As we beckon in the New Year and a new decade, Belpointe REIT recently announced that it has started trading on the OTCQX (the OTC) under the symbol “BELP.”
Read more in our new Opportunity Zones blog.
From the Land of OZ – My Top Ten Favorites from the Final Regs
Now that we have all had a chance to celebrate a Merry Christmas, a Happy Kwanzaa or a Happy Hanukah, and have had the chance to digest 544 pages of final OZ regs – what, you say you have not really studied the new final regs yet – can’t be the case :) !
Read more in our new Opportunity Zones blog.
From the Land of OZ – Final OZ Regulations Issued by the IRS/Treasury
On December 19, 2019, the U.S. Treasury Department and the IRS issued final regulations implementing the Opportunity Zones tax incentive. According to the IRS press release, the final rules seek to provide clarity for Opportunity Funds and their eligible subsidiaries in determining qualification and levels of new investment in Opportunity Zones. They also provide guidance regarding the types of gains that qualify for Opportunity Zone investments, as well as gains that may be excluded from tax after a 10-year holding period.
Read more on our new Opportunity Zones blog.
From the Land of OZ: New CRA Regulations proposed – including credit for providing “financing for or supports for a QOF”
The Office of the Comptroller of the Currency (OCC) along with the Federal Deposit Insurance Corporation (FDIC) released proposed regulations on December 13, 2019 which would institute significant changes to the implementation of the Community Reinvestment Act (CRA) if implemented.
Read more on our new Opportunity Zones blog.
From the Land of OZ – New Federal OZ Regulations to OMB; DOE Prioritizes OZs; Proposed Federal OZ Reporting Bill; and SC adds state incentives to OZ program
On Friday, December 6th, the IRS/Treasury delivered to the White House’s Office of Management and Budget (OMB) , approximately 500+ pages of final regulations for Opportunity Zones. Hey now!
Read more on our new Opportunity Zones blog.
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
Opportunity Knocks – 2nd Set of Of Opportunity Zone Regulations Issued by Treasury – Duane Morris, LLP
On April 17th the Department of Treasury released a second set of proposed regulations for the Opportunity Zone legislation (the first set of regulations was released in October, 2018) which is intended to encourage economic growth and investment in designated distressed communities (qualified opportunity zones) by providing Federal income tax benefits to taxpayers who invest new capital in businesses located within qualified opportunity zones through a Qualified Opportunity Fund.
The 169 pages of proposed new regulations provide much needed guidance to encourage the future use of the opportunity zone tax benefit and specifically provide guidance for opportunity zone businesses. The following are the highlights of the proposed regulations:
1. Reinvestment of Proceeds from a sale or disposition. A qualified opportunity fund (“QOF”) has 12 months from the time of the sale or disposition of qualified opportunity zone property or the return of capital from investments in qualified opportunity zone stock or qualified opportunity zone partnership interests to reinvest the proceeds in other qualified opportunity zone property before the proceeds would not be considered qualified opportunity zone property with regards to the 90-percent asset test.
2. Real Property straddling an Opportunity Zone and a Non-Opportunity Zone. A business that purchases real property straddling multiple census tracts, where not all of the tracts are designated as a qualified opportunity zones may satisfy the opportunity zone business requirements if the unadjusted cost of the real property inside a qualified opportunity zone is greater than the unadjusted cost of real property outside of the qualified opportunity zone.
3. Safe Harbors for the Fifty Percent (50%) Income Test for Qualified Opportunity Zone Businesses (“QOZBs”).
The proposed regulations provide three safe harbors and a facts and circumstances test for determining whether sufficient income is derived from a trade or business in a qualified opportunity zone for purposes of the 50-percent test.
a. The first safe harbor requires that at least fifty percent (50%) of the services performed (based on hours) for such business by its employees and independent contractors (and employees of independent contractors) are performed within the qualified opportunity zone.
b. The second safe harbor provides that if at least fifty percent (50%) of the services performed for the business by its employees and independent contractors (and employees of independent contractors) are performed in the qualified opportunity zone, based on amounts paid for the services performed, the business meets the fifty percent (50%) gross income test.
c. The third safe harbor provides that a trade or business may satisfy the fifty percent (50%) gross income requirement if: (1) the tangible property of the business that is in a qualified opportunity zone and (2) the management or operational functions performed for the business in the qualified opportunity zone are each necessary to generate fifty percent (50%) of the gross income of the trade or business.
d. Finally, taxpayers not meeting any of the other safe harbor tests may meet the fifty percent (50%) requirement based on a facts and circumstances test if, based on all the facts and circumstances, at least fifty percent (50%) of the gross income of a trade or business is derived from the active conduct of a trade or business in the qualified opportunity zone.
Note that the seventy percent (70%) tangible property test that requires that seventy percent (70%) of the tangible property of the QOZB be located within the Opportunity Zone continues to be operative for QOZBs.
4. Working Capital Plans – the 31 Month Test. The following two changes were made to the safe harbor for working capital.
a. First, the written designation for planned use of working capital now includes the development of a trade or business in the qualified opportunity zone as well as acquisition, construction, and/or substantial improvement of tangible property.
b. Second, exceeding the 31-month period does not violate the safe harbor if the delay is attributable to waiting for government action the application for which is completed during the 31-month period.
5. Measurement Periods. To help startup businesses the proposed regulations allow a qualified opportunity fund to satisfy the ninety percent (90%) without taking into account any investments received in the preceding 6 months provided those new assets being held in cash, cash equivalents, or debt instruments with term 18 months or less. This flexibility is intended to alleviate concerns with a QOF receiving additional capital gain funds right before a testing period and not being able to deploy the funds prior to the testing period.
6. Exclusion Elections. A taxpayer that is the holder of a direct qualified opportunity fund partnership interest or qualifying qualified stock of a qualified opportunity fund S corporation may make an election to exclude from gross income some or all of the capital gain from the disposition of qualified opportunity zone property reported on Schedule K-1 of such entity, provided the disposition occurs after the taxpayer’s 10-year holding period.
7. Continued OZ treatment after Death. Neither a transfer of the qualifying opportunity fund investment to the deceased owner’s estate nor the distribution by the estate to the decedent’s legatee or heir would result in the loss of the opportunity fund investment benefit.
8. Vacant Property. Where a building or other structure has been vacant for at least five (5) years prior to being purchased by a qualified opportunity zone business or qualified opportunity zone business, the purchased building or structure will satisfy the original use requirement.
9. Leased Property – QOZBs; Original Use; Related Party Permissions; Anti-Abuse Rules. Leased property may be treated a qualified opportunity zone business property if the following two general criteria are satisfied.
a. First, leased tangible property must be acquired under a lease entered into after December 31, 2017.
b. Second, substantially all of the use of the leased tangible property must be in a qualified opportunity zone during substantially all of the period for which the business leases the property.
The proposed regulations, however, do not impose an original use requirement with respect to leased tangible property and do not require leased tangible property to be acquired from a lessor that is unrelated. However, the proposed regulations provide one limitation as an alternative to imposing a related person rule or a substantial improvement rule and two further limitations that apply when the lessor and lessee are related.
a. First, the proposed regulations require in all cases, that the lease under which a qualified opportunity fund or qualified opportunity zone business acquires rights with respect to any leased tangible property must be a “market rate lease.”
b. Second, if the lessor and lessee are related, a qualified opportunity fund or qualified opportunity zone business at any time make not make a prepayment to the lessor relating to a period of use of the leased tangible property that exceeds 12 months.
c. Third, the proposed regulations do not permit leased tangible personal property to be treated as qualified opportunity zone business property unless the lessee becomes the owner of tangible property that is qualified opportunity zone business property and that has a value not less than the value of the leased personal property. This acquisition of this property must occur during a period that begins on the date that the lessee receives possession of the property under the lease and ends on the earlier of the last day of the lease or the end of the 30-month period beginning on the date that the lessee receives possession of the property under the lease.
d. Finally, the proposed regulations include an anti-abuse rule to prevent the use of leases to circumvent the substantial improvement requirement for purchases of real property (other than unimproved land). In the case of real property (other than unimproved land) that is leased by a qualified opportunity fund, if, at the time the lease is entered into, there was a plan, intent, or expectation for the real property to be purchased by the QOF for an amount of consideration other than the fair market value.
It is also worth noting that improvements made by a lessee to leased property satisfy the original use requirement and are considered purchased property. Thus, a tenant in a building can also satisfy the QOZB tests noted under the OZ Act.
10. Intangible Assets. For purposes of determining whether a substantial portion of intangible property of a qualified opportunity zone is used in the active conduct of a trade or business, the term “substantial portion” means at least 40 percent.
11. Unimproved Land. Unimproved land that is within a qualified opportunity zone and acquired by purchase is not required to be substantially improved if it is used in a trade or business of the QOF or the QOZB.
12. Investments Held by Funds. Funds have been provided with additional flexibility to hold more than one investment within a fund if they are structured appropriately.
13. Inventory. Inventory in transit to a QOZB within an OZ will be treated as tangible property that counts for purposes of the seventy percent (70%) test for QOZBs even if it is not within the OZ so long as it is on the way.
14. Debt Financed Distributions. Guidance has been provided under the new regulations regarding refinancing and distributions to partners/members which would permit appreciated portions of the property that have been refinanced to be distributed to the partners or members of the QOF on a tax free basis so long as the distribution is not in excess of the investors basis.
We will continue to review the new regulations and intend to issue additional commentary on it. In the interim, feel free to contact us to discuss any questions you have or transactions you are considering in this space.
Brad A. Molotsky and Art Momjian, Co-Heads, The Opportunity Zone Team – Duane Morris LLP
Opportunity Zones – Updated Regulations Timing Update; White House Appointments; and Disaster OZs Proposed Legislation – Brad A. Molotsky, Esq.
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
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.