Enterprise Comments on the IRS’ First Round of Proposed Rules on Opportunity Zones
The regulations for Opportunity Zones will have a profound impact on the ability of this tax incentive to create equitable and inclusive growth. The IRS released a first round of proposed rules in October and provided the public 60 days to submit comments on the regulations.
Enterprise has identified four main priorities to share with the IRS. We encourage all affordable housing and community development stakeholders to submit their comments to the IRS before the December 28 deadline.
Track and Report Outcomes of Opportunity Fund Investments
In the initial rule, the IRS committed to addressing information reporting requirements in the next round of proposed rules on Opportunity Zones. The White House also recently directed federal agencies to evaluate the effect of public and private investments in distressed communities, including in Qualified Opportunity Zones, in the Executive Order on Establishing the White House Opportunity and Revitalization Council that President Trump signed on December 12.
We are pleased to see this initial interest in tracking and reporting outcomes, since gathering data is a critical component of monitoring success and efficacy. We urge the IRS to enact regulations that genuinely promote the transparency of Opportunity Fund activities and ensure accountability, such as transaction-level reporting. There is precedent for the Treasury Department to collect and publicly report data on NMTC and CDFI Fund-supported deals, and we encourage the IRS to consider using existing infrastructure to accomplish this crucial work.
Prevent Predatory or Speculative Purchasing of Vacant Land Under the Substantial Improvement Test
The statute requires that Opportunity Funds “substantially improve” Qualified Opportunity Zone (QOZ) Property by doubling the tax basis of the property. The proposed rule would exclude the value of the land itself when determining the property’s tax basis, an approach that will likely be conducive to preserving existing affordable housing, especially in high-cost areas where rapidly rising costs often contribute to the displacement of low- and moderate-income residents in unsubsidized, market-rate housing.
However, Enterprise is concerned about the potential for abuse under this rule. Subtracting the value of land from QOZ Property could be especially problematic for land that is vacant, significantly underdeveloped or with significantly depreciating assets (i.e. dilapidated or uninhabitable structures). In such cases, the proposed substantial improvement test regulation would require little or no improvement to QOZ Property. As a result, there is the danger of predatory or speculative purchasing of vacant land, where investors could gain a profit by simply buying and holding a piece of valuable land, particularly in areas that have already experienced rising costs. This practice would be counter to the statute’s intent, since the community would receive no economic or other benefit. It should be explicitly prohibited in the IRS’ regulations.
Require a Higher “Substantially All” Threshold for Real Estate Projects
The statute requires that Opportunity Funds own or lease “substantially all” of its tangible property in a Qualified Opportunity Zone. The IRS has proposed 70 percent as the threshold for meeting this “substantially all” test. Although the 70 percent threshold may make sense for investments in qualified business activity, which may be more fluid and require such flexibility to be successful, we believe there should be a separate and higher threshold for real estate investments since those projects are static.
A threshold greater than 70 percent for real estate projects would be a prudent step to ensure that tangible property outside of a Qualified Opportunity Zone – that is, the remaining 30 percent of the investors’ holdings – does not receive preferential tax treatment from the federal government.
Provide Regulations that Encourage Pairing Investments with other Tax Credits
Enterprise believes that Opportunity Zone investments will be the most impactful when paired with existing federal, state and local community development initiatives, such as Low-Income Housing Tax Credit (Housing Credit) developments and New Markets Tax Credit (NMTC) projects.
Considering these tax credits and the new Opportunity Zones benefit share the common goal of improving low-income communities, we strongly urge the IRS to issue regulations that allow the Credits to be paired efficiently with Opportunity Fund equity and therefore maximize the impact of federal resources in low-income communities.
The IRS will review public comments on the first proposed rule before issuing a final rule. There will likely be a second round of proposed rules, including information reporting requirements, early in 2019. The IRS will also hold a public hearing on January 10 in Washington to solicit feedback on the proposed rules.
Enterprise remains committed to working with the Administration and Congress to create the kind of accountability and transparency that will enable stakeholders to evaluate if this program is benefiting the residents and businesses in these lower-income areas.