Brownfield Listings: Projects Must Still Pencil in Opportunity Zones

By Barry Hersh, Vita Nuova Member and Clinical Associate Professor, NYU SPS Schack Institute of Real Estate. 

Opportunity Zones (OZs) are a hot topic. The concept of providing a tax benefit that increases investment in low income communities has excited many redevelopers, financiers and community advocates. OZ funding carries with it lots of potential advantages but little oversight and therefore much risk. Tax incentives only function and result in community improvement and investor returns when the underlying real estate development or transaction makes sense and results in a return on investment.

The bottom line? The project still has to pencil.

This article will examine the nature and risks of OZs in relation to past efforts to use tax law, primarily federal income taxes, to encourage desirable real estate investment, with mixed results.

It is important to note at the beginning that despite their broadly stated intentions, the OZ regulations and criteria make no requirement of specific community benefits, environmental remediation, affordable housing, historic preservation, sustainability or otherwise. A project is either sufficiently (70%) in the zone and eligible, or not.

The hard and fast rules have drawn calls for added flexibility. The U.S. EPA Office of Brownfields and Land Revitalization (OBLR), for example, in a carefully crafted letter sent to Treasury on December 18, 2018, proposes some important suggestions to make the OZ regulations more supportive of brownfields redevelopment. These recommendations include; clarifying that remediation falls under the definition of “original use”; that remediation costs are an eligible capital investment in Qualified Opportunity Funds and providing enough time for remediation and redevelopment.  These recommendations are needed to help match the realities of brownfield redevelopment work in OZs to the structure of the OZ framework, so as not to exclude the large amount of impacted and brownfield land in these areas.

Compared to existing law, the closest model to OZs is the existing 1031 exchange statute which has long been a tool to defer capital gains taxes.  Begun close to a hundred years ago, tax deferred exchange rules have been revised numerous times, including last year’s modification to become limited to non-residential real estate. Notwithstanding its difficulty and limitations, the 1031 exchange program remains widely used in commercial real estate transactions.

OZ investments, like 1031 exchanges, do provide for deferment of capital gains on properties when the sale proceeds are directly invested into eligible property; but OZs go further by eliminating the capital gain if the OZ investment remains in place for more than ten years. 1031 exchanges have proven a valuable but demanding tool, those investors looking to sell while deferring capital gains tax must select a “like-kind” property within strict time restrictions, and are often seen as paying a premium for qualifying property, exceeding the market. If that price is too high, or the newly acquired property does not perform to expectation, whatever benefit gained by deferring capital gain taxes, losses can readily exceed the tax benefits.

Read the full article on Brownfield Listings

The EPA requests clarification to IRS Opportunity Zone guidance to spur brownfield remediation

Last month, the EPA’s Office of Brownfields and Land Revitalization (OBLR) requested clarification from the IRS on the extent to which brownfield site remediation could be facilitated through investments in Opportunity Zones.

 

As noted in a previous article, investors can enjoy deferred taxes and other incentives when investing in designated Opportunity Zones. The IRS released its initial Opportunity Zone guidance and proposed regulation back in October. The commentary notes that—in order to reap the tax benefits central to the Opportunity Zone program—the investment must lead to a doubling of the tax basis of the building (not including the value of the land) or the original use of the property must spurred from such an investment.

 

OBLR’s letter asked several key questions, and the IRS’ decisions may have a significant effect on the extent to which brownfield properties receive Opportunity Zone-related investments. Specifically, the OBLR recommended that the IRS revise its proposed rule to incorporate the following:

 

  • Allow environmental remediation costs to count as “substantial improvements” to a property;
  • Allow for funds to be deployed over a longer period of time so that properties can be cleaned up and developed along a more reasonable timeframe;
  • Allow the gains resulting from the remediation of one property to be invested in another Opportunity Zone-designated property; and,
  • Include brownfield cleanup and reuse of vacant, underutilized, or bank land bank property as an “original use” of a property, since enabling the original or initial use of a property from an investment spurs eligibility for the tax benefits.

 

How the IRS will ultimately weigh in on these issues remains to be seen. As of this writing, the Department of Treasury, including the IRS, is still impacted by the partial government shutdown and has yet to respond.

White House Opportunity and Revitalization Council Created to Support Opportunity Zone Program

On December 12th, President Trump signed an Executive Order to create the White House Opportunity and Revitalization Council to provide coordinated support for Opportunity Zones across the federal government. The Council will be led by Housing and Urban Development Secretary Ben Carson and include representatives from 13 federal agencies.

Over 8,700 Opportunity Zones have been designated throughout the United States to spur investment in distressed communities. These zones—home to about 35 million Americans—could attract over $100 billion in private funding spurred by a federal tax incentive included in the Tax Cuts and Jobs Act.

The Council is tasked with ensuring that relevant federal programs sufficiently support the Opportunity Zone program and maximize its effectiveness. Specifically, over the next year, the Council will propose:

  • changes to federal policies to encourage public and private investment in Opportunity Zones and other distressed areas;
  • changes to federal policies that would help state, local and tribal governments more effectively harness federal resources in Opportunity Zones and other distressed areas; and,
  • best practices for making public and private investments in Opportunity Zones and other distressed communities.

In addition, the Council will determine how to best evaluate the Opportunity Zone program and the efficacy of the actions of the federal government to support Opportunity Zone-related investments.

 

New National Council of the American Worker Seeks Opportunities, Parternships for Worker Training

Amid concerns that the U.S. labor force doesn’t have the right skills to fill available positions in a variety of industries, President Trump recently signed an executive order to create the National Council for the American Worker. This new Council will be co-chaired by the Commerce and Labor Secretaries, along with the President’s Assistant for Domestic Policy and the Advisor overseeing the Office of Economic Initiatives. Membership will include other top Administration officials from a variety of agencies. The Council will develop a national workforce development strategy that outlines recommendations for how a variety of public and private sector entities can deliver needed education and skills-based training.

Several major companies participated in an event highlighting the executive order. Over two dozen companies committed to create a combined 3.8 million apprenticeships and training opportunities. At that event, President Trump noted that constantly changing technology and innovations make it necessary for today’s workers to continue building upon their education and skills well beyond any time spent in a classroom as a young adult. He noted that there are more than 6.7 million unfilled jobs that properly-trained workers could fill.

The administration hopes the initiative spurs partnerships between industry, educational institutions, governments, and other organizations to coordinate and develop additional training opportunities that can help Americans better secure well-paying jobs while addressing employers’ needs for highly-skilled workers.

Executive Order Establishing the President’s National Council for the American Worker

List of companies that have made the Pledge to America’s Workers