Opportunity Zones in South Florida

The Opportunity Zone program has proven to be one of the rare instances where investors and communities have spoken and the federal government has listened. All of the stakeholders appear to be on the same page when it comes this economic development program, which aims to direct positive change in the nation’s distressed communities, including those in South Florida. This is most evident in the April 17^th second round of proposed rules. Neisen Kasdin, Co-Chair of the Qualified Opportunity Zones Practice at Akerman LLP in Miami and Beth Zafonte, the firm’s Director of Economic Development Services examine some of the highlights that are moving many investors off the sidelines.

GlobeSt.com: Capital gains may also be invested in a Qualified Opportunity Zone Business (“QOZB”). What are the proposed rules for this `and how does it work with a real estate investment in a Qualified Opportunity Fund (“QOF”)? 

Neisen Kasdin: We would like to emphasize that the clarification for leased property opened up the market for investment in businesses and should induce substantial investment in the tenant businesses that will occupy the real estate. To all of the land owners that want to develop their property with OZ investment, you may now do so with a leasing structure.

While a lease must have market terms and be arm’s length, unlike property acquisition, there is no requirement for the lease to be between unrelated parties. Finally, the Original Use Test and the Substantial Improvement Test do not apply to leased property. QOZB’s can now lease space at a big advantage.

GlobeSt.com: How does one structure OZ investments in businesses versus in real estate? 

Beth Zafonte: The favored two-tier structure for OZ investment in real estate is also applicable for investment in a QOZB. Under this structure, investors invest in a QOF, and the QOF acquires an interest in a subsidiary partnership or corporation which meets the requirements. For the most part, we call these the 90 percent, 70 percent and 50 percent rules.

A QOF must generally hold at least 90 percent of its assets in qualified OZ property and 70 percent of the tangible property “owned or leased” must be qualified OZ property for a business to be considered a QOZB, and at least 50 percent of the total gross income must be derived from the active conduct of a trade or business with three safe harbors, any one of which can meet the test. If a business doesn’t meet any of these “safe harbors,” it can still meet the 50 percent requirement if it can argue that at least half of its gross income comes from its “active conduct” within the OZ.

GlobeSt.com: What are the South Florida economic development agencies doing to leverage OZ investment in a directed manner? 

Zafonte: The OZ activity in the South Florida region is not atypical to other areas of the country where OZ fever has taken hold. This includes rising property values which is giving lenders cause for concern. The City of Miami is actively exploring the bundling of incentives within OZs to further incentivize development. Community Redevelopment Agencies (CRA) are also looking at how to provide additional incentives for job generating projects in other areas.

GlobeSt.com: What additional support has the federal government or other stakeholders provided to ensure the success of the program in the region?

Kasdin: The U.S. Economic Development Administration announced in June that it added OZ’s as an Investment Priority, increasing the number of projects that can receive EDA grant funds. Public entities such as states, cities, institutions e and non-profits can apply for funding to create infrastructure that facilitates economic development.

Other support is surfacing that deserves recognition. The Rockefeller Foundation announced a $5.5 million initiative to help U.S. cities attract responsible private investment in OZ’s. The Opportunity Zone Community Capacity Building Initiative selected Newark, New Jersey as the first city to receive $920,000 in co-funding from Prudential Financial and The Rockefeller Foundation. Five other cities will be announced over the next few months. Each will receive financial and human resources support.

These initiatives speak volumes to the necessary public/private collaboration that will drive the success of the OZ program. As long as the various stakeholders continue the open communication lines and listen to each other, the far-reaching economic development goals of the OZ program will be achieved.