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We Asked CRE Pros What Their Biggest Opportunity Zone Questions Were. Here Are One Expert's Answers

Opportunity zones have reached Amazon HQ2-level buzzworthiness in commercial real estate, with billions already lined up in funds to take advantage of a way to invest in real estate instead of paying capital gains taxes.

Miles & Stockbridge's Jerome Breed, DMPED's Jonathan Kayne, Baker McKenzie's Dan Cullen, Morris Manning & Martin's Matthew Peurach, Develop's Steve Glickman and CohnReznick's Ira Weinstein

But with trillions in investment opportunity and a seemingly low barrier to participate in the benefits, the buzz has been generated by a combination of eagerness to capitalize and a need to learn reliable information about the program quickly.

Bisnow has covered opportunity zones in the months since the program passed as a provision in the Republican tax reform package. In Washington, D.C., earlier this month, we hosted our first dedicated Opportunity Zones event. More are planned in the coming months in markets across the country.

At the event, Bisnow asked the audience to submit questions about the program to ask the panel and moderator. We received almost 70 responses out of a crowd of more than 400.

In the aftermath of the event, we honed the list down to the most pressing for the average prospective opportunity zone investor, and pose them to the panel's moderator — Miles & Stockbridge principal Jerome Breed — to get clarity.

Below are the submitted questions and Breed's written responses, edited lightly for clarity:

1. If you’re a landowner and you are keeping the maximum 20% contribution to stay within the related parties rule, can you 1031 the rest of your proceeds?

Breed: The 20% relatedness rule pertains to the percentage of common ownership between the QOZB [qualified opportunity zone business] and the seller of the land, not to the amount of the sales price. If land is subdivided and part is sold to the QOZB, the remaining part could be disposed of in a Section 1031 transaction. An entire property could be sold to an OZ Business, but the property seller cannot own more than 20% of the OZ Business.

2. If we already put our capital gains into our own OZ fund, can we still reallocate it to another OZ fund?

Breed: An opportunity fund that has cash on hand can invest that money into another opportunity fund provided that the 180-day investment period has not expired as to the cash that it has on hand. In that case, the first fund may not qualify as a QOF [qualified opportunity fund]. A better option in that case would be to refund the money to the investor and have the investor invest directly into the second opportunity zone fund. Multiple funds cannot be used to avoid the 180-day test.

3. Will ground leases work in the opportunity zones framework?

Breed: An opportunity zone business may ground lease property for use in its business. The ground lease may reduce total project cost to a number that can be supported by the capital stack. A ground lease could be from a related party.

4. If everyone is selling their assets after 10 years, doesn't that severely depress the market for the underlying assets such that the devaluation of equity offsets the tax benefit?

Breed: There is no guarantee as to the condition of the market at the time that the 10-year period expires. Pursuant to the recently issued guidance, the ability to step up basis to Fair Market Value expires on Dec. 31, 2047. So it is not a foregone conclusion that all OZ investors will sell at the earliest possible moment.

5. What happens if the market goes south and the bank takes back the property (i.e. the equity gets wiped out). The investors who contributed their gain now have no ownership stake, but do they still owe taxes on the original gain?

Breed: I will assume that the investor invested in a fund that holds a single-asset QOZ partnership. If the foreclosure occurs before Dec. 31, 2026, the amount of gain defined by reason of the OZ investment will be reduced to zero under the provisions of Code Section 1400Z-4834-0805-5673, v. 2-2-2(b)(2)(A). If the foreclosure occurs after Dec. 31, 2026, however, the taxpayer could have a loss on the foreclosure since his basis in the QOF would have been increased by the amount of gain that was subject to tax, plus the 15% gain that was previously forgiven.

6. Can sponsor loads be part of the 90% deployed?

Breed: Sponsor load charged to the investor would not count as part of the 90% test since it has not been invested into an Opportunity Zone Business.

7. Do you have to be a Qualified Investor to invest in an opportunity fund?

Breed: Yes. A taxpayer must have a capital gain and make an election to qualify a capital contribution to a fund under the Opportunity Zone Program.

8. Can one buy a recently built building in an opportunity zone ... [not] invest further and still take tax advantage? If you already own land in the zone, can you still qualify for the [capital] gain deferral?

Breed: No. If a property has been used by another taxpayer, the QOF must “substantially improve” the property. Substantial improvement means spending an amount equal to the purchase price of the building acquired, without regard to the cost of the land on which the building sits. Land that is located in an OZ can be sold and the profit reinvested in a QOF. The QOF cannot purchase assets from a related party and have those assets treated as QOZ business property.

9. When capital gains taxes are paid in 2026 what tax rate will be applied? Today's rates or rates in 2026?

Breed: The capital tax rate that will be imposed in 2026 under the OZ Program will be the applicable capital gains tax rate for 2026, which may be higher or lower than the current capital gains tax rate.

10. How can you benefit if you own a building located in an opportunity zone and made the investment in 2017?

Breed: You can sell the building to an unrelated QOF, and reinvest the capital gain realized on the sale into a QOF that invests in a different QOZ building. The unrelated QOF must then substantially improve your original building. You may own up to 20% of the QOF and still have it treated as an unrelated QOF.

11. What are the benefits to a tenant that locates in an OZ? 

Breed: The benefit to a tenant is to obtain the right to use a better building for lower rent. A tenant may also fund tenant improvements or other capital needs in the leased space with the proceeds of an OZ investment.

12. How do you avoid a geographic bias? Some states may be more desirable vs. others.

Breed: I don’t believe that geographic bias can be avoided. It is almost certain that some designated OZs will be favored over other OZs. There is no mechanism in the OZ Program to force investment into any particular OZ. States and localities are free to provide their own incentives for investment into particular OZs that are not receiving investments under the federal OZ statute.