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Updated: May 13, 2019 How To

Navigate the new rules for Opportunity Zones

By Brien Walton
FILE PHOTO
Brien Walton, chair of Maine Venture Fund

Maine is unique among the 50 states, and not just because we are the only state in the U.S. whose name has one syllable. Maine is currently the only state where forward-thinking, business-friendly towns have taken the initiative to create their own Opportunity Zone Funds (OZF) to attract investors to the entire town — not just a single project. Maine has three such funds, in Lincoln, Calais, and Baileyville, and their respective economic development directors are almost giddy over the new OZ rules released on April 17, 2019.

The proposed rules total 169 pages and are full of acronyms and legalese that are a great remedy for insomnia, but the impact of those pages is something to get excited about. Today, we will highlight the Top 3 benefits communities can immediately enjoy.

Partner with a landowner on the OZ line to launch your business using the 20% in capital gains saved

  • Real Property Straddling an OZ: The U.S. Department of Treasury and IRS will now permit real property straddling the boundaries of an OZ, e.g., 49% outside of the OZ, but 51% in the OZ, to qualify for the OZ’s tax deferral benefits. This is welcome news to any business whose land is on the census-tract line that defines the OZ and provides a great opportunity for real estate investors. Essentially, owners of those parcels should enjoy an increase in value because businesses no longer have to be 100% within an OZ — 51% is sufficient. Potential strategy: Partner with a landowner on the OZ line to launch your business using the 20% in capital gains saved under the OZ rules.
     
  • “Mega” OZ funds: The rules allow an OZ Fund to invest in multiple businesses or development projects, provided the fund has established “appropriate” monitoring and tracking protocols, as determined by the IRS. The OZ program is governed by the Treasury Department’s Community Development Financial Institution Fund, which has established appropriate tracking protocols routinely used by Community Development Entities (CDEs) in the federal New Markets Tax Credit program. Potential strategy: A town or city has a green light to create their own Fund to support the entire community, not just a single parcel, e.g., multiple projects aggregated under one Fund has economies of scale. So far, three towns in Maine correctly predicted this was coming, so count on other OZs to soon maximize this opportunity as well.
     
  • Vacant properties: I often hear from town managers with entire blocks of vacant buildings that, if rehabilitated, could jump-start the local economy, but they struggle to find banks or developers willing to take the chance. Because the OZ’s primary purpose is to support scalable businesses and keep investment dollars circulating in the community for at least 10 years, the Treasury Department has relaxed the rules that govern the holding period of OZ investments. Specifically, property that has been unused or vacant for at least 5 years prior to being used in the OZ, can now have a “start date” of the first day any person first uses or places the property in service in the OZ. Potential strategy: This should make it much easier for towns to attract investment in their most devastated neighborhoods, e.g., investors can use capital gains they won’t miss.

We will cover more benefits in the upcoming weeks, but for now, please be proud that Maine is leading the nation in maximizing the potential of Opportunity Zones.

Brien Walton, CEO of Acadia Capital Management II Inc., is a corporate real estate tax attorney certified to issue federal New Markets Tax Credits and is a leading expert in Opportunity Zones. He created and manages the OZ Funds for Lincoln, Calais, and Baileyville. He is also director of the Richard E. Dyke Center for Family Business and is an assistant professor of entrepreneurship at Husson University. He can be reached at brien@ac8ia.com 

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