Tag Archives: tax deferral

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 – Brad A. Molotsky, Esq.

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.

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!

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.

18 states and U.S. territories obtain Qualified Opportunity Zones for development investment

As a follow-up to our Alert from March 1, 2018, on April 9, the IRS and U.S. Treasury approved designated Opportunity Zones in 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.

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 as an investment vehicle that is organized to make investments in the zones designated above as Qualified Opportunity Zones. Note, that while we still await draft regulations, it appears that if investors hold their investments in the Opportunity Fund for at least 10 years, the investor 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 would be tax free.

While sounding almost too good to be true, the rationale of allowing for this type of appreciation treatment is to attempt to incentivize additional or initial investment in the designated low-income areas in an effort to boost economic growth and job creation.

Read the full Alert on the Duane Morris LLP website.

Qualified Opportunity Zones: Congress’ plan for community development

On December 22, 2017, as part of Congress’ House Resolution 1, the concept of a Qualified Opportunity Zone (QOZ) was added to the toolbox of potential community development tools. In this Alert, we explain what a QOZ is and offer strategies to help real estate developers take advantage of the benefits of QOZs. In short, an investment in a Qualified Opportunity Fund that is in turn invested within a QOZ is entitled to certain tax deferral of capital gains, certain basis step-up (which will lower tax on sale/disposition) and, if held long enough (10 years or more), the ability to not have to pay tax on the appreciation of investment within the fund beyond the initial deferred gain. As explained below, QOZs are in low-income areas; thereby, investment in these areas is incented by the creation of the ability to defer gain within them.

Read the full text of this article.