November 12, 2018
By Matt Ertman, Mike Pruter, Allen Matkins
One of the big financial opportunities to come out of The Tax Cuts and Jobs Act, signed into law in December 2017, was the creation of Opportunity Zones, which offers a new tax incentive program that encourages investors to make long-term financial investments in Qualified Opportunity Zones (QOZs). In exchange, the investor received a number benefits related to the deferral or elimination of capital gains taxes.
In California, 879 QOZs that include more than three million Californians were nominated by Governor Jerry Brown and certified by the U.S. Treasury. The QOZs were selected by focusing on only the poorest areas of the state—these areas either have poverty rates of at least 20% or median family incomes of no more than 80% of statewide or metropolitan area family income. Areas with at least 30 businesses were also prioritized to distinguish primarily residential tracts from those that are zoned to encourage more business investment, and encourage more business investments in these communities.
Potential investors can use a mapping tool made publicly available through the U.S. Treasury to determine if a piece of property is within an area designated as a QOZ: https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml
In order to reap the benefits of investing in QOZs, an investor must invest capital gains into a Qualified Opportunity Fund within 180 days of a sale or exchange that resulted in said gains. Unless relief is granted, the Fund’s assets must then be invested in business properties located in QOZs. In addition, the Fund must substantially improve the property, or the original use of the property invested in must commence with the Fund. Substantial improvement to the property must occur over a 30-month period.
In California, where some projects can take years to entitle, investors can be faced with challenges to meet these timeline requirements. As a result, most of the current QOZ property opportunities in California tend to be in pre-entitled projects that have been sitting on the shelf and happen to reside in QOZs.
The types of properties that qualify include directly-owned apartment buildings, hotels, mixed-use properties, retail strip malls and fast food chains. Certain “sin businesses” cannot be owned through a QOZ stock or partnership interest held by a QOZ fund—these include a country club, massage parlor, hot tub facility, racetrack, health club, or store whose principal business is the sale of alcoholic beverages for consumption off premises.
At the current time, California tax law has not been updated to have parity with these new federal tax regulations for QOZs. California regulators are expected to address these issues in early 2019.
About Allen Matkins’s Opportunity Zones Fund Team:
The Allen Matkins Opportunity Zones Fund Team is at the forefront of the evolving Opportunity Zone investment strategy since this legislation passed, working hand-in-hand with advisors involved with the U.S. Treasury Department in promulgating regulations and end -user clients in the formation of and investment in Opportunity Zone Funds.
The Opportunity Zones Fund Team counsels clients on all aspects of Opportunity Zone investments— ensuring they are compliant with evolving federal regulations for this program and guiding them through the unique logistical and legal issues related to this new investment structure. The team works with fund managers and investment and real estate professionals in forming Quality Opportunity Funds, and can also assist with tax structuring, business investments, asset purchases and sales, and any other facet of this developing field.
For comments, questions or concerns, please contact Dennis Kaiser