Tag Archives: ESG

From the Land of OZ: House Legislation Would Establish OZ Reporting Framework and Penalties; Senate Bill Would Limit Application of OZs – Brad A. Molotsky, Esq, Duane Morris LLP

While impeachment discussions continue to garnering most of the headlines, Representatives Ron Kind, D-Wis., Mike Kelly, R-Pa., and Terri Sewell, D-Ala., introduced legislation in the House to establish a reporting framework, disclosure requirements and a penalty structure for qualified opportunity funds (QOFs).

Their Bill, the “Opportunity Zone Accountability and Transparency Act”, would mandate that QOFs annually report assets; their aggregate amount of qualified OZ stock, OZ partnership interests and OZ business property; and provide details about the types of OZ businesses for which the QOF holds business property. According to Novogradac, the legislation would also institute a $500 daily fine for failure to file correct information and would require the Treasury Department to collect and compile statistical information on each OZ, including the number of QOFs that have invested in each OZ.

Across the way in the Senate, Senator Ron Wyden, D-Ore., introduced the “Opportunity Zone Reporting and Reform Act”. Senator Wyden’s bill would require information reporting from qualified opportunity funds (QOFs), end the designation of some 200 different opportunity zones (OZs), clarify some terms used in the OZ incentive and require a report from the Government Accountability Office (GAO) on the effectiveness of the incentive.

The Senate Bill would require QOFs to report in 9 areas, including:
– providing information on the amount and composition of assets, the names and taxpayer identification numbers (TINs) of investors along with the amount and dates of their investments;
– which opportunity zones the funds have invested in;
– the value of qualified OZ stock, partnership interests and business property;
– the value of any tangible or intangible property held by the QOF;
– the NAICS code of any Qualified Opportunity Zones Businesses (QOZBs) conducted by the fund or any corporation or partnership in which the fund holds an interest; and
– for QOZBs conducted by the fund or by a controlled corporation or partnership, the value of tangible and intangible property (including cash) and the average monthly full-time employees of the QOZB.

The Senate legislation, if enacted, would also end the OZ designation for all “contiguous zones” (a change that was added in the April 2018 regulations) that were named OZs, but which are not low-income and would define the term “substantially all” to mean “not less than 90 percent.” (i.e., effectively changing the QOZB asset test from 70% to 90%). The legislation would also require QOFs to make their reports public on the Internet and would require that the IRS maintain a public list of all QOFs.

The Senate legislation would also expand the application of “sin businesses” to disallow investments in private planes, along with skyboxes and luxury boxes. Prohibited investments would also be expanded to include sports stadiums, self-storage facilities, and housing developments that are un-affordable to existing zone residents.

While the proposed legislation would remove certain zones (approximately 200) as not being within what the Bill’s author believed to be in the spirit of the OZ legislation given the incomes and demographics that now are located within these “wealthy” zones, the legislation then allows states to designate an equal number of new zones which could be added to offset the lost zones. These new zones would remain on the same timeline as the zones originally designated in 2018, with their designations expiring at the end of 2028.

The legislation would also modify the Treasury letter ruling that did not require a QOF to include the value of land for purposes of calculating “substantial improvement” and would also impose a penalty of $10,000 on funds or investors failing to comply with their respective reporting requirements, with exceptions for reasonable cause. Penalties would be doubled for taxpayers found to be intentionally disregarding their reporting requirements.

While it is clearly too early to call whether these two Bills will move forward to a debate and/or passage, at the moment Republicans in the Senate are believed to be firmly against the proposed Senate Bill.

We will keep an eye on these proposed Bills and keep you apprised as things move, if they move on this front. In the meanwhile, if you have any questions or concerns, please do not hesitate to contact us at bamolotsky@duanemorris.com.

–Brad A. Molotsky, Esq.

Climate Change viewed as a Major Problem in NJ according to a recent Stockton University poll – Brad A. Molotsky, Duane Morris, LLP

According to a Stockton University poll released earlier this week, 2/3 of New Jersey residents believe climate change is a crisis and almost 75% believe it is affecting New Jersey.

Per Stockton’s press release, “the results show climate change is a concern to people all over New Jersey and not just those who live along the Jersey shore,” said John Froonjian, interim director of the William J. Hughes Center for Public Policy at Stockton, who presented an overview of the results at Coast Day at Stockton Atlantic City on Oct. 13.

As reported in Bisnow, among those who believe climate change is currently affecting NJ, more than 75% cited rising sea level, earth warming, harming or changing the ocean, extreme weather, and worsening pollution as major problems they are concerned about.

Beach erosion was cited by 70% as a major problem, while harm to farming was mentioned by 68%, flooding by 66%, and health effects by 57%.

More than half of respondents (56%) believe government could or should do more, and 31% say the government response is totally inadequate.

Per the poll, views did vary along party lines. Democrats (92%) and independents (64%) were more likely to see climate change as a crisis or major problem than Republicans (35%). Women (72%) were also more likely to view it as a crisis or major problem than men (62%).

The results also showed while young people are the most concerned about the issue, concern cuts across age, racial, ethnic, economic, gender and geographic lines. Almost 80% of respondents ages 18-29 see climate changes as a crisis or a major problem. That percentage drops to under 70% for those over 65.

We will continue to monitor trends and thinking in ESG and climate change and report back. If you have any questions, please do not hesitate to contact me at bamolotsky@duanemorris.com and I will direct your question accordingly.

-Brad A. Molotsky, Esq., LEED AP – O+M

New Markets Tax Credits – Application process and key dates announced by the CDFI – Brad A. Molotsky, Duane Morris

Earlier today, September 4, 2019, the Community Development Financial Institutions (CDFI) Fund announced the opening of the calendar year 2019 allocation round of the new markets tax credit (NMTC).

For those who participate in the New Markets arena, applications are due Oct. 28, 2019.

The CDFI Fund anticipates announcing 2019 NMTC awards in summer 2020.

If of interest to you, the NMTC program application, a notice of allocation availability, an introduction to the NMTC program, an Awards Management Information navigation guide, a frequently asked questions guide, and an application roadmap presentation are all available on line.

Copies of these materials can be found at www.newmarketscredits.com. If you have any questions, please do not hesitate to call or contact us – bamolotsky@duanemorris.com

NJEDA launches Opportunity Zone Challenge Program – Brad A. Molotsky, Esq.

On July 16th, the New Jersey Economic Development Authority (NJEDA) launched its previously announced Opportunity Zone Challenge Program. The Challenge Program is a competitive $500,000 grant program aimed at supporting community efforts to attract investments in NJ Opportunity Zones. Grants awarded through the program will fund municipal and county-level financial and technical planning around Opportunity Zone (OZ) economic development.

The OZ program is a federal incentive program which was part of the 2018 Tax Act that enables investors to re-deploy capital gains into low-income areas (which are the areas targeted by the designated Opportunity Zones) via the use of a Qualified Opportunity Zone fund (QOF). These Qualified Opportunity Zone funds or QOFs may be self-directed and self-certified. Capital gains placed into these QOFs must then be invested into real estate or a qualified business within applicable opportunity zones that exist within all 50 states in the US.

New Jersey has 169 separate Opportunity Zones which span 75 municipalities across all 21 NJ counties.

According to NJEDA, the Challenge Program is intended to encourage and assist communities in developing specific action plans to guide their pursuit of Opportunity Zone–based investments. The Challenge Program will award 5 grants of up to $100,000 each to select municipal or county governments or municipal partnerships of 2 to 5 municipalities whose applications demonstrate a clear strategic plan to build investment capacity in their applicable Opportunity Zones. The Challenge Program grants are open to all 75 NJ municipalities and 21 counties.

As part of the application process, the applicants are required to designate at least one strategic partner whose external expertise will be used to achieve the Challenge Program’s goals.

Our team is available to answer applicable questions about the Opportunity Zone program and the Challenge Program. Brad A. Molotsky, Esq. (bamolotsky@duanemorris.com)

Opportunity Zones – Additional States Continue to Join the Growing List of Places (39 States in All) Following Federal Form – Brad A. Molotsky, Esq.

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

Proposed Federal Bill targets an Additional $500 Million in NMTC Allocation for Rural Job Zones – Brad A. Molotsky, Esq.

Despite the DC gridlock and Democratic Presidential debates, the Rural Jobs Act was introduced this week in the House and Senate to authorize an additional $500 Million Dollars in annual new markets tax credit (NMTC) allocation for 2019 and 2020 that would go to rural job zones.

The rural job zones are defined as low-income communities with a population of 50,000 residents or less that are not adjacent to any urbanized area.

At least 25% of the new NMTC allocation authority would be prioritized for counties with persistent poverty and high migration.

Lead sponsors of the bicameral and bipartisan legislation are Reps. Terri Sewell, D-Ala., and Jason Smith, R-Mo., and Sens. Mark Warner, D-Va., Roger Wicker, R-Miss., Shelley Capito, R-W.V., and Ben Cardin, D-Md.

Glimmers of hope. Have a super weekend. -Brad

#DuaneMorris

Climate Risk and Real Estate Investment Decision Making – ULI –

The Urban Land Institute (ULI) released its new report entitled “Climate Risk and Real Estate Investment Decision-Making” this week at their Spring conference. This report is a follow on to their 2018 report entitled “Ten Principles for Building Resilience”. This year’s report addresses the state of current practice for assessing and mitigating climate risks in real estate as well as highlighting best practices across the real estate industry. was developed using a proactive approach to address climate risks.

Per the report’s conclusions, “a failure to address and mitigate climate risks may result in increased exposure to loss as a result of assets suffering from reduced liquidity and lower income, which will negatively affect investment returns. At the same time, investors who arm themselves with more accurate data on the impact of climate risks could help differentiate themselves and benefit from investing in locations at the forefront of climate mitigation.”

Continued focus and monitoring of results from an Environmental, Social, Governance (ESG) and social impact investing point of view, continue to be the touchstones as 2019 marches on.

-Brad A. Molotsky, Duane Morris LLP

Washington DC – Opportunity Zone March Madness – Brad A. Molotsky, Esq.

Earlier this week, DC Mayor Muriel Bowser announced 3 new initiatives intended to maximize opportunity zones (OZ) benefits in the nation’s capital.

The city committed $24 million to properties that support affordable housing, workforce development and the growth of small businesses in the district’s 25 OZs.

Mayor Bowser also announced the OZ Community Corps to provide free legal and other advice, as well as an online OZ marketplace for sponsors, fund managers, investors and community members.

For more information about Washington, DC’s Opportunity Zones, visit oppzones.dc.gov

While this will not help my brackets at all, it is a super step forward for DC’s 25 OZ’s, well done Mayor!

-Brad A. Molotsky, Esq.

Opportunity Zone Update – OMB Guidance Expected and Some State Follow On – Brad A. Molotsky, Esq.

Continued high interest and activity on the Opportunity Zone fronts on many levels this past week. Conversations, closings and connections continue at a torrid pace – including a packed IMN conference in NYC this past week with many of the national and regional luminaries in attendance. By way of a quick update on a few fronts, courtesy of our friends at Novogradac for their recon:

Federal – On March 12th, the Office of Information and Regulatory Affairs (OIRA) received the 2nd tranche of regulatory guidance for review from the Internal Revenue Service (IRS) concerning the opportunity zones (OZ) incentive. OIRA is a division of the White House Office Management of the Budget. The proposed IRS rule is expected to address what types of property qualify as qualified OZ business property, steps an OZ business must take to be qualified, the penalty for a qualified opportunity fund’s failure to meet the 90% investment standard and more. After a mandated review of at least 10 days, the OMB is expected to release the guidance to be published in the Federal Register. The first tranche of guidance was reviewed for 36 days before it was published.

Vermont – H 442 introduced in the Vermont Legislature would make investments made in Opportunity Zones eligible to apply annually for the state Downtown and Village Center Tax Credit, which is twice as often as other projects are allowed to apply and would expand eligibility under the program only for OZ investments. The Downtown and Village Center Tax Credit covers between 10 percent and 50 percent of eligible rehabilitation expenses and has a $2.4 million statewide annual cap. If enacted, the bill would go into effect July 1.

Ohio – Gov. Mike DeWine said that his proposed 2020-2021 budget will call for a 10% state income tax credit to attract investment to opportunity zones. DeWine will propose a nonrefundable credit using existing tax credit availability to create the new credit.

At this point 31 states have “followed form” and are offering some level of state capital gains relief to those who follow the federal opportunity zone rules and invest in businesses or real estate pursuant to the federal OZ rules and regulations. New Jersey is moving ahead with a bill to become the 32nd state.

I look forward to seeing some of you on the 25th at our discussion in Baltimore on OZs. If of interest, drop me an email as space is limited. Best regards.
– Brad A. Molotsky, Esq.

Leveraging Renewables in Opportunity Zones – Powerful Indeed!

Back on October 19, 2018, 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. We are in the same position now as we await additional guidance from Treasury that is expected in the next two weeks.

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.

In addition, an Opportunity Fund may combine the tax incentives available in Opportunity Zones with other incentives, including those for renewable energy projects.

Renewable energy projects typically are “project financed,” meaning that the project sponsor invests equity and raises debt on a nonrecourse basis where the debt is serviced from the cash flow generated by the renewable energy project. Federal tax incentives such as the investment tax credit (for solar), the production tax credit (for wind), and accelerated depreciation are available to renewable energy projects; however, the project sponsor may need to partner with a tax equity investor in order to take advantage of these incentives because the project company often is a newly created entity with no tax liability of its own. States may also offer tax and other incentives for investing in renewable energy projects, with the most significant being renewable energy certificate (“REC”) programs.

One REC represents one megawatt-hour of electricity generated by a renewable energy resource. In states that have a renewable portfolio standard (“RPS”), electric utilities are required to supply a certain percentage of electricity from renewable energy resources to their customers. If an electric utility is unable to meet its RPS requirement, it may offset the shortfall by purchasing RECs (or, for solar, SRECs) from a secondary market. Even if a renewable energy project is not located in a state with an RPS, it may be able to sell its RECs into a regional market. Thus, renewable energy projects can offer investors significant federal and state incentives.

Thus, having a development project with potentially lower cost equity due to OZ investors receiving the above stated OZ benefits and when combined with the powerful SREC benefits, accelerated depreciation and lower costs of utilities represented by being able to generate your own electricity, all aggregate to present not only an attractive OZ investment opportunity but one that combines incentives for powerful usage and consumption savings which will be reflected in the overall return for the project and which should inure to the benefit of the owner or their occupants.

A powerful gift that keeps on giving in power consumption savings and cost savings and potential upside on sale after ten years.  Let the sun shine!

By Brad A. Molotsky and Patrick L. Morand