Opportunity is knocking…new tax incentives for developers
The 2017 federal Tax Cuts and Jobs Act created the new federal Opportunity Zone program, designed to spur economic development and job creation in distressed communities by providing tax benefits for private investment. Based on low-income census tracts and typically representing urban centers, there are some 8,700 qualified Opportunity Zones (OZs) across the United States with 72 OZs in 27 Connecticut municipalities and 514 in New York State (300 in the metro NYC area). The Connecticut Economic Resource Center (CREC) has created the Sitefinder interactive tool to explore the Connecticut OZs while Empire State Development provides a similar resource in New York State.
The program allows tax benefits including capital-gains tax deferrals from prior investment that are subsequently invested in an OZ fund. Additional benefits are realized based on how long the OZ fund investment is held. If the OZ fund investment is held for at least 10 years, capital gain resulting from the sale of interest in the OZ would be exempt from tax.
OZ fund investments must be ‘substantially improved’ within 30 months. The fund may engage in ground up development or improve an existing property. However, due to uncertainty in interpreting program language, many developers are waiting for additional IRS guidance.
One problem is that under the current interpretation of ‘substantial improvements’, land value is not counted. On this basis, the costs associated with environmental investigation/remediation of contaminated properties, commonly found in urban centers, would not count toward the substantial-improvement goal.
This apparent exclusion of ‘brownfield-type’ properties from the OZ program is significant and prompted the EPA Office of Brownfield and Land Revitalization to send a December 18, 2018 letter to the IRS asking for clarification of the OZ program rules in the context of brownfields. The letter included a number of requests which, if adopted, would spur redevelopment of brownfield and other underutilized sites by expanding the scope of the OZ program.
The first round of proposed rulemaking for the OZ program went through public comment on February 14th and the hearing was standing room only with many turned away, evidence of strong interest in the program and the desire for clarification. The IRS states that they are continuing to review the first round of comments and a second round is expected in the coming months. A second public hearing is expected before finalizing the program rules. Where brownfields and environmental cleanups fit into the program is yet to be seen. We will continue to monitor and update our clients. One thing is clear, many see great opportunities in the Opportunity Zone program.
How can GeoDesign, Inc. be of assistance to OZ fund investors?
We possess the geotechnical and environmental expertise needed for investors to envision creative development, improvement and expansion of OZ properties. From basic environmental site assessment services to complete proper due diligence, to investigation and remediation of potentially impacted soil, groundwater and soil vapor, we are your partner in Opportunity Zone properties acquisition and development.
