A new federal “Opportunity Zones” investment program – and its potential to boost job creation, entrepreneurship, and economic development in low-income communities – is the focus of a July 16 GlobeSt.com interview with Real Estate Roundtable President & CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick.  With implementation guidance about the program expected soon from the U.S. Department of the Treasury, the article highlights the major tax considerations and regulatory questions for real estate, many of which are discussed in greater detail in The Roundtable’s June 28 Opportunity Zone comment letter.

Roundtable President & CEO Jeffrey DeBoer, right, and Roundtable SVP and Counsel Ryan McCormick, left, discussed the new federal "Opportunity Zones" investment program in a  July 16 GlobeSt.com interview.

• Last month, the Treasury Department formally designated more than 8,700 low-income census tracts in the United States, Puerto Rico, and territories as qualified Opportunity Zones. (IRS Notice 2018-48 and Roundtable Weekly, June 22)

• DeBoer explained in the GlobeSt interview, “The point of the program is to encourage capital formation and patient, long-term investment in these areas by reducing or eliminating capital gains taxes for taxpayers investing in newly established Opportunity Funds.”

• McCormick told GlobeSt that property in an Opportunity Zone – real estate or otherwise – must be acquired by the fund after Dec. 31, 2017.  He added, “The law delegated many of the key implementation issues to the Treasury Department to resolve. These include: (1) how an Opportunity Fund is certified (2) how quickly must an Opportunity Fund deploy new capital, and (3) when has an existing real estate asset qualified as an eligible investment?”

• A July 13 Wall Street Journal article on Opportunity Zones reported, “Unlike earlier federal efforts to spur economic development in poorer communities, the program takes a free-market approach and isn’t backed with federal spending.”

• House Speaker Paul Ryan (R-WI) on July 12 spoke at length regarding the program before the Economic Club of Washington.  “With these opportunity zones, we are essentially offering private investors a set of incentives. The longer you maintain your investment in these areas, the more tax benefits you receive.  Right now, we have $6 trillion of unrealized capital that can be deployed to help alleviate poverty in distressed communities and improve people’s lives,” Ryan said.

• DeBoer also noted in the GlobeSt interview, “Investors and real estate fund managers are actively in the process of evaluating options, setting up funds, and conducting due diligence.  As time passes and the regulatory regimes takes shape, the pool of Opportunity Fund investors may grow.  We anticipate Treasury will soon issue guidance, hopefully within the next 30 days.”

The Roundtable Tax Policy Advisory Committee (TPAC) recently convened a panel on Opportunity Zones that included the tax counsel for Senator Tim Scott (R-SC), the original author and sponsor of Opportunity Zone legislation.  TPAC’s Opportunity Zone Working Group will continue to provide insight into how the industry can help the program fulfill its ambitious objective of stimulating economic development and job creation. (Roundtable Comment Letter, June 28)

House Republican leaders aim to vote on “Tax Reform 2.0” legislation in September, followed by a tax technical corrections bill after the November mid-term elections.

House Speaker Paul Ryan (R-WI), right, and House Ways and Means Committee Chairman Kevin Brady (R-TX), left, pledged action on Tax Reform 2.0.  Ryan said taxwriters are compiling a list of "glitches and issues" in the new tax law that could be in a technical corrections bill.

• House Ways and Means Committee Chairman Kevin Brady (R-TX) on Tuesday said a second round of tax cuts would include permanently extending individual tax cuts passed last year in the Tax Cuts and Jobs Act.  Twenty-three provisions in the law relating to individual income taxes are currently scheduled to expire at the end of 2025.  (Tax Foundation, January 18)

• During the July 17 meeting with President Trump and other members of his committee, Brady said, "We anticipate the House voting on this in September and the Senate setting a timetable as well." After the meeting, Brady added, "We talked about timing and the importance of this. ... We're very well aligned with the White House on 2.0."  In a televised interview on Wednesday morning, Chairman Brady expanded on his vision for the next major tax bill, which he said would create 1.5 million additional jobs.  (Fox Business, July 18)

• Such a bill likely would face significant challenges in the Senate, where it would need Democratic support to pass.  Senate Finance Committee Chairman Orrin Hatch (R-UT) supports making the tax cuts permanent and “will continue to work with his colleagues to find a viable path and timing to achieve this goal,” according to a spokeswoman. (Wall Street Journal, July 19)

• House Speaker Paul Ryan (R-WI) last week also pledged action on Tax Reform 2.0 and added that a technical corrections tax bill would be introduced after the mid-term elections. Ryan said taxwriters are compiling a list of "glitches and issues" in the new tax law that could be corrected in the bill.  Chairman Brady also confirmed the timeline last week, stating, “We’re continuing to develop the technical corrections. It’s always been assumed that we would want to see how Treasury lays out its rules, from everything from pass-throughs to international.”  (CQ, July 12 and Bloomberg Tax, July 13)

Among the technical corrections needed is a drafting mistake that added nearly a quarter-century to the depreciation life for qualified improvement property that has negatively affected commercial real estate development.  Roundtable SVP and Counsel Ryan McCormick explained at a recent NYU tax conference that while Congress intended for qualified improvement property to receive bonus depreciation — setting the recovery period at 15 years — a drafting error put the recovery period at 39 years.  “In addition to conflicting with the clear legislative intent, this result is ... antithetical to the basic direction of the underlying bill,” McCormick said.  (Tax Notes, July 2 and Wall Street Journal, July 10 – "Legislative Mistake Causes Some Companies to Postpone Renovations")

In testimony before Congress this week, Federal Reserve Chairman Jerome Powell testified about interest rates and monetary policy.  “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate,” Powell told the Senate Banking Committee on Tuesday. 

In testimony before Congress this week, Federal Reserve Chairman Jerome Powell testified about interest rates and monetary policy.

• After the Fed raised short-term U.S. rates twice in the first half of 2018, it is expected to issue two more increases this year, starting in September.  (MarketWatch, July 17 and Wall Street Journal, July 19)

• President Donald Trump criticized the Federal Reserve's monetary policy again today after his initial critical remarks yesterday.  In a statement to CNBC, the White House clarified, "Of course the President respects the independence of the Fed. As he said he considers the Federal Reserve Board Chair Jerome Powell a very good man and that he is not interfering with Fed policy decisions."  (CNBC, July 19) 

• In Chairman Powell's Senate testimony, he said the Fed expects, with appropriate monetary policy, that the job market will remain strong and inflation will stay near two percent over the next several years.  He added that the Fed’s economic forecast faces the uncertain impact of trade policies and tax legislation. “It is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy,” Powell testified.  

• The Fed yesterday released its "Beige Book" of current economic conditions, which notes the effects of newly-imposed tariffs: “Manufacturers in all Districts expressed concern about tariffs and in many Districts reported higher prices and supply disruptions that they attributed to the new trade policies. Tariffs contributed to the increases for metals and lumber.” According to the report’s national summary commercial real estate markets show stable or improving growth.  (Reuters, July 18 and GlobeSt, July 19)   

• During the House Financial Services Committee on Wednesday, Powell also commented on CRE asset pricing.  “Broadly speaking, commercial real estate prices are in the upper range, I think, generally elevated. I wouldn't use the bubble word here, but I would say that many financial asset prices are elevated above their normal ranges.”

• According to a July 16 Financial Times article, U.S. banks are increasingly concerned about the effects of rising interest rates on CRE lending, with executives saying they are worried about an overheated market.  “US bankers have warned about mounting risks in commercial real estate, with figures showing they are putting the brakes on loans to buyers of office buildings, hotels and shopping malls,” the Times reports. 

The effects of monetary policy and tax legislation on commercial real estate will be a focus of The Roundtable’s September 26 Fall Meeting in Washington, DC.