The Opportunity Zone (OZ) program introduced multiple tax benefit incentives when capital gains of any character are invested in specially designated private equity investment funds called Qualified OZ Funds within 180 days after such gains are realized.

The first tax benefit that OZ investors will realize is the deferral of tax on their invested capital gains for as long as such gains are invested in the OZ Fund with a maximum deferral period of the earlier of 7 years or until December 31, 2026.
The second tax benefit that OZ investors can realize is the reduction of their tax on the invested capital gains by 10% if such gains remain invested and held in the OZ Fund for 5 years or 15% after 7 years. These reduced capital gains taxes have a limited time horizon of the OZ program as each reduction must be earned before December 31, 2026.

The effect is that in exchange for investing through the OZ system the federal government provides the investor a loan of up to 7 years of the tax that would have been due on the original capital gains and pays you, the Borrower, an interest rate of up to 15% – a negative interest rate.

The final tax benefit OZ investors can realize is the ability to sell their investment in the OZ Fund completely tax free after holding such investment for 10 years or more. Any OZ investor who invests in an OZ fund prior to January 1, 2027 is eligible to earn this tax-free upside. This tax forgiveness carries with it the most potential for capital growth out of any benefit of the OZ program. It is the most powerful of the OZ benefits and applies whenever the investor invests all the way through 2026.

OZ investing can be much like 401(k) or IRA investing where the investor’s capital grows and the growth comes out tax free, but without the constraints or taxation of those retirement programs upon exit.

While all the nuances of OZ investing may seem overwhelming, generally OZ investors can simply use their typical investment fund due diligence processes and rely on the OZ fund to ensure the necessary compliance with the details and technicalities of the OZ program. Also, the OZ ecosystem is rapidly being populated by lawyers, tax counsel, accountants and financial advisors like Coasis, who have become expert in the area. Soon the entire process will be well vetted and reliable as more and more investment finds its way into the OZ program.

Mr. Reihsen is a licensed Texas attorney and the Director of Legal Affairs for Coasis Coalition Companies PB LLC. Mr. Reihsen’s legal background includes investment fund formation and compliance with state and federal securities laws, mergers and acquisitions, corporate structuring, and contract negotiation.

Coasis Coalition’s mission is to engage the opportunity zone investment community and
opportunity zone residents with support and services that advance their solutions and interests and the goals of the opportunity zone program. Coasis is the organizer of the Coasis Coalition Opportunity Zone SuperConference (http://ozdfw.com) held on a periodic basis, the first of which is in Dallas April 3-4.

Key Takeaways from the January 24 Letter from the Congress of the United States to Treasury Secretary, Steven T. Mnuchin
By: Carson B. Reihsen, Director of Legal Affairs, Coasis Coalition Companies PB LLC
January 31, 2019

The ability to invest in businesses located in Opportunity Zones is a major component of the Opportunity Zone program and for good reason. While new infrastructure is an important factor in improving the lives of people in any community, there is a strong argument to be made that the greatest opportunity to touch the lives of people in Opportunity Zones lies in the program’s ability to drive investment into Opportunity Zone businesses. This amounts to investment directly into the people who make up these communities and adding new paradigms of self-driven problem solving and means by which to achieve success through work, ingenuity, and broad economic engagement. Unfortunately, the largest area of uncertainty around Opportunity Zone investing relates to investment in operating businesses, even after the first round of proposed regulations were announced by the IRS on October 19, 2018.

For example, the Code provides, that the types of businesses which can qualify for investment through the Opportunity Zone Program are those in which substantially all of their owned or leased tangible property (1) was acquired or leased after December 31, 2017, (2) was first used in the Opportunity Zone by no other person or entity except for the business or was substantially improved by the business, and (3) was substantially used only in the Opportunity Zone while the business owned or leased it.

As currently drafted, seems to generally disqualify all businesses in Opportunity Zones except for those that are newly formed after December 31, 2017 because older businesses will have property that they acquired or leased prior to this date. However, it is doubtful that Congress intended to exclude from the benefits of the Opportunity Zone Program all of the business that have roots in the community. Also, seems to generally disqualify all businesses in Opportunity Zones that purchased or leased property that others had already brought into the zone. Surely Congress did not intend to exclude from the benefits of the Opportunity Zone program every business that must lease preexisting office/workspace or even just all of the business that engage in commerce with other people and businesses who operate in the zone.

Much of the problem stems from the fact that the Code borrows directly from the provisions which define the types of real property investments in order to define the types businesses which qualify for investment. Fortunately, the IRS can alleviate these uncertainties by issuing regulations. Such regulations are needed for significant investment in Opportunity Zone business to be feasible, as Congress intended.

This need for further regulation is not lost on Congress, who created the Opportunity Zone program with bipartisan support and, in contrast to what seems ever increasing political acrimony, continue to bring bipartisan support to the program. On January 24, 2019 the original Congressional bipartisan sponsors of the Opportunity Zone Program released a letter to the Treasury Secretary which expressed continued support and enthusiasm for the program and the efforts of the IRS to date. The correspondence expressed seeming impatience at the pace of IRS efforts to adopt rules clarifying the program, especially rules for investing in Opportunity Zone businesses so that the program can function in ways in which it was intended.

Summary of the January 24, 2019 Letter from Congress to the Secretary of Treasury

The January 24 letter was to “address key issues that are critical” to the Opportunity Zone Program “working according to congressional intent” were the legislators who were the “original cosponsors of the underlying Investing in Opportunity Act, contained in the Tax Cuts and Jobs Act of 2017 (TCJA) which was “intended to deliver transformative impact, including new jobs and higher wages, in low-income areas throughout the country, many of which have been left behind by the national recovery after the Great Recession.”

In the letter the Legislators:

• Emphasized that Congress designed the Opportunity Zone incentives to be broadly applicable to rural and urban communities, flexible in the types of investments in encourages, and scalable through investment fund structures.

• Expressed dismay that the currently proposed IRS rules leave questions that are left unanswered, especially as to investments in operating businesses.

• Stressed that investments in operating businesses are a central goal of the Opportunity Zone legislation. (To date substantially all of the activity of the IRS and Qualified Opportunity Funds have been around real estate, which may be partly because real estate professionals and IRS professionals, unlike venture investors, have a history with similar programs and the ambiguities relating to venture investing under the Opportunity Zone program are considerable.)

• Clarified that the ability of Qualified Opportunity Funds to invest and reinvest is important to create “catalytic investments in operating businesses” and that adopting effective rules to clarify and ease this would also “eliminate a significant roadblock for investors.”

• Agreed with the IRS’s choice of 70% test for the amount of Opportunity Zone Business Property that must be held for a business to be a Qualified Opportunity Zone Business.

• Applauded the IRS’s clarification of requirements for Qualified Opportunity Funds, including:

    ◦ Types of gains eligible for the Opportunity Zone tax benefits.

    ◦ Partnership rules for deferral of capital gains. (Investors in partnership taxed entities may have up to 180 after the end of their partnership’s tax year to invest their allocated share of their partnership’s gains from the sale of partnership’s assets.)

    ◦ The ability for Qualified Opportunity Funds to be structured as limited liability companies taxed as either corporations or partnerships.

    ◦ The amount of time investors may hold their interests in Qualified Opportunity Funds. (Under the IRS’s proposed rules investors may sell their investment on a tax-free basis, after a 10-year hold, at any time through 2047.)

• Expressed concern with the IRS’s proposed rule that would seem to require that an Opportunity Zone Business derive 50% of its gross income from the active conduct of a trade or business in the Qualified Opportunity Zone and want suggestions of locational receipt of income removed.

• Called for the IRS to produce a rule that would allow timing flexibility for a Qualified Opportunity Fund to invest its capital similar to the proposed rule applicable to Qualified Opportunity Zone Businesses that allows 31 months under a “written schedule” (e.g., a budget or financial model) to apply its cash. (Without this type of a rule the requirement that a Qualified Opportunity Fund have 90% of its assets in appropriate Opportunity Zone investments could quickly be violated as the fund takes in investor’s capital.)

• Asked that the IRS to adopt rules that would clarify that a Qualified Opportunity Fund may have “churn” among its investments, (i.e., investments, sales of investments, reinvestment of investment sale proceeds, etc., within the fund) and provide for reasonable time periods to make reinvestments, without those activities negatively affect the fund investors’ Opportunity Zone tax benefits.

• Urged the IRS to include in final rules reporting requirements directed toward prevention of “waste, fraud, and abuse, and ensure that the incentive is delivering impact for communities.”

• Expressed the belief that reporting data on activities within the Opportunity Zone program would “move capital off the sidelines by connecting investors to funds and allowing community stakeholders to align local strategies and additional investments with Opportunity Fund capital.”

Now that federal employees are back to work, those in the Opportunity Zone ecosystem are looking forward to Treasury’s rapid production and resolution of rules which will add the certainty needed by investment fund sponsors to move forward and effect the goals of the program.

Mr. Reihsen is the Director of Legal Affairs for Coasis Coalition Companies PB LLC. The Coasis Coalition’s mission is to engage the Opportunity Zone Investment Community and Opportunity Zone Residents with support and services that advance their solutions and interests and the goals of the Opportunity Zone Program. It is the organizer of the Coasis Coalition Opportunity Zone SuperConference. The Conference not only has a robust plenary agenda in its main hall (that accommodates 2,000 people), but also has more than a dozen private breakout rooms where specific meetings and presentations are made to targeted audiences of 10 to 240. Whether educating or being educated, networking, or investor or client pitches, the Coasis Coalition Opportunity Zone SuperConference is all about its participant using the Conference as a tool to advance the participant’s unique interests and goals.