Qualified Opportunity Zone Funds – Opportunity Zones

February 7, 2020 by Brad A. Molotsky

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

January 26, 2019January 3, 2020 by Brad A. Molotsky

SNJ and the Opportunity Zone Program – Strike while the OZ is Hot!

On October 19, the U.S. Treasury Department issued proposed regulations for the federal Opportunity Zone tax incentive program created under the 2017 Tax Cuts and Job Act.

These regulations were highly anticipated by the real estate development and fund creation communities, which have been eagerly awaiting clarity from Treasury since the creation of the Opportunity Zone program earlier this year.

The program could become the most impactful federal incentive for equity capital investment in low-income and distressed communities ever. It offers significant capital gains tax benefits for taxpayers who invest in projects and businesses in low-income areas, allowing investors to delay, reduce and potentially eliminate capital gains taxes on appreciated assets or business located in and on Qualified Opportunity Zone investments.

Qualified Opportunity Zones are census tracts located in all 50 states in a low-income community. A detailed interactive map by state identifying the applicable opportunity zones is available, https://eig.org/opportunityzones.

As Forbes magazine indicated, there is likely $6 trillion of capital gains in the U.S. that represent potential available investment capital that could use this program to drive investment into applicable Qualified Opportunity Zone businesses or real estate.

The program is not limited to any specific product type nor does it mandate any job creation requirements as part of the investment in a Qualified Opportunity Zone. Thus, the program is applicable to any type of investor with capital gains from the sale of personal property or real property and to developers/owners of all property types including multi-family rental, retail, hotels, industrial, commercial, office, industries, self-storage, assisted-living, affordable housing, etc.

General Overview:

Under the Opportunity Zone program, individuals and other entities can delay paying federal income tax on capital gains until as late as December 31, 2026 – provided those gains are invested in Qualified Opportunity Funds investing 90 percent of their assets in businesses or tangible property located in a Qualified Opportunity Zone. In addition, the gains on investments in Qualified Opportunity Funds can be federal income tax-free if the investment is held for at least 10 years. These tax benefits could reduce the cost of capital for these projects, making them more viable, especially when paired with other development incentives like the New Markets Tax Credit or Low-Income Housing Tax Credit.

Specifically, appreciation on investments within Qualified Opportunity Funds that are held for at least 10 years are excluded from gross income. Thus, the longer one has an investment within a Qualified Opportunity Fund within an Opportunity Zone, the more one can reduce its capital gain – either by 10 percent or 15 percent, and if one stays in the zone for 10 years or more and the property or qualified business appreciated in value, the appreciation is not subject to capital gains tax at the federal level. The regulations as proposed give the investor/owner until December 31, 2047 to sell the business or property in order to take advantage of the no capital gains to be paid on the sale of appreciated assets rules.

Additionally, owners of low tax basis properties can sell their properties and defer the capital gains to the extent the gains are invested in a Qualified Opportunity Zone, which will likely attract investor capital that is looking to defer capital gains, thereby making the Qualified Opportunity Zones potentially more valuable than non-Qualified Opportunity Zone properties.

Deadlines:

While the benefits of the program can be advantageous, investors and developers seeking to capitalize on the Opportunity Zone program need to move quickly in order to take full advantage of the tax benefit as demand increases and the time period diminishes.

In other words, as the program only lasts until 2026, the seven-year ability to reduce capital gains by 15 percent will disappear if investments are not made by 2019 and the five-year ability to reduce capital gains by 10 percent will disappear if not made by 2021. Therefore, if one is interested in maximizing the value of the program and its value to investors, investors and developers need to move quickly to commence development and acquisitions in order to maximize the time periods available to invest their capital gains inside the program windows provided within the program.

Additionally, in order to defer short- and long-term capital gains realized on the sale of property, the capital gain portion of the sale or disposition has to be reinvested within 180 days in a Qualified Opportunity Fund.

Also important to note that gains are required to be recognized on the earlier of a disposal of the Qualified Opportunity Fund investment or by December 31, 2026, and are reduced over time.

The basis of the Qualified Opportunity Zone investment increases by 10 percent of the deferred gain if the investment is held for five years from the date of reinvestment and by 15 percent of the deferred gain if the investment is held for seven years from the date of reinvestment. In other words, the gain on which capital gains is paid is reduced to 85 percent of the original gain.

While the recently announced regulations provided clarity on specific time period for self-certification as an Qualified Opportunity Zone fund, for what constitutes a Qualified Opportunity Zone business and for what structures now qualify as Qualified Opportunity Zone Funds (i.e., limited partnerships, C-corporations, limited liability companies, REITs, RICs, etc.), investors need to be aware that certain rules regarding related parties and original use property still need to be clarified by Treasury in additional regulations.

In Southern New Jersey

In Southern New Jersey, the program will drive investment from all types of developers and investors seeking to place their capital gains into funds and seeking to place applicable businesses into Qualified Zones in order to potentially defer and reduce applicable capital gains. Developers will seek to purchase land in order to build with their own capital and/or equity from Opportunity Zone investment vehicles in order to utilize cheaper sources of capital and drive development returns.

Atypical real estate investors who are looking to defer and reduce capital gains may not be looking for typical real estate like returns due to the fact that they will be able to defer and reduce their capital gains via the Opportunity Zone program which will likely create a healthy dynamic for capital flows. Sectors such as multifamily, warehouse, self-storage, grocery anchor retail, and assisted living will see substantial interest from investors and developers.

In Camden County, areas such as Cinnaminson, Pennsauken, Deptford, Camden, Pine Hill, Glassboro and Lindenwold will likely be hot spots for focused/targeted Opportunity Zone investment. In Atlantic County, parts of Atlantic City, Pleasantville, the Atlantic City International Airport, Somers Point and in Cumberland County a large swath of Vineland has been designated as an Opportunity Zone and will likely see interest for focused/targeted Opportunity Zone investment.

As Confucius once said, it is good to live in interesting times. Not a day goes by without an article or post online regarding Opportunity Zones and the ability to utilize them for development and capital gains deferral.

Now is the time to optimize your capital gains deferrals and reductions if you have them vis-à-vis the sale of personal property or real property. Interested investors are already focusing on deploying capital in New Jersey and elsewhere in substantially improving various asset classes and in creating funds to deploy in investing in various asset classes.

Brad Molotsky is a real estate attorney and partner in Duane Morris’ New Jersey and Philadelphia offices. He advises clients on commercial leasing (including a specialty in cannabis leasing), acquisitions, opportunity zone fund creation and fund deployment, financing, public private partnerships and real estate joint ventures. He can be reached at BAMolotsky@duanemorris.com.

January 11, 2019January 3, 2020 by Brad A. Molotsky

Looking into the 2019 Crystal Ball – Opportunities (and Zones) Abound

As 2019’s first full week moves towards a close (well, so what if we are working tomorrow or Sunday :)), wishing all fellow P3, public-private partnership and Opportunity Zone participants and those delving into the area, a Happy and a Healthy New Years.

2019 looks to be a busy year in the #OpportunityZone space. With one of the key benefits of the federal program (i.e., a 7-year investment time period with related 15% reduction in invested capital gains) expiring at the end of this coming year, many clients and prospects are extremely focused on deploying capital gains capital into this space in 2019.

My prediction is that if 2019 is anything like the number of calls and conversations and meetings we have been hosting and fielding in the 4th quarter of 2018, it will be a very robust, active and busy year in the OZ space. Having closing multiple deals in the 4th quarter for family office owners, developers and having many on-going conversations regarding Qualified Opportunity Zone businesses and funds, I am very excited for 2019 and all it will bring.

Have a fabulous January and I look forward to speaking with you about OZs and P3s in 2019!

-Brad A. Molotsky