Lease Termination Costs Could Impact Your Opportunity Zone Deal

Lease termination costs have the potential to break an opportunity zone deal. These costs are not automatically included in the substantial improvement costs required of opportunity zone projects, but for major projects or when the lease termination is required for the ownership to make property improvements, these fees do meet the burden of substantial improvement costs. Investors and developers should make these considerations when evaluating opportunity zone deals.

“To qualify for Opportunity Zone tax benefits, existing structures must be substantially improved,” Phil Jelsma, a partner and chair of the tax practice team at Crosbie Gliner Schiffman Southard & Swanson, tells GlobeSt.com. “This means the Qualified Opportunity Zone or its subsidiary must spend an amount equal to the tax cost of the building or improvements improving that property within the first thirty months of ownership. The question is when can lease termination costs be included in the basis or cost of the building can help the QOF meet the substantial improvement test. Generally they can be included if the building’s tax cost or basis if the building is not being demolished and they are paid to get access to the property to make improvements.”

Termination costs aren’t the only leasing concerns on the minds’ of opportunity zone investors. Recently rent control bills leave a big question mark as to how developers can proceed with tenant terminations. “Since the California’s rent control bill, AB 1482, was signed on October 8th and isn’t effective until January 1, 2020, we don’t know yet how these restrictions will impact the California rental market.  However, it is likely this will exacerbate the problem,” adds Jelsma.