Posted on March 5, 2019 by James B. Witkin
The hottest topic of the past two years in the real estate development world has been the birth of the Opportunity Zone (“OZ”). A creature of the mammoth tax bill passed by Congress at the end of 2017 (the “Tax Cuts and Jobs Act”), the Opportunity Zone program provides potentially significant tax breaks for new investments in developments in certain economically-distressed communities. Accounting firms and law firms (including those of many ACOEL members) have produced blizzards of client alerts and set up OZ practice teams, to help clients benefit from the program, which some have estimated could amount to trillions of dollars.
The law provides for states to designate certain distressed areas as Qualified Opportunity Zones (each, a “QOZ”); almost 9,000 have now been established nationwide. A taxpayer who invests untaxed capital gains in a specialized investment fund (a “QOF”), which in turn invests in a property or business in a QOZ, can defer—and potentially receive a discount on—any tax ultimately owed on the invested gain. (Environmental lawyers will be happy to see that tax lawyers like acronyms as much as we do.) And, if those funds are invested for 10 years, and other rules are followed, any post-acquisition gains may be free from tax. (Warning: there are lots of gray areas and potential pitfalls which your tax partners have identified—make sure you review those client alerts before investing.)
The Department of the Treasury issued proposed OZ regulations a few months ago. While the legal consensus seems to be that there are still many unanswered questions, the market appears to be moving forward full steam ahead. Google “Opportunity Fund” and you will see many sponsors eager to separate taxpayers from their untaxed capital gains. OZ deals are working through the pipeline. I’ve heard practitioners opine with varying degrees of enthusiasm on the underlying deals which will, after all, provide the ultimate investment return.
So where is the environmental angle? While there is nothing in the OZ law that encourages investment in brownfields, there is also nothing that prohibits it. More important, certain states provide various types of incentives for brownfield development. Nothing (at least at the federal level) prohibits the layering of those incentives. The right project in the right location could benefit from the OZ federal income tax breaks, as well as state and local tax reductions and other benefits.
As an example, in various counties in Maryland, a project which has successfully completed the state Voluntary Cleanup Program (VCP) may be eligible for a five year property tax cut. If the property is also located in a state Enterprise Zone, the length of that period may extend to ten years and in certain counties the amount of the tax reduction increases.
There can be challenges combining these incentives–for example, reconciling the federal and state requirements concerning the length of time investments must be maintained, and satisfying the state rules on what constitutes a qualifying brownfields investment. Still, it appears that there may be opportunities for additional tax savings for properly structured brownfield developments in Opportunity Zones.