On Thursday, 12/19, the Treasury Department and IRS released their third and final set of regulations for the Opportunity Zone program, following the first set of guidelines in October 2018 and second set of rules in April 2019. The tax benefits and mechanics of the Investing in Opportunity Act, a component of the Tax Cuts and Jobs Act of 2017, were vague in the initial legislation. This was partly by design—allowing for flexibility to quickly spur capital flows into underinvested communities and facilitate public-private partnerships with a minimum of red tape. However, many investors were left feeling too unsure of the material details of the program’s tax incentives to commit extensive capital. The three rounds of clarifying guidelines have offered generally positive news for real estate investors. This third round should provide further comfort to real estate investors as they consider making a QOZ investment.
In case you do not have time to wade through a 544 page tax document, here are the cliffs notes:
- Expanded Development Timelines—the original proposed legislation limited qualification to projects that are completed within 31 months. This latest set of rules expands that timeline to 62 months.
- Facilitating Investment in Brownfield Sites—“Brownfields” are a designation of the EPA, signifying a property that is unusable due to the presence of environmental hazards or contaminants. These sites are typically in urban infill areas, carrying the potential for high-value redevelopment if decontaminated. This set of rules clarifies that brownfield sites may be treated as “original use” property, hence developers can qualify for tax incentives under the Opportunity Zone program by building on brownfield sites (as opposed to improving existing structures). Because of the lengthy environmental remediation and permitting required for brownfield development, the aforementioned 62 month development timeline should also help facilitate brownfield development. This guidance should open up additional sites for QOZ real estate investment, and facilitate value-add development that is true to the spirit of the legislation, creating jobs and repurposing derelict land in underinvested areas.
- Flexibility for Fund Structures—Under the latest set of rules, Qualified Opportunity Funds (QOFs) are afforded more accounting flexibility to remain, in aggregate, within the guidelines of the program and qualify for preferred tax treatment. This includes “safe harbor” periods following the sale or acquisition of individual assets within the program and flexibility as to when qualification tests are carried out. In other words, funds are afforded greater flexibility when it comes to staying within the program’s guidelines throughout and beyond a 10-year term.
On the Horizon
Some lawmakers and community activists have called for greater accountability standards around the program, including offering bigger tax breaks to lower-income areas, establishing uniform standards of measurement for impact of investment, and disqualifying the highest-income areas.
The Treasury Department has already signaled a commitment to “grandfather in” those census tracts and projects that previously qualified based on the original set of rules even in they fall into a census tract or classification that no longer qualifies in the future. In other words, tax incentives for any given project will not be revoked once initially qualified for.
This final set of guidelines, coming so late in the year, may not move the needle for most investors. However, aspiring Opportunity Zone investors should take comfort in seeing another round of rules that are friendly to real estate developers while further aligning the interests of real estate investors and the communities across the U.S. in most need of investment capital for revitalization. As John Lettieri, President and CEO of the Economic Innovation Group, stated, “These regulations provide much-needed clarity for communities and investors alike and will facilitate stronger levels of investment across a range of local needs in designated communities.”