Tag Archives: qualified opportunity fund

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: House Legislation Would Establish OZ Reporting Framework and Penalties; Senate Bill Would Limit Application of OZs

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).

Read more on our new Opportunity Zones blog.

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

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.

P-3s and Opportunity Zones – An Update on a Few Fronts

P-3s and Opportunity Zones – An Update on a Few Fronts – Brad A. Molotsky, Esquire

Infrastructure and P-3s – The Move America Act of 2019 (H.R. 1508) was re-introduced again yesterday by Reps. Jackie Walorski, R-Ind. and Earl Blumenauer, D-Ore. The Bill attempts to spur investment in infrastructure improvements through the issuance of Move America Bonds and Move America Credits.

The proposed bill would expand tax-exempt private activity bonds for infrastructure and create a federal infrastructure tax credit to fund infrastructure projects through public-private partnerships (P-3s). Sens. John Hoeven, R-N.D., and Ron Wyden, D-Ore., introduced the Senate companion bill (S. 146) in January.

Previous versions of the Move America Act were introduced in the Senate in 2015 and in the Senate and House in 2017.

According to the team at Novogradac, the House Ways and Means Committee is holding a hearing today on infrastructure reform and House leadership has tentatively targeted late spring for major infrastructure legislation on the House floor, which could include the Move America Act and other tax credit provisions from the Affordable Housing Credit Improvement Act and the New Markets Tax Credit Extension Act.

States incentivizing investments in their designated Federal Opportunity Zones.

Maryland – The Maryland legislature introduced HB 1141 this past week according to our sources at Novogradac. This bill would enable the creation of a state affordable housing tax credit effective in 2020. It would also create a “Qualified Maryland Housing Tax Credit” for properties that qualify for the federal low-income housing tax credit (LIHTC) and are in areas designated as “community revitalization areas”. These community revitalization areas are areas that include Opportunity Zones. The bill sets an annual statewide cap of $10 Million and no requirement that the development also receive federal LIHTCs.

Rhode Island – A bill in the Rhode Island House of Representatives (HB 5808) would create a tax credit for 10% of a taxpayer’s opportunity zones (OZ) investment in Pawtucket and Central Falls, R.I. Per the draft bill, a qualified opportunity fund would be required to invest at least $250,000 in the OZ for the participants to receive the credit. The tax credit could be taken in the year in which a qualified OZ business is placed in service.

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

Opportunity Zones – CO Taking the OZ Program Seriously!

Governor Jared Polis announced the formation of a dedicated office within the Office of Economic Development and International Trade (OEDIT) to cultivate active investment in Colorado’s 126 federally designated Opportunity Zones.

“Colorado has earned national recognition for our thoughtful and inclusive approach designating Opportunity Zones, and we are committed to ensuring that we realize the maximum potential,” said Governor Jared Polis. “It’s vital that we continue to build on this momentum and collaborate with communities and investors to make these opportunities a reality to create good jobs.”

The new team will be led by recently named Opportunity Zone Program Director Jana Persky and charged with engaging stakeholders to facilitate active investment in designated Colorado tracts. The office will provide procedural guidance and technical knowledge to enable communities to secure much-needed investment and is funded through an Economic Development Commission allocation.

The office is partnering with the Colorado Department of Local Affairs (DOLA) to support communities in developing Opportunity Zone strategies, with the goal of attracting capital to projects that will have a positive community impact.

“DOLA has been working in partnership with local communities and leaders and OEDIT to identify where their designated areas can achieve its full potential,” said DOLA Executive Director Rick Garcia. “Through the Opportunity Zone program, equitable distribution will be possible in some of our rural areas of the state which will provide them with the opportunity to continue along the path towards economic innovation throughout Colorado.”

To help facilitate Opportunity Zone investments, the office will offer grants to support economic modeling, prospectus development, and other technical assistance needed to help community-oriented projects come to fruition.

OEDIT, in conjunction with Startup Colorado and the Blackstone Entrepreneurs Network, has also launched CO-Invest.co to connect investors and opportunities – including opportunity zones – to leverage the speed and reach of technology to further facilitate the investment opportunities.

Great to see communities, the State and its economic development teams working hand in glove to deliver great resources and tools to the market place to assist those interested in appropriate investment that is desired by the applicable communities. Way to go CO!

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!