochure that outlines their community’s priorities and specific opportunities and assets (50%) and 34% believe supplemental monetary incentives will also be important. [Figures 37 and 41]

– 71% say the economic development director or city administrator is taking the lead in organizing the community to capitalize on the designations. [Figure 42]

– When it comes to their own role, 43% of mayors believe their job is to serve as an advocate for their city and its zones, and promote them to investors. [Figure 43]

Some very interesting numbers at a time when some national publications are saying the program is not working. While some zones may not be in the right spot or more difficult to develop or in the path of development already, they all needed to be part of the 2010 HUD census data for low income areas. Worth taking a read of the survey if you have the time and interest. Good stuff in there – well done BU!

If you have any questions or comments, please do not hesitate to contact me or my colleagues at the firm working in our Opportunity Zone team.

https://www.surveyofmayors.com/reports/Menino-Survey-of-Mayors-2019-Final-Report.pdf

-Brad A. Molotsky, Duane Morris, LLP

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.

Belpointe REIT OZ Fund is now trading on the OTCQX

As we beckon in the New Year and a new decade, Belpointe REIT recently announced that it has started trading on the OTCQX (the OTC) under the symbol “BELP.”

BELP represents the first QOF or Qualified Opportunity Fund that can be bought and sold directly through an investor’s brokerage account.

Per this am’s GlobeSt.com email, “We are very excited to be able to bring a Qualified Opportunity Fund to the public markets,” says Brandon Lacoff, CEO of Belpointe REIT. “Highly tax advantaged and private equity style vehicles like these are not typically available through the retail channels.”

It took Belpointe approximately 9 months to obtain approval by the FCC to list it shares on the exchange.

According to Mr. Lacoff, the minimum investment in the QOF is $100 and there are no investor servicing fees, acquisition or disposition fees. There is an annual management fee of 0.75%, and carried interest of 5%,

It will be interesting to see what kind of uptake Belpointe has in this investment vehicle but the price point is accessible and the liquidity should be helpful to those not sure if they want to stay in the OZ program for the full 10 years needed to obtain the benefit of elimination of capital gains on a sale prior to December 31, 2047. My instinct is if they can get the word out, this offering should be successful.

Good hunting friends and here is to a happy and healthy New Year and new decade. Over and out from the Emerald City. -Brad A. Molotsky

My Top Ten Favorites from the Final Regs

Now that we have all had a chance to celebrate a Merry Christmas, a Happy Kwanzaa or a Happy Hanukah, and have had the chance to digest 544 pages of final OZ regs – what, you say you have not really studied the new final regs yet – can’t be the case :) !

As we are working feverishly (with beer as our our co companion along with my trusty dog Marty) I wanted to list out what I see as some really nice clarifications and additional flexibility that the final regulations provided – ok to disagree or chime in with your favorites if you want.

1. Working Capital Plan Timing – increase of up to 62 Months not just 31 month safe harbor for QOZBs with a working capital plan;

2. Ability to sell assets from a QOZB after ten years and still have elimination benefit clarification. Like this a lot. Logical but appreciated on the clarification.

3. Real Property Straddling a site – 2 enumerated tests for real property that straddles a zone and a non-zone – square footage and value;

4. “Original Use” for Brownfields investments so long as they are made safe;

5. “Original Use” for vacant property which was 1 year vacant when designated as an OZ in 2018 and which remains vacant until purchase or real property that was vacant for 3 years prior to purchase – both count as Original Use property and represents a reduction from 5 years;

6. Aggregation – the ability to aggregate assets within a site and within adjacent sites for purposes of qualifying for the 90% test;

7. Timing – clarity and additional flexibility for partners of a partnership and shareholders of an S corp. to invest amount of capital gains in a QOF 180 days from the due date (without extension) of the entity they are involved in;

8. Business Property Gains – the ability to not have to net capital losses with capital gains on 1231 property enables more gains to be eligible for investment within OZs;

9. Personal property used in an opportunity zone business can be counted for purposes of meeting the “substantial improvement” test. This includes section 1245 property that is not included in the basis of a building; and

10. Leases –
• Leases from state and local governments and tribes are not required to be at market rate. This policy is intended to facilitate arrangements where governments hope to encourage development by offering favorable leasing terms.
• Leases that are not between related parties are presumed to be at market rate.
• The working capital safe harbor is extended 24 months, for a total of 55 months, when a project is delayed due to a disaster and the opportunity zone is located in a federally declared disaster area.

11. Sin Businesses – Some would say that the allowance of less than 5% sin business as part of a property should be a top ten, but we will leave that at 11 and a topic for a different day, as I am not sure why having a tenancy of a sin business would be relevant to the real estate investment in a building and/or adaptively reusing of a property. It impacts NOI yes, but would not impact the real property investment and substantial improvement thereof or the original use thereof so not sure what the hubbub is here but happy to ruminate.

Take a look and DM me (get it) with your thoughts or views or other key provisions you like or dislike. Busy working on a few more closings before the 12/31/19 witching hour where we will lose the 15% reduction, but around and happy to chat at your convenience. Fun and interesting deals. Come join the party. -Brad

Final OZ Regulations Issued by the IRS/Treasury

On December 19, 2019, the U.S. Treasury Department and the IRS issued final regulations implementing the Opportunity Zones tax incentive. According to the IRS press release, the final rules seek to provide clarity for Opportunity Funds and their eligible subsidiaries in determining qualification and levels of new investment in Opportunity Zones. They also provide guidance regarding the types of gains that qualify for Opportunity Zone investments, as well as gains that may be excluded from tax after a 10-year holding period.

Per the IRS’s FAQs on the final regulations:

What types of gains may be invested and when?
• General rule — The final regulations amend the proposed regulations’ general rule that only capital gain may be invested in a Qualified Opportunity Fund (QOF) during the 180-day investment period by clarifying that only eligible gain taxable in the United States may be invested in a QOF.

• Sales of business property — The proposed regulations only permitted the amount of an investor’s gains from the sale of business property that were greater than the investor’s losses from such sales to be invested in QOFs, and required the 180-day investment period to begin on the last day of the investor’s tax year. The final regulations allow a taxpayer to invest the entire amount of gains from such sales without regard to losses and change the beginning of the investment period from the end of the year to the date of the sale of each asset.

• Partnership gain — Partners in a partnership, shareholders of an S corporation, and beneficiaries of estates and non-grantor trusts have the option to start the 180-day investment period on the due date of the entity’s tax return, not including any extensions. This change addresses taxpayer concerns about potentially missing investment opportunities due to an owner of a business entity receiving a late Schedule K-1 (or other form) from the entity.

• Investment of Regulated Investment Company (RIC) and Real Estate Investment Trust (REIT) gains — The rules clarify that the 180-day investment period generally starts at the close of the shareholder’s tax year and provides that gains can, at the shareholder’s option, also be invested based on the 180-day investment period starting when the shareholder receives capital gains dividends from a RIC or REIT.

• Installment sales — The rules clarify that gains from installment sales are able to be invested when received, even if the initial installment payment was made before 2018.
• Nonresident investment — The final regulations provide that nonresident alien individuals and foreign corporations may make Opportunity Zone investments with capital gains that are effectively connected to a U.S. trade or business. This includes capital gains on real estate assets taxed to nonresident alien individuals and foreign corporations under the Foreign Investment in Real Property Tax Act rules.

When may gains be excluded from tax after an investment is held for a 10-year period?

• Sales of property by a Qualified Opportunity Zone Business (QOZB) — In the proposed regulations, an investor could only elect to exclude gains from the sale of qualifying investments or property sold by a QOF operating in partnership or S Corporation form, but not property sold by a subsidiary entity. The final regulations provide that capital gains from the sale of property by a QOZB that is held by such a QOF may also be excluded from income as long as the investor’s qualifying investment in the QOF has been held for 10 years. However, the amount of gain from such a QOF’s or its QOZBs’ asset sales that an investor in the QOF may elect to exclude each year will reduce the amount of the investor’s interest in the QOF that remains a qualifying investment.

• Applicability to other gains — The final rules clarify that the exclusion is available to other gains, such as distributions by a corporation to shareholders or a partnership to a partner, that are treated as gains from the sale or exchange of property (other than inventory) for Federal income tax purposes.

How does a Fund determine levels of new investment in a Qualified Opportunity Zone?

• Aggregation of property for purposes of the substantial improvement test — QOFs and QOZBs can take into account purchased original use assets that otherwise would qualify as qualified opportunity zone business property if the purchased assets:

o Are used in the same trade or business in the Qualified Opportunity Zone (QOZ) or a contiguous QOZ for which a non-original use asset is used, and

o Improve the functionality of the non-original use assets in the same QOZ or a contiguous QOZ.

• Aggregation of property for purposes of the substantial improvement test (continued) — In certain cases, the final regulations permit a group of two or more buildings located on the same parcel(s) of land to be treated as a single property. In these cases, any additions to the basis of the buildings in the group are aggregated to determine satisfaction of the substantial improvement requirement. Thus, a taxpayer need not increase the basis of each building by 100% as long as the total additions to basis for the group of buildings equals 100% of the initial basis for the group.

• Vacancy period to allow a building to qualify as original use — The final regulations reduce the five-year vacancy requirement in the proposed regulations to a one-year vacancy requirement, if the property was vacant for at least one-year prior to the QOZ being designated and remains vacant through the date of purchase. For other vacant property, the proposed five-year vacancy requirement is reduced to three years. In addition, property involuntarily transferred to local government control is included in the definition of the term vacant, allowing it to be treated as original use property when purchased by a QOF or QOZB from the local government.

• Leasing — The final regulations provide several changes to leasing provisions in the proposed regulations:

o State and local governments, as well as Indian tribal governments, will be exempt from the market-rate requirements for leased tangible property,

o Leases between unrelated parties are generally presumed to be at market rate terms, and

o Short-term leases of personal property to lessors using the property outside a QOZ may be counted as Qualified Opportunity Zone Business Property (QOZBP).

• Working capital safe harbor — The final regulations provide several refinements to the working capital safe harbor:

o They create an additional 62-month safe harbor for start-up businesses to ensure that they can comply with the 70-percent tangible property standard, the 50-percent gross income requirement, and other requirements to qualify as a QOZB;

o They provide that a QOZB can receive an extra 24 months to use working capital if the QOZ is in a Federally-declared disaster area;

o They clarify that the safe harbor can only be used for a 62-month period and that amounts remaining at the conclusion of the period cannot be counted as tangible property for purposes of the 70-percent tangible property standard; and

o They allow a QOZB to treat equipment, buildings, and other tangible property that is being improved with the working capital as QOZBP that is “used in a trade or business” for purposes of the requirement that a QOZB must be engaged in a trade or business.

o In addition, the final regulations provide that a QOZB not utilizing the working capital safe harbor may treat tangible property undergoing the substantial improvement process as being used in a trade or business.

• Measurement of “use” for the 70-percent use test— The final regulations provide that, if tangible property is used in one or more QOZs, satisfaction of the 70-percent use test is determined by aggregating the number of days the tangible property in each QOZ is utilized. Accordingly, the final regulations set forth a clearer way for determining satisfaction of the 70-percent use test, including a safe harbor for certain tangible property used both inside and outside the geographic borders of a QOZ.

• Determinations of location and “use” of intangible property — The final regulations provide that intangible property qualifies as used in the QOZ if:

o The use of the intangible property is normal, usual, or customary in the conduct of the trade or business, and

o The use contributes to the generation of gross income for the trade or business.

• Other clarifications regarding business property of QOFs or QOZBs —

o Real property straddling census tracts — The final regulations include both a square footage test and an unadjusted cost test to determine if a project is primarily in a QOZ, and provide that parcels or tracts of land will be considered contiguous if they possess common boundaries, and would be contiguous but for the interposition of a road, street, railroad, stream or similar property. Importantly, the final regulations also extend the straddle rules to QOF’s and QOZB’s with respect to the 70-percent use test.

o Brownfield sites — The final regulations provide that both the land and structures in a Brownfield site redevelopment are considered to be original use property as long as the QOF or QOZB make investments into the Brownfield site to improve its safety and compliance with environmental standards.

o Self-constructed property — The final rules provide that self-constructed property can count for purposes of the QOF’s 90-percent asset test and the QOZB’s 70-percent asset test, and is valued at the purchase price as of the date when physical work of a significant nature begins.

o De minimis exception for “sin businesses” — The final regulations provide that a QOZB may have less than 5 percent of its property leased to a so-called “sin business” described in 26 U.S.C. §144(c)(6)(B). For example, a hotel business of a QOZB could potentially lease space to a spa that provides tanning services.

Our team looks forward to diving into the minutae and will be issuing further white papers over the coming days. In the meanwhile, please do not hesitate to email or call with any questions or comments.
-Brad A. Molotsky