Category: News

The government shutdown is slowing progress on tax guidance important to real estate, including Opportunity Zone incentives.  The IRS cancelled a Jan. 10 administrative hearing on the October proposed regulations.  However, under a special two-year IRS appropriation for tax reform implementation, and the agency’s own contingency plan, background work continues on Opportunity Zone rules and other  critical regulatory guidance.”

The  Wall Street Journal reported on Jan. 15 that “there has been a surge in site acquisitions in the zones last year as developers planned for a surge of investments. There were 58% more deals [in] the zones in the third quarter of 2018, compared with the same quarter in 2017.”  (WSJ, Jan. 15 and Real Capital Analytics.) — enlarge graphic—

• The Wall Street Journal reported on Jan. 15 that “there has been a surge in site acquisitions in the zones last year as developers planned for a surge of investments. There were 58% more deals [in] the zones in the third quarter of 2018, compared with the same quarter in 2017.”  (WSJ, Jan. 15 and Real Capital Analytics.)

• John Lettieri, chief executive of the Economic Innovation Group, a public policy organization that advocated for the inclusion of opportunity zones in last year’s tax overhaul, told The Journal, “The sooner you get regulatory clarity, the more benefit is available to investors and the sooner they can stand up a marketplace.” (WSJ, Jan. 15)

• The Real Estate Roundtable on Dec. 19 provided formal commentsthat encourages Treasury and the IRS to clarify a number of tax issues that would remove uncertainty for potential opportunity zone investors and opportunity fund managers.  The letter was the second round of Roundtable comments on opportunity zones following Treasury’s publication of proposed regulations last October. (Roundtable Weekly, Oct. 21, 2018 and Dec. 19, 2018)

• Roundtable Senior Vice President & Counsel Ryan McCormick participated this week in a CBRE conference call presentation on qualified opportunity zones.  Joining McCormick was Steven Kennedy (Director, PwC), a member of The Roundtable’s Tax Policy Advisory Committee Working Group on Opportunity Zones, and experts from CBRE’s capital markets and research team. The Jan. 16 CBRE PowerPoint presentation can be downloaded here.

• Also this week, Jared Bernstein, a former chief economist to former Vice President Joe Biden, authored an op-ed in the Washington Postin support of the opportunity zone program.  Bernstein and Kevin Hassett, current chairman of the White House Council of Economic Advisers, wrote the original paper that put forward the opportunity zone concept.  In the Jan. 14 op-ed, Bernstein states, “[M]ost OZ communities have faced disinvestment and depopulation for so long, they have both the need and capacity to absorb new investment, development and people without displacing local residents … I suggest we give OZs a chance, while scrutinizing their progress.”

The future of the OZ program will be discussed by Sen. Tim Scott (R-SC) – who led the effort in Congress for enactment of the opportunity zone program – and Roundtable member Geordy Johnson (CEO, Johnson Development Associates, Inc.) on Jan. 29 during The Roundtable’s State of the Industry Meeting in Washington, DC.  Opportunity Zones will also be a focus of The Roundtable’s TPAC meeting on Jan. 30.

President Trump on Dec. 12 signed an Executive Order that seeks to facilitate long-term equity investment in new Opportunity Zones and other low-income communities.  The order formally established the White House Opportunity and Revitalization Council.  (White House statement and PBS Video, Dec. 12)

President Trump on Dec. 12 signed an Executive Order that seeks to facilitate long-term equity investment in new Opportunity Zones and other low-income communities.   (White House statement and PBS Video)

• Congress created Opportunity Zones in the 2017 Tax Cuts and Jobs Act to encourage long-term, capital investment in economically struggling, low-income communities.  Opportunity Funds that invest in tangible business property, such as real estate, located in a qualifying zone are eligible for tax benefits that are tied to the investment holding period.  The capital gain on an Opportunity Fund investment is excluded from tax altogether if the asset is held for 10 years or more. 

• In June 2018, the Treasury Department designated 8,761 communities in all 50 States, the District of Columbia, and five Territories as Opportunity Zones.  (IRS Notice 2018-48 and Roundtable Weekly, June 22) 

• The new Council will lead joint efforts across executive departments and agencies to implement reforms that streamline existing regulations, optimize the use of federal resources, and align the requirements for public and private investment programs in economically distressed communities. The Council will also present the President with a number of reports identifying and recommending ways to encourage investment in these areas.   (White House statement, Dec. 12).  The White House signing was live streamed and included comments from Sen. Tim Scott (R-SC), the original author and sponsor of Opportunity Zone legislation.  (New York Times, Jan. 29, 2018)

• The Council-chaired by Secretary of Housing and Urban Development Ben Carson-will be comprised of officials from 13 Federal agencies and include Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross.

Second Round of Opportunity Zone Regulations Expected in January

• The Treasury Department released its first round of Proposed Regulations governing the Opportunity Zone program in October.   An Oct. 26 GlobeSt.com interview with Real Estate Roundtable President & CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick focused on the initial regulatory guidance and its implications for the real estate industry.
  

  The next round of Opportunity Zone regulations may be released in January, according to Treasury Assistant Secretary for Tax Policy David Kautter, above.  (Tax Notes, Dec. 14).

• The next round of Opportunity Zone regulations may be released in January, according to Treasury Assistant Secretary for Tax Policy David Kautter.  (Tax Notes, Dec. 14)

• The day after the White House Executive Order signing, Kautter told reporters that it would be “about January before we come out with additional guidance.”  Kauter noted, “The first set of regulations was designed to provide rules for getting funds up and operating, and the second set of rules is more about the operational aspects of the funds themselves.”

• According to the New York Times, an anonymous administration official said Tuesday that the coming regulations would include reporting requirements for investments in Opportunity Zones to evaluate the program‘s impact.  (New York Times, Dec. 12)

The Roundtable’s Tax Policy Advisory Committee (TPAC) recently convened a panel on Opportunity Zones that included the tax counsel for Senator Tim Scott (R-SC).  TPAC’s Opportunity Zone Working Group is developing additional comments on how the industry can help the program fulfill its ambitious objective of stimulating economic development and job creation in low-income communities. (Roundtable Comment Letter, June 28 and Roundtable Weekly, July 20) 

The Real Estate Roundtable’s support for a federal proposal that would implement modified capital rules for High Volatility Commercial Real Estate (HVCRE) loan exposures is detailed in a  Nov. 26 comment letter to three banking agencies.  The Agencies — tasked with developing a rule consistent with Section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) to clarify the capital treatment of HVCRE Acquisition, Development, or Construction (ADC) loans — invited comments on their Notice of Proposed Rulemaking. (Roundtable Weekly,  May 25)

The  Real Estate Roundtable’s support for a federal proposal that would implement modified capital rules for High Volatility Commercial Real Estate (HVCRE) loan exposures is detailed in a  Nov. 26 comment letter  to three banking agencies..

• The Roundtable’s comment letter to the Office of the Comptroller of the Currency; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation states the current implementation proposal “more realistically aligns the requirements for HVCRE loans on commercial real estate projects with the actual periods of development or construction risk.”  The letter also notes that when the final proposal is implemented, it “will aid economic growth and job creation, while maintaining adequate capital levels to manage the risks associated with ADC lending.”  (Roundtable Comment Letter, Nov. 26)
• The changes to the capital rules address key deficiencies in the agencies’ prior regulations governing the criteria for HVCRE or HVADC loans by providing the following modifications and clarifications:
• The 15% equity requirement would be revised to expressly include contributed land/property at the appreciated  land value as determined by a FIRREA appraisal and bank review (versus the cost basis under the current rule).
• Clarifies that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don’t trigger the capital penalty.
• A new exemption would be added to the HVCRE rule covering acquisition/refinancing loans for performing income producing properties.
• Allows borrowers to use internally generated capital in the project and, once the development/construction risk period has passed, outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).
• All ADC loans made prior to January 2015 would be grandfathered and do not have to satisfy current HVCRE exemption criteria.
• Banks would able to withdraw HVCRE status prior to the end of an ADC loan’s term.
• Roundtable President and CEO Jeffrey DeBoer also suggests in the letter that periodic industry forums be held on the implementation of the capital rules. “This feedback would allow the Agencies to appropriately address any possible unintended economic consequences resulting from the regulation by supervisory personnel or by the institutions they supervise that might threaten the soundness of the banking system or the stability of the real estate lending market,” DeBoer added.
• The Roundtable’s letter is supported by The American College of Real Estate Lawyers (ACREL) and The American College of Mortgage Attorneys (ACMA).  (Joint Letter of Support, Nov. 27)

The Agencies’ HVCRE proposal was one of the issues discussed at this week’s meeting of The Roundtable’s Real Estate Capital Advisory Committee (RECPAC).  Since 2015, The Roundtable’s HVCRE Working Group and industry coalition partners have played a key role in advancing specific reforms to the HVCRE Rule.  (Roundtable HVCRE Comment Letter, March 2).