Tag: Opportunity Zones (OZs)

IRS Issues Pandemic-Related Relief for Opportunity Zone Investors and Funds

Posted on by Trey Jackson

The Internal Revenue Service (IRS) yesterday issued broad relief for Qualified Opportunity Zone Funds and their investors in response to the ongoing COVID-19 pandemic.  (IRS news release, June 4)

IRS Notice 2020-39 includes five helpful changes and clarifications to the current rules governing the capitalization and operation of opportunity funds.  The Roundtable’s Opportunity Zone Working Group has strongly supported greater flexibility in the Opportunity Zone rules to ensure that capital investment continues to flow to hard-hit, low-income communities during the economic crisis brought about by COVID-19.

Under the new guidance:

  1. if the 180-day investment period to roll gain into an opportunity fund would have expired between 4/1/20 and 12/31/20, the deadline is now extended to 12/31/20;
  1. if an opportunity has a compliance date for the 90% investment asset test that falls between 4/1/20 and 12/31/20, failure to comply is automatically excused under the reasonable cause exception;
  1. the 30-month substantial improvement period for real property owned by an opportunity fund or opportunity zone business from 4/1/20 through 12/31/20 is disregarded;
  1. the IRS has clarified that the working capital safe harbor for opportunity fund working capital assets is extended under the President’s emergency declaration by 24 months (for a total period of 55 months) if the working capital is held by the fund before 12/31/20 and the other requirements for the safe harbor are met; and
  1. the 12-month period for an opportunity fund to reinvest proceeds from the return of capital or disposition of property is extended by an additional 12 months if the original period included 1/20/20, the date of FEMA’s major disaster declaration and other requirements are met.

Additionally, the IRS has updated their Qualified Opportunity Zones Frequently Asked Questions.

  • The Roundtable and a broad coalition of real estate organizations continue to support more significant enhancements to Opportunity Zones that would require congressional action.
  • The 11-member industry coalition urged members of Congress on May 14 to consider Opportunity Zones (OZ) rule changes that could spur investment, promote capital formation and bolster job growth in economically disadvantaged communities impacted by the coronavirus pandemic.  (Coalition letter)
  • The IRS changes this week come not long after the coalition’s letter, and several regulatory recommendations made by Sen. Tim Scott (R-SC) and eight other Senate Republicans on May 4 in a letter to Treasury Secretary Mnuchin and IRS Commissioner Charles Rettig.  (Roundtable Weekly, May 8)

The Roundtable’s Tax Policy Advisory Committee will discuss Opportunity Zone guidance and other tax relief resulting from the COVID-19 pandemic during the first Virtual Roundtable Annual Meeting on June 12.

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Industry Coalition Urges Congress to Consider Opportunity Zone Rule Changes to Spur Investment in Hard-Hit Communities

Posted on by Trey Jackson

An 11-member industry coalition, including The Real Estate Roundtable, urged Members of Congress on May 14 to consider Opportunity Zones (OZ) rule changes that could spur investment, promote capital formation and bolster job growth in economically disadvantaged  communities impacted by the coronavirus pandemic.  (Coalition letter, May 14)

  • Opportunity Zones seek to stimulate jobs and growth where they are most needed by encouraging taxpayers to make long-term, patient investments in targeted, low-income communities.  On Thursday, Federal Reserve Chairman Powell reported that “among people who were working in February, almost 40 percent of those in households making less than $40,000 a year had lost a job in March.” (Chairman’s Prepared Remarks, May 13)
  • The coalition letter asks Congress to make three critical improvements to the Opportunity Zone incentives.  The changes would:
  • Allow opportunity funds to raise capital from all sources, not just gain rolled over from a recently disposed investment.
  • Spur productive real estate investment in low-income communities by providing that a 50 percent increase in the basis of a building constitutes a substantial improvement of the property.
  • Strengthen the economic incentives by codifying the tax rate on deferred gain and extending for two years the recognition date for deferred gain, and consequently, the deadlines that must be met in order to qualify for the increase in basis for gain rolled into an opportunity fund.
  • The coalition’s legislative suggestions come not long after Sen. Tim Scott (R-SC) and eight other Senate Republicans made several regulatory Opportunity Zone recommendations on May 4 in a letter to Treasury Secretary Mnuchin and IRS Commissioner Rettig.  (Roundtable Weekly, May 8)
  • The Senators encouraged 10 specific changes in their letter, which states, “Significant challenges arise from the inability to raise capital; decreased demand for space, products and services; a decline in the local economy; governmental delays; supply chain interruptions; and uncertainty regarding valuations and ability to secure loans and necessary funding apart from Opportunity Zone capital gain investments.”

The role of investment in Opportunity Zones may be addressed in eventual Covid-19 stimulus legislation in Congress.  The Roundtable’s Tax Policy Advisory Committee (TPAC) will continue to collect and share information regarding with policymakers regarding the real estate industry’s experience with the Opportunity Zone tax incentives and the impact on low-income communities of real estate-focused opportunity funds.

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IRS Grants REITs Pandemic Relief; Lawmakers Challenge Tax Rules for PPP Loans and Request Greater Flexibility for Opportunity Zones

Posted on by Trey Jackson

Several tax policy issues affected by the coronavirus pandemic were the focus of policymakers’ attention this week in Washington, including:

Regulatory Relief for REITs

  • The IRS on March 4 granted relief with respect to distributions that publicly traded REITs must make to their shareholders in order to retain their single-level, preferred tax treatment.   The new guidance temporarily lowers the minimum percentage of shareholder dividends from these investment vehicles that must be made in cash from 20% to 10%.   The agency granted similar relief during the 2008 financial crisis.   
  • IRS Revenue Procedure 2020-19 is effective for distributions made by REITs on or after April 1, 2020 and on or before December 31, 2020.  According to the IRS, the guidance was issued to enable REITs to conserve capital and thereby enhance their liquidity.
  • Nareit wrote to the Treasury Department on March 8 seeking the change.  “The current COVID-19 has significantly impacted all REITs, but most severely in the lodging, retail, and health care sectors.  Many REITs have reduced their dividends because the rents they expect to receive are declining dramatically because of the restrictions put in place or suggested by federal and state authorities,” according to Nareit’s letter. 

Congress Challenges Treasury on Tax Aspects of PPP Loans

  • Congressional leaders are questioning a recent notice from the IRS prohibiting taxpayers from deducting business expenses paid with loans from the $670 billion Paycheck Protection Program if the loans are subsequently forgiven (see IRS Notice 2020-32, April 30).
  • The chairmen of the House and Senate tax-writing committees sent two letters this week to Treasury Secretary Steve Mnuchin urging him to reconsider the Department’s interpretation, which significantly reduces the economic benefit of the loan forgiveness for the borrower.  

  • House Ways and Means Chairman Richard Neal (D-MA), Senate Finance Chairman Chuck Grassley (R-IA) and Sen. Ron Wyden (D-OR), the Finance panel’s top Democrat, wrote that Treasury and the IRS’ position defies lawmakers’ intentions when they passed the CARES Act.  “We believe the position taken in the Notice ignores the overarching intent of the PPP, as well as the specific intent of Congress to allow deductions in the case of PPP loan recipients,” the lawmakers stated in their letter to Sec. Mnuchin. 
  • Yesterday, Treasury responded to the lawmakers’ May 5 letter, acknowledging the agency guidance (Notice 2020-32), and that it would “follow up” with Grassley’s office on the matter.  
  • Additionally, Sen. John Cornyn (R-Texas) on May 6 led a group of Senators in introducing the Small Business Expense Protection Act, which would clarify the PPP so small businesses can deduct expenses paid with a forgiven PPP loan from their taxes. 

Covid-19 Relief for Opportunity Zones

  • Sen. Tim Scott (R-SC) and eight other Senate Republicans wrote to Treasury Secretary Mnuchin  and IRS Commissioner Rettig on May 4 asking Treasury Department and the IRS to consider several regulatory recommendations aimed at providing flexibility to Opportunity Zone businesses and investors in response to the coronavirus pandemic.   
  • National estimates show approximately $67 billion has been pledged towards investments in Opportunity Zones, with $10 billion in equity already raised.  (Sen. Scott news release.  May 4)    
  • The Senators are encouraging 10 specific changes in their letter, which states, “Significant challenges arise from the inability to raise capital; decreased demand for space, products and services; a decline in the local economy; governmental delays; supply chain interruptions; and uncertainty regarding valuations and ability to secure loans and necessary funding apart from Opportunity Zone capital gain investments.”
  • The May 4 letter continues, “Relief focused on giving stakeholders, projects, and businesses additional time and flexibility to meet Opportunity Zone requirements, timelines, and thresholds will enable Opportunity Zone businesses to weather the storm and be part of the robust post-COVID economic recovery.” 

The Roundtable continues to be a strong supporter of the Opportunity Zones program as a powerful catalyst for transformational real estate investment in designated low-income areas.

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Final Opportunity Zones Regulations Remove Uncertainty, Should Mobilize Real Estate Investment in Low-Income Communities

Posted on by Trey Jackson

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The Treasury Department yesterday released final regulations implementing Opportunity Zones (OZ) tax incentives.  The details of the 544 pages of regulations are still under review, but the highly anticipated rules appear to embrace key Roundtable recommendations aimed at spurring capital formation and economic development in low-income communities.  (Roundtable comment letter, July 1, 2019)

The final regulations provide helpful guidance in several areas that should remove taxpayer uncertainty and allow productive real estate investments in low-income communities to move forward. 

Specifically, the final rules:

  • Clarify the types of gains that may be invested in opportunity funds and when.  For example, they amend a general rule in the proposed regulations that only capital gain may be invested in an opportunity fund.  The rules allow a taxpayer to invest the entire amount of gain from the sale of business property, which can include gain from the sale of real estate.
  • Clarify when gain may be excluded from tax after an investment is held for a 10-year period.  The proposed rules did not allow an investor to exclude gain when the subsidiary of an opportunity fund sold an asset.  The final regulations liberalize these rules, which should greatly facilitate the formation and operation of real estate-focused opportunity funds that invest in multiple properties.
  • Include important changes to how an investment is measured when testing whether an opportunity fund has substantially improved real estate.  The rules provide opportunity funds with greater flexibility to aggregate multiple assets.  For example, they permit a group of two or more buildings located on the same parcel(s) of land to be treated as a single property—thus eliminating the need to increase the basis of each building by 100 percent.
  • Allow a vacant property to be treated as being put to its original use in an opportunity zone if the property has been vacant for a continuous period beginning one year prior to the census tract’s designation as an opportunity zone.  The proposed regulations would have required a property to be vacant for five years.  A property that meets the original use requirement is not subject to the substantial improvement requirement.
  • Provide important refinements to the previously proposed working capital safe harbor.  The safe harbor provides opportunity funds with a minimum of 31 months to invest their working capital in qualified opportunity zone property, rather than the six months suggested in the statute. This longer runway aligns better with the practical realities of real estate investment.  The final regulations ensure that an opportunity fund that is using working capital to improve real estate will be able meet the opportunity zone requirement that it be engaged in a trade or business.

The most recent Roundtable regulatory recommendations were submitted on July 1, 2019.  The Roundtable also submitted prior letters on the OZ tax incentives in June 2018 and December 2018. 

The Roundtable has strongly supported the Opportunity Zone tax incentives since their enactment as a potentially powerful catalyst for transformative real estate investment in economically struggling parts of the country.  (GlobeSt.com interview with Roundtable President and CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick –July 16, 2018).

The Roundtable’s Tax Policy Advisory Committee and its Opportunity Zone Working Group will be analyzing fully this week’s 544 pages of rules and will report on the details during The Roundtable’s Jan. 28-29 State of the Industry meeting. 

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White House Reviewing Final OZ Tax Regulations; Senate Legislation Introduced on Reporting Requirements

Posted on by Trey Jackson

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The White House’s Office of Management and Budget (OMB) is reviewing a set of highly anticipated final rules for the Opportunity Zones program created by the 2017 Tax Cuts and Jobs Act, according to a Dec. 6 OMB notice.  The rules will address requirements of qualified opportunity funds that invest in opportunity zones (OZs).

  • OZ investors are looking for clarifications on a number of open issues that will help qualified opportunity funds drive economic development in economically distressed communities nationwide.
  • Treasury released its first set of proposed OZ rules in Oct. 2018, followed by expanded guidance in April 2019.  The Treasury rulemakings have reduced investor uncertainty and encouraged capital formation, job creation and productive real estate.  However, certain questions remain that warrant additional guidance, such as whether an existing owner can retain a carried interest when selling property to a related Opportunity Fund.
  • The Real Estate Roundtable on July 1, 2019 submitted recommended clarifications for final OZ tax regulations, which may be issued by the Treasury Department before the end of this year (Roundtable Comment letter, July 1).  The Roundtable also submitted prior letters on OZ tax incentives in June 2018 and December 2018.)
  • In Congress, GOP senators on Dec. 6 introduced a bill that would expand information reporting requirements for OZ investments, including requiring investors to report the number of full-time workers employed by opportunity zone projects. (BGov, Dec. 8 and Sen. Marco Rubio news release, Dec. 9)
  • The Senate’s “Improving and Reinstating the Monitoring, Prevention, Accountability, Certification, and Transparency Provisions of Opportunity Zones (IMPACT) Act” would “… help show communities and investors that the initiative is working, as well as help root out any fraud or abuse,” according to Sen. Tim Scott (R-SC), the lead sponsor of the bill.  (The Hill, Dec. 6)
  • Democratic lawmakers in the Senate and House have also recently proposed measures that would require more reporting requirements about Opportunity Zone investments – as well as reform the tax incentive, and formally investigate recent allegations of wrongdoing related to the program. (Roundtable Weekly, Nov. 8)
  • The Roundtable has strongly supported the Opportunity Zone tax incentives since their enactment as a potential powerful catalyst for transformative real estate investment in economically struggling parts of the country.  (GlobeSt.com interview with Roundtable President and CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick –July 16, 2018).

Through its Tax Policy Advisory Committee and Opportunity Zone Working Group, The Roundtable will continue to contribute to the implementation and oversight of the Opportunity Zone incentives, offering constructive comments and recommendations to Members of Congress and Treasury officials. 

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Lawmakers Seek Greater Opportunity Zone Oversight and Information Reporting, Float Possible Reforms

Posted on by Trey Jackson

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In response to allegations that the Treasury Secretary improperly intervened in the designation of certain census tracts as Opportunity Zones, key Democratic lawmakers put forward proposals this week to enhance Opportunity Zone information reporting, reform aspects of the tax incentives, and formally investigate the reports of wrongdoing.

  • The allegations, published in the New York Times, have been denied by both Treasury Secretary Steven Mnuchin and Michael Milken, the implicated private investor.  (Bloomberg, Oct. 29, 2019) (Letter from Michael Milken to the Milken Institute Community)
  • On Monday, the Chairman of the House Ways and Means Committee Richie Neal (D-MA) and the Ranking Democrat on the Senate Finance Committee Ron Wyden (D-OR) announced they were launching an investigation to determine “whether political appointees interfered in the process to potentially steer millions in tax breaks to longtime associates.”  (Letter to Treasury Secretary Mnuchin requesting a wide range of documents and records.)
  • The same day, Chairman Neal, Senator Wyden, Ways and Means Oversight Subcommittee Chairman John Lewis (D-GA), and Senator Cory Booker (D-NJ) sent a letter asking the Government Accountability Office (GAO) to collect and analyze information about how the Opportunity Zones incentive has been implemented by Treasury and the IRS, how census tracts were designated as Opportunity Zones, what compliance measures were used to ensure adherence to the law, and how the Treasury Department can measure the effectiveness of the tax incentive.
  • Just two day later, on Wednesday, Senator Wyden introduced the Opportunity Zone Reporting and Reform Act (S. 2787).  Under the bill, in addition to requiring greater taxpayer reporting, certain previously certified census tracts would no longer qualify as Opportunity Zones.  Several types of real estate assets would be blacklisted and ineligible for investment (e.g., self-storage property, stadiums, casinos).  In the case of opportunity funds that are renovating or rehabilitating existing structures, the bill would increase the level of new investment required to qualify for benefits.
  • The Wyden bill would exclude multifamily housing as an eligible Opportunity Zone investment unless 50 percent or more of the housing units are rent-restricted and occupied by tenants whose income is 50 percent or less of the area median income.  (Detailed Summary)
  • If enacted, the restriction on multifamily housing could have a profound negative impact on future Opportunity Zone investment.  New research indicates that multifamily construction starts represented over one-half (53.2%) of the total commercial real estate investment in Opportunity Zones over the last 18 months.  (CBRE, Multifamily Development: A Bright Spot in Opportunity Zone Initiative, Nov. 6, 2019)
  • Also on Wednesday, Representatives Ron Kind (D-WI), Mike Kelly (R-PA), and Terri Sewell (D-AL) unveiled bipartisan draft legislation to enhance reporting requirements for opportunity funds.  The Opportunity Zone Accountability and Transparency Act would require opportunity funds to submit annual information reports that would be publicly available.  In the case of real estate investments, funds would report information such as: the aggregate amount invested, structures’ square footage, the number of residential units, the number of low-income residential units, and the number of employees, Failure to report information accurately could trigger a penalty up to $200,000.

Since its enactment, The Real Estate Roundtable has strongly supported the Opportunity Zone tax incentives as a potential powerful catalyst for transformational real estate investment in economically struggling parts of the country. Through its Tax Policy Advisory Committee and Opportunity Zone Working Group, The Roundtable has played an active role throughout the lengthy rulemaking process, offering constructive comments and recommendations to Treasury officials. (GlobeSt.com interview with Roundtable President and CEO Jeffrey DeBoer) (Roundtable Weekly, Dec. 21, 2018)

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Roundtable Proposes Modifications to Treasury’s Opportunity Zone Rules

Posted on by Trey Jackson

The Real Estate Roundtable on July 1 submitted recommended clarifications for final Opportunity Zones tax regulations, which are expected from the Treasury Department before the end of 2019.  (Roundtable comment letter , July 1) 

The Real Estate Roundtable on July 1 submitted recommended clarifications for final Opportunity Zones tax regulations. 
  • This month’s Roundtable 12-page comment letter to Treasury and the IRS encourages the government officials to include 10 key clarifications in their final regulations. (The Roundtable submitted prior letters on OZ tax incentives in June 2018 and December 2018.) 

    The recommendations would: 

  1. clarify that gross section 1231 gain (gain that relates to property used in a trade or business) is eligible for investment in an Opportunity Fund; 
  2. further facilitate the use of “aggregator funds” for multi-asset Opportunity Funds; 
  3. allow existing owners to retain a carried or profits interest when selling property to related Opportunity Fund; 
  4. clarify that the working capital safe harbor applies during the construction of qualifying property; 
  5. encourage investment in languishing Opportunity Zone properties by treating investment in vacant property favorably; 
  6. promote ambitious and transformative projects by allowing assets to be aggregated together under the substantial improvement test; 
  7. ensure that property that straddles inside and outside of an Opportunity Zone qualifies; 
  8. treat property that will be demolished as “unimproved land” for Opportunity Zone purposes; 
  9. confirm that investors qualify for the tax benefits when an Opportunity Zone business sells an asset after 10 years; and 
  10. make certain additional clarifications related to Opportunity Zones and REITS.  

  • Cushman & Wakefield’s new publication –  ” In the Opportunity Zone: Location. Timing. Capital ” – reports that capital inflows into OZs could increase by $100 billion.  

    Roundtable President and CEO Jeffrey DeBoer states in the letter, “Partnering with local leaders and entrepreneurs, real estate-focused opportunity funds will spur long-term, patient investment that drives productive economic activity.  Real estate projects financed through opportunity funds will generate well-paying jobs, improved infrastructure, and a built environment that helps attract and retain new businesses and employers. Regulatory clarifications along the lines described above will help ensure that the Opportunity Zone incentives fulfill their ambitious objectives.”  

  • Cushman & Wakefield’s new publication – “In the Opportunity Zone: Location. Timing. Capital” – reports that capital inflows into OZs could increase by $100 billion.  The company is tracking 138 large CRE funds targeting more than $44B in equity that intend to invest in multiple product types.  The report also states Opportunity Zone prices are rising 14% for redevelopment projects and 20% for land sites. (Commercial Property Executive, July 8) 

Additionally, Forbes and the Sorensen Impact Center at the University of Utah have launched a nation-wide competition to feature the top leaders, investors and entrepreneurs who are pioneering creative approaches to equitably revitalize distressed OZ communities throughout the nation.  Applications and nominations for the Forbes OZ 20 close Aug. 31.  (Forbes, July 11) 

 

Bipartisan Senate Legislation Proposes Reporting Requirements for Opportunity Funds; Freddie Mac Releases Analysis of OZs

Posted on by Trey Jackson

Bipartisan Senate legislation introduced May 8 would direct the Treasury Department to collect data and issue annual reports on Opportunity Zone (OZ) tax incentives. Reporting requirements were included in the original Investing in Opportunity Act before Congress passed it as part of tax reform in December 2017.

The Opportunity Zones bill (S. 1344)—introduced by Sens. Cory Booker (D-N.J.), Tim Scott (R-S.C.), Todd Young (R-Ind.), and Maggie Hassan (D-N.H.)­—would require data on the number of opportunity funds created, their asset classes, their holdings, and their economic ripple effects in the designated OZs where they invest. (BGov, May 8)

  • Congress approved the creation of Opportunities Zones-economically distressed areas characterized by high poverty and subpar employment opportunities-and tax incentives to encourage redevelopment in these lower-income communities.
  • The program allows for capital gain related to a current sale or transaction to be deferred until December 31, 2026 – if investors place their capital gain into a fund that makes qualified investments in Opportunity Zones.  Individuals and entities can contribute to these Opportunity Funds.
  • The bill (S. 1344)—introduced by Sens. Cory Booker (D-N.J.), Tim Scott (R-S.C.), Todd Young (R-Ind.), and Maggie Hassan (D-N.H.)­—would require data on the number of opportunity funds created, their asset classes, their holdings, and their economic ripple effects in the designated OZs where they invest. (BGov, May 8)
  • “Already leaders in rural and urban communities across the country are beginning to use Opportunity Zones as a valuable new tool to drive high-impact investment into their communities,” Sen. Booker said. “This legislation will restore and strengthen transparency measures to ensure [the Opportunity Zones program] lives up to its original promise and delivers real impact to those who need it most.”  (Sen. Booker news release, May 8)
  • “Opportunity Zones have been a unifying message for both Republicans and Democrats,” Sen. Scott said. “It’s imperative that we create reporting requirements to allow us to accurately measure the success of the initiative…” 
  • The Treasury Department last month released a highly-anticipated, second set of Opportunity Zone (OZ) regulations that seek to provide certainty to potential OZ investors and drive economic development in economically distressed communities nationwide. (reference: 169-page Treasury regulations and IRS news release, April 17 / Roundtable Weekly, April 19) 
  • No action on S. 1344 is imminent, though Congress could consider tax legislation this summer or fall. 

Freddie Mac has released an analysis of its own financial data to show multifamily market characteristics in Opportunity Zones.  Notable among the reports many findings were the following: 

Freddie Mac has released an analysis of its own financial data to show multifamily market characteristics in Opportunity Zones.

  • Housing units in OZs tend to be relatively old-28.7% of the multifamily rental stock was built prior to 1960 (compared to a rate of less than 20% elsewhere).
  • The population density of OZs is low-about two-thirds of the national rate
  • Of the 117 opportunity funds identified by the National Council of State Housing Agencies as of April, 76% have an investment focus on multifamily residential development. 

The report concludes that census tracts designated by governors as OZs “overlap quite well with areas that Freddie Mac targets for affordable housing assistance.” 

The OZ program’s goals and incentives were the focus of a Jan. 29 discussion during The Real Estate Roundtable’s State of the Industry Meeting, which featured Sen. Scott and Roundtable member Geordy Johnson (CEO, Johnson Development Associates, Inc.). (Roundtable Weekly, Feb. 15)

Treasury Issues Highly Anticipated and Favorable Opportunity Zones Guidance

Posted on by Trey Jackson

The Treasury Department on Wednesday released a highly-anticipated, second set of Opportunity Zone (OZ) regulations that seek to provide certainty to potential OZ investors and drive economic development in economically distressed communities nationwide. (reference: 169-page Treasury regulations and IRS news release, April 17) 

President Donald Trump with Scott Turner, executive director of the White House Opportunity and Revitalization Council,  at the April 17 Opportunity Zone Conference with state, local, tribal and community leaders. (Official White House Photo by Shealah Craighead)  

  • A White House Opportunity Zones event on Wednesday featured President Trump, Treasury Secretary Steven Mnuchin and officials from local governments around the country.  (White House Remarks and  Video, April 17)
  • The Treasury Department designated more than 8,700 low-income census tracts as Qualified Opportunity Zones last June. (IRS Notice 2018-48).  Treasury estimates that Opportunity Zones will boost investment in these targeted areas by $100 billion.  According to White House Chief Economist Kevin Hassett (citing Zillow data), property values in Opportunity Zones have appreciated by about 20 percent since zone designations were made in early 2018. 
  • Roundtable President and CEO Jeffrey DeBoer said, “We are pleased that these proposed regulations provide answers to many key structural and operational questions that have concerned potential opportunity zone investors, developers, and business owners.   The opportunity zone program, designed to stimulate investment in economically struggling communities nationwide, has tremendous potential.   We look forward to continuing to work with policymakers to reduce unnecessary, counterproductive aspects of the new law.”

The Roundtable previously submitted two comment letters to policymakers on Opportunity Zones, one in June 2018 and one in December 2018. (Roundtable Weekly: Oct. 19, and  Dec. 21). The rules issued this week expanded on the previously proposed regulations and address a variety of OZ investment issues.  Positive developments in the newly proposed regulations include the following:

The  169-page Treasury regulations and IRS news release, April 17

  • Opportunity Funds that own more than one property can sell assets individually after a 10-year holding period and fund investors can exclude the gain, without a requirement that the fund investor sell his or her interest in the fund.  In addition, the regulations clarify that multi-asset Opportunity Funds that choose to set up separate funds for individual assets can reduce the administrative burden on their investors through the use of a “feeder” fund that aggregates the fund interests;
  • Opportunity Funds can make nontaxable, debt-financed distributions to fund investors during the 10-year holding period, provided they comply with “disguised sale” rules that limit distributions made during the first 2 years;
  • Land (improved and unimproved) is qualified opportunity zone business property provided it is used in an active trade or business, and it does not have to meet the “original use” or “substantial improvement” requirements that apply to structures;
  • The working capital safe harbor, which provides up to 31-months for Opportunity Funds to deploy capital, is further liberalized.  Specifically, the regulations clarify that: (1) subsequent contributions of capital to the same Opportunity Fund are subject to a new 31-month period, and (2) the 31-month period is extended if the delay is due to waiting for government action or approval;
  • Leased property, including property leased by an Opportunity Fund from a related property, can qualify as opportunity zone business property if certain requirements are met.  This clarification in particular should help existing owners of property in Opportunity Zones participate in the tax incentives without having to sell or dispose of their ownership interest; 

Roundtable President and CEO Jeffrey DeBoer said, “We are pleased that these proposed regulations provide answers to many key structural and operational questions that have concerned potential opportunity zone investors, developers, and business owners.”

  • Real estate that straddles an Opportunity Zone border can qualify as opportunity zone business property as long as the portion of the property that is inside the zone is substantial relative to the total property;
  • While the sale of an asset during the 10-year holding period is generally a taxable event for the Opportunity Fund investors, the regulations infer that a fund could do a like-kind exchange and as long as the replacement property is qualified opportunity zone business property, the gain would be deferred for the investors;
  • Lastly, the regulations include a number of changes that aim to facilitate investment in operating businesses, which should increase tenant demand for commercial real estate located in Opportunity Zones.

The IRS has scheduled a public hearing on the second set of proposed rules for July 9, 2019. Comments are due 60 days after the proposed rules are published in the Federal Register. A third set of proposed guidelines is expected on Opportunity Fund’s reporting requirements to measure the effectiveness of the program.

The OZ program’s goals and incentives were the focus of a Jan. 29 discussion during The Real Estate Roundtable’s State of the Industry Meeting, which featured Sen. Scott and Roundtable member Geordy Johnson (CEO, Johnson Development Associates, Inc.). (Roundtable Weekly, Feb. 15) 

The Roundtable’s Tax Policy Advisory Committee (TPAC) plans to continue its work with policymakers on the OZ program and regulations affecting Qualified Opportunity Funds.

 

 

IRS Holds Hearing on Opportunity Zones; Roundtable Working Group Meets With Treasury Officials on OZ Regulations

Posted on by Trey Jackson

An IRS hearing this week focused on how Opportunity Zone regulatory guidance may affect long-term investments in certain low-income communities.  The hearing, originally scheduled for Jan. 10, was rescheduled due to the government shutdown in December. 

An IRS hearing this week focused on how Opportunity Zone regulatory guidance may affect long-term investments in certain low-income communities.

  • Earlier in the week, a delegation from The Real Estate Roundtable’s Opportunity Zone Working Group met with Treasury officials to discuss proposed and forthcoming tax regulations.  The meeting addressed key areas where additional guidance could help ensure the Opportunity Zone tax incentives succeed in stimulating productive, job-creating real estate investment in the designated low-income communities. Among the issues discussed:
    • Determining what constitutes the original use of property for Opportunity Zone purposes, and in particular, whether a Qualified Opportunity Fund can purchase a newly constructed building before it is placed in service;
    • Clarifying how land is treated for purposes of the Opportunity Zone asset test, and how to account for leased property;
    • Facilitating contributions of real property to Opportunity Funds by current property owners
    • Ensuring that capital gain in multi-asset Opportunity Funds can qualify for the tax incentives;
    • Clarifying the tax consequences of refinancing and debt distribution transactions, particularly those that involve appreciated Opportunity Zone assets;
    • Encouraging capital formation and growth in Opportunity Zones through favorable gain reinvestment, roll-over, and holding period rules at the investor, fund and business level; and
    • Enhancing the 31-month working capital safe harbor through additional safeguards and relief for fund investors making a good faith effort to deploy their capital. 

Sen. Tim Scott (R-SC) led the effort in Congress for enactment of the Opportunity Zones program.

Similar issues were raised by 23 witnesses at the five-hour IRS hearing on Thursday.  (Bisnow, Feb. 14). 

  • A letter on Feb. 5 from Senators Chris Coons (D-DE) and Michael Bennet (D-CO) to Treasury Secretary Steven Mnuchin raised additional issues and expressed concerns regarding the potential for waste and abuse, including in the context of real estate investment. (Delaware Business Now, Feb. 6).
  • The Opportunity Zone program’s goals and incentives were the focus of a Jan. 29 discussion during The Roundtable’s State of the Industry Meeting, which  featured Sen. Tim Scott (R-SC) – who led the effort in Congress for enactment of the program – and Roundtable member Geordy Johnson (CEO, Johnson Development Associates, Inc.).
  • The Real Estate Roundtable provided formal comments on Dec. 19, 2018 that encouraged Treasury and the IRS to clarify certain tax issues for potential Opportunity Zone (OZ) investors and Qualified Opportunity Zone managers.  The letter was the second round of Roundtable comments following Treasury’s initial set of proposed OZ regulations issued last October. (Roundtable Weekly, Oct. 21, 2018 and  Dec. 19, 2018)

The highly-anticipated, second set of Treasury OZ regulations are expected in the coming weeks.  Another public hearing will follow before rules for the program are finalized.