Key Takeaways from the Novogradac OZ Conference, with Mike Novogradac and John Sciarretti

Michael Novogradac

What were the biggest highlights from last week’s Novogradac Opportunity Zones Virtual Conference?

Mike Novogradac is the managing partner of Novogradac, a top 50 accounting firm founded in 1989. John Sciarretti is chair of the Novogradac Opportunity Zones conferences and leader of the Novogradac Opportunity Zones Working Group.

Click the play button below to listen to my conversation with Mike and John.

Episode Highlights

  • Challenges and opportunities in organizing a virtual conference.
  • Recap of Senator Tim Scott’s role in securing IRS relief for Opportunity Zones investors, and the need for some key legislative changes to the policy.
  • Highlights from Dan Kowalski and whether there may be any need for future regulatory guidance from Treasury.
  • Options for how census tract boundary changes may impact Opportunity Zones investments.
  • Data collection from Treasury, when we can expect the first Treasury reporting on Opportunity Zone investment, and how granular the reporting may be.
  • The upcoming report on the impact of Opportunity Zones from the Council of Economic Advisers expected later this summer.
  • The importance of passing bi-partisan reporting legislation, from Senator Scott’s and Senator Booker’s offices.
  • Deferred capital gains, and issues with locking in today’s capital gains rate or accelerating gain recognition.
  • Highlights of the session with IRS team members, and key issues with the final regulations that need clarification.
  • Initiatives being spearheaded by the Novogradac Opportunity Zones Working Group, and the value of being a member of the working group.
  • Plans for future Novogradac conferences on Opportunity Zones.

Featured on This Episode

Industry Spotlight: Novogradac

Novogradac

Based in San Francisco, Novogradac is a top 50 national accounting firm with an emphasis in the real estate sector, specializing in tax credits. In recent years, the firm has become one of the foremost thought leaders in the Opportunity Zone industry and are one of the leading providers of education and live events in the space.

Learn more about Novogradac

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m your host, Jimmy Atkinson. On July 15th, hundreds of Opportunity Zones stakeholders participated in the Novogradac Opportunity Zones Virtual Conference. Speakers included Senator Tim Scott of South Carolina, Dan Kowalski from Treasury and IRS officials who authored the regulations on qualified opportunity funds. Joining me today to recap some of the key takeaways from the conference are Mike Novogradac and John Sciarretti. Mike joins us from San Francisco and John joins us from Dover, Ohio. Gentlemen, welcome to the show.

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Mike: Thank you. Great to be part of it.

John: Great to be here. Thank you, Jim.

Jimmy: Yeah. Great to have both of you back. Mike, you were on the podcast late last year, and John, you were on the podcast earlier this year to promote the conference pre-pandemic days when we were assuming that it would go on as planned without a hitch in Long Beach, still. So, very glad to have both of you hear back and together. This is fantastic to have both of you on at the same time. So, like I said, the conference was originally planned for April in Long Beach. Was supposed to be, you know, a very large in-person gathering that got postponed and then eventually moved to a virtual platform, very understandably, given the times that we’re living in today. But despite that, I thought the virtual conference, it certainly had some hiccups, but overall, you know, it was still very educational. The networking opportunities were still very much there, and a lot was learned. What, what were some of your big takeaways from the conference as a whole?

Mike: All right. Thank you, Jimmy. And thanks for also being a sponsor of the conference, and thanks for your wonderful podcast every week. It’s on my weekly must-listen podcast list, and it should be for every listener. Yeah, the conference was originally scheduled to be in-person in April, a two-day event in Long Beach. And Long Beach has a number of opportunity zones. We thought it was a great place in California to hold the event. And then COVID-19 came along and we postpone the event to July, July 15th and 16th, once again, thinking it would be in-person. And then quickly, thereafter, we realized that even the July 15, 16th in-person date wasn’t gonna work. So, we did pivot to a virtual event, and we held it last Wednesday, July 15th. And I think the event was excellent. We had close to 500, maybe over 500, attendees. And there was a lot of networking possible, a lot of great information shared.

And as you noted, there were a few hiccups. Some of the hiccups were, you know, the software, some of the hiccups were just user, myself included. I had to learn how you work through the virtual conference and all the rest. It was more than Zoom. But we learned a lot, shared a lot of great information. And the beauty of it being a virtual event is now we have recordings of all the events, and now even listeners could go in later and register and watch the conference still. So, particular sessions and all the rest. So, we’re excited to have been able to hold the virtual event. We learned a lot, and look forward to future virtual events. We’ve been doing in-person events for over 20-some years. This was our first entirely virtual conference. We’ve done webinars over the years, but our entirely first virtual conference. So, we’re really pleased with how it turned out.

John: Again, I wanna thank you as well, Jimmy. It’s great to be here. And, you know, when we pivoted the virtual, I was concerned about the networking opportunities because for many years, we’ve been doing conferences and one of the main reasons people like our conferences is that they can go to a central place and meet the industry. We had some face-to-face mixer meetups on Zoom, and it was kind of like a speed dating technique where we all gathered and then were split up into smaller groups, and it was a great opportunity for tremendous networking and shared learning in those groups. So, I was really pleased with how that worked out.

Mike: I just wanna also add that we also had, you know, chat rooms and the like. And the chat rooms, in some ways, were easier for networking because you didn’t have to worry about, you know, at a cocktail reception, walking up and interrupting somebody and all the rest. You just could hop into, and you’re a little bit anonymous. Obviously, you had your name and such. So, it made the outreach maybe a little easier for many people.

Jimmy: Yeah. You didn’t have to actually interrupt anybody’s conversation physically, I guess, which it’s a little bit of a different dynamic for sure being in those chat rooms. I thought the mixers were great as well, John. Those were, those were really fun for me, and how the rooms were kind of randomized was interesting. I got to chat with a lot of interesting folks that way that I may not have otherwise met. So, that was really great for me. So, what I’d like to do now for the two of you, and for our listeners as well, is to just kind of recap, we’re not gonna recap every session of the conference, but recap some of the key points from some of the sessions that you put on on July 15th. So, Mike, I’ll turn to you, you know, the first keynote address of the day was from Senator Tim Scott, a Republican senator from South Carolina. Why don’t you spend a little bit of time highlighting some of the key points from his address?

Mike: Yeah, we were really pleased to have Senator Tim Scott make time to be able to provide a keynote address to the event. Senator Tim Scott, as all your listeners know, is the real advocate. He introduced the initial Opportunity Zones bill in the Senate, issued the follow-up bill, and was central to the statue being enacted. And Senator Scott shared with us the role that he played in getting the IRS guidance to deal with COVID-19, the extra 180…you know, extending the 180-day investment period to the end of the year, expanding or halting, freezing the substantial improvement measurement period, as well as, you know, helping funds, you know, build, rely, and reach more QOZ if you’re unable to meet the 90% investment test this year. So, he really pointed out the role that he played in helping with that guidance. And as you know, our Opportunity Zones Working Group also submitted a number of recommendations to get that IRS guidance.

So, Senator Tim Scott showed his leadership here. He also discussed the need now for certain key legislative changes. And he was pointing out during his keynote that because of the pandemic, it’s more important than ever to get a 2-year extension of the 2026 deadline. And I know that’s something a lot of your listeners and our Opportunity Zones Working Group, we’ve really been sort of promoting, extending that 2026 date out 2 years, so you have additional time to get the 7-year hold benefit as well as make investments in Opportunity Zones. The rollout of the underlying regulatory guides in and of itself cause a lot of a delay, and kind of lost a couple of years there. And now we have the pandemic which is then, you know, causing us to lose some time to be able to invest. So, I think now more than ever, Senator Scott was pointing out the importance of trying to get it to your extension.

And then he also emphasized what he’s been emphasizing since he first introduced the legislation back in 2016, how important reporting requirements are. And he wants to see his Bipartisan IMPACT Act enacted in the law, so there are more robust reporting requirements. And the third area that he really focused on, was really a call to action to all our attendees. You know, encouraging all the attendees to be vocal and loud about the investments they’re making Opportunity Zones, pointing out now’s the time to be reinvesting in distressed communities and wanted, you know, all of our attendees to continue to make those investments, thank them for making the investments as well as to be vocal and loud and proud as investments that they’ve been making. So, we were really pleased to have him there. And those were some of the highlights.

Jimmy: Good. And so, just to revisit that potential 2-year extension of the 2026 date, correct me if I’m wrong, but just for the sake of our listeners, currently investors in Opportunity Zones have to recognize the deferred gain by the end of 2026. So, December 31, 2026 is the latest date in which a capital gain recognition can end up being deferred and invested into a qualified opportunity fund to receive all of the tax benefits or, excuse me, to at least receive the deferral and the exclusion benefits. Is that correct?

Mike: That’s right. They get that deferral until, you know, 2026. So, therefore, it won’t be very long.

Jimmy: Yeah, that’s true. It wouldn’t be very long.

Mike: It gets recognized in 2026. I think it’s recognized on December 31, 2026. But it’s really the…

Jimmy: It’s really the exclusion.

Mike: …in order to get the 10-year hold.

Jimmy: Right. The 10-year hold exclusion.

Mike: You should get the 10-year hold benefit such that you’ll be able to exclude from a taxation appreciation in the value of your opportunity zones investment.

Jimmy: Right. So, then pushing that date out from December 31, 2026 to December 31, 2028 would do a couple of things. One, it would push that recognition event out an additional 2 years, but then it would also kind of reopen the window for the 7-year hold, 15% step-up in basis. And it would further push out the 5-year hold, 10% step-up in basis benefits as well, right?

Mike: That’s correct.

Jimmy: Good. So, let’s move on to one of the next panels that you had. You had a fireside chat, I believe it was, with Dan Kowalski from Treasury. So, what were some of the key points, key takeaways from that discussion that you had with him, Mike?

Mike: Yes. So, Dan Kowalski is a counselor to Secretary of the Treasury, Steven Mnuchin. And, once again, although your listeners know, certainly your regular listeners know that he was a key person at Treasury and Treasury leadership to help shepherd through the final regulations. So, he helped get through the proposed regulations, and then get the final regulations, and then helped oversee the corrections to the final regulations. And Dan gave us an overview in terms of what to expect in terms of future regulatory guidance, and also shared some insights in terms of data collection and the like. And on the future regulations front basically said, you know, Treasury sees the regulations as final. They are final and didn’t see any great need right now as it stood for additional regulatory guidance.

And there was the one exception, and that had to do with the census. And the census is going now. Census day was April 1st. And as part of doing the census every 10 years, the census lines themselves end up being altered for many census tracts. And the question Treasury will have to address for opportunity zones is what is the impact of changes in track boundaries on opportunity zones investments. And there’s a handful of places Treasury could go. Unfortunately, he didn’t tell us which way they were going, but he just said that that is an area where they know they’re going to have to come out with guidance as census tracts do change.

And when you think about a given sort of census tract, it can either get larger, smaller, or stay the same, and then Treasury can either decide that those changes to census tracts don’t affect the opportunity zone designation, such that the existing tracts, as they are defined now, don’t change for purposes of opportunity zones investing even though the census tract lines are changing, kind of going forward, or Treasury could come up with some blend of the two. And our Opportunity Zones Working Group does have…one of its work items is to survey our group and try to come up with a recommendation as to what we think Treasury should do with respect to a census tract of boundary changes and how that should affect opportunity zones. But that was one. He talked about the census tracts. That was really the big takeaway in terms of future guidance on that front.

And then we also talked about data collection, and where Treasury was on data collection. And Dan said that he thought the form 8996, which is the opportunity fund form where you have to disclose the amount of money that you’ve raised and invested in opportunity zones, that he feels that they’ve gotten that form pretty tight and that they don’t expect any changes to that form or any changes to data collection. They might change the instructions to the form. They think they need to clarify, you know, what some of the words mean and how to go through and do the reporting, but they feel they have the data they’ll need because that form will basically give the IRS and Treasury information on how much capital has been raised by opportunity funds. And it’ll also show where that capital is being invested by census tract.

And Dan projects that there will be heat maps that can come out. Unfortunately, for those of us who can’t wait for that data for 2018, the data for 2018, the information from 2018, which seems like a while ago now, wasn’t filed until 2019 and it takes about 18 months to do this work. So, they don’t expect the actual data to be available for 2018 until the summer of 2021. And then similarly the data from the 2019 filing year, which we’re going through now, would be the summer of 2022. So, he said that’s what we can look at in terms of data.

And then he also shared how they have to work with the Census Bureau to get data on a per-census tract basis. And they wanna get one-year data. A lot of the census data comes out in five-year data sets or rolling data sets. And in order to compare census tracts, you know, pre and post-opportunity zone investment and the like, they need annual data. So, then the process of working with the Commerce Department to try to break out census data in terms of one-year data so they can use that as a metric to evaluate the opportunity zones incentives. I mean, we spent a lot of time talking about how important it is to measure the success of the incentive.

And you have to look at existing tracts, opportunity zone tracts that get investment and find good control groups to compare that weren’t designated opportunity zones and even finding good control groups will be, you know, an exercise, a theoretical exercise. And it’s not as simple as finding just a neighboring census tract or one with certain key statistics. You have to evaluate it in a number of ways to come up with a good control group. But that’s most of the…those were some of the highlights. It was a half-hour or so conversation, but those are a couple of the key points that I came away with that I thought were interesting.

Jimmy: Yeah. That’s fascinating. If you wanna really drill down, I think we could talk about this for several hours, certainly. Just the census tract map alone, that’s really interesting that the lines do get redrawn every 10 years. I think most of the lines don’t get redrawn, but there are, you know, a handful or maybe a few hundred, I don’t even know, that do get redrawn very subtly or split in half, or made larger, or made smaller as you indicate. And I know one of the things that the Working Group may be working on is a proposal whereby you know a census tract getting smaller wouldn’t harm OZ investment, but, you know, if a census tract were to get larger and maybe encompass more buildings across the street, for instance, that maybe those buildings would then become eligible. Is that right?

Mike: Yeah. And some of what we’ll be discussing in terms of what’s the best policy answer for opportunity zones incentive itself.

Jimmy: Right. Right.

Mike: And there’ll be a dynamic discussion. And we also have to spend the energy to go back and look at 2010 and look at the magnitude of census tract zone changes and the like to try to get a good handle on what’s feasible.

Jimmy: Yeah. Do you mean comparing what changed in 2010 from what the map was in the year 2000?

Mike: That’s correct.

Jimmy: Yeah. So, then you can kind of know what to expect here in 2020.

Mike: That’s right.

Jimmy: Yeah.

Mike: That’s what we’re working on now.

Jimmy: Yeah. That’s really interesting. It seems to me like maybe just the simplest thing would be just a lock the tracts in place, just use the 2010 map indefinitely for opportunity zones. But, yeah, maybe, certainly, if you can work some more communities into the mix, if a certain census tract gets enlarged, then maybe it would be worthwhile. That’s something to consider for sure. It’s also really interesting the reporting that we can expect to see from Treasury. It’s a shame it takes so long to crunch those numbers and get the reports out to the public. But yeah, if we could see some sort of not just aggregate reporting on the total number of capital that was raised in 2018, but also if we could break that down by census tract, do you have any indication of how granular they’re gonna be able to get? Because I think there may be some privacy concerns once you get into the census tract level, right?

Mike: There are privacy concerns. There are privacy concerns. So, there is an expectation that there will be some type of heat map. So, you’ll see areas that have more or less levels of investment. And even those heat maps, you know, they can be a variety of ways. Is it just sheer dollar amounts invested? Is it dollar per square foot? Is it dollar per population? You know, there’s a lot of ways in which you can look at the heat maps and sort the data to determine its effect. But one overarching concern that Treasury will have is they can’t release information at such a granular level that it might reveal private taxpayer information. So, the granularity will likely be largely a function as to how much investment is in a given community, and to what extent a release in that level of granularity could reveal confidential client information.

So, I wouldn’t be surprised to see, you know, a heat map with various areas just have, you know, a circle of stuff there that says, “Can’t disclose,” because it would reveal private taxpayer information. We see that in other…there’s other areas where we deal with data that we get from the IRS, where there’s just whole spots where they’re just blank. And it’s because of, you know, there are so few taxpayers working in a certain area that if you disclosed it, you could reverse engineer who those taxpayers were. So, that is something they’ll have to struggle with, which is why the first round of release of information I would expect to take a little bit longer as they have to work through all those privacy concerns. And you can plan ahead as much as you want but when you actually see the data, then a lot of issues will arise that they won’t have anticipated to try to address.

Jimmy: Right. Yeah. That makes sense. That makes sense. Well, I’m very curious as I’m sure you are and all of our listeners are to see that first report. And it sounds like we’ve gotta wait about another year before we get that out, but it’ll be really interesting once it finally does get released. Mike, let’s move on now to the next panel, which was your Washington Wire or Washington Report where you moderate a panel of officials from Washington, D.C. You had Alfonso Costa, Deputy Chief of Staff from HUD on that panel, along with Emily Lavery, a legislative assistant to Senator Tim Scott’s office and her counterpart at Senator Cory Booker’s office on the other side of the aisle Chad Maisel, an economic policy advisor to Senator Booker. How did that panel go and what were some of the key takeaways there?

Mike: Yeah, that was a great session as well. I mean all the sessions were great. I’ll start with Alfonso Costa, he also, you know, is one of the key contacts within HUD with respect to the White House Opportunity and Revitalization Council. So, Alfonso was able to share with us the Best Practices Report that had recently been presented to the president. And I won’t go into all the details of the report. You know, your listeners can google it. But I will encourage others to go through and look at the report. It’s a great resource for examples of community and economic development activity in opportunity zones. We at Novogradac get lots of questions periodically from, “Is there energy development going on?” “Is there a formal rental housing?” “Is there non-real-estate operating businesses?” “Are there community health centers and the like?” And there is a long list of different categories of businesses that are receiving investment in opportunity zones that are furthering community economic development activity. So, there are a number of really impressive vignettes.

Jimmy: That’s the Best Practices Report that they released a few weeks ago now. It has a lot of interesting case studies in it. I would highly recommend reading it or at least parsing through it if you haven’t already. I agree, Mike. Please continue.

Mike: Yeah. And I would also note, tracking back to our data, is that I’m really anxious to see, is one of the workstreams…There are five key workstreams to the Revitalization Council, economic development, entrepreneurship, safe neighborhoods, education, workforce development, and then the fifth one was measurement and analysis. And in the summer of 2020, there is suppose to be a release from the President’s Council of Economic Advisors of the amount of capital raised by opportunity funds and more analytics on the impact of that capital. So, I’m looking forward to getting that report, and we’ve been doing our own capital raising data collection. So, we’re anxious to see what the report says about the impact of opportunity zones to date.

Jimmy: And that CEA Report, that’s due summer of 2020, which is now, essentially. So, we can expect that within the next few weeks, I would imagine. Do you know how they’re gathering that data? Because they’re not able to…like the Treasury Department, they don’t actually require anybody to report to them on a particular tax form. What sources are they using to get that data? Do you know?

Mike: You know, I think they’re using whatever data is sort of out there that’s sort of public-available. So, they’re looking at SEC filing data. You know, I suspect they’re looking at the data that we’ve collected and other economic information that’s available, you know, in interviews and the like. So, they’ve been researching, we’ve had a number of folks focused on collecting data, aggregating it, and analyzing it. So, I am, myself, anxious to see how it is that they pulled together this data and what their estimates are. I mean our estimates ourselves are…our most recent estimate was on $11.5 billion of capital that’s been raised from opportunity funds. And as I had mentioned before on the prior podcast, our data collection is just with respect to funds that are collecting, raising capital from third parties, not, you know, sort of friends and families, but out there fundraising from third parties.

And it’s a rolling survey. So, we basically are reaching out to funds and the like, and collecting that data. And we estimate that the actual amount that has been raised is two to three, maybe more times that. So, we estimate the number at, you know, $20 billion, $30 billion, maybe $40 billion, could be higher. It’s difficult to know, but that’s kind of the numbers that we’ve come up with, and we’re anxious to see with, you know, the additional resources that the CEA is able to dedicate. And I’m sure there’s additional sources that they have that we don’t have access to. So, I’ll be anxiously looking forward to what their estimates are.

Jimmy: Yeah. That’ll be really interesting to see that. I’m looking forward to that as well. And then also on that panel were Emily Lavery from Senator Scott’s office and Chad Maisel from Senator Booker’s office. Did they hint at any legislative efforts that may be in the works or anything that their two offices are working on at the moment in regards to opportunity zones?

Mike: They certainly did, and won’t come as a surprise to anyone. They’re both in agreement. We need to get reporting legislation passed. So, reporting legislation is sort of very important for both offices. You know, Emily did also discuss the timing extension of 2026 going out 2 years and how that remains a key goal for her boss, Senator Tim Scott, and many other members of the Senate. Chad also talked about, in addition to that, in terms of other legislation, you know, Chad talked a bit about a need for certain guard rails in perspective bills. He himself said that there were some tracts that he looks at and thinks maybe those tracts aren’t in need of the incentive. So, there was some discussion of that.

Another area, actually, during the Q&A part of the session, we got a question about locking in the capital gains rate, and I know that’s come up on a previous podcast of yours, a desire to be able to lock in the capital gains rate from, you know, with a year, you make the deferral election, have that be the capital gains rate that applies in 2026 or 2028, if we get the 2-year extension. And obviously, there was a concern that depending upon how future elections go, that the top capital gains rate could rise. And if you’re an individual investor, then that could be, you know, a reason to not make an opportunity zone investment. Now, we’ve run lots of numbers, and even if the capital gains rate were to rise from 20% to 28%, the deferral benefit is still, you know, pretty beneficial at, you know, any sort of reasonable discount rate if it goes up to, say, 28%. And Joe Biden, you know, is suggesting a 28% top individual capital gains rate.

So, I think there’s some notion that, you know, the fear of the capital gains rate rising is more significant than the actual present value economic significance of that that can kind of have the benefits as well. But, you know, Chad said he didn’t see that happening, that the chances of being able to lock in the capital gains rate isn’t likely to happen. And I will just say that we’ve also, at Novogradac and through the Opportunity Zones Working Group, thought that maybe just, you know, having an election to accelerate gain recognition might be a more plausible approach to deal with that question that you would basically build to elect, to accelerate, to gain early, and preserve your 10-year hold, but recognize the gain earlier at a lower…at a then-current capital gains rate if you’re concerned about it rising.

Jimmy: Just to forego the deferral benefit entirely for the sake of being able to lock in the current rate.

Mike: That’s right. That’s right. If fear of rising capital gains rate is keeping you from investing, then that would eliminate that fear.

Jimmy: Right.

Mike: And then you can look at it and say, “I might as well…I can go ahead and invest now. I’ll get the benefits of the 10-year hold, invest in a distressed community, do a lot of good for the neighborhood, and overcome this risk.”

Jimmy: Right. And, you know, I like to argue, the flip side of the coin of cap gains rates rising is that it makes the exclusion benefit all that much more powerful, right?

Mike: No. It definitely does. And we’ve emphasized that as well.

Jimmy: Yeah. And the point you make about the present value benefit still exceeding paying current rates, even if it goes up to 20%, that’s a really interesting one. I’m gonna use that line now myself when I get asked that question because that’s a good point you make.

Mike: Yup. So, those are some of the key points out of that. We had a good lengthy discussion, but those were the high points from the legislative side.

Jimmy: Good. So, let’s bring in John now because he’s been sitting here very patiently. He’s been very quiet.

John: I’m still here, Jimmy.

Jimmy: You’re still here. Fantastic. Good to hear that he’s still here with us. John, I wanted to get…I wanted to turn to you now. You guys had a panel with several members of the IRS team that covered the opportunity zones regulations. So, could you maybe touch on some of the high points of that panel that you had with them, John?

John: Sure. Yeah. So, we are really excited that we had the opportunity to have the IRS panel. We had a number of…There’s a number of issues in the final regs that need clarification, although the final regs were great, they answered a lot of questions. The issues that needed clarification from time to time, you know, practitioners will have the opportunity to have a one-off conversation with a member of the reg writing team and sort of report that back through the channels. But this was sort of the first time that I know of where we had this sort of national stage of an IRS team that could clarify some of the issues. And we picked 10 issues where we had questions for them. And they did a really nice job clarifying a lot of things. Some things they couldn’t clarify, didn’t feel like they had the authority to give us an answer around. But, you know, there was a lot of things that were sort of cleared up.

Some of the, I’d say, more important issues that were discussed, there was the issue with the 70% tangible property test. And that sort of when you’re in this working…on businesses in the working capital safe harbor and happens to have some non-qualified property, which happens a lot because if a business would sort of have land that they purchased before 2018, or maybe they purchased it from a related party to get into the investment partnership. And, you know, that land being non-qualified might be the only asset they have for a while until they spend enough money to have enough qualified assets to pass the 70% test and be qualified. And so, it was a little confusing in the first set of regs whether the cash that they were holding for working capital assets sort of covered that non-qualified land sort of a deemed asset purchase. And there were a lot of questions around that.

And so, IRS made a correcting amendment that still wasn’t as clear as people would have liked. And so, there was some questions whether folks with bad assets, you know, sort of failed the tangible property test. And the IRS was pretty clear that the intent of that provision was to address any startup business, which would be like a development-type business or any startup company that might have a small amount of non-qualified assets that they wouldn’t be penalized for that. So, that was refreshing to hear. And I think a lot of practitioners out there will be glad to know that they do have sort of safety while they’re in the working capital safe harbor where the 70% test is sort of shut off. But they were clear that, you know, the intent was for startup businesses. So, it’s not for the business that’s been around for a while.

Another issue that they cleared up, which is, I think, important for a lot of your practitioners, accountants that might be listening to your podcast, is the issue that we uncovered when preparing fund tax returns during this tax season. As you know, any sort of contribution that a fund receives can be disregarded for up to six months before a testing date. So, you don’t have to invest the money right away if you keep it in certain temporary investments and the like. You can sort of disregard that. But what we found is that funds had earnings on these contributions in a material amount that, you know, where they deposited those earnings and that cash, obviously, wasn’t from a contribution, but were from earnings. And so, by definition, it wouldn’t meet the exemption.

And then funds also have organizational costs, startup costs, and the tax laws require you to capitalize these costs. So, they have these sort of bad assets that would be in the numerator, and even though I’m disregarding my contributions that came in within the last six months, the bad assets would cause it not to satisfy the test, and therefore, they’re in a penalty situation. So, it was refreshing, again, to hear from IRS that you could disregard the earnings, it’s reasonable to disregard the earnings and also any sort of startup organizational costs that you might have capitalized won’t have to be in that numerator, which brings a lot of funds to a zero-over-zero fraction, which isn’t 100%, but the IRS said you could treat that as being 100% for your 90%. So, that was a good takeaway too.

One area that they didn’t clarify, or give us a favorable answer, in the preamble to the regs, there’s a discussion that any sort of non-qualified property, like a non-qualified building that a business may either have, you know, because they owned it for some time before 2018, or because maybe they purchased it from a related party. And again, this happens more often than not, especially in historic tax credit transactions. There’s a discussion in the preamble where Treasury provides that any sort of improvements to that building would not be qualified property. And it’s inconsistent with their treatment of leased assets where leasehold improvements are clearly qualified property. And the regs is discussing in the preamble, although not in the text of the regs but in the preamble, gave many taxpayers and practitioners pause that, you know, the whole building might be tainted and, therefore, not counted as good property.

And we asked the IRS whether, you know, because…Or go back, the reason that they provided this discussion is they said, or they hinged on the fact that it would be an administrative burden for the IRS and the taxpayer to sort of track these assets. So, knowing that we have to track them already as accountants for depreciation purposes and the like, we asked that perhaps it would be, you know, okay if a taxpayer could track it whether the building itself could be qualified, and IRS seemed to have some concerns about abuse and really, concerns about whether they had the authority to make these purchases good assets. And so, they did indicate that they’re gonna continue to look at this issue and ask for examples and the like, to help understand it a little better. But, unfortunately, we didn’t get a positive response to that question. So, those are some of the bigger takeaways from the IRS panel. And like I said, they addressed 10 separate questions, and they did a nice job of clarifying a lot of things that folks had difficulty understanding and how to implement based on the final regs.

Jimmy: Yeah. Fantastic. It practically amounted to another IRS hearing. So, now, John, I wanna turn to the Novagradac Opportunity Zone Working Group. First, for those listening who may not be aware of what the Working Group is, maybe you can explain briefly what the Working Group is, who the members are, and what it does, essentially. And then I’d also like to ask you, you know, what are some of the initiatives that the Working Group is currently working on? I know that as you pointed out, there’s still a number of items that the IRS hasn’t addressed satisfactorily.

John: Sure. So, the Opportunity Zone Working Group is a group that we started in the legislative phase of the opportunity zones legislation. We had a handful of clients that, you know, everyone was trying to figure out if based upon the initial bills, whether it’s something that they might be able to participate in. And we met early on in the legislative phase, as I said, and actually commented on the preliminary legislation, and had the opportunity to even work with the IG during that phase and contribute our ideas around the legislation. And once the legislation was passed in 2017, the group began to grow. We have approximately 150 member firms in the group now. They consist of funds, professionals, consultants, developers, and intermediaries, and nonprofits, and nonprofit community development-type groups. So, it’s a nice cross-section of the industry.

It gives folks an opportunity to benefit through collaborating with other opportunity zone stakeholders on a monthly basis. We have a call and you have subgroup calls in the interim about specific topics that certain folks might be interested in. We comment a lot on the regulations. We provide technical guidance around issues that might not be so clear. It gives folks kind of the opportunity to understand how other stakeholders are implementing the regulations on things that might lack clarity. We discuss business strategies and the like around structures in fund formation. We talk about market trends. We discuss the fundraising survey that we do on a rolling basis. And so, it’s been a very, I think, informative group, and also gives our stakeholders the opportunity to network among other stakeholders that might have like views or like opportunities. So, been a real success for us.

Right now, some of the things that we’re working on, Mike mentioned earlier where we are discussing sort of a good…or what the Working Group desires are with respect to policy around the census tracts. And once we gather that information, we’ll draft the comment letter, sort of direction to what we wanna see as policy. And then we’re also working on a response. Treasury is seeking recommendations to be included in the 2020-2021 Priority Guidance Plan. And so, we’re drafting a response around the issues that we would like to see additional guidance on. A lot of them will be the same questions that we asked the IRS, even though they may have answered informally, it’d be nice to have some formal guidance around things, in addition to things that they were not able to answer in our panels. But those were, sort of, the main update of items that we’re going to be addressing in the Priority Guidance letter.

Mike: And I would just sort of add that one of the real benefits from the Opportunity Zones Working Group from the beginning through now is the ability to share information among the members. One thing about a new tax incentive is, A, you initially need to have guidance from the IRS, and we were very active in making recommendations about types of guidance in the rest. And we have experienced in a number of other tax incentives that we are able to build upon. But also, we’re also knowledgeable and we understand that the IRS is not going to be able to answer every single question. And there’s gonna be lots of areas where a consensus has to develop as to how to interpret various matters. And one thing the Working Group does a lot of is develop consensus around interpretations of various, sort of, provisions.

And we sometimes analogize it to traveling within the herd, and a lot of the members of the Working Group take comfort in the fact that the interpretations and the ways in which they’re addressing and deal with opportunity zone is consistent with what others in the group are doing so that, you know, they’re not alone with some odd interpretation or are doing something so unique that if the IRS or somebody else were to disagree with that interpretation, you know, they’d be the only one affected. So, that whole aspect of it, I think, is very important. We did the same thing when new market tax credits came out back in 2000 and formed a similar group that continues to this day, which is another community development incentive that’s more targeted to individual businesses as opposed to being targeted to a broader census tract.

Jimmy: Yeah. Excellent. Yeah, I agree. That’s a very valuable element of the Working Group is that moving with the herd as you mentioned. Now, for those of our listeners who may be unfamiliar with who Novogradac is, or what you guys do exactly. You know, Mike and I, you guys, we were joking earlier before we hit record that, you know, some people assume Novogradac is a conference organizer, and you certainly are that, but you’re much more than that. Could you explain, you know, some of the accounting and tax preparation services and other accounting services that you provide to your clients and why might an opportunity zone project sponsor or an opportunity zone fund manager come to you for what they need help with?

Mike: Yes. Absolutely. So, we’ve been around since 1989, which is a long time ago now, but I didn’t get any older. So, we’ve been around since 1989, 25 offices, over 700 employees and we’re, you know, an accounting and tax professional services firm. We also have a valuation group. But we’re, you know, auditors, and tax repairers, and valuation, and appraisers for those that are participating in a wide variety of community development incentives. And we were founded off of working on affordable housing, namely the low-income housing tax credit, along with other incentives through the Department of Housing and Urban Development, through HUD, as well as various state programs for affordable housing. We also do work extensively in the historic tax credit area, extensively in the energy tax credit area, extensively in community development, including new markets tax credits.

And that’s how we came to be involved with opportunity zones is when that was beginning to make its way through Congress in early 2016, late 2015, we started getting involved. We have a strong public policy group in Washington, D.C. So, we’re very focused on federal and state policy to advance, you know, affordable housing, community development, historic preservation, and renewable energy. And clients come to us because we have such a depth of experience and can come to us and ask for interpretations on questions and the like, wanna know what’s common in this particular niche area, and we have experience with that. And not only can we tell them our interpretation, we can talk to them about where the IRS was on this, and what recommendations were made, and some of the evolution of various, sort of, provisions. So, it’s really all about the in-depth expertise that we have in the areas that we really go deep.

John: Well, I just was gonna add that we have a large transaction advisory practice. We’re getting involved with our clients very early in a transaction, and we provide structuring consultation as well as financial models, and due diligence around the transaction, our expertise around not only the tax laws but the programmatic laws and help our clients structure things, you know, for their best benefit in the transaction. So, that’s been the joy of my practice is getting involved very early when these transactions are being structured.

Jimmy: Fantastic. Yeah. Novogradac has definitely been on the leading edge of opportunity zones since the very beginning, since before the beginning, even, since well before it was passed, even. And, of course, you are also still a conference organizer, and I know that you have another Opportunity Zones Conference coming up here later this year. Mike, can you tell us a little more about what you have planned?

Mike: Yes. So, our next Opportunity Zones Conference, our fall conference, we, you know, have several conferences every year around opportunity zones and a number of other incentives, but opportunity zones included. And for the fall, we’re currently scheduled to be in Cleveland on Thursday, October 22nd, and Friday, October 23rd. And the conference is currently scheduled to be both an appropriately social distancing in-person conference, as well as a virtual conference. So, it’s much like kids going back to college in the fall. We’re scheduling our fall events to be in-person where we can, but they will all be virtual no matter what. So, right now, we expect the conference in Cleveland to be virtual. So, virtual attendees will probably attend just like they attended the virtual conference we just held last Wednesday. And then also there will be an in-person aspect of the conference with appropriate social distancing alike.

So, we certainly expect the in-person attendance to be a lot lower than it has been in the past, and, hopefully, will be in the future. And we do expect, you know, many of the attendees are more likely to be driving to the event than flying to the event, but we’ll get many of both. And then the attendance will be lower because we wanna have the appropriate social distancing. And then we also are very aware that conditions on the ground in October might not allow for a local in-person event, in which case it’ll be entirely virtual. So, you know, we’re being flexible, and, you know, so folks can know that it’s going to be held. It’s just a question of, is there gonna be an in-person aspect, or is it going to be entirely virtual?

Jimmy: Got it. So, a hybrid model with the hope that you’re able to do at least some in-person. I hope you are able to do some in-person. I’m looking forward to it. We’ll find out in the coming months, I suppose. Well, John and Mike, thank you so much for taking some time out of your day to join me and speak with our listeners today. Before we go, can you tell our listeners where they can go to learn more about you and Novogradac and the upcoming conferences?

Mike: Yeah. They can go to www.novoco.com or just search “Novogradac.” You don’t even have to spell it right. It’ll probably take you there. And then you also can go to opportunityzonesresourcecenter.com, opportunityzonesresourcecenter.com. And go to our website and get lots of information or just call me, Mike Novogradac, in our San Francisco office or John Sciarretti in our Dover, Ohio office.

Jimmy: Fantastic. And for our listeners today, I will have show notes on the Opportunity Zones Database website for today’s episode, and you can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that Mike and John and I discussed on today’s show. I’ll be sure to link to the Novogradac Opportunity Zones Resource Center, and also link to the White House Opportunity and Revitalization Council’s Best Practices Report that we were speaking about earlier. And Mike and John, I’m gonna give your office phone numbers on there as well now, too. So, I hope you can expect some calls from our listeners.

Mike: Please do. And thanks, Jimmy, for everything that you do for opportunity zones. You’re a tremendous resource for the broader community and there are many families living in opportunity zones that don’t appreciate what great work you’re doing for them. So, thank you for that.

Jimmy: Well, thank you, Mike. Thank you for the kind words. And John, thank you for taking some time today too. I appreciate it.

John: Thank you, Jimmy. I enjoyed it.

Jimmy Atkinson

Jimmy Atkinson

Hi, I'm Jimmy Atkinson... I founded OpportunityDb in August 2018. I'm a veteran Internet entrepreneur with a background in economics and Web marketing. I previously founded ETFdb.com. These days, I am passionate about impact investing and tax-advantaged investment opportunities. At the crossroads of these two ideals is the opportunity zones program, a place-based tax policy intended to economically transform some of the poorest areas of the United States with new real estate and business development.

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