An existing owner of property in an opportunity zone may have an economic advantage in the opportunity zone era to sell the property at a higher price as a result of the opportunity zone classification, but the OZ program requires an existing owner to jump through a series of hoops in order to be eligible for the opportunity zone tax benefits.
To illustrate the structuring hurdles for existing owners of property in opportunity zones, I have included some of the basic rules below, but there are additional requirements that are not covered here which are critical to properly structure a qualified opportunity fund, or QOF.
Specialized tax counsel familiar with the intricacies of the OZ program is a must for properly structuring and executing such a transaction. At the JV level, one of the key requirements is that the JV qualify as a qualified opportunity zone business, or QOZB. One of the asset tests at the QOZB level requires that 70 percent of the tangible property owned or leased by the JV must be qualified opportunity zone business property, or QOZBP.
How Existing Owners Can Qualify Their Property as QOZBP. The QOZBP rules are the reason that existing owners of property in opportunity zones have to get creative to take advantage of the OZ tax benefits. This requirement is the roadblock that limits existing property owners’ access to the OZ tax benefits, since in many cases those owners acquired the property prior to Dec. 31, 2017.
Even in a straight percentage interest deal with no promote, existing owners are limited to no more than 20 percent of the QOF/QOZB ownership, so the policy behind this rule appears to weigh heavily on bringing new investors into opportunity zones, rather than letting existing property owners claim the OZ tax benefits.
There is a third hoop to jump through for existing owners of opportunity zone property that want to sell their property to a new QOF/QOZB structure and reinvest some or all of the resulting gains from that sale into the new QOZ/QOZB structure that is acquiring their property. If existing owners of property in an opportunity zone are not interested in OZ tax benefits themselves, but want to use QOF funds to develop the property, they may be able to contribute the property to the QOZB in exchange for a JV interest.