Last November, I wrote a piece here about Opportunity Zones, a feature of the Tax Cuts and Jobs Act geared towards spurring new capital investment in specific low-income areas by providing capital gains deferral, reduction and avoidance for long-term infusions of working capital in these selected regions. In that article, I noted that the IRS had issued proposed regulations providing additional details about several features of this legislation, which would only become effective once they were released in final form.
Since then, this new tax-advantaged policy has drawn a substantial amount of attention and enthusiasm from a variety of quarters. In particular, I have been hearing much excitement about Opportunity Zones and their potential from different sources in my orbits. Despite this focus, and notwithstanding ongoing rumors of its imminent release, however, further guidance from the Treasury Department regarding this program has not yet been released, which has left a great many investors and other interested parties impatient and frustrated.
In the meantime, many of these enterprises are moving forward, full steam ahead, with Opportunity Zone investment strategies. Here in the Bay Area, Erik Hayden, a developer with deep roots in the Valley, is seeking to bring together investors to help realize his vision of redeveloping downtown San Jose and other similar areas. Towards this goal, Hayden helped launch Urban Catalyst in 2018 in response to the Tax Cuts and Jobs Act with the goal of establishing a qualified opportunity fund that would be able to proceed with redevelopment projects located in San Jose, Oakland, and beyond.
Still others are evaluating how they can proceed with their own real estate and business investments in a manner that would be able to take advantage of Opportunity Zones. Julie Treppa of Farella Braun + Martel in San Francisco, a member of the Opportunity Zones Working Group created by the Novogradac accounting firm to identify and address technical and administrative issues with the program, points out that it is relatively straightforward to create up a corporation or partnership that would meet the basic requirements to serve as a qualified opportunity fund under the proposed regulations. However, she adds, there are several open questions left for further clarification by Treasury that, when answered, could make it difficult, if not impossible, for some potentially proper investments to qualify.
Given the state of play with regard to Opportunity Zones, it appears to me that a number of these issues merit continuing attention and study. The Real Property & Business Law Section Executive Committee of the Santa Clara County Bar Association, of which I am co-chair, is charged with developing continuing legal education programs of interest and value for our members. I expect that we will be taking up the idea of putting on a class on this topic in the near future.
UPDATE:
Shortly after this blog article came out, the Treasury Department finally issued its highly-anticipated second set of proposed regulations for the Opportunity Zone program (https://www.irs.gov/pub/irs-drop/reg-115420-18.pdf). These new proposed regulations include provisions that, inter alia, allow funds to hold cash for longer periods of time, specify how funds may invest in real estate redevelopment, clarify the time limits on holding land for future development, broaden the 31-month working capital safe harbor rules, allow qualified distributions of refinancing proceeds, provide exit planning guidance for the ultimate disposition of the investment, describe how leases may qualify as a fund investment, and address how funds may invest in operating businesses (https://dsllp.com/content/April_2019_White_Paper_A_Clearer_Path_to_Opportunity_Zones.pdf). We will continue to monitor this situation and report on these developments as they arise.