By Dan Gauthier, who is a Transactional Attorney at Rose Law Group working on a lot of opportunity zone projects. The following does not represent legal advice.
Potential investors have been anxiously awaiting guidance from the Treasury Department on the Tax Cuts and Jobs Act of 2017’s Opportunity Zones Program (“Program”). The first round of such guidance was issued last Friday in the form of proposed regulations, a Revenue Ruling, and sample IRS form.
Prior to the guidance, many practitioners agreed that there were too many unanswered questions surrounding the Program for investors to move forward with their investments. Now, the looming question is whether the proposed regulations offer enough guidance for Opportunity Funds (“Funds”) to take off.
According to Treasury Secretary, Steven Mnuchin, the answer is a resounding “yes”: the guidance “should provide investors and fund sponsors the information they need to confidently enter into new business arrangements in designated Opportunity Zones.”
At the same time, however, it is clear that these regulations are, in fact, proposed. For example, the Treasury Department and IRS are soliciting comments on “all aspects” of the definitions of “original use” and “substantial improvement” – with respect to whether tangible and real property qualify as Qualified Opportunity Zone Property. Answers to these questions and others will likely be provided through additional proposed guidance before the end of the year.
Upcoming guidance may also address the types of transactions eligible for deferral through the Program, the period of time a Fund will have to reinvest the return of capital from investments in Fund assets, penalties for a Fund’s failure to maintain the 90 percent requirement, anti-abuse regulations, Fund reporting requirements, and more.
Notably, many of the remaining open questions are capable of being addressed later in the life of a Fund (i.e. once the Fund has raised capital or invested in an Opportunity Zone), which is consistent with the Treasury Department’s statement that a second round of proposed regulations are forthcoming.
While it remains unclear whether the proposed regulations offer enough comfort for investors and fund sponsors to confidently move forward with their investments and Funds, this first round of guidance has provided investor-friendly answers to several material Opportunity Zone questions.
Dan Gauthier can be reached at Dgauthier@roselawgroup.com.