treasury – Opportunity Zones – Insights From the Land of OZ

September 25, 2020 by Brad A. Molotsky

Treasury awards $204.1M in CDFI Funds to Low Income Native American Communities

Earlier this week, the U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) announced and awarded 397 Community Development Financial Institutions (CDFIs) $204.1 million in awards.

The awards, through the fiscal year (FY) 2020 round of the Community Development Financial Institutions Program (CDFI Program) and the Native American CDFI Assistance Program (NACA Program), will enable CDFIs to increase lending and investment activity in low-income and economically distressed communities across the nation.

“I am proud to announce the fiscal year 2020 CDFI Program and NACA Program Award Recipients,” said CDFI Fund Director Jodie Harris. “These organizations are providing vital economic development and financial services to neighborhoods, businesses, and families. I am especially proud that we have 91 new organizations receiving awards this year, expanding the opportunity of this program to even more communities across the country.”

The CDFI Program invests in and builds the capacity of CDFIs to serve low-income people and communities lacking adequate access to affordable financial products and services.

For the FY 2020 CDFI Program round, the CDFI Fund awarded $142.8 million in Base-Financial Assistance and Technical Assistance awards to 357 organizations in 45 states, the District of Columbia, and Puerto Rico. In addition to the Base-Financial Assistance awards, the CDFI Fund will also provide the following supplemental Financial Assistance awards:

• $22 million to 13 CDFIs through the Healthy Food Financing Initiative-Financial Assistance (HFFI-FA) awards, a supplemental program designed to encourage investments in businesses that provide healthy food options for communities;

• $4 million to 17 CDFIs through the Disability Funds-Financial Assistance (DF-FA) awards, a supplemental program designed to help CDFIs finance projects and services that will assist individuals with disabilities; and

• $18.5 million to 106 CDFIs through the Persistent Poverty Counties-Financial Assistance (PPC-FA) awards, which is a supplemental program designed to encourage investments in Persistent Poverty Counties nationwide.

The NACA Program facilitates the creation and advancement of Native CDFIs, which are Certified CDFIs that must predominantly serve Native American, Alaska Native, and/or Native Hawaiian communities. A diversity of institutions in various stages of development are supported by the NACA Program, including: organizations in the early planning stages of CDFI formation; tribal entities working to certify an existing lending program; and established Native CDFIs in need of further capacity building assistance.

Per Treasury’s press release, the CDFI Fund awarded $15.2 million in FY 2020 NACA Program Base-Financial Assistance and Technical Assistance awards to 40 organizations in 18 states. In addition, the CDFI Fund awarded $1.6 million in NACA Program PPC-FA awards to 11 Native CDFIs.

Duane Morris has an active Opportunity Zone Team to help CDCs and other 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. 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, Keli Isaacson Whitlock, AK Kastrinakis, Art Momjian or the attorney in the firm with whom you are regularly in contact.

June 5, 2020 by Brad A. Molotsky

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

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

The key take aways are as follows:

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

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

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

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

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

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

Over and out from the Land of OZ. -Brad

April 2, 2020 by Brad A. Molotsky

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

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

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

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

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

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

Stay safe. Be vigilant.

July 14, 2019January 3, 2020 by Brad A. Molotsky

Opportunity Zones – Additional States Continue to Join the Growing List of Places (39 States in All) Following Federal Form

Busy times continue in the Opportunity Zone world now that we have gotten past the clarion call of 2018 partnership rollovers into Qualified Opportunity Funds and Qualified Opportunity Zone Businesses that occurred on or before June 28, 2019. In our little corner of the world, deals are getting closed and new engagements happening, in particular on the business side of the ledger and some on the community impact side as well. Interesting and exciting stuff.

Based on my conversations with friends and colleagues at KPMG (thanks team for your continued excellent efforts) regarding the various states and their conformity with the federal OZ program – as of July 14th, 39 states for corporations and 33 states for individuals have elected to follow form with Pennsylvania being the latest to join the hit parade as of last week:

For Corporations:
— 39 states currently are conforming (rolling or updated state IRC conformity; AZ and MN are recent changes; AZ retroactively conforms starting TY18; HI conforms starting in TY19; IA conforms starting in TY19; MN might be retroactive but DOR guidance has not been issued yet)
— 2 states didn’t update IRC conformity
(CA, NH)
— 1 state updated IRC conformity but decoupled from IRC 1400Z (NC)

For Individuals:
— 33 states currently conforming (rolling or updated state IRC conformity; AZ and MN are recent changes; AZ retroactively conforms starting TY18; HI conforms starting in TY19; IA conforms starting in TY19; MN might be retroactive but DOR guidance has not been issued yet)
— 1 state didn’t update IRC conformity (CA)
— 1 state updated IRC conformity but decoupled from IRC 1400Z (NC)
— 6 states where IRC conformity is different for personal income tax or only have selective IRC conformity (AL, AR, MA, MS, NJ, PA) of which three do not conform (AL, MA, MS), one conforms (NJ), one will conform (PA for TYB 1/1/20), and one conforms but only with respect to QOZs located within this state (AR)

Check it out and let us know if you have any questions or need help on your various deals and transactions.

Brad A. Molotsky, Duane Morris LLP

April 4, 2019January 3, 2020 by Brad A. Molotsky

Opportunity Zones – Updated Regulations Timing Update; White House Appointments; and Disaster OZs Proposed Legislation

Much going on this week friends – so jumping right into the OZ pool today:

Updated Regulations; Timing – while we were originally hearing that the next set of regulations were supposed to be issued by the IRS and Treasury before April 15th, we have now heard as of earlier this week that it is more likely that the next set of regulations will be issued by the end of April rather than by the 15th. We will keep asking for updated timing and keep you apprised.

White House Appointment – Scott Turner was named the executive director of the White House Opportunity and Revitalization Council. Turner will head up the committee that was established by President Trump in December to help implement and optimize use of federal resources connected to the opportunity zones (OZ) incentive. Turner previously served in the Texas House of Representatives from 2013 through 2017.

Disaster Opportunity Zones – Sens. Marco Rubio, R-Fla., and Rick Scott, R-Fla., introduced new federal legislation that would allow governors to nominate new areas hit by 2018 hurricanes and California wildfires as opportunity zones (OZs). The Disaster Opportunity Zones Act (DOZA) would enact a new round of OZ designations for North Carolina, South Carolina, Georgia, Florida and California.

If passed Governors will be able to select the greater of 25 tracts or 25% of low-income census tracts in their states affected by natural disasters from January 1, 2018 through March 1, 2019. Curious that the flood ravaged central states of Nebraska, Iowa and Missouri were not included but maybe they will be (and maybe the end date of March 1 will be extended) as discussions commence on this proposal.

We will keep our eye on this draft legislation and keep you all apprised as and if this progresses but surely an interesting way to funnel incentive dollars to assist in rebuilding efforts that will be critically necessary.

Keep on keeping on – deals are indeed getting done despite the lack of the second set of regulations – best regards friends. -Brad

January 28, 2019January 3, 2020 by Brad A. Molotsky

Treasury Set to issue new OZ Regulations – 50% Gross Income Test appears to loosen the original standard

In Secretary Mnuchin’s speech at the US Conference of Mayor’s Winter Meeting, he stated:

“…We plan to issue shortly a second set of Opportunity Zone proposed regulations that will provide additional certainty for both businesses and investors. We will clarify, as we have already indicated in the press, that income is not the same as revenues for the requirement that 50% of a zone’s business gross income must come from active conduct of business in the Opportunity Zone. We are also reviewing appropriate safe harbor rules for meeting the test based on where services are performed and where the tangible property is located to create additional opportunity”

While not yet Treasury’s official position, it appears as though these comments indicate Treasury’s inclination to loosen the requirements rather than tightening them.

Per CRE Model, if the regulations ultimately allow Qualified Opportunity Zone Businesses to satisfy the 50% gross income test by locating in an Opportunity Zone without requiring them to derive that income from transactions that take place within the Opportunity Zone, then this would enable many businesses that otherwise would not qualify to consider locating within the Opportunity Zone.

Under the October regulations, retail properties are likely to see increased interest from QOZB tenants because they will (in most cases) more easily source 50% of their income from inside the Opportunity Zone. However, many office and industrial tenants are likely to have wider trade areas that could disqualify them. If Treasury expands the requirement to only require that the activity that generates the income must take place inside an Opportunity Zone, then these property types are likely to see increased tenant interest.

Feel free to contact our OZ team at Duane Morris if you have any questions or other concerns on this or any other OZ topics – Brad A. Molotsky

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.