The IRS and Department of the Treasury recently released updated opportunity zones regulations. The long awaited second set of proposed regulations include revised guidelines to address many of the questions and concerns developers and investors expressed following the initial incentive announcement. However, it’s important to note that more regulations and updates are to come, so the proposal isn’t final.
At Uptown Consortium, Inc. (UCI), opportunity zones are top-of-mind as the incentive has been in many other areas across the country. Avondale is one of 8,700 federal opportunity zones, so UCI has been helping shape the new regulations to ensure that they best benefit neighborhoods like Avondale. UCI President and CEO Beth Robinson is a member of a nation-wide working group comprised of industry experts to keep abreast of regulations and provide input on development trends. Based on the new guidelines, here are three key updates developers and investors should know.
Invest in businesses, not just real estate
Opportunity zone investments aren’t limited to real estate holdings—businesses located in opportunity zones and funded by an opportunity fund qualify for tax incentives as well. However, they must meet one of three criteria:
· At least 50 percent of hours employees or contractors spend are within the opportunity zone;
· At least 50 percent of the company’s services are in the opportunity zone;
· Management and operations are based in the opportunity zone.
This is significant for startups considering locating in and around the Uptown Innovation Corridor Under the new federal guidelines, such companies could benefit from the opportunity zones incentive.
No substantial improvement provisions for land or vacant buildings
Opportunity zones regulations state that investors who acquire property in a designated zone must meet a substantial improvement requirement by making updates to the property. However, under the new guidelines, the substantial improvement provision does not apply to land purchased for the use of trade or business (not if held for investment) or to properties that have been vacant for more than five years.
Opportunity zone/non-opportunity zone borders
An important clarifying regulation addressed what happens if land straddles an opportunity zone and non-opportunity zone. Under the new rules, if a majority of the property’s square footage is based in an opportunity zone, then the property outside of the zone is considered to be located within a qualified opportunity zone.
In Uptown, this means that as long as a majority of the property is located in Avondale, the land will be included in the opportunity zone, even if part of the land is technically located in a surrounding neighborhood that is not an opportunity zone.
Even though more regulations and adjustments are needed, this recent round provides enough clarity for many investors to begin investing in designation opportunity zones, bringing much-needed capital to distressed and underserved communities. UCI will continue to keep abreast of developments in this emerging and potentially powerful incentive to benefit communities.