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Opportunity Zones Program: New Financing Opportunities for NYC Projects

Written by Jeffrey Lee, Senior Vice President, Capalino+Company

In the two months since the passage of the 2017 Tax Cuts and Jobs Act, the real estate community has combed through its language to better understand its implications for real estate development. While some of the obvious – and immediate – impacts of the legislation have been the reduced value of several tax credit programs (including LIHTC, NMTC, and HTC programs) due to diminished tax credit pricing, one potential bit of good news for developers of residential and mixed-use facilities may be the Opportunity Zones program.

Program Overview

The Opportunity Zones program was established by Congress in the 2017 Tax Cuts and Jobs Act as a new tool to incentivize private sector investments in low-income communities nationwide. The result of bipartisan efforts in Congress, the program has the potential to leverage trillions of dollars in unrealized capital gains to spur new development and business growth nationwide.

The program seeks to incentivize private investors — whether corporations or individuals – to invest in Qualified Opportunity Funds in exchange for a suite of tax benefits. By placing realized capital gains into Qualified Opportunity Funds, investors can receive deferrals of those capital gains. Furthermore, depending on how long investors maintain their investments in such Qualified Opportunity Funds, they may receive partial forgiveness of capital gain (via basis step-ups) and complete forgiveness of any gain in the Qualified Opportunity Fund investment.

Eligible Project Types

According to the new program language in the tax code and related materials, investments channeled through Qualified Opportunity Funds can invest in Qualified Opportunity Zone Property, a broad category that, based on preliminary analysis, includes residential real estate projects, provided that the project is either (a) newly constructed or is (b) acquired after December 31, 2017, is substantially improved, and meets “active conduct” statutory requirements. Other types of real estate projects may also qualify, and forthcoming guidance from the Treasury Department will help define which project types are eligible for Opportunity Zone financing.

Eligible Census Tracts

Before the program can begin operations, the precise geographic areas which will be eligible for Opportunity Zone financing must be defined. Each state may “nominate” a number of low-income census tracts (as well as a few tracts adjacent to such low-income tracts) to be designated as Qualified Opportunity Zones. However, the number of potential Qualified Opportunity Zones is limited to 25% of the number of low-income census tracts statewide. (In New York State, the maximum number of eligible census tracts is 513.) The state-by-state process of determining which areas are to be Qualified Opportunity Zones is under way, and the statute and regulations give governors until March 21st to either submit their nominations to the Treasury, or alternatively, seek a 30-day extension, so states will need to move quickly.

Next Steps for City and State Stakeholders

To kick off the process of determining which of New York State’s census tracts will be selected to be among the 513 tracts nominated as Qualified Opportunity Zones, the State will look to Empire State Development (ESD) and Housing and Community Renewal (HCR). ESD staff will work in close coordination with Regional Economic Development Councils (REDCs) and HCR staff to map existing federal, statewide and local economic development initiatives, funding programs and priority areas. The mapping exercise will help screen for areas which are well-positioned to receive and deploy private capital and which can leverage existing sources of funding. All of this activity needs to happen in fairly short order. Due to the short timeframe between now and March 21st, it is likely that ESD and Governor Cuomo will seek a 30-day extension – i.e., through April 20th – to buy additional time to formulate a cohesive, policy-aligned slate of census tracts to be nominated as Opportunity Zones.

The next few weeks will be a busy time for the Opportunity Zones program as details are fleshed out, guidelines are promulgated, and the program commences operations. At Capalino+Company, we see Opportunity Zones as a potentially valuable new program for investors, real estate developers, and local stakeholders. To learn more about the program and how it might benefit your organization, contact Jeffrey Lee at jeffrey@capalino.com or 212.616.5824.

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