(May 2019) Washington, DC is currently living out the old adage of “when it rains, it pours” – both in its spring weather patterns and its regulatory activity. Six months after the last release of proposed Opportunity Zones regulations, the federal government has released multiple Opportunity Zones-related documents totaling nearly 200 pages, with deadlines for public comment ranging from the end of May to mid-July. Here’s what those of us in the single-family housing space need to know in order to respond, with each opportunity for input listed in order of deadline:
- Department of Treasury – Request for Information (RFI) on Data Collection and Tracking for Qualified Opportunity Zones
Document Number 2019-08076
Written comments are due by May 31, 2019, and can be submitted via regulations.gov at this link.
This RFI solicits public input specifically about proposed changes to Form 8996 and its Instructions, both of which are currently in draft form. Qualified Opportunity Funds (QOFs) would use this form to report the amount of assets in the fund and the percentage of those assets that are invested in qualified Opportunity Zone properties. The public is invited to provide detailed input on Form 8996 as well as more general input on the kind of data that would be useful for tracking the impact of Opportunity Zones.
- Department of Housing and Urban Development (HUD) – Review of HUD Policy in Opportunity Zones Request for Information (RFI)
Docket No. FR-6155-N-01
Written comments are due by June 17, 2019, and can be submitted via regulations.gov at this link.
This RFI follows the release of Executive Order 13853, which created the White House Opportunity and Revitalization Council and designated HUD Secretary Carson as its Chair. HUD is inviting the public to respond to broad questions on the ways in which existing HUD programs (examples are listed in the RFI) and authorities can be used to further the mission of Opportunity Zones.
- Department of Treasury – Notice of Proposed Rulemaking & partial withdrawal of a previous Notice of Proposed Rulemaking
Written comments are due by July 1, 2019, and can be submitted via regulations.gov at this link.
Unlike the previous two documents, this notice is over one hundred pages and covers numerous Opportunity Zone topics. Here are two of the most relevant sections for single family housing:
- “Original Use” requirement
In order for tangible property (such as a single family home) to qualify as an Opportunity Zone property, it must satisfy either the “original use” requirement or “substantial improvement” requirement. In the statute, the definition of a “Qualified Opportunity Zone Business Property” includes a requirement that “…the original use of such property in the qualified opportunity zone commences with the qualified opportunity fund or the qualified opportunity fund substantially improves the property…” Details about the “substantial improvement” requirement were laid out in the proposed regulations released in October 2018 but regulatory clarification around the “original use” requirement as it relates to tangible property is new. According to this recently released notice, “[t]he Treasury Department and the IRS are proposing that where a building or other structure has been vacant for at least five years prior to being purchased by a QOF or qualified opportunity zone business, the purchased building or structure will satisfy the original use requirement. Comments are requested on this proposed approach, including the length of the vacancy period and how such a standard might be administered and enforced.”
NCST thinks that requiring properties to be vacant for a minimum of five years in order to qualify as “original use” creates a risk of exacerbating the challenging conditions that already exist with REO. Research has shown links between property vacancy and crime and violence, negative community health outcomes, fire risk, and neighborhood property values. The longer a property sits vacant, the more likely it is to negatively impact its surrounding community in these ways. We recommend that the Treasury Department consider a significantly shorter timeframe than five years for vacant properties to qualify under the “original use” requirement, but also include other requirements to ensure that parties do not vacate properties for the purpose of qualifying. If you would like to participate with us in developing a specific recommendation, please reach out.
We also recommend that Treasury provide a regulatory definition of “vacant” since the Census, USPS, and municipalities, among other entities, each define the term differently. As the GAO’s Example Timeline of the Foreclosure Process and Potential Periods of Vacancy (Figure 5) illustrates, there are varying points along the foreclosure process when a property could become vacant, which impacts its eligibility to meet the original use requirement.
- QOF Reinvestment Rule
After the passage of the tax law, there was a major question about whether Qualified Opportunity Funds (QOF) would invest in single-family rehab and resale because under the statute, for investors to realize the greatest gains, they must hold their investment for ten years. While they can also realize lesser benefits for holding their investment for a period of five or seven years, single-family developers with a resale goal usually aim to rehab and resell within a time period that is much shorter than five years. The new proposed regulations address this issue, providing that “proceeds received by the QOF from the sale or disposition of…qualified opportunity zone business property…are treated as qualified opportunity zone property for purposes of the 90 percent investment requirement…so long as the QOF reinvests the proceeds received by the QOF from the distribution, sale or disposition of such property during the 12-month period beginning on the date of such distribution, sale or disposition. The one-year rule is intended to allow QOFs adequate time in which to reinvest proceeds from qualified opportunity zone property.” In a hypothetical situation with investors and a QOF that funds the acquisition, rehab, and resale of single-family properties, the QOF could sell a home and have 12 months to reinvest the proceeds into the acquisition and rehab of another home. If the QOF did not reinvest the proceeds within 12 months (assuming it did not hold any other assets), it would have to pay capital gains taxes. If it wanted to maximize investor benefits under Opportunity Zones, it could repeat the acquisition, rehab, and resale process several times within a ten-year time period. Based on NCST’s experience with typical acquisition timeframes, we believe that 12 months is a reasonable timeframe for reinvesting the proceeds from a home sale.
- For more information on the other provisions in the proposed regulations, check out the summary provided by the Economic Innovation Group.
NCST plans to submit a comment or join a coalition letter for all three of these opportunities for input. If you have questions or wish to discuss further, please email Theo Chang: email@example.com
Additionally, Senators Booker (D-NJ) and Scott (R-SC) and Reps. Kelly (PA-16) and Kind (WI-03) have been working on legislation to institute the reporting requirements that were found in the original conference report but not included in the statute at passage. The text of S.1344 has been released and it is expected that the text of H.R. 2593 will be similar.
Theo Chang serves as a Senior Policy Associate for NCST.