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The o zones overmeyer


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PRISM 2019 Presentation

Published in: Real Estate
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The o zones overmeyer

  1. 1. Brownfields and Opportunity Zones
  2. 2. Opportunity Zones • Opportunity Zones (OZs) were created under the Federal Tax Cuts and Jobs Act of 2017. • In June 2018, the U.S. Internal Revenue Service (IRS) certified 8,762 low-income census tracts as Opportunity Zones. These census tracts were nominated by the governors of each state. • The Opportunity Zones program allows people and corporations with capital gains tax liability to invest those capital gains in Opportunity Funds. • Opportunity Funds (OFs) invest in real estate development, businesses, and business assets in an Opportunity Zone-designated census tract. These funds are designed to produce long-term capital investment in distressed and underserved community areas. • Purpose of the OZ tax incentive is to drive new businesses and development in distressed areas.
  3. 3. Opportunity Zones and Qualified Opportunity Funds Investors in Opportunity Funds can realize the following benefits: – Temporary Tax Deferral for Investments of Fewer than 5 Years: Funds invested in an Opportunity Fund for up to five years will have capital gains tax liability deferred until the Opportunity Fund investment is sold or exchanged. – Tax Reductions for Investments of 5-10 years: Opportunity Funds invested for 5-7 years in an Opportunity Zone have the basis of the investment stepped up 10% (which reduces tax on 10% of the investment). Opportunity Funds invested for 7-10 years in an Opportunity Zone receive an additional 5% step-up in basis (and reduction in taxable funds), which means that funds invested for at least seven years can receive reductions in original capital gains tax liability by 15%. – Tax Exclusion for Gains on Investment Held At Least 10 Years: Funds invested in an Opportunity Zone for at least 10 years receive a permanent exclusion of any tax liability for capital gains that occur after the Opportunity Fund investment was first made. U.S. Environmental Protection Agency 3
  4. 4. Using Opportunity Funds for Brownfield Redevelopment • Qualified Opportunity Funds (QFOs) may encourage private investment in brownfields revitalization in Opportunity Zones. • IRS draft guidelines (issued Oct 2018) created uncertainty regarding treatment of brownfield sites. • OBLR requested clarifications on issues in comments to IRS (Dec 2018): – Brownfields should meet “Original Use” test – Property vacant/underutilized ≥1 year should meet “Original Use” test – Land remediation activities should meet “Substantial Improvement” test – Permit gains from land improvements to carry over – Allow brownfields investments in QOZs to be stacked – Treat foreclosed and tax-reverted properties as “underutilized or abandoned” 4
  5. 5. IRS’s second proposed rule (4/17/19) EPA’s understanding of the second IRS draft clarifies that brownfields assessment/cleanup can be QOF- eligible site prep predevelopment costs if tied to vertical development Assessing and remediating properties without undertaking vertical development for an income-producing use will not be an eligible QOF investment. • Land must be used in the active conduct of a trade or business to qualify as QOZ Property Land held for investment purposes or for future sale is not considered active conduct of a trade or business. 5
  6. 6. IRS’s second proposed rule (4/17/19) EPA’s understanding of the second IRS draft clarifies which OZ property “test” – original use or substantial improvement – will be relevant: 6 Property purchased after December 2017 Must meet substantial improvement test Satisfies original use requirement Bare land (including land purchased with buildings to be demolished for new development) X Land with buildings vacant < 5 years X Land with buildings vacant > 5 years X
  7. 7. Other Issues addressed (or not) in IRS second proposed rule • Gains from QOF investments in brownfields improvements to land should be permitted to be carried over into other QOZ investments • The IRS should allow QOF investments to be stacked for brownfields properties to require remediation Separate 30-month windows for substantial improvements to land and vertical development • Foreclosed and tax-reverted properties held by local governments should be treated as “Underutilized or Abandoned Property” U.S. Environmental Protection Agency 7 within 12 mo not addressed
  8. 8. A few take-aways: • Growing market interest in OZ properties may enhance the value of a brownfield site without planned vertical development, enough to make assessment/remediation feasible despite the inability of the purchaser to access QOF tax advantages • QOF investment in “flipping” brownfields for resale is not eligible for tax advantages • Remember - communities retain the power to control the local development that occurs in OZs! o City approval still required for projects - Create & align local plans; apply zoning rules - judicious approval of development incentives o Consider how community benefit agreements or inclusionary practices can help address concerns of possible displacement 8
  9. 9. New Issues U.S. Environmental Protection Agency 11 Can add something in here on the 31-mo working capital safe harbor, but I don’t think that is needed
  10. 10. U.S. Environmental Protection Agency 12
  11. 11. For More Information EPA’s Brownfields Program Patricia Overmeyer U.S. Environmental Protection Agency 13