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Treasury Issues Proposed Guidance on Opportunity Zone Program: What This Means for Your Project

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

After several months of unanswered questions and insufficient clarity regarding the Opportunity Zone Program requirements, the real estate and community development sectors finally have substantive guidance to propel the first round of transactions forward. On October 19, 2018, the Treasury Department issued new guidance that provides clarity on a number of questions that enable real estate developers, property owners, and investors to channel investment into Opportunity Zone businesses and investments.


The Opportunity Zone program is a new, large-scale community investment program created under the 2017 Tax Cuts and Jobs Act. Since the program was enacted into law, the real estate and community development sectors have been increasingly focused on ways to utilize the program to channel investment into designated Opportunity Zone businesses and investments. For more background on the program, read our blog post Opportunity Zone Program Updates: Local and Federal Developments.

Nationwide, interest in the program has surged, and several large Opportunity Zone-focused funds have been established, such as Fundrise Opportunity Fund and Bridge Investment Group. More relevant to the New York City market, firms such as RXR, Red Stone Equity Partners, Goldman Sachs and others have been raising funds to deploy into these zones. However, due to a number of unanswered questions and insufficient clarity necessary for large investment funds to close on Opportunity Zone transactions at scale, the program has essentially been on hold until the release of IRS guidance clarifying several points.

Treasury Issues Initial Guidance

On October 19, 2018, the Treasury Department issued new guidance that provides clarity on a number of questions that enable real estate developers, property owners, and investors to channel investment into Opportunity Zone businesses and investments. Many of the rules go to the Opportunity Zone Program’s statutory requirements which require funds (“Qualified Opportunity Funds”) to invest substantially all (90%) of its assets in qualified opportunity zone property. Other proposed rules go to the statutory requirement that, with respect to a Qualified Opportunity Zone business, such business must have substantially all of its tangible property located in a Qualified Opportunity Zone.

Additionally, the revenue ruling issued as part of these overall guidelines addresses the requirement that, for property to be considered valid Qualified Opportunity Zone Business Property, the original use of such property must either commence with the creation of the Qualified Opportunity Fund, or else the Qualified Opportunity Fund must substantially improve such property within a defined period of time (the “substantial improvement” test).

The draft program regulations are fairly voluminous and many of them go into detailed tax analysis. The overall guidance touches upon the following issues:

  • Clarifying the types of gains (capital versus ordinary gains) that are eligible for deferral
  • Defining the types of entities that may constitute eligible Qualified Opportunity Funds
  • Clarification of how projects involving the repurposing of vacant land will be viewed in terms of the substantial improvement test
  • How a Qualified Opportunity Fund will value its assets for the purposes of the 90% asset test
  • Implications of the expiration of opportunity zone census tract designations in 2028 on long-term (10 year) program tax benefits
  • Defining the “substantially all” requirement concerning tangible property owned by Qualified Opportunity Zone businesses in Qualified Opportunity Zones
  • Creating a safe harbor for working capital for operating businesses to avoid running afoul of the 90% substantially all test (note that there are several “substantially all” tests).

The Treasury and IRS released a press release, which contains links to the proposed rules and related revenue ruling.

Next Steps

This initial round of Opportunity Zone Program guidance will be helpful in giving investors and developers clarity and confidence to pursue straightforward investments in Opportunity Zone businesses and projects. The Treasury is also requesting additional public feedback to inform their next round of guidance pertaining to more complex investment strategies involving multiple assets and investors. As stated in the draft regulations, this guidance will come at a future date, so all industry stakeholders should continue to watch for updates in the coming months.

Capalino+Company will continue to monitor current and proposed developments in the Opportunity Zone Program. Our firm provides a suite of services regarding Opportunity Zone projects, including assessing the feasibility of development sites in Opportunity Zones, identifying potential Opportunity Zone investments, and assembling the teams that are needed to ensure success of a project. To learn more about how the latest Opportunity Zone Program regulations may impact your development or investment strategy, contact Jeffrey Lee at 212.616.5824 or

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