Qualified Opportunity Zones and Tax - gtlaw.com

Qualified Opportunity Zones and TaxCredit Incentives Under the Tax Cuts and

Jobs ActJames O. Lang and Justin J. Mayor*

The authors discuss a significant new economic development tool created under thenew tax reform legislation that, among other things, will provide businesses, projects, andcommercial property in eligible low-income census tracts attractive financing and whatcould amount to a substantial long-term subsidy for economic development.

The new tax reform legislation, the Tax Cutsand Jobs Act (“TCJA”), created a significantnew economic development tool alongside ameaningful tax deferral and abatement mech-anism, “qualified opportunity zones.” The newprovision provides a flexible deferral mecha-nism for short and long term capital gains forcurrent investments in nearly all asset classes.Unlike Section 1031 “like-kind” deferral, quali-fied opportunity zones will provide:

(i) the ability to invest only the gain ratherthan the full corpus of a current investment;

(ii) a broader range of investments eligiblefor the deferral;

(iii) a potential basis step-up of 15 percentor substantially more of the initial deferredamount of investment; and

(iv) an opportunity to abate all taxation oncapital gains post-investment.

This program will provide businesses, proj-ects, and commercial property in eligible low-income census tracts attractive financing andwhat could amount to a substantial long-termsubsidy for economic development. The provi-sion will also provide opportunities for inves-tors, individual and corporate, to defer currentcapital gains, significantly increase basis intheir current investments, and abate all futurecapital gains on the investment. Sophisticatedfund managers should be able to find complexstructures and entity planning to optimizereturn for investors and maximize subsidy forlow-income businesses and propertyinvestment.

*James O. Lang, a shareholder in Greenberg Traurig, LLP, focuses his tax and corporate project finance practiceon tax credit incentive programs and related state and federal incentive programs. Justin J. Mayor, an associate withthe firm, focuses his practice on structuring and closing transactions which utilize federal and state tax credit incentives.Resident in the firm’s office in Tampa, the authors may be reached at [email protected] and [email protected],respectively.

The Real Estate Finance Journal E Winter 2017© 2018 Thomson Reuters

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New Stamp

Business Tax Credit, IncentivePrograms, and Capital Asset First YearDepreciation and Expensing

The TCJA preserves existing tax credit andtax credit incentive programs along withexpansion of first year depreciation and ex-pensing for purchase of capital assets. Impor-tantly, the legislation also creates QualifiedOpportunity Zones, a new incentive investmentprogram with the intent to subsidize growingbusinesses in low-income communitiesthrough short term and long term capital gainstax deferral and the potential of significantbasis step-up. Maintaining tax credit programsand growing immediate capital asset taxexpensing is meant to incentivize economicgrowth and community impact in targeted sec-tors and across industries. Specifically, Con-gress intends to preserve incentives for afford-able housing expansion, economicdevelopment investment in low-income com-munities, and development of specific renew-able energy technologies, including solar andwind, as well as encouraging increased invest-ment into capital assets, including equipment,for the expanded production of income.

While the reconciled tax legislation does notsignificantly change existing tax credit pro-grams, ancillary impacts will arise throughother revisions in tax policy through TCJA. No-tably, the pricing of tax equity will be impactedthrough reduction of corporate rates, realestate investment provisions, and internationalrepatriation provisions.

Qualified Opportunity Zones

TCJA legislation adopts an important andunheralded new tax incentive program pro-posed by Senator Tim Scott and Representa-tive Pat Tiberi in the form of Qualified Op-

portunity Zones in a new Section 1400Z of theInternal Revenue Code of 1986, as amended(the “Code”). Due to the broad base of poten-tial investors and eligible projects, property,and transactions, this program has the abilityto provide substantial returns to investors,administrative opportunities for funds, andsubsidy for eligible projects and businesses.

These “qualified opportunity zones” will bedesignated through a nomination of censustracts qualifying as “low-income communities”(as such term is defined under Section 45D ofthe Code for New Markets Tax Credits) by thegovernor of each state to the Treasury Depart-ment and certification of the zone by the Trea-sury Department. Each state may nominateno more than a number of “qualified op-portunity zones” equal to 25 percent of desig-nated “low-income communities” in each state.States may also nominate census tracts con-tiguous with “low-income communities” if themedian family income in the designated cen-sus tract does not exceed 125 percent of thequalifying contiguous “low-income community.”The process for state designation will neces-sarily be political and likely include advocacyto draw the governor’s attention to the censustracts with the most economic developmentpotential.

The new provision allows taxpayers to deferthe short term or long term capital gains taxdue upon a sale or disposition of property ifthe capital gain portion of the sale or disposi-tion is reinvested within 180 days in a “quali-fied opportunity fund.” If the investment ismaintained in the “qualified opportunity fund”for five years, the taxpayer will receive astep-up in tax basis equal to 10 percent of theoriginal gain. If the investment is maintained inthe “qualified opportunity fund” for seven

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years, the taxpayer will receive an additionalfive percent step-up in tax basis. A recognitionevent will occur on Dec. 31, 2026, in theamount of the lesser of (i) the remainingdeferred gain (accounting for earned basisstep-ups) or (ii) the fair market value of theinvestment in the “qualified opportunity fund.”Because of the recognition event trigger, sev-eral structuring opportunities may be availableto increase basis step-up, substantially insome cases. Importantly, investments main-tained for 10 years and until at least Dec. 31,2026, will allow for an exclusion of all capitalgains from post-acquisition gain on the invest-ment in a “qualified opportunity fund” to beexcluded from gross income. For an invest-ment maintained longer than 10 years andupon a sale or disposition of the investment,the new provision also allows the taxpayer toelect the basis in the investment to be equalto the fair market value of the investment.

“Qualified opportunity funds” will be deter-mined by the Community Development Institu-tions Fund of the Treasury Department in aprocess similar to allocation of New MarketsTax Credits to “community developmententities.” The “qualified opportunity funds”must maintain at least 90 percent of assets in“qualified opportunity zone property,” includinginvestments in “qualified opportunity zonestock,” “qualified opportunity zone partnershipinterest,” and “qualified opportunity zone busi-ness property.” The qualifications as “qualifiedopportunity zone stock,” “qualified opportunityzone partnership interest,” and “qualified op-

portunity zone business property” encompassinvestments in new or substantially improvedtangible property, including commercial build-ings, equipment, and multi-family complexeswith a common requirement that such invest-ments must be made in qualified opportunityzones.

This new tax incentive program will providesignificant planning opportunities for manyinvestors and is intended to generate ad-ditional long-term investment in areas mostneeding redevelopment and business growth.Qualified commercial property, businesses,and projects may use this new incentive as alow-cost subsidy for growth. This new legisla-tive program has garnered little attention andmay be a useful tool in capital gains deferral,particularly for individuals, funds, and compa-nies considering investments in low-incomecommunities. At worst, this incentive programwill provide for a capital gains deferral mecha-nism for short term investments in a form moreattractive than current Section 1031 “like kind”exchanges. Optimally, this program will providefor short and long term capital gains deferral,substantial step up in tax basis, and tax abate-ment of all post-investment appreciation.

Much guidance and regulatory clarificationis expected in coming weeks and months toflesh out this nascent incentive program.

Qualified Opportunity Zone InvestmentExample:

Qualified Opportunity Zones and Tax Credit Incentives Under the Tax Cuts and Jobs Act


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New Markets Tax Credits

Financing enhanced by New Markets TaxCredits (“NMTC”) provides opportunities forbusinesses, developers, and not for profitorganizations to expand, grow, and create eco-nomic stimulus and community impact. Proj-ects financed through NMTC structures often-times realize a net benefit of 20 to 25 percentof eligible project costs. Eligible costs mayinclude new buildings and resource facilities,capital expenditures, equipment, workingcapital, programmatic activities, and landacquisition. Use may include both for-profitand not-for-profit facilities and the facilitiesoftentimes utilize NMTC financing to closegaps in capital stacks for project completion.For example, a $10 million manufacturing plantproject may net the company a benefit equal-ing $2 to $2.5 million after structuring and clos-ing costs are paid.

Almost as important as the fulfillment of thelast 20 to 25 percent financing gap critical forthe success of many projects, sophisticatedlenders familiar with NMTC financing view theNMTC benefit as “like equity” in a traditionalloan to value analysis. Due to this substantialadvantage vis a vis senior financing or equity,not for profits can enhance and “supercharge”capital campaigns and businesses and devel-opers may require less equity for projectcompletion.

The new $3.5 billion of allocation of NMTCfor financing pending and new projects shouldbe available in February or March 2018. Thegroups allocated these credits for use withsome of the most impactful projects. Com-munity Development Entities are currentlyevaluating and accepting review of highlyqualified projects for this allocation round.

Overview

The purpose of the NMTC program is theprovision of capital infusion through lendingand equity contributions into qualifying low-income communities as determined via censustract or through provision of services to tar-geted populations. These communities andpopulations traditionally prove to be difficult toinitiate lending or equity investment. Lendersmay be motivated to make senior loansthrough utilization of NMTC both because ofthe risk ameliorated status of the borrower dueto the transaction’s net benefit and because ofthe opportunity to obtain necessary credits forthe financial institution as required under theCommunity Reinvestment Act. Through a 39percent federal income tax credit availableover a seven-year compliance period, taxcredit investors effectuate capital investmentand lending to qualified businesses andprojects. Whereas traditional sources of capitalmay not flow into these low-income communi-ties, the New Markets Tax Credit financings(“NMTC financings”) allow favorable terms andincentives to boost economic viability foroperating businesses, real estate projects, andnot for profit ventures serving these identifiedcommunities.

The federal NMTC program was adopted in2000 in the Community Renewal Tax ReliefAct of 2000 championed as a bipartisan effort.The first allocation of credits commenced withthe 2002 allocation with initial credit invest-ments taking place in 2003. Throughout its 15-year existence, the program continues to enjoybipartisan support with program extensions onan annual or bi-annual basis with the latestfive-year extension, the longest extension inprogram history, for $3.5 billion of allocation ineach year found in the Protecting Americans



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from Tax Hikes Act of 2015. The applicablegoverning federal law is located in Section 45Dof the Internal Revenue Code of 1986, asrevised, and in Section 1.45D-1 of the Trea-sury Regulations. The United States TreasuryDepartment through its Community Develop-ment Financial Institutions Fund (the “CDFIFund”) manages and administers the federalNMTC program. The CDFI Fund allocatesNMTC on an annual competitive basis to Com-munity Development Entities (“CDEs”), privategroups who provide loans or equity invest-ments to the most impactful projects acrossthe nation. The competitive nature of the al-location process to the Community Develop-ment Entities is passed on to projects wishingto benefit from NMTC as these CDEs areincentivized to allocate credits to the mostimpactful projects presenting significant com-munity outcomes. One hundred twenty Com-munity Development Entities were awarded al-location in the latest November 2015 allocationof $7 billion of NMTC.

Tax Reform Impact

This economic catalyst, job creation, andcommunity development initiative for revitaliza-tion of low-income communities found in theNMTC program was preserved in its currentstate through the TCJA. House legislationproposed an elimination of the NMTC programfollowing the current 2017 allocation of taxcredit authority to private “community develop-ment entities” for placement in high communityimpact projects nationwide. Existing legislationallows for three more allocation rounds of taxcredits and it has, throughout the program’shistory, been subject to frequent tax extenderlegislation.

NMTC transactions are also subject to tax

equity pricing adjustments because of corpo-rate rate reductions. Under the reconciliationtax legislation, the pool of corporate taxpayersinvesting in NMTC transactions may be limiteddue to the tax credits’ ineligibility to offset theBase Erosion and Anti-abuse Tax (“BEAT”) inthe reconciled bill, a minimum tax on foreign-owned corporations or corporations withsubstantial foreign operations. However, theelimination of the corporate Alternative Mini-mum Tax and increase in the individual thresh-olds for individual Alternative Minimum Taxcould open the door for new investors in theNMTC space.

Pending legislation would make the NMTCprogram a permanent provision of the Code,but under current law, NMTC will have threemore allocation rounds. Tax extender legisla-tion often provides renewal, and permanencyhas been a continued goal for the program.

Qualification

In a typical NMTC transaction, the borrowerdoes not utilize the NMTC against its own tax-able liability. For this reason, for profit entitiesand not for profit organizations can benefitfrom NMTC financing regardless of whetherthe entity or organization may owe federaltaxes.

Three primary factors weigh into projectqualification and attraction of NMTC:

1. The primary threshold qualification crite-rion commences with an examination of thesitus of a business or project. A qualified busi-ness or project should be located in a qualify-ing low-income community as determined bycensus tract data. It is preferable for a busi-ness or project to be located in or serve aseverely distressed low-income community.



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Qualification and severe distress are mea-sured by a census tract’s poverty rate, unem-ployment rate, and the comparison of resi-dents’ income to area median income. If acensus tract is qualified but not severelydistressed using this primary criteria, it is pos-sible the tract may still be severely distressedunder an analysis of secondary criteria factors.Tests to ensure qualification of situs in a low-income census tract include evaluating thesitus of gross assets and tangible personalproperty as well as the location of the servicesprovided and employment of personnel for thebusiness or project. We can assist in evaluat-ing a project’s location and qualification,particularly if identification of secondary criteriais necessary.

2. Because of the broad assortment ofuses of NMTC financing, the second factor forqualifying a project relies on prohibited anddisqualifying uses. If the initial location thresh-old qualification is met, several disqualifyingfactors may still apply. First, a business orproject cannot be operating as a “sin business”as provided in the following list:

E a private or commercial golf course;

E a country club;

E a massage parlor;

E a hot tub facility;

E a suntan facility;

E a racetrack;

E a gambling facility; or

E a liquor store.

Additionally, the business or project cannotbe a farm (except in narrow qualifying cir-

cumstances) or be predominantly engaged inthe development or holding of intangibles forsale or purchase. Importantly, NMTC financ-ing is limited to businesses or projects whereno more than 80 percent of gross revenue isderived from income from residential rentalhousing. Mixed use and multi-use projectsmay be permissible, but projects must includea substantial non-residential component.Structuring may be available to delineate res-idential rental housing from commercial uses.Temporary or transient housing does not ap-ply against this restriction, and in many caseswhere both housing and services are pro-vided, an analysis of the market value of eachcomponent can lead to successful transac-tion structures. The NMTC program placesrestrictions upon the amounts of collectiblesor cash (or cash equivalents) a business orproject may retain. Professional structuring isusually required in order to meet many ofthese qualification requirements.

3. The most important factor for attractionof NMTC relates to a project’s “communityimpact.” The competitive nature of attractionof tax credits to a particular project oftentimescan be measured by community impact. EveryCDE measures community impact somewhatdifferently, but there are common themesacross CDEs. Job creation and creation ofhigh quality jobs ranks highly in highly for com-munity impact with many CDEs. Quality jobsinclude jobs providing positions for residentsof low-income communities and low-incomeindividuals, jobs with sustainable and livingwages, benefit packages, opportunities foradvancement, and job training. Catalytic proj-ects that will lead to further development of alow-income community tend to make projectsattractive. Provision of services to a low-



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income population that are not otherwiseprovided and support from the local com-munity, local elected officials, and the busi-ness community are other factors showingcommunity impact. Minority ownership orimpact, environmental factors, and either skilltraining or small business incubator promotioncan be attractive projects features to variousCDEs.

For profit businesses and projects, as wellas not for profit organizations, are eligible forNMTC financing. Highly sought after busi-nesses and organizations include projectsanticipated to provide significant communityimpact. Community impact includes subjectivestandards and support along with objectivemeasures such as job creation and expansionof previously limited services or offerings.Oftentimes, attractive projects include “but for”stories whereby but for the NMTC financingthe business or not for profit entity may nothave completed the same scale of project inthe low-income community.

Focus factors in the program include provi-sion of healthy foods in food deserts, supportof community healthcare, including federallyqualified health centers, advancement of joband skill training, furtherance of positiveenvironmental impacts, and most projects lo-cated in non-metropolitan (rural) counties.

The CDFI Fund identified underservedstates and territories and underserved targetedareas. Many CDEs are required to close all ora portion of their allocation in these states, ter-ritories, and areas, and CDEs receive en-hanced consideration on future NMTC alloca-tion applications for activity within these states,territories, and areas.

Targeted States and Territories:

E Arkansas

E Florida

E Georgia

E Idaho

E Kansas

E Nevada

E Tennessee

E Texas

E West Virginia

E Wyoming

E Puerto Rico

E American Samoa

E Guam

E Northern Mariana Islands

E S. Virgin Islands

Targeted Underserved Areas:

E Federal Indian Reservations

E Off-Reservation Trust Lands

E Hawaiian Home Lands

E Alaska Native Village Statistical Areas

State Program

Several states enacted complementaryNMTC programs in order to attract economicactivity and federal tax credit allocations.These programs work either independently orin conjunction with the federal NMTC program.State programs may provide for either ad-



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ditional or fewer criteria than the federalprogram, and transaction sizes tend to belower for a state NMTC transaction. A typicalnet benefit from a state NMTC transactionwould equal nine percent to 12 percent of totalproject costs. This benefit can be twinned orstacked with a federal NMTC transaction toenhance total project benefits.

Twinning with Other Incentives

NMTC financing flexibly works in concertwith many other economic incentive programs.NMTC financing works in conjunction withHistoric Rehabilitation Tax Credits, RenewableEnergy Investment and Production Tax Cred-

its, grant programs, local and state tax creditenhancements, subsidized loan programs, andbond financing. NMTC financing notably doesnot work alongside Low-Income Housing TaxCredits. Structuring a NMTC transaction withother incentive programs leads to increasedincentives and enhancement of a project’scapital stack. Notably, NMTC financing maybe paired with the new opportunity zoneprogram in order to create a deep incentivefinancing with a high subsidy for a commercialproject.

New Markets Tax Credits —Prospective Deal Structure



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Historic Rehabilitation Tax Credit

The Rehabilitation Tax Credit (“HTC”) ofSection 47 of the Code provides a 20 percenttax credit for certain certified historic structuresapproved by the National Park Service and a10 percent tax credit for qualified rehabilitatedbuildings not eligible as a certified historicstructure (buildings constructed and originallyplaced in service prior to 1936). The Houselegislation would have eliminated the HTC,subject to transition rules. The TCJA preservesthe 20 percent HTC and eliminates the 10percent tax credit, subject to transition rules.Currently, the 20 percent HTC may be claimedas “placed in service” for the certified historicstructure, but the reconciled tax legislationprovides the HTC will be ratably claimableover the five year compliance period followingthe certified historic structure’s status as“placed in service.” Both the elimination of the10 percent credit and the implementation ofthe longer claim schedule for HTCs are subjectto transition rules whereby a property ownedby the taxpayer at all times after January 1,2018, and with rehabilitation construction com-mencing before or within 180 days of thereconciled legislation’s enactment will beeligible to have the HTC claimed by thetaxpayer under prior law for a period of 24months (or 60 months in the case of a phasedrehabilitation project). While the property mustbe acquired and owned by the taxpayer, theTreasury Department or Internal Revenue Ser-vice must provide guidance on the transitionrules as they relate to whether all of the own-ers or investors in a taxpayer must be in placeprior to Dec. 31, 2017.

The HTC is subject to tax equity pricingadjustments because of corporate rate reduc-tions, but the ratable spread of the credit over

five years may lessen the one year impact.The spread of the claim of the HTC over fiveyears should result in lower tax equity pricingin the amount of ten to fifteen percent due tothe diminished present value of the credits.Under the TCJA, the pool of corporate taxpay-ers investing in HTC transactions may belimited due to the tax credits not offsetting theBEAT, a minimum tax on foreign-owned corpo-rations or corporations with substantial foreignoperations.

Infrastructure Tax Credits

The Trump Administration and Congress areformulating plans for an expansive infrastruc-ture tax credit program in conjunction withrepatriation of company profits invested over-seas by United States corporations. The taxcredit program, projected at $150 billion ormore, would serve to leverage more than $800million in private investment into infrastructureprojects. Infrastructure may be broadly definedto include businesses supporting the “publicgood” including manufacturing, companyheadquarters, research and development, andenergy production along with more traditionalinfrastructure, including roads, bridges, rail,airports, seaports, and transmission lines. Thisdefinition may include infrastructure essentialfor large scale real estate development. Theproposed infrastructure tax credit program maywork in a mutually beneficial manner withexisting NMTC program objectives and thenew qualified opportunity zone subsidies toenhance the same type of economic develop-ment projects in a broad and significantmanner.

Affordable Housing and Low-IncomeHousing Tax Credits

The Low-Income Housing Tax Credits pro-



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gram has promoted the national private sectordevelopment of affordable housing since 1986.While the TCJA preserved the Low-IncomeHousing Tax Credits (“LIHTC”) under Section42 of the Code, the House legislation proposedan elimination of tax exemption on interestfrom issuances of Private Activity Bonds, anintegral financing tool in affordable housingprojects. Low-Income Housing Tax Creditsconsist of two separate tax credit provisions,commonly referred to as “nine percent” and“four percent” credits. The “nine percent” taxcredit is allocated on a competitive basisthrough state housing agencies while the “fourpercent” tax credit is allowable on qualifiedhousing projects utilizing tax exempt bond is-suances, or Private Activity Bonds. Therefore,the House legislation would have effectivelyended the “four percent” LIHTC program,preventing the financing mechanism used byhundreds of affordable housing projects acrossthe country on an annual basis. The reconciledTCJA preserved the LIHTC program along withPrivate Activity Bonds.

The LIHTC program will be subject to adjust-ments in tax equity pricing based upon reduc-tions in corporate income tax rates. Theproposed Affordable Housing Credits Improve-ment Act of 2017 sponsored on a bi-partisanbasis by Senators Maria Cantwell and OrrinHatch, not included in the reconciled taxlegislation, may be taken up again in 2018 andinclude provisions that increase tax credit al-location to state agencies by up to 50 percentfor use with “nine percent” credits and adjust-ers to tax basis to address the reduction inyield in LIHTC transactions resulting fromlower corporate tax rates. LIHTC may beparticularly exposed to pricing impact fromBEAT and corporate rate reductions.

Renewable Energy Investment andProduction Tax Credits

The 30 percent investment tax credit (“ITC”)subject to Section 48 of the Code is availablefor commercial solar installations and certainother technologies placed in service prior toJan. 1, 2017. The solar ITC is subject to anannual phase down of the credit for projectscommencing construction after Jan. 1, 2020,with all projects required to be “placed in ser-vice” by Jan. 1, 2024. The solar ITC has beenattractive to large land owners in Florida whereraw land is converted into large scale com-mercial solar arrays utilizing the equity fromthe tax credit. Residential roof top solar hasalso experienced a renaissance in recentyears and opportunities exist to retain rooftoprights for solar and utilize tax equity generatedfrom the solar ITC.

The House legislation proposal would haveextended certain “orphaned” ITC technologies(fiber optic solar, fuel cell, microturbine,geothermal heat pump, small wind, and com-bined heat and power property) to match thesolar ITC phase down and construction com-mencement timelines. The House bill wouldhave also provided both partially clarifying andpartially conflicting guidance on commence-ment of construction for ITC energy projects,including the codification of a physical worktest, a five percent safe harbor, and a continu-ity requirement for construction. The TCJAdoes not revise the solar ITC, nor does itinclude “orphaned” ITC technologies or com-mencement of construction codification.

The production tax credit (“PTC”) under Sec-tion 45 of the Code is available for eachkilowatt hour produced from certain renewabletechnologies for a period of 10 years from the



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date the facility was placed in service. ThePTC expired for all but wind generation tech-nologies after Dec. 31, 2016. Under currentlaw, the wind PTC is subject to an annualphasedown beginning in 2017. The wind PTCis subject to annual adjustment for inflation.Alternatively, taxpayers may also elect to usethe 30 percent ITC in lieu of the PTC. TheHouse legislative proposal would have elimi-nated inflation adjustments for the wind PTCfollowing the effective date of the legislationand adopted commencement of constructioncodification similar to the solar ITC proposal.The TCJA does not eliminate the inflationadjustment, nor does it include the commence-ment of construction codification.

Because of the pass-through of ongoinglosses and depreciation, the ITC and PTC aresubject to tax equity pricing adjustmentsbecause of corporate rate reductions. Also dueto foreign and multi-national investors in theITC and PTC industry, the BEAT may have asubstantial impact on current and futureinvestors. Tax extenders legislation proposedby Senator John Thune and Orrin Hatch maystill yet be enacted prior to 2018 in order toextend eligibility for orphaned ITC technolo-gies, subject to the solar ITC and wind PTCphasedown schedules.

Expanded First Year DepreciationDeductibility and Expensing forAcquisition of Capital Assets

TCJA expands first year accelerated depre-ciation for investment in qualified tangibleproperty, including many categories of equip-ment and non-real estate capital assets, underSection 168(k) of the Code from 50 percent to100 percent of all new investments in assetsacquired and placed in service after Sept. 27,

2017, subject to a phase-down schedule fol-lowing Dec. 31, 2022. Similarly, the legislationincreases the amount a taxpayer may im-mediately expense under Section 179 of theCode from $500,000 to $1,000,000 in the yearsuch property is placed in service with aphase-out provision increasing from$2,000,000 to $2,500,000. The expensing pro-vision applies to qualified tangible propertyand is elected by the taxpayer in lieu of ac-celerated depreciation. These two provisionsin concert are intended to increase capitalinvestment back into businesses and grow theproduction of income from such investment. Inthe context of real estate, this bonus deprecia-tion expansion and expensing provision will beimpactful for investment in tangible personalproperty and FF&E and cost segregation anal-ysis will likely be required.

Key Takeaways and Potential QualifiedOpportunity Zone Benefits

For investors:

E Six percent or higher after tax internalrate of return with lower risk profile for upto 80 percent of current investment port-folio appreciation

E Ability to either maintain or liquidate cur-rent investments with tax deferral and/orabatement of capital gains recognition

E Utilization of up to 80 percent of currentcapital gains appreciation in investments(the non-tax portion of appreciation) forutilization in the same investment orsubstitute investments or liquidity

E If affiliated with the project, ability to deferand/or abate capital gains while investingin new projects and growth



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For projects:

E Low-cost third party financing at taxadvantaged rates

E Third party investor financing as low asthree percent or less annualized cost tothe project over a 10-year investment ho-rizon, net of all expenses and investortax reserves (including a share of long-term appreciation with the investor and apermanent investor contribution to theproject)

E Ability to fully complete project financingwith little to no debt or sponsor equity

E Ability to complete and realize projectswith lower than market rate cash flow orreturn

E Ability to utilize financing for new con-struction or improvement of existing build-

ings (not currently owned by the projectowner)

E Ability to utilize financing for new equip-ment or substantial improvement ofequipment

E Increased subsidy for the project if utiliz-ing affiliated investors (with capital gainsappreciation on current investments)

E Ability to twin and stack with other incen-tive programs, notably NMTC

For fund managers:

E Substantial fees for raising capital andasset management in connection withOpportunity Funds (up to two to fourpercent annually)

E Ability to structure related partner levelfinancing and/or project level standing let-ters of credit



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