From the Land of OZ: Bi-Partisan OZ Bill Introduced in the House and the Senate – Wait, Whaaaattttt?

Yes, indeed, you have read it correctly.  A bi-partisan (both Ds and Rs) and a bi cameral (dating us back to grade school – both the House and Senate) have announced an OZ bill that is intended to address multiple perceived issues in the OZ Act.  Wow – both D’s and R’s and both branches of government – that has a nice sound to it doesn’t it?

The Bill is entitled the “Opportunity Zones Transparency, Extension and Improvement Act”  was put forth late last week in both the House and Senate.

The Bill seeks to address a host of items including:

1.  Reporting – it will require investors to file an annual report with the IRS.  In my view not a big deal;  QOZBs (qualified opportunity zone businesses) will be required to provide relevant reporting to their QOFs (the Fund) to enable the QOF to do its annual reporting.  QOFs will be required to file their forms electronically with the IRS.

2.  Penalties – the Bill includes penalties of $500/day for the QOF not filing a return that is complete and correct and up to $10,000 for a fund valued at up to $10M or less or $50,000 if $10M or more. The Bill also includes personal penalties on the individual investor for failure to file required forms under the OZ Act.

3.  Treasury Reporting Out – the Secretary of the Treasury will be required to make publicly available a report on QOFs that includes various attributes of the QOFs like the dollar aggregate held in assets, the percentage of QOZ tracts that have investments; average Full Time Employees in each census tract; percentage of total investment in Real Estate and Other Property; aggregate residential units created and held by QOFs, aggregate dollar amounts of investments in each census tract.  The secretary will also be required to report after the 6th year on various features of the OZ Act including job creation, poverty reduction, new business starts and other key performance indicators. Furthe reporting from Treasury will be required to compare five year incremental periods (years 1-5; 6-10; 11-15) with each other regarding features such as the rate of home ownership in the census tract, the number of business starts; employment creation; rate of home ownership; median family income; percentage of income spent on rent; etc.

4.  Extension of Investment Period – the Bill is enacted, it would move back the expiration of the required investment end period from 12-31-2026 to 12-31-2028, a 2 year extension.  This would enable an additional 2 year period to invest funds into a QOF and be eligible to participate in the OZ program.

5.  15% Basis Step Up – the 7 year holding period would be reduced to 6 years under the Bill.

6.  Effect of the Extension and the Basis Step up Modification – if passed, the Bill would enable investments made in 2021 and 2022 to receive the 15% basis step up (as these investment would be held presumably for 6 years or more on 12-31-28; moreover, investments made in 2023 would be eligible for the 10% basis step up given the new ability to show a 5 year holding period.

7.  Feeder Funds or Fund of Funds – the Bill would correct a technical glitch that prohibited QOFs from investing in other QOFs.  If passed QOFs will be permitted to invest in other QOFs.

8.  Dynamism Fund – the Bill will create a $1B state and community fund that presumably could be used as grant funds to kick start some OZ investments in various municipalities.

9.  Removal of Certain High Income  OZ Tracts – the Bill will require the “early sunset” of certain census tracts with high median family income statistics (i.e., tracts that should not have been placed into the OZ in the first place) .  If a tract has a median family income (“MFI”) that exceed 130% of the national MFI would NOT retain their OZ status. The Bill provides for an appeal and ability of state officials to petition to have such tracts NOT sunset and allows state officials to replace retired zones with new eligible ones. Note, early stage investments that have already been made into these tracts to be retired, will KEEP their OZ status.  That said, the QOF may NOT undertake new projects or enter into new trades or businesses if not already commenced.  Treasury will be required to publish a list of affected tracts within 12 months of the passage of the Bill.

10.  Inclusion of Certain Brownfield OZ Tracts – the Bill allows for the limited inclusion of new tracts if the tracts are industrial, are adjacent to OZs, have zero population and which are considered to be “brownfields” as defined by the EPA.  This addition is intended to allow for the limited expansion of OZs onto adjacent brownfields that may not have been included to incentivize brownfield clean up and revitalization.

On balance, the Bill gives MUCH more than it potentially takes away via the 130% of MFI tracts that may be disqualified. A 2 year extension on the time period to invest additional capital gains AND the ability to get 15% and 10% basis step up eligibility is a HUGE win for the OZ community and will likely drive more capital into the OZ marketplace given the basis step up and the additional 2 year period to garner and invest capital gains.  The additional reporting obligations while seemingly a lot, really do not add much more substantive work for the QOF Manager and the Treasury required reporting out will allow Funds and Managers to show the value of their work and their key performance indicators when it comes to job growth and income and alleviating or reducing poverty in various census tracts.  Necessary reporting and helpful data for future decisions on the efficacy of the program and how successful it will be!

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 196 OZ deals since their inception and are actively working on over 31 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, Scott Gluck, Lee Potter, Anastasios Kastrinakis, or the attorney in the firm with whom you are regularly in contact.

OZ Filing Deadlines Approaching – Make sure to connect with your tax filer on who is doing what!

Friends and colleagues, a quick reminder which you are likely aware of, but in the “let’s be sure” category:

2021 QOFs – If you created a QOF (a Qualified Opportunity Zone fund) in 2021, your first tax return will be due in 2022, likely next month on March 15th .  Reminder that it is critical to file the Form 8996 with your filing or the IRS will NOT treat you as a fund and the OZ will not work for your project or your business.  IMPORTANT to review with your tax filer.

2018, 2019 and 2020 QOFs – for QOFs formed in 2018, 2019 and 2020, you will have your normal annual compliance filing with the IRS for the QOF; please again make sure you have clarity with your tax filer on who is filing this required piece of paper.

Personal Tax Filings for the Investor – if you have invested in a QOF in 2021, then you need to file with the IRS a Form 8997 that advises the IRS that you have invested in a QOF along with a deferral election form which will effectively defer your tax on your OZ eligible investment until 12-31-2026.  These forms should be filed with your personal tax return on April 15, 2022.

Note, if you are involved in deals with lower tiered QOZBs (Qualified Opportunity Zone Businesses), the QOZB does not need to file anything with the IRS but (and a big BUT), they do need to do compliance testing on June 30th and December 31st of each year and report such testing to their QOF.  Please make sure this is occurring for your investments.

Apologies for being slightly over protective of you here but a few QOFs and investors in the past have missed these deadlines or their accountant was not aware that they were supposed to be filing the relevant form.  As such, we wanted to make sure you all get your signals straight and that we avoid any crossed OZ wires.

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 173 OZ deals since their inception and are actively working on over 34 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, Art Momjian, Scott Gluck, Lee Potter, Anastasios Kastrinakis, or the attorney in the firm with whom you are regularly in contact.

Take care and stay safe.

OZ: NY moves to reduce certain state Opportunity Zone benefits for NY deals – Smart, Necessary or Something Else?

New York legislators have moved forward in their 2021 budget process to limit some of the state Opportunity Zone benefits that had previously applied in New York. Some commentators have pointed to the budget process reduction of benefits as a “left wing” reaction to former President Trump’s support of the federal OZ program (which applies in all 50 states and the US Virgin Islands and Puerto Rico). Others have stated that it is a necessary move to reduce benefits for deals that should not be receiving federal and state benefits.

If the budget is approved, and the provisions become operative, New York will no longer offer some of the state tax benefits to real estate investors funding Opportunity Zone projects in New York, placing New York deals at a disadvantage to New Jersey, Connecticut, Ohio and other adjacent states that have approved and will retain their state benefits.

The OZ program is a Federal program that was enacted in 2017 and which became operative in 2018.  Governors of all 50 states, including New York, were asked to review census data provided by the federal government which focused the Opportunity Zone program on low income areas throughout the US as identified in HUD census data from 2010. The Governors of all 50 states were then given 3 months to choose from within the potential applicable opportunity zones in their state which zones should become Opportunity Zones.  Thereafter, once these zones were selected by the various governors, they were sent to Treasury for final approval, all of which selected zones were ultimately approved.

This process occurred during early 2018.  Thereafter, the majority of states also “followed form” and permitted zones that the states had previously selected to be OZs to also be eligible for state benefits which would be the same as the federal benefits that existed under the program (i.e., (1) deferral of capital gains until 12-31-2026 (the “Deferral Benefit“); (2) potential reduction of the amount that is subject to tax by 15% if gain eligible dollars were invested into a qualified opportunity zone fund in 2018 or 2019, or 10% if gain eligible dollars were invested into a qualified opportunity zone fund in 2020 or 2021 (the “Reduction Benefit“); and, (3) if the investor followed the rules of the OZ Program and invested an amount of gain eligible dollars into a QOF (the “fund”) and left its investment in the QOF for 10 years or more, and, thereafter the QOF sold the property or the business it owned after the 10 year period but before 12-31-2047, then all gain on the sale of the business or real estate would NOT be subject to federal capital gains tax (the “Exclusion Benefit”).  By electing to follow form, the states that did so, elected to have the Deferral Benefit, the Reduction Benefit and the Exclusion Benefit also apply at the state level on gains that would have otherwise been payable to the state; meaning the applicable states would also permit investments in their applicable OZ areas to obtain a state level Deferral Benefit, Reduction Benefit and the Exclusion Benefit.

New York, like all of its adjacent neighboring states, was one of the states that enacted legislation to incent Opportunity Zone investments by permitted such OZ benefits at the state level (i.e., the Deferral Benefit, the Reduction Benefit and the Exclusion Benefit at the New York level).

Under the 2021 New York budget proposal, the New York Deferral Benefit and the New York Reduction Benefits at the New York level would NO LONGER be applicable.  The result of this change is that investors in New York businesses in the New York OZs and in real estate in the New York OZ, will no longer receive the same benefits as neighboring states, which could result in investors looking at these other adjacent states first or in a more meaningful way, given that the state level OZ incentives exist there rather than in New York.

While some commentators have stated this will “deal[] another blow to the program and developers taking advantage of it”, my personal view is that the benefits being eliminated in the budget process (i.e., deferral of capital gains payments until 12-31-2026 and reduction of the amount subject to tax by 10% if investment was made in 2020 or 2021), are not the real driver of the OZ program and the massive amount of investment that has occurred in the low and moderate income opportunity zones nationally since the enactment of the OZ program – rather, it is the Exclusion Benefit, which is NOT being eliminated in New York, that is the main driver of behavior in the OZs.

Even with the New York budget modifications, New York’s 514 census tracts included in the program will still qualify for federal tax incentives for investing in these distressed areas and the New York Exclusion Benefit will still apply.

Follow The Yellow Brick Road:  So, has New York cut off its nose to spite its face?  Slightly, as some investors who are seeking both federal and state benefits to justify a more difficult project will likely look elsewhere.  That said, the real driver of transactions in the OZ space as noted above is the Exclusion Benefit which applies once one has been invested in the applicable opportunity zone for 10 years or more, and this benefit, notwithstanding the New York change, will still exist at BOTH the federal and New York state level.  On balance, while the budget change sounds like a big move and strikes a blow for anti-Trump sentiment, in reality, the real opportunity of the OZ program in hopefully creating jobs for local residents will remain and the Exclusion Benefit driver will remain in tact and continue to provide a reinforcer for this type of behavior.

Duane Morris has an active Tax Credits and Opportunity Zone Team to help organizations and individuals plan, respond to, and invest in Opportunity Zones and low income areas throughout the USA, including the US Virgin Islands and Puerto Rico using tax credit equity and standard equity. We have closed over 73 OZ deals since their inception and are actively working on over 33 OZ projects for owner/developers, investors and business owners. We would be happy to discussion your proposed project with you. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

If you have any questions about this post, please contact Brad A. Molotsky, Art Momjian, Scott Gluck, Lee Potter, Keli Isaacson Whitlock, Anastasios Kastrinakis, or the attorney in the firm with whom you are regularly in contact.

Take care and stay safe.

Federal GSA prioritizes Opportunity Zones for Owned and Leased Assets – Wow!

On Tuesday, August 25, 2020, the General Services Administration (“GSA”) announced that it will increase its investment in opportunity zones with owned and leased federal buildings, following an executive order that President Donald Trump signed Monday.

The order directed the GSA to prioritize opportunity zones and other distressed communities in federal agency moves to help bring new economic activity to the neighborhoods and to save taxpayer money by occupying more affordable real estate.

“We are excited to now officially include qualified Opportunity Zones in the list of priorities we formally assess when selecting sites,” GSA Administrator Emily Murphy said in a release. “Yesterday’s Executive Order is consistent with GSA’s long term role in spurring economic development within the communities where our buildings are located.”

The GSA owns or leases 376.9 Million Square feet in 9,600 buildings in over 2,200 communities. As the GSA is the largest owner and user of space in the US by far, this is a very significant development in OZ world.

The opportunity zone program was passed into law in 2018 as a way to incentivize investors to place their equity investments into underserved communities. According to BisNow, beyond using the government’s real estate footprint, the Trump administration has sought to support the opportunity zone program through other methods. The Department of Education last week launched a grant program to help institutions of higher education recover from the coronavirus crisis, and it gives priority to applicants who expand educational access to students in opportunity zones.

Duane Morris has an active Opportunity Zone Team to help organizations and individuals plan, respond to, and invest in Opportunity Zones throughout the USA, including the US Virgin Islands and Puerto Rico. We have closed over 45 OZ deals since their inception and are actively working on over 54 OZ projects for owner/developers, investors and business owners.  We would be happy to discussion your proposed project with you.  Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

If you have any questions about this post, please contact Brad A. Molotsky, Scott Gluck, Lee Potter, AK Kastrinakis, Art Momjian or the attorney in the firm with whom you are regularly in contact.

Be well and stay safe.

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: 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.

-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 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.

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

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

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

Proudly powered by WordPress