The TreasuryDepartment


➤➤ Join the GlobeSt.comADAPT: Opportunity Zones conference September 16-17 in Baltimore,MD The new national conference series is aimed at identifyingOpportunity Zones across all property types and geographic regions.This first-of-its-kind event will educate, connect and celebratethe investors, developers and owners with the people behind theplanning and decision-making, such as architects, consultants,academics and, most importantly, municipalofficials.  Clickhere to register and view theagenda.


WASHINGTON, DC—The Treasury Department has released anotherround of proposed regulations clarifying how Opportunity Zoneinvestments and developments will work. Like earlier rounds, thesenew rules appear to be generally favorable to the commercial realestate industry.

|

At 169 pages, Treasury covered a lot of ground in this release.One important topic that was addressed was the question of whatactivities would meet the act of conduct requirement of a business,Jonathan W. Giokas, a partner with Husch Blackwell, tellsGlobeSt.com. “One key test for Opportunity Zone investments is thatan investor has to be engaged in an active conduct of business,” hesays. “In this new set of proposed rules it was determined thatleasing can meet the act of conduct requirement for abusiness.”

|

Another important measure, Giokas continues, is that the IRSprovided safe harbors that help determine how a business can meetthe gross income requirement in the Opportunity Zone program.“Those are based on the provision of services and the employment ofworkers.”

|

The IRS also clarified that an Opportunity Zone fund had 12months to reinvest proceeds from the sale of assets owned by such afund, according to Giokas. Until now it was not clear how a sale ofa project would be treated — as the sale of an investment in afund, or would the fund be able to redeploy the proceeds intoanother investment? 12 months to redeploy the proceeds is agenerous time frame, Giokas says.

|

In another measure favorable to CRE investors, Marc Schultz,partner and co-chair of the Opportunity Zones and Funds IndustryGroup at Snell & Wilmer, notes that this second tranche ofproposed regulations do not require that unimproved land besubstantially improved in order to be an Opportunity Zone businessproperty—that is, a qualifying property. “However, the land needsto be used in a trade or business rather than for investmentpurposes,” he tells GlobeSt.com. “The proposed regulations invokeanti-abuse rules where a significant purpose for acquiring theunimproved land was to achieve an inappropriate result.”

Future Guidance

There is more that needs to be addressed in future guidance. Forinstance, while the Treasury Department spent a great deal ofeffort to deal with the churning of funds—that is, if someoneinvests money in an Opportunity Zone fund, can he pull it out andreinvest in another—it didn't come to a conclusion in this round ofproposed rules, Giokas says. “The IRS left open the possibility todo that in future guidance,” he says. “They are trying to findauthority to get there.”

|

Besides fund churning, another topic that was not addressed wasthe treatment of carried interest, which many in the CRE communityhad been hoping would be clarified sooner rather than later.

|

For Giokas, the biggest unknown about Opportunity Zoneinvestment cannot be answered by the Treasury Department—and thatis how the market will respond to this guidance. After the firstround of rules there had been an expectation that the faucets wouldturn on and investments would flow. That didn't happen. Yes, Giokassays, there is very strong interest in Opportunity Zones butinarguably the number of actual deals have been few to date.

|

“Will the deal flow finally catch up with the interest now thatthese proposed rules have been released?” he wonders. “And if itdoesn't what does it say about the program?”

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.