Tag Archives: QOF

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

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

New CRA Regulations proposed – including credit for providing “financing for or supports for a QOF”

The Office of the Comptroller of the Currency (OCC) along with the Federal Deposit Insurance Corporation (FDIC) released proposed regulations on December 13, 2019 which would institute significant changes to the implementation of the Community Reinvestment Act (CRA) if implemented.

https://www.occ.treas.gov/news-issuances/federal-register/2019/nr-ia-2019-147-federal-register.pdf

The new regulations include guidance on many topics, including how CRA performance is measured, transparency of CRA reporting, the definition of assessment areas, and what activities qualify for CRA credit.

Interestingly, the draft guidance includes community development activity that “provides financing for or supports” Qualified Opportunity Funds (QOFs) that benefit Opportunity Zones communities as a qualifying activity for CRA credit.

There is a 60-day comment period from the date the proposed regulations post on the Federal Register.

If passed, this may spur additional lender interest in lending into Opportunity Zones and into OZ deals given the expansion of where these lenders will get CRA credit. Stay tuned for more information as it becomes available.

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

House Legislation Would Establish OZ Reporting Framework and Penalties; Senate Bill Would Limit Application of OZs

While impeachment discussions continue to garnering most of the headlines, Representatives Ron Kind, D-Wis., Mike Kelly, R-Pa., and Terri Sewell, D-Ala., introduced legislation in the House to establish a reporting framework, disclosure requirements and a penalty structure for qualified opportunity funds (QOFs).

Their Bill, the “Opportunity Zone Accountability and Transparency Act”, would mandate that QOFs annually report assets; their aggregate amount of qualified OZ stock, OZ partnership interests and OZ business property; and provide details about the types of OZ businesses for which the QOF holds business property. According to Novogradac, the legislation would also institute a $500 daily fine for failure to file correct information and would require the Treasury Department to collect and compile statistical information on each OZ, including the number of QOFs that have invested in each OZ.

Across the way in the Senate, Senator Ron Wyden, D-Ore., introduced the “Opportunity Zone Reporting and Reform Act”. Senator Wyden’s bill would require information reporting from qualified opportunity funds (QOFs), end the designation of some 200 different opportunity zones (OZs), clarify some terms used in the OZ incentive and require a report from the Government Accountability Office (GAO) on the effectiveness of the incentive.

The Senate Bill would require QOFs to report in 9 areas, including:
– providing information on the amount and composition of assets, the names and taxpayer identification numbers (TINs) of investors along with the amount and dates of their investments;
– which opportunity zones the funds have invested in;
– the value of qualified OZ stock, partnership interests and business property;
– the value of any tangible or intangible property held by the QOF;
– the NAICS code of any Qualified Opportunity Zones Businesses (QOZBs) conducted by the fund or any corporation or partnership in which the fund holds an interest; and
– for QOZBs conducted by the fund or by a controlled corporation or partnership, the value of tangible and intangible property (including cash) and the average monthly full-time employees of the QOZB.

The Senate legislation, if enacted, would also end the OZ designation for all “contiguous zones” (a change that was added in the April 2018 regulations) that were named OZs, but which are not low-income and would define the term “substantially all” to mean “not less than 90 percent.” (i.e., effectively changing the QOZB asset test from 70% to 90%). The legislation would also require QOFs to make their reports public on the Internet and would require that the IRS maintain a public list of all QOFs.

The Senate legislation would also expand the application of “sin businesses” to disallow investments in private planes, along with skyboxes and luxury boxes. Prohibited investments would also be expanded to include sports stadiums, self-storage facilities, and housing developments that are un-affordable to existing zone residents.

While the proposed legislation would remove certain zones (approximately 200) as not being within what the Bill’s author believed to be in the spirit of the OZ legislation given the incomes and demographics that now are located within these “wealthy” zones, the legislation then allows states to designate an equal number of new zones which could be added to offset the lost zones. These new zones would remain on the same timeline as the zones originally designated in 2018, with their designations expiring at the end of 2028.

The legislation would also modify the Treasury letter ruling that did not require a QOF to include the value of land for purposes of calculating “substantial improvement” and would also impose a penalty of $10,000 on funds or investors failing to comply with their respective reporting requirements, with exceptions for reasonable cause. Penalties would be doubled for taxpayers found to be intentionally disregarding their reporting requirements.

While it is clearly too early to call whether these two Bills will move forward to a debate and/or passage, at the moment Republicans in the Senate are believed to be firmly against the proposed Senate Bill.

We will keep an eye on these proposed Bills and keep you apprised as things move, if they move on this front. In the meanwhile, if you have any questions or concerns, please do not hesitate to contact us at bamolotsky@duanemorris.com.

–Brad A. Molotsky, Esq.

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)