This week, the New York state $212 billion budget passed by lawmakers included a provision decoupling the state and New York City tax codes from the federal Opportunity Zone tax incentive. Given New York’s budget issues, many think New York’s decision to decouple from the Opportunity Zone tax incentive is a result of political pressure from left-leaning groups. Once the bill is enacted, New York taxpayers will not be able to defer or exclude their capital gains, and any New York income tax imposed thereon will need to be paid. This decision to penalize its own taxpayers might deter them from investing needed money into low income communities.
Additionally, the Internal Revenue Service (IRS) released proposed regulations that would provide flexibility for Qualified Opportunity Zone Businesses to revise or replace their original safe harbor written plans if located in a Federally declared disaster area. This proposed change is due to many OZ businesses having to recalibrate as a result of the COVID-19 pandemic. In addition, the IRS included provisions to try to make it easier for foreign investors to invest in Qualified Opportunity Funds (QOFs), by allowing relief from withholding requirements. Comments are due on the proposed regulations by June 11, 2021.
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IRS Guidance Provides Flexibility for Disaster-Related Extension of OZ Working Capital Safe Harbor
The Internal Revenue Service (IRS) published proposed regulations for the Opportunity Zone tax incentive that provides flexibility within the 24-month extension of the working capital safe harbor in areas declared Federal disaster zones. The proposed rule would allow Qualified Opportunity Zone businesses to revise or replace their original written designation and remain eligible for the safe harbor exemption as long as remaining working capital assets are expended within the original 31-month period, plus the 24 additional months provided.
In addition, the IRS included provisions to attempt to make it easier for foreign investors to invest in Qualified Opportunity Funds (QOFs). The rule would allow relief from required withholding rules for foreign investors with taxable capital gains that want to invest in QOFs.
You can read more about the proposed regulation here.
New York State Decouples from Opportunity Zone Tax Incentive
In a controversial decision, New York State and New York City have officially decoupled from the Opportunity Zone tax incentive, joining just four other states which lack conformity. The state’s $212 billion budget passed by lawmakers included this decoupling provision that some say stemmed from political pressure from left-leaning groups. Once the bill is enacted, New York taxpayers will not be eligible to defer or exclude their capital gains, and any New York income tax imposed thereon will need to be paid. New York designated 514 Opportunity Zones, but critics seem ignorant of the mechanics of the Opportunity Zone designation and have misdirected the criticism of the zone selection.
New York State Sen. Michael Gianaris cited, “what we saw is that a lot of the developments that were getting the credits were already in development before the program even existed, so this is not something that was needed to incentivize these projects.” In reality, per the OZ legislation, Governor Cuomo designated the Opportunity Zones based on eligible low income Census tracts. You can read more about New York’s designation process here.
You can read more on New York’s decoupling decision here.
EJF Capital Launches Second Opportunity Zone Investment Fund
EJF Capital LLC, a global asset management firm, announced the launch of their second Opportunity Zone Investment Fund, EJF OpZone Fund II LP. The fund will launch on April 15 and will focus on real estate multifamily apartment and industrial developments. EJF’s first Opportunity Zone fund closed at approximately $280 million.
“Our investors can see the value of investing in Opportunity Zones,” said Asheel Shah, Head of Real Estate Development at EFJ. “The investments made in this fund will pay for developments in some of the nation’s lower-income communities, providing jobs, housing and accelerating growth in those areas. Opportunity Zone investments across the country are clearly having an impact, pumping in a substantial amount of private capital across the country.”
CaliberCos Inc. Embarks on School Expansion Project in Scottsdale, Arizona Opportunity Zone
CaliberCos Inc., a real estate investment company, recently announced an expansion project for Rancho Solano Preparatory School located in a Scottsdale, Arizona Opportunity Zone. Caliber acquired Rancho Solano earlier this year and will spend $11.5 million on the expansion project. Caliber will construct a new campus for Rancho Solano that will serve all grades, pre-K through 12th grade.
“The impact from the current pandemic has touched every part of the global economy, and education has not gone untouched,” said Chris Loeffler, co-founder and CEO of Caliber. “Now, more than ever, there is higher demand for private education as many private schools remained opened throughout the pandemic. These institutions are providing a needed resource for parents who are unable to effectively home-school their children. Caliber’s open architecture allowed investors in our fund, high-net worth direct investors, and a respected family office to combine forces and provide the necessary capital to build this asset for the community.”