Roundtable Opportunity Zones Comment Letter - July 1, 2019

The Real Estate Roundtable submitted a 12-page comment letter on guidance regarding Opportunity Zones on July 1, 2019 to the Treasury Department and IRS.   

 2019-07-01 OppZone cmmt Lett x200 image RER  
July 1, 2019 Roundtable comment letter on Opportunity Zones guidance.   

Treasury released proposed regulations in April 2019 that thoughtfully addressed critical issues regarding the Opportunity Zone tax incentives (reference169-page Treasury regulations and IRS news release, April 17).  The rules expanded on previously proposed regulations in Oct. 2018.

The Roundtable believes the most recent guidance is accelerating capital formation, job creation, and productive real estate investment in struggling, low-income communities. Nonetheless, certain questions remain that warrant additional, clarifying guidance

Following up on The Roundtable's prior letters on Opportunity Zones in June 2018 and December 2018, the July 2019 comments recommend clarifications for the final regulations.  Ten key points from the letter are summarized below:  

1.)  Section 1231 gain:
To maximize the redeployment of capital for Opportunity Zone purposes, the final rules should allow taxpayers to invest section 1231 gain in a qualified opportunity fund (QOF) without a netting requirement. In addition, the rules should allow taxpayers to elect to invest section 1231 gain at the time of the sale/exchange, rather than waiting until the end of the year. Lastly, the rules should provide flexibility with respect to the investment period when the seller of the property is a partnership, similar to the rules for capital assets.

2.)  Aggregator funds:
The proposed regulations create favorable rules that should facilitate the formation and administrative operation of multi-asset opportunity funds by allowing investors to contribute their QOF interests to an upper-tier partnership (Aggregator fund). The final rules should clarify that these “roll up” rules will be respected for tax purposes when the aggregation is part of the fund formation process. The rules should also clarify that a merger of QOFs is not an inclusion event.   

OppZone Map EIG x200
Interactive map of U.S. Opportunity Zones from the Economic Innovation Group.   
3.)  Related party rules:
If an existing owner/developer is willing and able to facilitate a substantial new investment in an Opportunity Zone asset and subordinate his or her right to share in the profits, the Opportunity Zone rules should not unnecessarily discourage the owner from doing so by precluding him or her from retaining a capital and/or profits interest, particularly when there are no Opportunity Zone tax benefits associated with the profits interest. The final rules should clarify that a profits interest is excluded from consideration for purposes of measuring compliance with the Opportunity Zone related party rules. 

4.)  Working capital safe harbor and the 70/30 test:  
Some question whether a qualified opportunity zone business (QOZB) that otherwise satisfies the working capital safe harbor could still fail the 70% QOZBP tangible property threshold during the period working capital is being expended. The final rules should clarify the application of the 70/30 test when capital is being expended during the working capital safe harbor period. Options: treat any tangible property that is intended to be used in the zone when placed in service as qualifying property; assume that all working capital that will be expended has been expended before each testing period; or do not apply the 70/30 test until all working capital has been expended and the substantially improved or new building is placed in service.   

Jeff DeBoer - bluex200
Roundtable President and CEO Jeffrey DeBoer states in the July 1 letter, "Opportunity Zones can be a powerful catalyst for transformational real estate investment in economically struggling parts of the country. Partnering with local leaders and entrepreneurs, real estate-focused opportunity funds will spur long-term, patient investment that drives productive economic activity."  
5.)  Vacant buildings and original use:
The final regulations should encourage new investment in Opportunity Zones, while also avoiding any incentive for existing owners to vacate a building to improve its marketability, by adopting the vacancy test set forth in existing Treasury regulations for empowerment zones. Specifically, the final rules should replace the 5-year rule in the proposed regulations with the one-year vacancy test in the Empowerment Zone regulations, which also requires that the building was vacant on the date of the zone’s designation.

6.)  Aggregation of assets:
Allowing the aggregation of assets for purposes of the substantial improvement test will encourage funds to take on more ambitious and transformative projects. The final rules should allow a QOF or QOZB to aggregate assets on the same tract or contiguous tracts under a test similar to the section 1250 regulations, which allows for aggregation of structures that are operated as an integrated unit (as evidenced by their actual operation, management, financing, and accounting).

7.)  Real estate straddle rule:  
Additional clarifications are needed to ensure the real estate straddle rule operates as intended. The final rule should apply for all Opportunity Zone purposes, not just the 50% gross income test. It should apply to both leased and owned parcels. The rule should clarify the ways in which an Opportunity Zone property can be “substantial” relative to the non-zone property. Contiguous property should include properties separated by roads and other public property.

8.)  Replacing old buildings:
In many cases, an opportunity fund may acquire a dilapidated building that it intends to demolish—constructing a new building in its place—but cannot do so immediately. The final rules should provide that improved land with buildings that will be demolished within 30 months will be treated as unimproved land for Opportunity Zone purposes.

9.)  Exclusion of gain after 10 years:
Treasury should issue guidance as soon as possible confirming that investors can rely on the proposed rule that allows taxpayers to exclude gain when an opportunity fund sells an asset after 10 years. This guidance is needed to provide investors in professional, multi-asset opportunity funds with important tax assurances and accelerate the flow of investment into the designed, low-income communities. The final rules should also clarify that the exclusion applies to the sale of assets by a QOZB, not just a QOF.

10.)  REIT-specific issues:
The final rules should include a number of clarifications important to the operation and management of real estate investment trusts (REITs) and endorsed by Nareit. These relate to: (a) when REIT capital gain dividends can be invested in a QOF; (b) the application of section 291 recapture rules; (c) how the Opportunity Zone rules apply to REIT earnings and profits, and (d) the extension of the Opportunity Zone tax benefits to REIT shareholders who invest in a QOF through upper-tier REITs.

The letter from Roundtable President and CEO Jeffrey DeBoer concludes, "Opportunity Zones can be a powerful catalyst for transformational real estate investment in economically struggling parts of the country. 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."

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