Tag: robert montego

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.