Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 76

74 OPPORTUNITY ZONE MAGAZINE | VOLUME 1 • ISSUE 1 Lastly, the proposed regulations provided a 70 percent threshold to interpret the substantially all requirement for an Opportunity Zone Business’s requirement to hold Opportunity Zone Business Property. Effectively, because 90 percent of a QOF’s assets must comprise Qualified Opportunity Zone Property, this means that only 63 percent of the assets of a QOF need to be Qualified Opportunity Zone Property if such QOF assets are held indirectly in partnership or stock interests. There is now a 31-month working capital safe harbor, provided a written schedule is in place and there is substantial compliance with the schedule. PRACTICAL IMPACTS: SPONSORS One of the most important clarifications in the proposed regulations concerns the requirements for construction or rehabilitation of real estate to qualify for the program. There is now a 31-month working capital safe harbor, provided a written schedule is in place and there is substantial compliance with the schedule. The schedule must set forth the expected amount of QOF funds appropriated for the acquisition of the subject property, construction expenditures, and necessary ancillary expenditures for the project. If such a plan is in place and substantially complied with, the cash earmarked for its use will fall under the working capital exception in meeting the 90 percent asset test of a QOF. Banks may be able to play an intermediary role here in facilitating escrow accounts that meet the necessary requirements of the proposed regulations. Another important clarification came in the form of a revenue ruling. In Revenue Ruling 2018-29, the value of land is not included when calculating whether the substantial improvement test has been satisfied. Therefore, only the value of the building is taken into account in meeting the test. This rule significantly assists developers in making projects qualify for the program as the amount invested to substantially improve existing structures should be less, and in some cases, significantly less. WHAT’S NEXT FOR STAKEHOLDERS? During the Feb. 14, 2019 Opportunity Zone Fund hearing, the IRS stated it will be releasing a second round of regulations shortly and is working to release final regulations in the spring. The first round begins to answer many of the questions confronting QOFs, investors, and sponsors, and the IRS has OPPORTUNITYZONEEXPO.COM