Montrose Development Advisors created the Opportunity Zone One Stop Center to provide critical information to organizations seeking information on the federal Opportunity Zone Program.  8700 census tracts in all fifty states have been designated by the federal government as opportunity zones.  The federal tax reform law created the new “Qualified Opportunity Zone” program designed to encourage investment in businesses that are located in low-income communities by permitting a taxpayer who recognizes gain on the sale of property to gain certain tax benefits by offering a temporary tax deferral for capital gains reinvested in an Opportunity Fund– the deferred gain is recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026,  a step-up in basis for capital gains reinvested in an Opportunity Fund– the basis of the original investment is increased by 10% if the investment in the qualified opportunity zone fund is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years, excluding up to 15% of the original gain from taxation, and a permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years.

 

Montrose Opportunity Zone Infographic

 

Montrose Opportunity Zone Services

 

Montrose Opportunity Zone Articles

 

Montrose Opportunity Zone News & Events

 

Opportunity Zone Federal Regulations

 

Montrose Opportunity Zone Services

 

Opportunity Zone Site Plan

An Opportunity Zone is a census tract and within the Opportunity Zone are many sites and buildings.  Opportunity Zone Fund Organizations need to identify and market the best sites and building in the Opportunity Zone to attract investors.  An Opportunity Zone without a clear site development plan that identifies the industry focus, workforce, infrastructure, transportation and funding needed for the site or building will be unlikely to develop high-wage jobs and capital investments and attract Opportunity Zone investors.  Montrose, in conjunction with an engineering consulting firm will utilize its decades of economic development site planning experience to create customized site development plans to position sites and buildings in the Opportunity Zone for economic success.

 

Opportunity Zone Fund Organization

The release of the Internal Revenue Service regulations permits Opportunity Zone Funds to be organized and readied for operation.  Working in conjunction with leading national legal counsel and accounting firms, Montrose will assist Opportunity Zone Funds to move from the concept stage to the actual development of a corporate organization prepared to receive investments and develop their site.

 

Opportunity Zone Investor Recruitment

Attracting outside capital to an Opportunity Zone is the most important benefit this federal government program provides.  Many Opportunity Zones have not seen considerable development for one reason or another, but the substantial tax advantages these sites and buildings now have through the Opportunity Zone is creating interest among a new generation of impact investors looking not just to make money but truly make a difference in improving the human condition.  Montrose will work with Opportunity Zone Funds to recruit investors through the development of promotional materials, project prospectus, and marketing to investors for the Opportunity Zone Fund.

 

Opportunity Zone Investment Strategy

Where to make Opportunity Zone investments is a critical decision for many investors.  Montrose, working with leading national securities advisors, lawyers and accountants, will provide advice and counsel to investors based upon the federal regulations for the program, and the likelihood the site or building will increase in value based upon its site development plan that includes an industry target, infrastructure, and workforce analysis, transportation analysis, local and state public policy climate, and the incentives and funding plan in place for the site.

 

Opportunity Zone Fund Operation

8700 federal Opportunity Zone Funds will be operated in different fashions.  Many of these sites will need professional assistance in the day to day operations of the federal Opportunity Zones in a way that complies with the federal regulations and encourages investment in the site.  Montrose, working in conjunction with leading national legal and accounting firms, will provide operational services to Opportunity Zone Funds for those looking for general advice as well as those looking to outsource the operation of the Opportunity Zone Fund entirely.

 

Opportunity Zone Public Policy and Project Financing

Success of an Opportunity Zone is unlikely to happen without additional public policy changes at the local and state level to provide economic development incentives and project financing to transform these struggling sites.  Montrose will provide public policy and project financing services to advocate for public policy changes at the local and state government and project financing with state and local economic development officials to prepare Opportunity Zones for development.

 

Opportunity Zone Workshops

Public education on the value of Opportunity Zones and what is needed for them to succeed is critical to the program’s success.  Montrose will conduct Opportunity Zone workshops and coordinate the meeting logistics to prepare an Opportunity Zone, region or state for economic success based upon this federal government program.  Montrose will recruit speakers, secure a date and venue, promote the event with local leaders, and develop an agenda that includes basic education on the Opportunity Zone program, site development planning, investor recruitment, public policy agenda development, and project financing strategies.

 

Opportunity Zone Speakers Bureau

Interest in the Opportunity Zone Program is high and education about the program will help its success.  Montrose will provide speakers for organizations wishing to learn more about the federal Opportunity Zone Program.  Montrose will request the speaker’s expenses are covered and a speaking fee be provided, and will make the speaker available that day for other Opportunity Zone briefings.

Montrose Opportunity Zone Articles

 

Montrose Development Advisors Leading Ohio Opportunity Zone Discussion

Economic development, real estate and financial leaders from across the Buckeye state gathered in Columbus, Ohio on November 13, 2018 to discuss how to launch an Opportunity Zone.  Montrose Development Advisors, a Columbus based consulting firm who provides economic development planning, corporate site location services and project financing, outlined five steps to launch an Ohio Opportunity Zones during a briefing at the Ohio Chamber of Commerce offices. 320 Ohio Census Tracts have been designated by the US Treasury Department based upon recommendations from Governor John Kasich as federal Opportunity Zones.  With the release of proposed Opportunity Zone program rules by the Internal Revenue Service, communities, developers and investors of and in these certified Opportunity Zones are off to the races to develop these sites.

Nate Green, Director of Economic Development for Montrose Development Advisors, joined by leading national Opportunity Zone experts, outlined five steps to launch an Opportunity Zone that include:

  • Develop Site Plans & Infrastructure Finance Strategies. Opportunity Zones are attractive to investors with strong site development plans that outline target industries and infrastructure finance strategies.   
  • Enact Land Use Entitlements & Tax Incentives.  Opportunity Zone sites need required zoning, water and sewer agreements and local and state tax incentives to make the site operational and attractive to investment.  
  • Advocate for an Opportunity Zone Policy Agenda.  Opportunity Zone success will result if state and local leaders align government tax policy and tax incentives to support development in Opportunity Zones.   
  • Market the Opportunity Zone.  Whether as a single site, regional sites, statewide or nationally, Opportunity Zones need a strong marketing package attractive to investors.
  • Seek Professional Guidance.  Launching and operating and making investments in an Opportunity Zone fund involve federal tax and securities law and other accounting issues that require professional help.

“Launching an Opportunity Zone needs involves preparation and a clear strategy with strong economic development outcomes in mind.”  Stated David J. Robinson, Principal of Montrose Development Advisors, LLC, “This launch strategy also involves a strong team of experts to develop Opportunity Zone sites that have struggled up to this point to attract high-wage jobs and capital investment.”

A strong team of experts joined Montrose Development Advisors at the Launching an Ohio Opportunity Zone briefing that included: Pat Tiberi of the Ohio Business Roundtable; Rich Langdale of NCT Ventures; Nate Green of Montrose Development Advisors, John Sciarretti of Novogradac and Steven Mount, Squire Patton Boggs.  Pat Tiberi, as a member of the US House of Representatives, sponsored legislation to create the federal Opportunity Zone program, and he along with Rich Langdale are working with Ohio business leaders to promote this new program. Nate Green outlined the five steps needed to launch Opportunity Zones. John Sciaretti and Steven Mount are national experts on understanding the tax and securities aspects of starting and operating an Opportunity Zone, and they provided expert perspective on avoiding any pitfalls of this new federal government program. Finally, David Robinson issued a call to action with the group by announcing Montrose planned to launch an Ohio Opportunity Zone Council to promote the development of Opportunity Zones and advocate at the local and state government for the creation of additional economic development incentives and tax law changes to encourage the growth of these zones.

 

The Answers to Four Questions Determine if Your Region Behind in the Opportunity Zone Battle

Maybe it is a silly question since the ink on the IRS regulations are not dry nor are the even written in ink but economic development, elected officials and real estate developers are asking the question—is our region already behind in attracting capital for Opportunity Zones?  The answer to four questions determines if your region is behind in this critical economic development opportunity.

Are your Opportunity Zone sites ready for development?  Opportunity Zones are on the Treasury list for a reason— they are complex sites that need a government subsidy to succeed.  The first question that needs an affirmative answer is whether these census tracts have a site development plan, entitlements and incentives in place that make them an attractive investment opportunity.  Erie, Pennsylvania offers an early success story for a community that has its act together related to their Opportunity Zones.

Even before the Opportunity Zone regulations were announced the The PA Flagship Opportunity Zone Corporation was developed to identify deal flow, identify local funds, connect with developers and investable business opportunities; work with economic development organizations and professionals, and connect local investors, lenders, bankers, and service providers.  The PA Flagship Opportunity Zone has created an in depth prospectus for potential investors that illustrates clear site plans needed for economic success which can be found at http://www.erie.pa.us/Portals/0/Content/News/City%20of%20Erie%20Investment%20Prospectus.pdf.

Is your state organizing and educating Opportunity Zone owners? State leadership in the Opportunity Zone issue is critical.  Regions don’t often play well together and the reality is regions working together offer a better package to investors than on their own.  In addition, state governments can pass tax policy and create new economic development incentives that can spur growth in Opportunity Zones.  In the early stages of Opportunity Zones, state leadership involves organizing and educating local Opportunity Zone owners about what they should be doing but also promoting their sites with investors.  The Illinois Department of Commerce and Economic Opportunity is convening forums to educate communities about Opportunity Zones and introduce them to potential investors and Opportunity Fund managers and is considering the potential creation of a state-operated Opportunity Fund with other branches of the Illinois state government.  The Kentucky Cabinet for Economic Development dedicated a portion of its website to act as a clearinghouse for all information related to Opportunity Zones in Kentucky including a map of available industrial sites and buildings located in Opportunity Zones, and is planning a regional tour to provide communities with information and resources to capitalize on their Opportunity Zones.  

Do you have an Opportunity Fund Prospectus?  Capturing the early investors in Opportunity Zones involves work.  Long-term, larger players like the investment banks and insurance companies are likely to wait for the dust to settles on the IRS regulations and the program.  However, high-wealth individuals, venture capitalists and others enjoying substantial capital gains have a looming tax bill waiting and are searching for Opportunity Zone Fund investments.  Making an Opportunity Zone investment involves creating your own Opportunity Zone Fund or investing in one of the early Opportunity Zone funds. The best chance for regions to capture this early Opportunity Zone money is to organize their existing Opportunity Zones into a prospectus that provides detailed information on the area’s Opportunity Zones.  Louisville, Kentucky offers an example of a high-quality Opportunity Zone prospectus– https://louisvilleky.gov/sites/default/files/louisville_forward/louisville_prospectus_11.13.2018.pdf.

Do you have a regional Opportunity Zone Fund?  One site Opportunity Funds are being created all over the United States primarily targeted toward multi-family and other real estate developments for individual property owners.  Workforce housing is of critical importance in communities across the United States and these small funds matter. However, it is doubtful these individual funds will be transformational for a region or state.  Instead, communities across the United States, often through private sector players, are launching regional Opportunity Funds. The Detroit Opportunity Fund offers just one example. North Coast Partners, a Detroit real estate investment company, announced in June of 2018 the launch of the Detroit Opportunity Fund, which will invest in newly designated opportunity zones in the Detroit Area. The fund is reportedly beginning with a $500-million pipeline of new deals in the city.  The fund is noteworthy because it is reportedly the first of several geographically-targeted opportunity funds that will be offered by North Coast Partners through North Coast Asset Management.

 

Site Development Strategy Key to Early Opportunity Zone Success

Marketing helps but a fancy web site cannot replace a strong site development plan that illustrates an Opportunity Zone is prepared for development.  Creating an Opportunity Zone site development plan involves five steps that includes the creation of site plans and infrastructure finance strategies, enacting land use entitlements and tax incentives, advocating for a state and local Opportunity Zone public policy agenda, marketing the Opportunity Zone and seeking professional guidance to operate an Opportunity Zone by seeking investors.  

Site plan and infrastructure finance strategies are an essential first step for Opportunity Zone development as all these 8700 census tracts are competing for investors from around the U.S..  Early Opportunity Zone investment is likely to travel to Opportunity Zones with strong site development plans that outline target industries and infrastructure finance strategies.  Investors want to understand the likelihood of a complicated site generating a profit. This profit is tied to the succeed gaining in value.  The value proposition is most likely connected to attracting an end-user with an interest in the site but that end user will not move to an Opportunity Zone unless the infrastructure, zoning, water and sewer agreements and local and state tax incentives are in place.  

Opportunity Zones must be focused on the highest and best use of the site.  Different Opportunity Zones will have different highest and best uses. Research into the industry likely to find an Opportunity Zone site attractive should be based upon an industry cluster analysis that develops a location quotient measure based upon federal government occupational data as well as with an eye on the impact of automation and other economic trends that could impact the future of investment at the site.  In addition, the costs and availability as measured by the real estate market matter for site development plans as rental rates, land purchase, construction costs, vacancy and absorption rates all impact the likelihood of economic success at an Opportunity Zone.

Understanding the transportation and water and sewer and other infrastructure costs at a site is essential to launching an Opportunity Zone.  No site can develop without adequate infrastructure to permit transportation to and within the site as well as the provision of water and sewer service at the site.  Both Brownfield and Greenfield sites need this analysis so investors can understand the complete development costs tied to their Opportunity Zone investment.

Finally, learning the costs of infrastructure at an Opportunity Zone site sets up the discussion for how these costs are going to be met.  Opportunity Zone infrastructure finance strategies can be based upon U.S. Commerce Department Economic Development Administration Public Infrastructure Grants, New Market Tax Credits, historic preservation redevelopment tools such as Downtown Redevelopment Districts and Historic Preservation Tax Credits, state economic development organization loans and grants, local public finance programs such as Tax Increment Financing and finally local and state tax credits and abatements.  

Opportunity Zone site development strategies are not flashy or exciting but they involve the hard work essential for Opportunity Zones to gain early investment.

 

Opportunity Zone Public Policy Agenda Impacts Likelihood of Success

A prime method for Opportunity Zones to gain an early advantage is changing the proposed IRS regulations to promote job and capital investment and for regions and communities to create new local and state public policy programs and tax changes that incentivize investments in Opportunity Zones.  Public policy is not enacted in a vacuum and economic development and real estate leaders need to develop the public policy agenda and lobby for its enactment. Federal, state and local government Opportunity Zone public policy agendas include providing leadership on the issue, creating new infrastructure funding programs and changing local and state tax policy tied Opportunity Zone investment.

The place to start with Opportunity Zone lobbying is the current draft IRS regulations.  While the IRS regulations provide much clarity and flexibility for the starting of an Opportunity Zone Fund and investing in these organizations, the draft IRS regulations also create substantial roadblocks to achieving the transformation goals of this program.  As just one example, the current IRS Opportunity Zone regulations define Opportunity Zone Property as:

      • Stock, partnership interests or Opportunity Zone Business eligible for investment under the Opportunity Zones Program;
      • Substantially all the tangible property used in trade or business;
      • Acquired after December 31, 2017;
      • Original use substantially improves the property in the OZ;
      • At least 50% of its gross income is derived from the active conduct of business in the OZ; and
    • Substantial portion of the intangible property held be used in the active conduct of its business.

Business leaders considering investments in Opportunity Funds are very concerned about the proposed requirement at least 50% of the Opportunity Zone Property’s gross income be derived from the active conduct of a business in the Opportunity Zone.  Whether its large-scale industrial, tech or other companies succeeding in the global economy, the “50% Test” may well kill a major job creation aspect of the Opportunity Zone program. Opportunity Zone industry leaders have pointed out that the proposed IRS definition for what constitutes an Opportunity Zone Property or business require that the active conduct of the trade or business be derived in the opportunity zone. Determining where a business’s gross income is derived can be

complex and time consuming, and factors for determining where income is derived like where an entity uses its property, where its employees perform services, and where its customers are located are weighted differently by different taxing authorities which creates uncertainty. The result of the proposed 50% Test runs counter to the goals of the Opportunity Zone legislation which is focused on economic transformation for underserved communities—in plain terms this means providing jobs in these struggling neighborhoods. In, essence the regulations as drafted will lead to more apartments and less job producing projects as companies will struggle to understand or meet this 50% Test.  

While the Opportunity Zone program is really not even “out of diapers” yet, many states are pressing forward with an aggressive public policy agenda.  The Ohio General Assembly is debating Ohio House Bill 727 which would create a tax credit for investments in Qualified Opportunity Zones. Under HB 727, taxpayers investing at least $250,000 during a taxable year in an Ohio Qualified Opportunity Fund would earn a nonrefundable tax credit equal to 10% of the investment, and the tax credit could be claimed against the aggregate tax liability of the taxpayer for the taxable year in which the investment is made.  

The Illinois Department of Commerce and Economic Opportunity is convening forums to educate communities about Opportunity Zones and introduce them to potential investors and Opportunity Fund managers and is considering the potential creation of a state-operated Opportunity Fund with other branches of the Illinois state government.  The Kentucky Cabinet for Economic Development dedicated a portion of its website to act as a clearinghouse for all information related to Opportunity Zones in Kentucky including a map of available industrial sites and buildings located in Opportunity Zones, and is planning a regional tour to provide communities with information and resources to capitalize on their Opportunity Zones.  The Missouri Department of Economic Development created a section on its website describing the program and hosted an informational webinar for interested stakeholder, and the Missouri legislature enacted S.B. 773, signed into law in this summer, that reserves $30 million of the state’s annual historic preservation tax credits allocation for eligible projects in Opportunity Zones. Finally, North Carolina’s legislature has introduced, H.R. 6890, that allows for the designation of new opportunity zones every 10 years, allowing the policy’s benefits to build and compound rather than expire.

Enacting an Opportunity Zone public policy agenda is a two-step process—identification of a public policy challenge and creating a solution government solution to that challenge.  Opportunity Zones exist because the sites have unique challenges—these range from a complex site that may be contaminated or in a challenging location such as the mountains or a struggling urban neighborhood.  Government public policy solutions to these sites is essential and local and state government funding programs for public infrastructure is an easy first step to addressing the larger challenges for an Opportunity Zone site.  Promoting a region and state with investors is another likely area for an Opportunity Zone public policy agenda. Addressing state capital gains taxes at Opportunity Zone sites and creating tax credits to promote investment are a good starting point for regions and states looking to attract investors.

Addressing the Opportunity Zone public policy agenda involves old-fashioned lobbying that starts with defining the challenge, creating the solution and then educating public officials on the importance and benefits of jumping into the issue.

 

Montrose Opportunity Zone Fact Sheet

Federal Opportunity Zones Program Q & A

8700 census tracts across the United States have been designated as Federal Opportunity Zones and this Q&A has been prepared to provide basic information on this program.

What is the Federal Opportunity Zone Program? The federal tax reform created the new “Qualified Opportunity Zone” program.  The Qualified Opportunity Zone program is designed to encourage investment in businesses that are located in low-income communities by permitting a taxpayer who recognizes gain on the sale of property to gain certain tax benefits.

What tax incentives do Federal Opportunity Zones offer? Federal Opportunity Zones offer three tax incentives to investors:

    1. A temporary tax deferral for capital gains reinvested in an Opportunity Fund– the deferred gain is recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026.
    1. A step-up in basis for capital gains reinvested in an Opportunity Fund– the basis of the original investment is increased by 10% if the investment in the qualified opportunity zone fund is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years, excluding up to 15% of the original gain from taxation.
  1. A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years.

 How will the Federal Opportunity Zone Program Operate?  The US Treasury Department will certify who is a “Qualified Opportunity Fund” but the tax reform law defines this as a partnership or corporation formed for the purpose of making investments in businesses located in low-income communities designated as “Qualified Opportunity Zones.” To gain the program benefits, an investor must invest proceeds from a sale or exchange of assets to an unrelated party into a Qualified Opportunity Fund within 180 days from the date of such sale or exchange.  This investor may choose to reinvest only a portion of the proceeds from the original sale or exchange, in which case only a portion of the gain would be deferred.  A Qualified Opportunity Fund is required to invest at least 90% of its assets in targeted businesses where substantially all of the tangible assets of each such business are used in a Qualified Opportunity Zone, and at least 50% of the gross income earned from each such business is from the active conduct of business in a Qualified Opportunity Zone. Opportunity Funds provide investors the chance to put that money to work rebuilding the low income communities.

Where will the Federal Opportunity Zone Program apply?  8700 federal census tracts have been designated based upon the recommendation of state Governors and certified by the U.S.  Treasury Department.

 

Montrose Opportunity Zone: Five Steps to Prepare an Opportunity Zone

The U.S. Treasury Department has certified over 8700 census tracts across the United States as Opportunity Zones and the Internal Revenue Services has announced the federal regulations needed to operate Opportunity Zone Funds.  Like an Oklahoma Sooner, developers of these 8700 census tracts are running, riding and flying to transform their site through the benefit of substantial capital gains tax breaks.

According to the Economic Innovation Group, the certified Opportunity Zones have an average poverty rate of nearly 31 percent, well above the 20 percent eligibility threshold, and an average median family income of only 59 percent of its area median, compared to the 80 percent eligibility threshold, but these zones may well be positioned to succeed economically as they contain 24 M jobs and 1.6 M places of business and three-quarters of zones are located in zip codes that experienced at least some level of post-recession employment growth from 2011 to 2015.

To best prepare an opportunity zone, communities and property owners can position their Opportunity Zones now with steps critical to make the site an economic success.  The reality is not all Opportunity Zones are born alike and local and state governments, economic development leaders and the property owners can all play a large role in making their site attractive to investors.  Key steps communities and property owners should taken include:

    1. Site Plans. Opportunity Zone owners and/or the communities promoting them need to develop a site infrastructure plan that includes not just the infrastructure and transportation study but also to review the likely industries to succeed at this site and how the infrastructure and transportation costs can be funded. The more “job ready” an Opportunity Zone site the more likely it has a strong chance of attracting investors.
    1. Land Use Entitlements. Based upon the site development plan, Opportunity Zone sites should proceed with the zoning, water and sewer agreements and other land use entitlements needed to make the site operational.
    1. Tax Incentives. No doubt part of any Opportunity Zone site plan will be recommendations for the site to gain the needed tax incentives- abatements, credits, Tax Increment Financing, grants or loans needed for the site to succeed.  Developers or community leaders need not wait for the final Treasury Department rules to be announced to advocate for the local government to place needed tax incentives at the site.
    1. Infrastructure Funding. Another critical part of a site plan is the identification of the infrastructure needs and the sources of funding.  Gaining the funding for an Opportunity Zone’s necessary infrastructure and building the infrastructure is another site development step that does not need to wait for the final regulatory approvals.
  1. State Advocacy Agenda. Early wins for the Opportunity Zone program will likely have state government leadership that works to align state government tax policy with the federal law in their state’s Opportunity Zones.  A suggested state advocacy agenda for Opportunity Zones could include:
      1. Opportunity Zone Council. State government leaders need to coordinate the public and private sector partners interested in the success of Opportunity Zones into a state council where best practices and a common public policy agenda can be developed and advocated for.
      1. Opportunity Zone Summit. State government leaders should convene all the owners and local governments interested in developing Opportunity Zones at an annual Opportunity Zone Summit to promote best practices and to build public and private support for developments in the Opportunity Zones.
    1. Advocacy Agenda. Based upon the feedback of local communities and property owners and developers of Opportunity Zones, a public policy agenda to promote the use of Opportunity Zones should be created that can address:
        1. Common Tax Code. State capital gains taxes should be removed from all Opportunity Zones to maximize the financial attractiveness of the site.
      1. Opportunity Zone Economic Development Corporation. A new not-for-profit economic development corporation could be permitted by state government that grants all the powers of an Ohio port authority to an organization formed to develop a federal government designated Opportunity Zone.
  • Opportunity Zone Infrastructure Grants. State governments should be encouraged to develop specific infrastructure funding tied to the development of their Opportunity Zones.

Opportunity Zone News & Events

Keeping up on news and events in the Opportunity Zone world is critical to understanding where the “puck” is going on this issues.  Montrose will provide weekly updates on the news and events impacting Opportunity Zones.

IRS Guidance Permits Opportunity Zone Transactions to Proceed by By Steven F. Mount, Esq., Bloomberg Tax, Tax Management and Real Estate Journal, Vol. 34 No. 11, 11/07/2018.

Novogradac Opportunity Zone Working Group Submits Letter to IRS Requesting Regulatory Clarification

https://www.novoco.com/sites/default/files/atoms/files/novogradac_wg_comment_letter_oz_guidance_112618.pdf

Detroit Opportunity Fund Launched

http://www.dbusiness.com/daily-news/Annual-2018/Detroits-North-Coast-Partners-Launches-Detroit-Opportunity-Fund/

Louisville Opportunity Fund Prospectus Development

https://louisvilleky.gov/sites/default/files/louisville_forward/louisville_prospectus_11.13.2018.pdf

Tech Focused Hypothesisvc Opportunity Fund Launched

https://hypothesisvc.com/

Rhode Island article raises issue of equity and Opportunity Zones

http://www.providencejournal.com/news/20181124/opportunity-zones-in-ri-raise-questions-of-equity

Cecil County, Maryland looking at benefits of Opportunity Zones

https://www.cecildaily.com/business/federal-program-creates-land-of-opportunity-in-cecil/article_43b92bf6-bddf-56d5-844e-805e3a3875c7.html

Politico discusses Opportunity Zones and national politics

https://www.politico.com/agenda/story/2018/11/20/opportunity-zones-republican-tax-law-000789

Wichita panel discusses local impact of Opportunity Zones

https://www.bizjournals.com/wichita/news/2018/11/16/table-of-experts-opportunity-zones.html

Treasury, IRS issue proposed regulations on new Opportunity Zone tax incentive

https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-new-opportunity-zone-tax-incentive

Investors can get big tax breaks if they invest in ‘opportunity zones’ under new Treasury rules

https://www.cnbc.com/2018/10/19/investors-can-get-tax-breaks-for-investing-in-opportunity-zones-treasury.html

New ‘Opportunity Zone’ Tax-Break Rules Offer Flexibility to Developers

https://www.wsj.com/articles/new-opportunity-zone-tax-break-rules-offer-flexibility-to-developers-1539948600

Treasury releases guidance on ‘opportunity zone’ program created by Trump tax law

https://thehill.com/policy/finance/412236-treasury-releases-guidance-on-opportunity-zone-program-created-by-trump-tax

New tax break rules for ‘opportunity zone’ investors

https://www.apnews.com/e4f0e1b081b9478e9424eb89855f4845

State government leaders across the union are embracing the federal Opportunity Zone program in an effort to create a range of new state government incentives designed to jump start this new federal government program in the 8700 federal certified Opportunity Zone sites.

Arkansas S.B. 196. Enacted February 26, 2019. Legislation was passed by both houses of the Legislature in Arkansas that creates a state incentive to match the federal opportunity zones incentive. SB 196 would mirror the federal provisions for capital gains while computing state income tax liability. 
http://www.arkleg.state.ar.us/assembly/2019/2019R/Pages/BillInformation.aspx?measureno=SB196 

California A.B. 742. Introduced February 19, 2019. This bill would enact the Place-Based Economic Strategies Act for the purposes of supporting place-based and other geographically targeted economic development programs, including, but not limited to, federal California Promise and California Opportunity Zones. 
http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB742 

Connecticut Proposed Bill 6552. Introduced January 28, 2019. To exempt distressed municipalities that have been unable to alter a historic building for five years or more and individuals who wish to alter a historic building located in an opportunity zone from compliance with the provisions of chapter 97a of the general statutes. 
https://www.cga.ct.gov/asp/cgabillstatus/cgabillstatus.asp?selBillType=Bill&bill_num=HB06552&which_year=2019 

Florida H.B. 481. Introduced January 22, 2019. Legislation introduced in the Florida Legislature this week revives and renames the expired Florida Enterprise Zones Act as the Florida Opportunity Act and links it to the federal opportunity zones (OZ) incentive. HB 481 would change the name of the Florida Enterprise Act, which expired at the end of 2015, and would change the definition of the zones to match federal qualified OZs. The legislation would require projects to indicate how federal and state OZ incentives and resources will be used while applying for the jobs, sales tax and property tax credits and other incentives. 
https://www.flsenate.gov/Session/Bill/2019/481 

Kentucky HB 203. Introduced February 5, 2019. An act creating the Kentucky Rural and Opportunity Zone Jobs Act creating a state opportunity zone tax credit through a competitive process. 
https://apps.legislature.ky.gov/record/19rs/hb203.html

Nebraska L.B. 87. Introduced January 10, 2019. Bill would make OZs a priority in allocating affordable housing trust fund money; Also makes OZs preferred locations for state’s Enterprise Zone Act. 
https://nebraskalegislature.gov/bills/view_bill.php?DocumentID=37409 

New York S3401. Introduced February 6, 2019. An act to amend the tax law and the administrative code of the city of New York, in relation to investment income to defer state capital gains taxes. 
https://www.nysenate.gov/legislation/bills/2019/s3401 

Ohio SB 8. Introduced February 12, 2019. Creates a nonrefundable and transferable state income tax credit of up to 10%, against the aggregate tax liability of a taxpayer that invests equal to 1% of a taxpayer’s investment of at least $250,000 during the taxable year in an Ohio qualified opportunity fund. 
https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA133-SB-8

Puerto Rico S 1147. Introduced November 7, 2018. To create the “Puerto Rico Economic Development Opportunity Zones Development Act of 2018”

South Carolina H3186. Introduced December 18, 2018. Legislation permits a taxpayer that is a company investing in a designated opportunity zone in South Carolina is allowed a credit against any tax due pursuant to this title equal to twenty-five percent of the total investment costs, not to exceed fifty thousand dollars. The company shall provide a community-benefits agreement with the area in which it is investing in order to qualify for the tax credit. A taxpayer only may claim the credit for investments made during the tax year. If the amount of the credit exceeds the taxpayer’s income tax liability for that taxable year, the taxpayer may carry forward the excess for up to five years. The taxpayer shall claim the credit allowed by this section on the taxpayer’s income tax return in a manner prescribed by the department. The department may require any documentation it considers necessary to implement the provisions of this section. 
https://legiscan.com/SC/bill/H3186/2019

Texas SB 826. Introduced February 14, 2019. Creates Texas rural and opportunity funds and provides insurance tax credits for certain investments in those funds; imposing a monetary
penalty and authorizing fees. 
https://legiscan.com/TX/text/SB826/id/1908784 

Texas H.B. 2397. Introduced February 25, 2019. Legislation creates a state sales and use tax refund and franchise tax credit for certain businesses that make investments in qualified opportunity zones. 
https://capitol.texas.gov/tlodocs/86R/billtext/html/HB02397I.htm 

West Virginia 2828. Introduced January 31, 2019. Relating to promoting investment in a Qualified Opportunity Zone by providing a mechanism to exempt taxable income from corporate net income tax and personal income tax during the first ten (10) years of a Qualified Opportunity Zone Business’s operation within one or more Qualified Opportunity Zones located in West Virginia. 
http://www.wvlegislature.gov/Bill_Status/bills_text.cfm?billdoc=HB2828%20ORG.htm&yr=2019&sesstype=RS&i=2828

Opportunity Zone Federal Regulations

Following the recommendations of state Governors and the certification of federal Opportunity Zones by the U.S. Treasury Department, the U.S. Internal Revenue Service release regulations regarding the many federal tax issues that impact the operation of an Opportunity Fund.  The IRS regulations can be found at https://www.irs.gov/pub/irs-drop/reg-115420-18.pdf.  Montrose is working with leading national lawyers and accountants to provide the critical guidance to those organizing Opportunity Zone Funds as well as investors considering Opportunity Zone for an investment.

 

US Treasury Adopts Over 20 New Opportunity Zone Regulations

 The April 2019 US Treasury regulations published provide a clearer roadmap for the creation of Opportunity Zone Funds.  The new federal government program provides substantial capital gains tax relief for longer term investors in Opportunity Zones covering all fifty states and US territories.  Key concepts central the Opportunity Zone program include: 

Qualified Opportunity Zones.  8700 primarily low wealth census tracts certified by US Treasury as an Opportunity Zone in all fifty states and U.S. territories are eligible for capital gains tax reductions.

Opportunity Funds.Certified by the US Treasury, a partnership or corporation needs to be formed to make investments in a Qualified Opportunity Zones with at least 90% of its assets in targeted businesses where substantially all of the tangible assets of each such business are used in a Qualified Opportunity Zone.

Opportunity Zone Business.A company locating in a Qualified Opportunity Zone with at least 50% of the gross income earned, measured by the services performed (hours or amounts paid) by its employees and independent contractors performed within the qualified opportunity zone, or the tangible property of the business that is in a qualified opportunity zone and the management or operational functions performed for the business in the qualified opportunity zone in a Qualified Opportunity Zone.

Opportunity Zone Investment.  Capital gains invested after 12/31/2017 gains a temporary capital gains tax deferral reinvested in an Opportunity Fund–recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026 with a step-up in capital gains basis up to 15% of the original gain from taxation; and a permanent exclusion the federal capital gains tax from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years, and an investor must invest proceeds from a sale or exchange of assets to an unrelated party into a Qualified Opportunity Fund within 180 days from the date of such sale or exchange. 

An original set of Treasury regulations was released in October 2018 that provides some answers as to how the program would operate but they also created substantial questions.  The April 2019, 21 new US Treasury rules for the Opportunity Zone program provided essential insight into how fund managers, investors and business can utilize this important new program.  

These Treasury rules cover a wide range of topics including:

  1. Clarifying the 10-year exit rules for investors; 
  2. Expanding opportunities to use some leased property; 
  3. Providing 12 months for an Opportunity Fund to reinvest ‘‘interim gains,’’ but require investors to pay tax currently on such gains;
  4. Establishing that ‘‘carried interests’’ does not qualify for the benefits of the OZ program;
  5. Loosening restrictions on the original use and substantial improvement requirements;
  6. Permitting refinancing proceeds to be distributed to Opportunity Fund investors;
  7. Defining transactions called ‘‘inclusion events’’) where deferred gain will be recognized
  8. prior to December 31, 2026;
  9. Creating safe harbors for the all-important 50% gross income test; 
  10. Allowing new capital received by an Opportunity Fund to be excluded from the 90% asset test for six months;
  11. Defining the term ‘‘substantially all’’ to be 90% when used to define a holding period and 70% when it refers to use of assets, and define ‘‘substantial portion,’’ concerning intangible property as 40%;
  12. Expanding the 31-month safe harbor provided in the first set of proposed regulations for the acquisition, construction and improvement of tangible property to include development of a trade or business, so that it can be used by both real estate and non-real estate in an Opportunity Zone Business;
  13. Providing that delay due to waiting for governmental action for a completed application will not invalidate the safe harbor; 
  14. Confirming that a triple net lease of real estate does not constitute a qualifying trade or business;
  15. Permitting a taxpayer acquiring an interest in an Opportunity Fund from another investor to make a gain deferral election to the extent that the acquirer has timely capital gains;
  16. Permitting a consolidated subsidiary to be an Opportunity Fund but treat this fund as an unconsolidated subsidiary for non-QOF tax purposes—thus creating a major disincentive to use this tool; 
  17. Making optional the use of the ‘‘applicable financial statement’’ requirements from the October, 2018 rules;
  18. Extending the start of the 180-day period to invest gains constituting net §1231 gains to the last day of the taxable year, since a taxpayer will not know the net gains and losses from §1231 transactions until then;
  19. Approving ‘‘feeder funds’’ that would allow formation of a fund to hold an Opportunity Fund interests does not serve the same purpose;
  20. Clarifying real property that straddles an Opportunity Zone boundary will qualify if the square footage located within the OZ is substantial as compared to the square footage outside the Opportunity Zone, and the property within and without the OZ are contiguous; and
  21. Creating anti-abuse rule empowering the IRS to recast a transaction if it finds that a significant purpose of the transaction is to achieve a tax result.

These rules are open to comment but can be relied upon for Opportunity Zone transactions.  Please contact Dave Robinson, drobinson@montrosegroupllc.com, if you wish to impact these proposed Treasury regulations.

 

New Treasury Opportunity Zone Regulations to Spur Corporate Site Location Projects

 The April 2019 US Treasury regulations published provide a clearer road map for the use of  Opportunity Zone in corporate site location projects.  The new federal government program provides substantial capital gains tax relief for longer term investors in one of 8700 census tracts designated as Opportunity Zones covering all fifty states and US territories.  An original set of Treasury regulations was released in October 2018 that provides some answers as to how the program would operate but they also created substantial questions.  The second wave of regulations published by the US Treasury Department on April 17, 2019 could well be the key to transforming the federal Opportunity Zone program from a way to develop housing, mixed use and retail projects into a tool for creating high-wage jobs.  The practical impact of the first set of Opportunity Zone rules is that real estate projects tied to small, local retail (think coffee shop) and multi-family projects were likely to qualify for the program but projects that actually create high-wage jobs would not.  Seeing the challenge to this approach, the US Treasury’s new set of regulations touch on a wide range of Opportunity Zone issues.

First, the April 2019 Treasury regulations establish clear rules for how leased property could benefit from the Opportunity Zone program.  Many large-scale corporate site location projects involve companies expanding or locating into leased space.  The new Treasury regulations treat leased property held by an Opportunity Zone Business, as lessee, as tangible property for purposes of the 70% substantially all test, and they apply the same rule for the 90% asset test for an Opportunity Fund. This rule will help those Opportunity Funds that conduct business directly as opposed to through an Opportunity Fund business as it will allow leased property to be included as a good asset for the 90% asset test.  Leased property must have the same purchase date of 12/31/17, be at market rates in arm’s length transactions. 

Second, the April 2019 Treasury regulations address questions about the original rule’s discussion of “substantial improvement” to the property.  The Opportunity Zone program requires the property to be a “Qualified Opportunity Zone Business Property that either the Opportunity Fund or Opportunity Fund Zone Business is the original user of the property in the OZ or that the property be substantially improved—with a substantial improvement test requiring doubling the basis of the property over a 30-month period.  The April 2019 Treasury regulations clarified there is no substantial improvement requirement with respect to unimproved land nor with respect to a building that has been vacant for an uninterrupted period of at least 5 years.  Tangible property, providing that an Opportunity Fund or Opportunity Fund Business will be treated as the original user of such property if the prior use was not in an Opportunity Zone. The regulations established there are no original use or substantial improvement requirements for leased property between unrelated parties but the substantial improvement test is to be applied on an aggregate basis, and thus the test must be applied on an asset-by-asset basis. Thus, land with multiple buildings are acquired in an Opportunity Zone must separately satisfy the substantial improvement test. 

Finally, the Treasury regulations addressed what many believe to the largest impediment to the successful use of the Opportunity Zone program through the discussion of several Safe Harbors related to the “50% test”.  In an effort to present “shell corporations” from using Opportunity Zones without any economic investment, the October, 2018 Treasury regulations established that at least 50% of the gross income of an Opportunity Zone Business must be from the active conduct of a trade or business within the Opportunity Zone.  The April 2019 Treasury regulations keep the 50% Test but create several Safe Harbors that should encourage corporate site location projects in Opportunity Zones. 

  • Hours of Services Safe Harbor. 50% of the services performed for the Opportunity Zone Business for the taxable year are performed in the Opportunity Zone as measured by the number of hours of work performed by employees or independent contractors;
  • Amount Paid Safe Harbor.  50% of the services performed for the Opportunity Zone Business for the taxable year are performed in the Opportunity Zone as measured by the amount paid to the employees and independent contractors of the Opportunity Zone Business.
  • HQ/Management Safe Harbor.  The 50% Test will be deemed met if the tangible property located in an Opportunity Zone and the management or operational functions performed in an Opportunity Zone are each necessary for the generation of at least 50% of the gross income of the Opportunity Zone Business.

The 50% Test Safe Harbor regulations use industry examples from computer software to landscapers located in an OZ as well as a “catch all” test that the Opportunity Zone Business can work with the IRS to use a facts and circumstances test to determine where its gross income is derived.  It is worthy to note what the Treasury regulations do not require—they do not require an Opportunity Zone Business to have 50% of their customers in the Opportunity Zone, do not make local employment requirements, nor do they have any requirements related to the company’s supply chain.

Based upon these new federal regulations, the Montrose Group created an Opportunity Zone model geared toward the implementation of a corporate site location project. 

While this model is simplified for purposes of presentation, the chart above illustrates how a corporate site location project involving headquarters or substantial management services tied to the facility would work. This case study would involve the development of a campus which could be tied to nearly any industry as it would fall under the “Management Safe Harbor.” 

New Opportunity Zone Regulations Provide Glide-path for Opportunity Fund Creation
 The April 2019 US Treasury regulations published provide a clearer roadmap for the creation of Opportunity Zone Funds.  The new federal government program provides substantial capital gains tax relief for longer term investors in one of 8700 census tracts designated as Opportunity Zones covering all fifty states and US territories.  An original set of Treasury regulations was released in October 2018 that provides some answers as to how the program would operate but they also created substantial questions.  Developers, regions, states and companies seeking to gain some of the $6.1 Trillion in capital gains will likely seek to create an Opportunity Zone Fund.  Novogradac has 123 Opportunity Zone funds with a reported $27 B in assets listed on their website.  This is clearly just the start, and the speed at which Opportunity Zone Funds blossom is going to be impacted by the recently published Treasury rules on the program. 

The US Treasury Department will certify who is a “Qualified Opportunity Fund” but the tax reform law defines this as a partnership or corporation formed for the purpose of making investments in businesses located in low-income communities designated as “Qualified Opportunity Zones.” To gain the program benefits, an investor must invest proceeds from a sale or exchange of assets to an unrelated party into a Qualified Opportunity Fund within 180 days from the date of such sale or exchange.  This investor may choose to reinvest only a portion of the proceeds from the original sale or exchange, in which case only a portion of the gain would be deferred.  A Qualified Opportunity Fund is required to invest at least 90% of its assets in targeted businesses where substantially all of the tangible assets of each such business are used in a Qualified Opportunity Zone, and at least 50% of the gross income earned from each such business is from the active conduct of business in a Qualified Opportunity Zone. 

Several key provisions are relevant for those seeking to start and/or operate an Opportunity Zone Fund. First, an Opportunity Fund Entity qualification includes those organized in Indian Territory if also in one of the fifty states. The regulations also address the meaning of “substantially all” throughout the Opportunity Zone program. The term substantially all is 70 percent for the “use in an Opportunity Zone” threshold that must be met for tangible property to be qualified Opportunity Zone business property.  The term substantially all is also 70 percent for the tangible property “owned or leased” threshold that must be qualified OZ property for a business to be a qualified OZ business. The term substantially all is 90 percent when used to measure a QOF’s holding period of tangible property as qualified OZ business property, or an interest in a business as a qualified OZ partnership interest or qualified OZ stock, and 90 percent to measure the holding period of a qualified OZ business of tangible property as qualified OZ business property. 

The proposed regulations provide Opportunity Funds six months to invest capital received from investors—not the one day that could have operated under the previous regulations—and the proposed regulations allow an Opportunity Fund to apply the test without taking into account any investments received in the preceding six months based upon those new assets being held in cash, cash equivalents, or debt instruments with terms of 18 months or less. Last year’s requirement that Opportunity Funds use GAAP to calculate compliance with the 90 percent and 70 percent asset tests was changed in the regulations to permit Opportunity Funds and Opportunity Zones Businesses to elect to use unadjusted cost basis to value tangible property regardless of whether or not they have an applicable financial statement.  In addition, if an Opportunity Zone is sold for cash, it is no longer a qualified investment for the 90 percent test–but the Opportunity Zone statute allows a reasonable time to reinvest. Treasury has clarified that a “reasonable time,” is within 12 months, and the proposed regulations provide a special election for certain sales of assets of an Opportunity Fund partnership or S corporation. A taxpayer that holds a qualifying Opportunity Fund partnership interest or qualifying Opportunity Fund stock of an Opportunity Fund corporation may make an election to exclude from gross income some or all of the capital gain from the disposition of qualified Opportunity Zone property reported on Schedule K-1 of such entity, provided the disposition occurs after the taxpayer’s 10-year holding period. Importantly, the Treasury Department and the IRS intend to implement targeted anti-abuse provisions with respect to this election.  

Finally, the proposed rules authorize Opportunity Fund real estate investment trusts (QOF REITs) to designate special capital gain dividends, not to exceed the QOF REIT’s long-term gains on sales of qualified OZ property. Clearly, the Treasury and IRS are trying to make it easy for a fund to hold multiple assets without an administrative burden and sale a single asset in the same fund structure without recognizing a gain.  Most Opportunity Zone Funds created to date are real estate investors focused on individual properties.  The REIT vehicle is made for the Opportunity Zone program and the new Treasury regulations attempted to spur their application to these 8700 census tracts that have created Opportunity Funds have done so only for individual properties thus far, with the exception of a vocal few REIT offerings.

When regions, communities, developers or companies are considering creating an Opportunity Zone Fund, several questions come to the top related not just to the Treasury regulations but related to the operation of the Opportunity Fund.  Key questions that should be asked and answered include:

  • What type of entity should be created or utilized to develop the sites in question through the federal Opportunity Zone Program?
  • Should new Opportunity Zone Funds be created, or would the projects be more successful operating through an existing Opportunity Zone Fund?
  • What are the prime operational issues of concern related to an Opportunity Zone Fund for this project?
  • How can investment be attracted to these Opportunity Zone Funds and Opportunity Zone Property at these sites?
  • What businesses and industries are best suited to locate at these sites and would be most attractive in particular for Opportunity Zone investors?
  • What should the elements of an investment policy be for the Opportunity Zone Fund include?
  • What other state and federal government programs should be a focus for application to these sites?

The creation of an Opportunity Zone Fund Plan is an important step that can not only answer there critical operational questions but also can provide a site development and transportation plan and an industry analysis to determine what is the best use for a specific Opportunity Zone under consideration.  

Montrose Group’s Opportunity Fund Creation Model

As the chart above illustrates, the new federal regulations matched with traditional community investment strategies, provide an outline for how a region, organization or company can create an Opportunity Zone Fund.  The Montrose Group would recommend a holistic strategy tied to a solid business plan for regions, communities, developers and companies considering creating an Opportunity Zone Fund. Planning tied to site development, transportation assessment, marketing material such as a prospectus, development of an Opportunity Fund investment policy to guide decisions of the fund such as what industries and companies are the target for the fund and, of course, how the fund will gain investors.  If done correctly, accepting and making the investments in Opportunity Fund Businesses should be the easy part.   Please contact Nate Green at ngreen@montrosegroupllc.com if you have any additional questions about forming an Opportunity Fund.