New Opportunity Zones rules are released. Will developer money follow?

The government’s rules give more leeway to funds and businesses looking to invest in distressed areas nationwide

Apr.April 17, 2019 04:32 PM

Steven Mnuchin and a map of Opportunity Zones (Credit: Getty Images and Enterprise Community Partners)

UPDATED, April 17, 6:48 p.m: The government released its long-awaited and latest set of Opportunity Zone regulations Wednesday, hoping to provide investors who have been on the fence with the clarity needed to begin developing projects in distressed areas nationwide.

Real estate developers have become enamored with Opportunity Zones, seeking to raise funds into the billions of dollars.

But without complete certainty on the program’s rules, many developers have held back on deploying that capital.

Industry experts said that development projects could start pouring into the designated zones with the new regulations from the Treasury and the IRS.

Under the new regulations, funds now get a 12-month grace period to sell Opportunity Zones assets and then reinvest the proceeds into an Opportunity Zone. Before, there was concern that these funds would be penalized for failing to reinvest the proceeds immediately.

Also, under the old guidelines, a business that operates in a designated zone had to make at least 50 percent of its gross income from activity in that zone.

Now, that business can also qualify if 50 percent of its wages or hours come from revenue earned from within the zone.

The new regulations also clarified how a leased property could qualify for the tax benefit.

The rules should provide some “comfort to use the incentive,” said Jill Homan. Her real estate development firm, Javelin 19 Investments, focuses on Opportunity Zones. Homan said the provisions mean that investors can still qualify for tax breaks if they invest in funds that sell off some Opportunity Zone assets.

Before the new regulations were released, President Trump along with Housing and Urban Development Secretary Ben Carson and Treasury Secretary Steven Mnuchin spoke about the importance of the federal program at the White House Opportunity Zones Council. Trump said even he was surprised by the success of the legislation.

The federal Opportunity Zone program gives developers and investors the ability to defer or potentially forgo paying capital gains taxes if they invest in a designated Opportunity Zone. The first regulations were released in October, but developers wanted more guidance before they started to deploy capital.

The biggest benefit goes to investors and developers who hold their money in an Opportunity Zone for at least 10 years. That would allow them to forgo paying all their capital gains taxes on their Opportunity Zone investment, a feature particularly attractive to real estate developers.

Investors who wanted to receive the maximum tax break would also need to invest by the end of 2019, creating a rush for Opportunity Zone investment.

The new rules did not give guidance around how to measure the value of or report on Opportunity Zone investments. This was a concern for critics who worried that the program will incentivize gentrification, or benefit wealthy developers for projects that they were already planning to build.

Some government officials anticipate the program could spur $100 billion in new investment into the more than 8,700 zones throughout the U.S.

Sec. Carson told The Real Deal last month that his agency cannot mandate affordable housing in the zones. It will, however, give preference for developers who apply for certain federal grants to build affordable housing within Opportunity Zones.

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