QOF Update: Proposals on Opportunity Zone Reporting Requirements

In an effort to “ensure that this program is used as it was intended,” Rep. Ron Kind (D-Wis.), Rep Mike Kelly (R-Pa.) and Rep. Terri Sewell (D-Ala.) have recently introduced the Opportunity Zone Accountability and Transparency Act. This legislation is intended to create transparency and oversight for Qualified Opportunity Funds (QOFs) by providing data and, notably, making each report publically available.
The bill requires additional reporting by QOFs, including:

• Total assets held by the QOF.
• Aggregate amount of Qualified Opportunity Zone (QOZ) stock, QOZ partnership interests, and QOZ business property.
• Details about the types of OZ businesses for which the QOF holds business property, such as property square footage, number of residential units and, to the extent known, the number of residential rental units occupied by individuals whose income is 50% or less of area median gross income.
  The penalty would be a $500 fine for each day that a QOF fails to file a complete and correct return (up to a maximum of $200,000).
  Finally, the bill requires the Treasury Department to collect and compile statistical information with respect to each QOZ, including the number of QOFs, amounts invested in each QOZ, and metrics concerning job creation and poverty reduction.

Opportunity Zone Reporting and Reform Act

Rep. Ron Wyden (D-Ore.) has introduced the Opportunity Zone Reporting and Reform Act, which imposes several reporting and compliance requirements. In addition to many of the same reporting and transparency requirements introduced by the Opportunity Zone Accountability and Transparency Act, the bill also includes several other significant modifications to the QOZ rules. First, “substantially all,” for purposes of the QOF’s holding period, would be modified to mean “not less than 90%.” Additionally, self-storage property, stadium property, or “disqualified residential rental property” (defined as any residential rental property unless 50% or more of the residential units are both rent-restricted and occupied by individuals whose income is 50% or less of area median income) would not qualify as QOZ business property. With regard to QOZ business property, only leased property from unrelated parties would qualify. Finally, the “substantial improvement” requirement would include the value of land such that improvements made to the property would have to equal the value of both the land and building.

The penalty for failing to file the informational returns would result in a $10,000 fine (or $20,000 in the case of intentional disregard), or $250 if corrected or filed within 30 days of the due date. All fines are to be adjusted for inflation.

The bill also modifies previously designated and qualifying tracts to eliminate any tract where the median family income in that tract exceeds 120% of the national median family income, unless (1) the poverty rate in the tract is at least 20 percent; and (2) less than 10% of the population is enrolled in an institution of higher education. Additionally, no contiguous tracts would qualify for QOZ treatment. The bill does, however, allow states to newly designate tracts to replace any tracts that are disqualified as a result of this new enactment.

Many of the provisions in both bills would be applied retroactively to the original date of the Tax Cuts and Jobs Act, December 22, 2017, thereby impacting prior transactions and QOFs already formed. As QOFs reach a critical stage in maximizing tax benefits with the approaching year-end, the proposed legislation is sure to make waves in QOF investment circles. Please contact the QOF team at EisnerAmper for any questions or concerns.