Qualified Opportunity Zone QOZ Real Estate Summit San Francisco

Published: May 16, 2019
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EisnerAmper Partner and Co-Leader of Real Estate Services Group, kicked off the firm’s Annual Real Estate Principals Summit in San Francisco on May 2, 2019, with a discussion on the hottest topic in real estate: Qualified Opportunity Zones (QOZs).

Ken began with a few key highlights of the new regulations on QOZs that were recently released. For example, multiple-asset funds are now a viable solution for QOZ investments, whereas the early QOZ partnerships were generally only doing single-asset strategies due to the lack of clarity. There were updates and relief in relation to the 90% asset test for capital contributions. This relief should ease the time constraints on QOZs that need to purchase eligible assets with the cash they are receiving from investors. Additional relief was also spelled out for the 31-month working-capital safe harbor, providing an exception if the delay is due to waiting for government approval. A major clarification in the new regulations covers debt on the books of QOZs. Prior to these, it was unclear if partners would get basis for their share of the debt and if a QOZ could refinance a property and distribute cash. Both are now permissible under certain conditions, which is a major win for investors.

Ken proceeded to give the audience insights into the QOZ origins and data that he’s noted over the last year. There are more than 8,700 of these zones in the U.S. and its territories, including the entire island of Puerto Rico. QOZ eligibility is based on income levels from 2010 census data. College towns make up more than 1,400 of the zones, ostensibly due to a high concentration of students with lower- than-average annual income. Some of the zones would not be eligible if it was based on current census data. One notable example is Irvine, California. It qualified based on 2010 census data due to the 2008 economic downturn and mortgage crisis, however, it has since recovered economically.

Ken talked about QOZ operating businesses and possible state legislation in California. Only certain businesses operating in socially conscious industries and affordable housing would be eligible under the proposed state legislation. While adopting the QOZ rules would cost the state tax revenue, affordable housing is an issue that California must solve. Investors and developers are watching this legislation closely. Ken concluded the segment by fielding several excellent questions from the audience and mentioning that while previous tax programs to help distressed areas had spotty results, there is hope that this time QOZs will lead to a more favorable outcome.