Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 76
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OPPORTUNITY ZONE MAGAZINE | VOLUME 1
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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
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