Things To Know About The New Opportunity Zone Guidelines
After several months of waiting, real estate investors, developers and other keen commercial real estate observers have finally received answers to some of their many questions about the Opportunity Zone program.
The Department of Treasury on Friday released new regulations and some clarifications regarding the much-hyped Opportunity Zone program that can benefit investors, business owners and developers who place money in a qualified opportunity fund before deploying the investment in a designated opportunity zone in return for a hefty tax break.
“Overall, I think the regulations are a good start but incomplete,” Develop founder and CEO Steve Glickman said. Glickman is a former Obama administration official who spearheaded the Opportunity Zone policy.
“[The new regulations] will provide, I think, the impetus for a number of real estate investors and developers who have been on the sidelines to the marketplace pretty soon,” Glickman said.
He said the new regulations provides more flexibility than the former statute on acquisition timing, types of businesses and the substantial improvement test.
"I think Treasury and IRS took a practical approach that will facilitate investments in these designated areas," said Lisa Starczewski, co-chair of Buchanan, Ingersoll & Rooney's Tax Section and Opportunity Zones team.
Established late last year as part of President Donald Trump’s Tax Cut and Jobs Act of 2017, the Opportunity Zone program was created to help spur development in low-income neighborhoods as determined based on the U.S. census.
Each state nominated designated tracts and later sent the designations to the Treasury Department for certification. More than 8,700 communities nationwide are designated opportunity zones.
When the first set of rules came out earlier this year, investors were excited about the possibilities of the program and the prospect of receiving a 10% or 15% discount or a tax-free break on capital gains depending on how long they hold and sell their investments in these zones.
However, as more investors continued to study the initial draft, the less confident many became. Several investors were frustrated by the lack of information and guidance from the government, which had promised guidelines in the summer.
"If you're looking for specifics and clarity, it's still not there yet," said Lorin, who is part of the Economic Innovation Group's Opportunity Zones Coalition. The coalition is tasked with making sure the Opportunity Zone program is effectively implemented.
"It's just not clear yet. It could be," Lorin said. "We're looking for clear answers and we just don't have them yet."
The Treasury Department said it is accepting public input and will issue a new iteration of the program by the end of the year.
Bisnow spoke with several advisers to highlight the proposed guidelines for the Opportunity Zone program.
Here are some of the key points:
Qualified Opportunity Funds
One persistent question is what qualifies as an opportunity fund — the investment vehicle for an opportunity zone investment. Who can start one? What are the requirements?
All you need is to self-certify and fill out Form 8996 and attach it to your federal income tax return.
"The proposed regulations generally permit any taxpayer that is a corporation or partnership for tax purposes to self-certify as a Qualified Opportunity Fund, provided that the entity self-certifying is statutorily eligible to do so," the regulations state.
Kosmont Cos.' founder Larry Kosmont likes that a qualified opportunity fund could be created as a limited liability company.
"This is a real estate developer's dream," Kosmont said. "They love LLCs in terms of the flexibility, structuring deals and easier administration of it."
Starczewski said there is nothing in the regulations that requires an investor to be attached to a big fund run by a bank or a private equity firm.
"A fund could just be a two-person partnership," Starczewski said. "It could be a real estate developer and a city or an investor who gets together and pool capital gains they have and decide they are going to these zones and purchase a property and renovate the building."
Deferred Gain Clarification
There was a concern that the incentives for investors would expire in 2028, when the Opportunity Zone program to invest in the 8,700 designated opportunity zones ends.
Glickman said that is not the case. The Treasury Department clarified the rules and allows investors to hold interest in a qualified opportunity fund until 2047.
"The last day you can take advantage of the incentive is the end of 2047," Glickman said.
Lorin said if an investor invests in an opportunity fund and deploys that money — for example in 2021 — "it is now clear that one can get the benefits of the 10-year hold (the tax-free capital gains) post the 2028 end of the program. One can hold assets up to 2047."
Substantial Improvement Test
The first iteration of opportunity zones required investors to double down on the improvements of a property purchased in an opportunity zone to qualify for the program. This meant that if an investor purchased a property valued for $5M, that investor would need to make $5M in improvements.
"It made the project more difficult to work economically," Starczewski said.
Now, the Treasury Department has removed the double-down provision and only requires an investor to make improvements based on the value of the building.
"You only have to double the basis of the building and not the land," Starczewski said.
Share your thoughts on and planned investment in opportunity zones in Bisnow's survey: