With the unveiling of the highly anticipated second set of proposed regulations related to opportunity zones, 2019 is going to be a big year for investors wanting to take advantage of the much-hyped federal program.
By Wednesday afternoon, commercial real estate professionals, investors and others were poring over the 169-page regulations released by the IRS and the U.S. Department of the Treasury.
"From what we’ve seen so far, this is a positive step,” EIG President and CEO John Lettieri said. “This removes a lot of the obvious impediments that have kept capital on the sidelines to date … I think it’s going to free up a lot of capital."
About 15 months after the program passed as part of the president's trillion-dollar Tax Cuts and Jobs Act in 2017, officials hope the new set of guidelines will finally give local city officials guidance and developers and investors confidence to start investments in the more than 8,700 distressed communities in the U.S.
President Donald Trump and other White House officials held a press conference and discussed the second set of proposed regulations. They also announced the various subcommittees supporting the new federal program that allows investors to put money into a qualified opportunity fund and invest in a distressed community.
"I think these regs remove the cloud of doing it," DLA Piper's Stephen M. Sharkey said. "In my assessment, this gives us something that can make this work and make investments happen."
The federal program is still evolving and changing, experts note, and there remain unanswered questions and more regulations to come. With that, here are some of the new guidelines that stood out and other things we learned with the release of the second set of proposed regulations:
1. It's not just a real estate game anymore Prior to the second set of regulations, no one really knew how businesses like startups headquartered in designated opportunity zones would benefit from the new federal program, only that they would in some way. Under the new set of regulations, a business funded by a qualified opportunity fund and located in an opportunity zone, could qualify for the tax incentives if it meets one of three "safe harbors": at least 50% of the hours the employees or contractors work are spent within the opportunity zone, half of the company's services are within the area or if the management and operations are based in the designated zones.
2. Reinvestment rule In the first set of regulations, the government mentioned there would be some type of a mechanism that allows an investor to recycle capital upon sale of a designated opportunity zone investment. Qualified opportunity funds will now have a one-year grace period to sell assets and reinvest the proceeds into another opportunity zone investment. The Treasury Department and the IRS believe this gives fund managers a reasonable time to reinvest the proceeds without the fund being harmed or penalized, according to the statute.
3. What happens if a property in an opportunity zone straddles over a non-opportunity zone area? The federal government received a lot of questions about what happens if a property, like a retail complex, straddles the area between an opportunity zone and a neighboring, non-opportunity zone area. Could the owners receive the benefit? The government cleared this up. If the majority of a property (based on square footage) is located within a qualified opportunity zone compared to the amount of its property outside of the zone and that "property outside of the zone is contiguous to part or all of the real property located inside the zone, then all of the property would be deemed to be located within a qualified zone."
4. Vacant properties Prior to the second set of regulations, investors who acquired property in an opportunity zone would be required to meet a substantial improvement provision by providing upgrades to that property. But what if the acquired property was abandoned, dilapidated or run down and vacant? Under the new regulations, the government says a building or other structure that has been vacant prior to being purchased by a qualified opportunity fund will satisfy the original use requirement. In short, the investor will not need to meet the substantial improvement provision.
5. What happens if a QOF investor dies during the investment period? OPZ Bernstein principal Craig Bernstein said this is one of the major issues for older investors. Under the first set of regulations, the investor's children or heirs would not receive the benefits of the QOF investment. The second regulation cleared this up. Bernstein said the government has now created a mechanism that will not penalize the children or heirs of investors. Upon the death of an investor, the investment will be passed on. The heirs of the investor will now receive the benefits from the original QOF investment.
"This is a major concern for older investors contemplating weighing the positive and negatives of the opportunity zone program for fear the benefits would not pass on," Bernstein said.
6. No triple net leases Triple net leases will not be part of the opportunity zone program. Businesses taking advantage of the opportunity zone program have to be active, and the main benefit of a triple net leased property is the passivity it allows the owner. The regulations say clearly: "The ownership and operation (including leasing) of real property is the active conduct of a trade or business. However, merely entering into a triple-net-lease with respect to real property owned by a taxpayer is not the active conduct of a trade or business by such taxpayer."
7. The White House is all-in on opportunity zones The White House Opportunity and Revitalization Council chaired by Ben Carson will be supported by five subcommittees that will focus on identifying, targeting and streamlining federal program efforts to these opportunity zones. The committees will vary from economic development led by the Department of Commerce, to entrepreneurship led by the Small Business Administration, to education and workforce development led by the departments of education and labor.
The new council will also host listening tours about the opportunity zone program with community leaders in the next few months.
Additionally, the council will launch a new website, opportunityzones.gov, to provide resources for those interested in the program. That website is not yet live.
https://www.bisnow.com/national/news/opportunity-zones/heres-what-you-need-to-know-about-the-second-set-of-regulations-for-opportunity-zones-98540
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