“State and local governments are going to want to have a hand in determining what gets done in the zones,” he adds. As permits, zoning, variances and building demolitions are all very local, the tax lawyer predicts greater involvement by local governments wanting to see designated areas truly benefiting and wanting to collect data.

Original Use, Substantial Improvement and Capital Reserves

The program requires that either the original use of the property commences with the qualified opportunity fund or that the property be substantially improved. Brockway asserts, “Nobody knows what original use in opportunity zones actually means. If you are developing land, the original use can never commence with you.”

He opines the law should clearly state with vacant land or abandoned buildings after a certain number of years, the developer is coming in and commencing an original use.

To substantially improve the property, the regulations say within 30 months the developer must spend an amount equal to the allocable component apportioned to the building if purchasing building and land.

Brockway provides the following example: An investor pays $1,000,000, with the land worth $400,000 and the buildings worth $600,000. Within 30 months, the investor must put in another $600,000 into the deal for it to qualify as an opportunity zone business property.

But in New York City it can be difficult to finish a project within 30 months. Brockway points out it can take 24 months to even get clearance. So this requirement needs some adjustments.

Cash reserves can be treated like working capital to be spent within 31 months of being received by the opportunity zone business. This seeks to prohibit parking cash in qualified opportunity funds and encourages putting money to productive use. Brockway notes that all businesses require working capital cash. Plus, in construction, things happen. What if the property floods or zoning issues arise or a labor dispute erupts? The law has not defined the quantity of cash that could be working capital. He opines there needs to be a reasonable exception clause for setting aside capital reserves beyond the 31-month period.

Entrance and Exit Policies

The tax legal pro also observed concerns about the entrance and exit policies in qualified opportunity funds. “The investment requirements in many cases will require an upfront loading of cash contribution,” he says. Many projects are done in stages where excess capital would have to sit with upfront cash contributions due to the 180-day deadline to invest gains. This may fail the qualified opportunity business property test.

Investors eventually need to exit the property to reap the tax benefit. Once a person holds a qualified opportunity zone investment for 10 years, except for taxes paid in 2026 the increase in property value is exempt from taxes. However, because the exemption applies only upon disposition of an interest, Brockway says a qualified opportunity fund with multiple properties may not be able to generate the benefits within given exit deadlines because an entity with multiple properties may not be marketable.

Originally the exit deadline was 2028 and it was extended to 2047. However, Brockway comments for those looking to hold their investment for a longer term, there should be the ability to mark-to-market with an appraisal at the end of 2047 or an extension or elimination of the exit deadline. This way the program is not creating an unnatural market or forcing people to dispose of successful businesses to get the tax exemption.

The Withers tax partner expects new rules, guidances or notices to come out in March with new regulations supplementing the existing law in October 2019.