The Internal Revenue Service and Department of the Treasury have issued what are expected to be the final regulations for Opportunity Zones.
The new regulations were issued on Dec. 19 and comprise more than 500 pages in length.
“For us, it has not changed any of our plans or projects,” said Dan Fullmer, chief investment officer and chief development officer for Galena Opportunity Inc., a Boise-based organization that has funded most of the Opportunity Zone projects in Idaho. “It is exactly what we thought they would do when they finalized it.”
One change will give Opportunity Funds more time to complete projects.
“The final rule provides Opportunity Funds with 62 months to deploy their capital, a two-fold increase over the 31 months allotted in the initial rules,” said Jerry Miller, economic development specialist with the Idaho Department of Commerce, in an email message.
Another change addresses an issue that had concerned historic preservationists. Because existing buildings required a large investment to count, they worried that it would be easier for developers to tear such buildings down and rebuild them rather than renovate them. But the new rules reduce that likelihood.
“Buildings vacant one year prior to or three years after the designation of the Opportunity Zones are no longer subject to the ‘substantial rehabilitation test,’” Miller said. “For properties subject to the ‘substantial rehabilitation test,’ both structural improvements and items that enhance the functionality of a property can be counted towards meeting the test.”
For example, for properties with brownfield issues – that is, where there is concern about real or perceived contamination – property clean-up and mitigation costs now count towards meeting the “substantial rehabilitation test,” Miller said.
In addition, Opportunity Funds looking to make business investments can now count intangible property as an asset provided that the software, license or patent is customary for that industry and contributes to the generation of gross revenues, Miller said.
Finally, the new rules make it easier for investors to move their capital gains into Opportunity Funds, Miller said. The final rules provide more flexibility for investors moving dollars from Section 1231 properties, partnerships and investments paid out in installments, he said.
A little bit of sinning
Other regulations that had prohibited Opportunity Zones’ use for “sin businesses” have been liberalized to allow for a little bit of sinning, noted Jonathan McGuire, CPA and senior tax manager at Real Estate for Aldrich CPA, a Salem, Oregon, accounting firm.
“For example, an athletic club could include a tanning bed and a place for massage as an amenity,” McGuire wrote in an analysis of the regulations. “As long as it doesn’t occupy a significant portion of the club and doesn’t account for a 5% portion of revenue, these would be deemed de minimis and not disqualifying the entire business. Additionally, a grocery store that sells alcoholic beverages may also still qualify if the space and income meet the 5% test.”
John Lettieri, president and CEO of Economic Innovation Group, a Washington, D.C.-based research organization, said the updates provide “much-needed clarity for communities and investors alike and will facilitate stronger levels of investment across a range of local needs in designated communities.”
“The final rules include several significant improvements designed to make it easier to use Opportunity Zones for the purposes Congress intended,” he said.
The regulations are scheduled to go into effect 60 days after publication in the Federal Register.
Opportunity Zones, a community development program established by Congress in the 2017 Tax Cuts and Jobs Act, are intended to encourage long-term investment in low-income urban and rural communities through tax breaks. Thus far, two have been announced in Idaho: one in Twin Falls and one in Meridian, though workforce housing projects are also being finalized for Twin Falls and McCall.
Investors needed to be involved in an Opportunity Zone by Dec. 31 to get full tax advantages, but the majority of the exemptions still apply.