By staff writer
The new proposed regulations for opportunity zones issued by the Internal Revenue Service and the Treasury Department earlier this month could unlock further real estate investment in Miami and give business investors a chance to reap greater profits.
The qualified opportunity zones are part of the Tax Cuts and Jobs Act that passed in 2017 and were implemented last year, but they also build on tax breaks for what used to be referred to as “empowerment zones.” They seek to incentivize investment in distressed areas through relaxation of taxation on capital gains obtained through the sale of appreciated assets if those gains are reinvested in qualified opportunity funds. The new rules could drive development as well as property values.
Ronald Fieldstone, one of the partners of Saul Ewing Arnstein & Lehr LLP, was bullish on the opportunity zones even before the new rules. Recently, he told Invest: Miami that there was “tremendous opportunity” in the designated areas.
“For instance, the area extending from the west side of Biscayne to the railroad tracks up to 36th Street is a booming opportunity zone. Most of Overtown is an opportunity zone, and you will see a lot of residential and multifamily development there. All of North Miami is an opportunity zone as well, and there is currently an almost 200-acre, mixed-use project being developed there.”
One of the most important updates under the new regulations is the definition of “substantially all.” Generally, the law requires a qualified opportunity fund to hold at least 90 percent of its assets in eligible stock, partnership interests or business property. For business property to be an eligible investment, the law specifies that “substantially all” of the fund’s tangible property must be held within an opportunity zone; however, “substantially all” was not originally defined. The new regulations provide an explicit definition: at least 70 percent of the fund’s tangible business property must be held within opportunity zones, it now says. This clear standard allows businesses and investors to easily know whether they qualify.
Investors can already avoid capital gains taxes on appreciation resulting from opportunity zone investments that they hold for more than ten years. However, the program expires in 2028, meaning that the cutoff to benefit is the recognition of capital gains by December 31, 2026 and reinvestment in a qualified opportunity fund by June 30, 2027. Under the new regulations, though, investors are entitled to hold their opportunity zone investments for a longer time than the original ten years when acquired near the program’s expiration in 2028, but also for another 10 years after expiration.
The new regulations also provide an important safe harbor from the requirement that 90 percent of a fund’s assets be held in eligible property categories. They provide that investing in businesses that are rehabilitating or constructing tangible business property in an opportunity zone, including real estate development companies, can count cash provided to those businesses toward the 90 percent requirement if they use the money for the project within 31 months.
The original opportunity zone regulations included a “50 percent Rule” which required that at least half of an opportunity zone business’s revenue had to be generated within an opportunity zone. Under the new regulations, businesses can qualify if at least 50 percent of the hours their employees work are within the zone, if it performs at least half of its services within the zone or if there are significant management and operational functions present within the zone.
Finally, the new regulations notably provide that the “original use” requirement for designating qualified opportunity zone business property will be disregarded in certain cases. In the original wording, used tangible property satisfied this requirement only if the property had not been previously placed in service in the qualified opportunity zone. Now, structures that have been vacant or abandoned for five years or more, or property acquired after December 31, 2017 under a market rate lease, counts as qualified opportunity zone business property.
In aggregate, these changes are likely to make the opportunity zone incentive program even more attractive to investors, thereby further promoting investment in the zones.
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