Roundtable Weekly - April 19, 2019
Treasury Issues Highly Anticipated and Favorable Opportunity Zones Guidance
The Treasury Department on Wednesday released a highly-anticipated, second set of Opportunity Zone (OZ) regulations that seek to provide certainty
to potential OZ investors and drive economic development in economically distressed communities nationwide. (reference: 169-page Treasury regulations and IRS news release,
President Donald Trump with Scott Turner, executive director of the White House Opportunity and Revitalization Council, at the April 17 Opportunity Zone Conference with state, local, tribal and community leaders. (Official White House Photo by Shealah Craighead)
- A White House Opportunity Zones event on Wednesday featured President Trump, Treasury Secretary Steven Mnuchin and officials from local governments around the country. (White House Remarks and Video, April 17)
- The Treasury Department designated more than 8,700 low-income census tracts as Qualified Opportunity Zones last June. (IRS Notice 2018-48). Treasury estimates that Opportunity Zones will boost investment in these targeted areas by $100 billion. According to White House Chief Economist Kevin Hassett (citing Zillow data), property values in Opportunity Zones have appreciated by about 20 percent since zone designations were made in early 2018.
- Roundtable President and CEO Jeffrey DeBoer said, "We are pleased that these proposed regulations provide answers to many key structural and operational questions that have concerned potential opportunity zone investors, developers, and business owners. The opportunity zone program, designed to stimulate investment in economically struggling communities nationwide, has tremendous potential. We look forward to continuing to work with policymakers to reduce unnecessary, counterproductive aspects of the new law."
The Roundtable previously submitted two comment letters to policymakers on Opportunity Zones, one in June 2018 and one in December 2018. (Roundtable Weekly: Oct. 19, and Dec. 21). The rules issued this week expanded on the previously proposed regulations and address a variety of OZ investment issues. Positive developments in the newly proposed regulations include the following:
- Opportunity Funds that own more than one property can sell assets individually after a 10-year holding period and fund investors can exclude the gain, without a requirement that the fund investor sell his or her interest in the fund. In addition, the regulations clarify that multi-asset Opportunity Funds that choose to set up separate funds for individual assets can reduce the administrative burden on their investors through the use of a "feeder" fund that aggregates the fund interests;
- Opportunity Funds can make nontaxable, debt-financed distributions to fund investors during the 10-year holding period, provided they comply with "disguised sale" rules that limit distributions made during the first 2 years;
- Land (improved and unimproved) is qualified opportunity zone business property provided it is used in an active trade or business, and it does not have to meet the "original use" or "substantial improvement" requirements that apply to structures;
- The working capital safe harbor, which provides up to 31-months for Opportunity Funds to deploy capital, is further liberalized. Specifically, the regulations clarify that: (1) subsequent contributions of capital to the same Opportunity Fund are subject to a new 31-month period, and (2) the 31-month period is extended if the delay is due to waiting for government action or approval;
- Leased property, including property leased by an Opportunity Fund from a related property, can qualify as opportunity zone business property if certain requirements are met. This clarification in particular should help existing owners of property in Opportunity Zones participate in the tax incentives without having to sell or dispose of their ownership interest;
Roundtable President and CEO Jeffrey DeBoer said, "We are pleased that these proposed regulations provide answers to many key structural and operational questions that have concerned potential opportunity zone investors, developers, and business owners."
- Real estate that straddles an Opportunity Zone border can qualify as opportunity zone business property as long as the portion of the property that is inside the zone is substantial relative to the total property;
- While the sale of an asset during the 10-year holding period is generally a taxable event for the Opportunity Fund investors, the regulations infer that a fund could do a like-kind exchange and as long as the replacement property is qualified opportunity zone business property, the gain would be deferred for the investors;
- Lastly, the regulations include a number of changes that aim to facilitate investment in operating businesses, which should increase tenant demand for commercial real estate located in Opportunity Zones.
The IRS has scheduled a public hearing on the second set of proposed rules for July 9, 2019. Comments are due 60 days after the proposed rules are published in the Federal Register. A third set of proposed guidelines is expected on Opportunity Fund's reporting requirements to measure the effectiveness of the program.
The OZ program's goals and incentives were the focus of a Jan. 29 discussion during The Real Estate Roundtable's State of the Industry Meeting, which featured Sen. Scott and Roundtable member Geordy Johnson (CEO, Johnson Development Associates, Inc.). (Roundtable Weekly, Feb. 15)
The Roundtable's Tax Policy Advisory Committee (TPAC) plans to continue its work with policymakers on the OZ program and regulations affecting Qualified Opportunity Funds.
ULI Reports on Climate Risks; NYC Sets Aggressive GHG Targets on Buildings
Climate Risk and Real Estate Investment Decision-Making explores current methods for assessing and mitigating climate risk in real estate.
- Climate Risk and Real Estate Investment Decision-Making concludes, "An eventual downward repricing of higher-risk assets will be the market's way of redirecting capital to locations and individual assets where it is expected to be better insulated from these particular risks. This process will be painful for investors who are caught off guard, but those who are prepared have the potential to outperform." (CNBC, April 9 and ULI news release, Feb. 5 )
- The New York City Council this week approved a set of bills that set greenhouse gas (GHG) emission caps for many different types of buildings, along with fines for those who do not meet the caps. (New York Times, April 17 and Politico Pro, April 18)
- Real Estate Board of New York (REBNY) President John Banks responded that the organization is fully supportive of the City's carbon emission goals, but the Council is leading New York in the wrong direction. "The legislation is not an energy efficiency measure. With so many exemptions and carve-outs, we will be confronted with the fact that our city is off-track from meeting its ambitious 40 percent carbon reduction goal by 2030," Banks said. (REBNY, April 16 and April 18)
- Commercial building owners and operators, including several members of The Real Estate Roundtable, were recognized last week at the annual ENERGY STAR Awards for demonstrating national leadership in cost-saving energy efficient solutions. The U.S. Environmental Protection Agency and the U.S. Department of Energy awarded 183 ENERGY STAR partners for their outstanding contributions to public health and the environment. The award winners also include Fortune 500 companies, schools, retailers, manufacturers and home builders. (EPA news release, April 9)
- The Roundtable and its Sustainability Policy Advisory Committee (SPAC) continue to work with lawmakers on sound policy issues that promote energy efficiency – not only to achieve better building performance, but to spur innovation, create construction jobs that cannot be exported, and enhance the country's energy security through a more resilient building stock. (The Roundtable's 2019 Policy Agenda Energy Section)
In this session of the U.S. Congress, climate-related policy is expected to play a role in any major tax, infrastructure, energy, or disaster-relief legislation, as the political parties seek to stake out their respective positions before the 2020 election. (Stanford News, April 17)