New York State of Mind – What Gives?

While I am sure there is some logical explanation, I am a bit puzzled at the moment having just read a blurb from Novogradac regarding a tax bill in New York State –

According to the report, New York State Sens. Michael Gianaris and Jessica Ramos introduced a bill that would eliminate state tax incentives for capital gains when investing in federal qualified opportunity zones (OZs).

Yes, you read that correctly – eliminate state incentives for investing in the OZ…hmm aren’t we trying to incent people to invest in low and moderate income areas Senators?

S.B. 3401 would be effective for tax years beginning on and after Jan. 1, 2018. The bill, designed to eliminate a NY state incentive to participate in the OZ incentive, was assigned to the Senate Budget and Revenue Committee.

While I can totally appreciate that some might be frustrated by what looks like the rich getting richer regarding certain large companies being incented to come to the New York and receive the benefits of not only a federal incentive in deferral and reduction of capital gains but to then add New York local and state benefits as well might seem like too much, but these benefit to companies like Amazon and Google and others should be weighed in the context of job creation, economic multiplier effect to the local economy and local job creation for local zip codes and for folks who live in the area.  I look forward to hearing from the Senators’ on their rational for eliminating the benefit – maybe too much of a good thing? Should be interesting to say the least.

p.s. congrats to our friends Joe Scalio, Rich Blumenreich, and Ruth Tang, in case you have not heard about it or seen it, but they were all named to the Top 50 in OZs nationally – a worthy honor – have a super weekend!

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

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.

OZs and Affordable Housing – Good Bedfellows in Nebraska

A bill in the Nebraska Legislature would give priority to federal opportunity zones (OZs) in the allocation of state Affordable Housing Trust Fund and other state programs.

As crafted, LB 87 would add OZs to already existing statewide enterprise zones in receiving priority for allocation of precious housing trust fund assistance. T

The bill would similarly prioritize OZs to receive Job Training Cash Fund, Site and Building Development Fund and Business Innovation Act assistance.

The legislation was referred to the Urban Affairs Committee and is likely to see movement in the coming weeks. This type of OZ together with other incentives at the state level is also seeing similar movement in Ohio and California for different types of incentives for job creation and housing.

If interested, give us a call at Duane Morris where we continue to track and execute on Opportunity Zone related matters for our clients and friends.

Opportunity Zones – Government Shut Down Stalls US Treasury Clarifications

Putting aside partisan points of view on the wall and whether a government shut down to get a wall paid for is a good idea, the shut down is already impacting US Treasury’s ability to finalize new regulations to clarify certain aspects of the Opportunity Zone program.

Comment letters have been sent in by various trade association and OZ groups my team and I are involved with to the IRS and Treasury but, unfortunately, the clarity we are looking for will need to wait until the shutdown has been resolved plus two weeks thereafter (at least) per a notice posted in the Federal Register. Open issues that the Real Estate Roundtable, Novogradac’s OZ team and others are seeking include the following:
◾Defining original use and substantial improvements
◾Two tiered structures and the “working capital” impact – 31 months
◾How vacant land might qualify as “original use” property
◾Clarifying how and when the 180 day rule applies to certain pass through entities
◾Clarifying how Section 1231 gains of pass through entities are eligible for deferral
◾Seeking a removal of the fixed end of 2047 for sale purposes to qualify for a stepped up basis
◾Clarification regarding the methodology for applying the 90% and 70% asset tests
◾Requesting limitations on non compliance penalties to the portion of the aggregate assets of a QOF that are funded with gains for which a deferral election has been made
◾Definition of “substantially all” – keeping the definition at 70% and generally requiring real property businesses to hold 90% of tangible property inside a QOZ
◾Clarifying if property that straddles a QOZ can treat the improvements as being all within the QOZ
◾Clarifying the requirement that a substantial portion of the intangible property of a QOZB be used in the “active conduct of a trade or business” in the QOZ
◾Clarifying the timing of capital gains and dividend treatment for REITs

While our clients are still closing deals and effectively using the OZ program to defer, reduce and ultimately, hopefully, create a capital gain free sale after 10-years at the federal level, additional clarity would, in fact, be nice.

Border security for sure, but let’s get these rules clarified now so we can spur investment where its needed without the histrionics and the child like tantrums.

See attached Novogradac letter to US Treasury for more details – https://www.novoco.com/system/files/group/Opportunity%20Zones%20Working%20Group/novogradac_wg_comment_letter_proposed_regs_122818.pdf

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

ESG – Is anybody listening, does anybody care – YES indeed!

Who Cares About ESG?

Before we answer the question “Who cares about ESG?” I think we should first define it. The acronym itself stands for environmental, social and governance factors that apply to a business or enterprise. According to Investopedia, E-S and G are the three main factors investors consider with regard to a firm’s ethical impact and sustainable practices. The site gives some examples that fall under each of the broad headings, including “the company’s impact on climate change or carbon emissions, water use or conservation efforts, anti-corruption policies, board member diversity, human rights efforts and community development.”

ESG and sustainability are often used interchangeably (even though they are not) because the investor community tends to refer to ESG whereas companies tend to refer to these criteria under the umbrella of sustainability. Regardless, Nasdaq reports that both terms refer to the ESG factors that “can impact a company’s ability to execute its business strategy and create value.”

So, who cares about ESG? Certainly member states of the U.N. who signed on to the organization’s Sustainable Development Goals (SDGs) are monitoring, measuring and verifying these criteria. And, moving from the perspective of the nation state to an enterprise, more than 12,000 have pledged to support the 17 SDGs of the 2030 Agenda for Sustainable Development. Drilling down to the individual level, Thomson Reuters notes that we’re in the midst of the “the largest inter-generational transfer of wealth ever seen, with some US $24 Trillion expected to be under the control of the millennial population by 2020.” Yes, by next year. And, just as millenials value purpose in their work, they also choose investments that reflect their values.

At Duane Morris, we strive to serve our clients as trusted business partners so we can deliver them exceptional value. Throughout the year, starting later this month, we will be convening business leaders to take a deeper dive into various ESG topics that are affecting their companies and creating opportunities for investors and venture partners. In addition to this blog, we will also be hosting a webinar series and will seek to create additional content as ESG-related issues arise through new legislation and regulatory mandates.

With so much of the world’s attention on the impact we’re having on our collective environment and in our communities, and with so much of the world’s wealth at stake, perhaps the real question is not who cares about ESG, but, rather who isn’t concerned about ESG?

#ESG #sustainability #GRESB #SDG #SASB #GRI

ESG – Relevant in this day and age or just a fad?

I had the pleasure of attending the National Association of Corporate Directors (NACD) – Philadelphia Chapter meeting yesterday morning at the Union League in Philadelphia.  Very good attendance to hear Dave Stangis (Campbell’s Soup), Jamie Rantanen (US Trust) and Jennifer Wong (Glenmede) discuss the topic of ESG (“Environmental, Social and Governance”) as it relates to public company and private company investment.

ESG provides companies and investors with a systematic means to identify risk within the lens of environmental issues, social issues and governance issues.  Different, but related to, Corporate Social Responsibility (“CSR”) which is the means of improving social outcomes within an organization and how and organization measures its ESG outcomes.

Super conversation and some interesting questions from the audience during the presentation that touched on aligning values with investment outcomes (i.e., impact investing), risk mitigation through focus on ESG, the Sustainable Development Goals (or SDGs), the increase of shareholder activism in the investment space, including an increased focus on ESG issues, the Sustainable Accounting Standards Board (or SASB) and their focus on measurable sustainability metrics, and the difference between philanthropy, impact investing, ESG investing and standard market investing.

To the question about ESG and is it relevant from the audience member focused on mutual fund investing – the panel and this author firmly believe yes, ESG is relevant, becoming more relevant and an increasing amount of investors are seeking to invest in companies that align their ROI with ESG.  No, not everyone, of course, but more and more as time goes on.  I for one believe ESG will continue to become more relevant as a lens within which to view investing, efficiency, and alignment of investor interests with companies that more closely match their values.

I look forward to engaging in the conversation as the year progresses and to including some of my friends and colleagues in a monthly chat on ESG. Come join us if of interest.

Check out RBS’s chart at http://go.pardot.com/l/441592/2018-09-18/jjjrt8 for some interesting data

See also, Larry Fink, CEO of Blackrock’s statement on ESG – https://www.blackrock.com/corporate/literature/publication/blk-esg-investment-statement-web.pdf

#Sustainability #ESG #SRI #impactinvesting #governance #SASB #environmental, social, governance

Treasury Dept. Issues Much-Anticipated Opportunity Zone Regulations

On October 19, the U.S. Treasury Department issued the much-anticipated proposed regulations for the federal Opportunity Zone (OZ) tax incentive program created under the 2017 Tax Cuts and Job Act, as well as related Revenue Ruling 2018-29.

The guidance indicates that a second set of proposed regulations will be issued later in the year that will address issues such as defining “original use,” the treatment of assets sold by a Qualified Opportunity Fund (QOF) and logistical issues with respect to the movement of tangible assets of a QOF business in and out of an Opportunity Zone.

Read the full text of this Alert on the Duane Morris LLP website.

Pennsylvania files for Opportunity Zones for 10-year tax deferred investments in community development

On April 20, 2018, Governor Tom Wolf submitted to U.S. Treasury his list of designated Opportunity Zone sites for Pennsylvania. To date, 18 states and territories—including Arizona, California, Colorado, Georgia, Idaho, Kentucky, Michigan, Mississippi, Nebraska, New Jersey, Oklahoma, South Carolina, South Dakota, Vermont and Wisconsin, as well as American Samoa, Puerto Rico and the U.S. Virgin Islands—have filed for and received approval of their sites. Pennsylvania has now followed suit and submitted its list for approval. Previously, we discussed Opportunity Zones in our Alerts dated March 1 and April 10, 2018.

Designations are approved for 10 years and permit investors to defer tax on any prior gains until no later than December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund. A Qualified Opportunity Fund is an investment vehicle that is organized to make investments in the zones designated above as Qualified Opportunity Zones. Note that while we are awaiting draft regulations, which are anticipated within the next 60 days (i.e., by June 30, 2018), it appears that if investors hold their investments in the Opportunity Fund for at least 10 years, they would be able to increase its basis to that of the fair market value of the investment on the date it is sold. In other words, their appreciation in the value of the asset thereafter would be tax-free.

Read the full Alert on the Duane Morris LLP website.