Opportunity Zones investors get a Covid-19 lifeline

New federal guidelines give investors more time before they have to deploy their capital into properties in distressed areas

National /
Jun.June 05, 2020 05:30 PM
Opportunity Zone investors received an extension from federal government because of Covid-19

Opportunity Zone investors received an extension from federal government because of Covid-19

The federal government has extended the deadline for Opportunity Zone investors and developers to deploy capital and begin construction on projects, citing the pandemic as the reason.

The rules had required that twice a year the government check to ensure Opportunity Zone funds and investors had steered 90 percent of their money into designated projects as mandated. Now, the Treasury Department and Internal Revenue Service released modifications allowing those funds and investors to hold their money until June 30, 2021.

The government had also previously given investors and developers 30 months to make improvements to their Opportunity Zone property in order to qualify for the tax benefits. Now, they have an extra nine months, for a total of 39 months. That doesn’t count the April through December 2020 window, created as a grace period, also because of the pandemic.

Investors also now have more time before they have to pour their capital gains into a qualified Opportunity Zone fund. Previously, they would have had to invest capital gains within 180 days in order to be eligible for the tax benefits. Now, investors have until the end of December to steer those gains into an Opportunity Zone fund to qualify for the tax benefits.

The modifications and extensions come at a time when property values have plummeted because of Covid-19 and large institutional investors are gearing up to pour big money into distressed assets.

The new Opportunity Zones guidelines, there are several in all, came at the request of Republican Sen. Tim Scott of South Carolina and eight other Repubican senators. The group — Scott co-authored the original legislation for the Opportunity Zone program — wrote last month to Treasury Secretary Steven Mnuchin and IRS Commissioner Charles Rettig, outlining the need for relief.

“It is critical that we provide the necessary flexibility to these entrepreneurs, community-based organizations, developers, and investors to cope with this pandemic and not wrongfully punish Opportunity Zone businesses and funds alike,” according to the May 4 letter.

Steve Glickman, an architect of the Opportunity Zones program, said many of the funds in the Opportunity Zone space “have dry powder because we are in the beginning of the new real estate market and there has been a big change across a number of asset classes.” The new guidelines “gives funds the time to adjust their strategy” and get more “deals done,” said Glickman of the Opportunity Zone Funds advisory firm of Develop LLC.

The Opportunity Zones program, tucked into the December 2017 tax overhaul plan, drew early attention because of its lucrative tax breaks to commercial real estate investors and developers who invest in distressed areas. It allowed developers to defer or possibly forgo capital gains taxes if they build a new project or substantially rehabilitate an existing project in one of the 8,700 designated Opportunity Zones, and held the asset for up to 10 years.

The program, however, didn’t take off like some projected in part because of a lack of clarity about its rules and regulations. Developers also expressed trouble in finding deals that made financial sense because of the high land costs in many Opportunity Zones.

Regulations have subsequently been issued, intending to clarify the rules. The Treasury and the IRS released the final set of guidelines in December, which industry pros said would open the gates to more investment.

Investment has grown since then. Of more than 600 Opportunity Zone funds analyzed by the accounting firm Novogradac & Company, those funds raised $10 billion, an increase of 50 percent in a year.

But the Opportunity Zones program has also come under scrutiny from Congressional Democrats, following media reports earlier this year suggesting it has benefited wealthy developers rather than the low-income communities for which it was intended.


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