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Memo

From: Squire Patton Boggs (US) LLP

Date: July 19, 2019

Subject: Opportunity Zones

Opportunity Zones are a new form of tax investment, created by the Tax Cuts and Jobs Act in
December 2017, designed to help economically struggling areas. This memo (1) provides
background on Opportunity Zones; (2) summarizes current legislation regarding Opportunity
Zones; and (3) discusses other action regarding Opportunity Zones.

I. Introduction

An Opportunity Zone is defined as an “economically-distressed community where new

investments, under certain conditions, may be eligible for preferential tax treatment.” Localities
with a minimum 20 percent poverty rate and an average median family income of not more than
80 percent of the surrounding area’s median income may qualify as an Opportunity Zone after
being nominated by the state and certified by the Secretary of the U.S. Treasury. Governors are
allowed to nominate up to 25 percent of all low-income census tracts to be designated
Opportunity Zones.

Opportunity Zones present tax benefits; investors are allowed to postpone taxes on their
investments until they sell their investment or at the end of 2026 (whichever is earlier), which
can lead to tax reductions up to 15 percent. If an investor holds an asset for ten years, he/she can
exclude any accumulated gains due to appreciation of an asset.

Expectations on Opportunity Zones are varied – supporters believe that the selection process
yielded fair results, and that investment in the designated areas will benefit distressed
communities. Opponents argue that Opportunity Zones benefit investors more than the
communities themselves. They are pushing for additional reporting requirements to determine
whether the tax credits are effective in creating job and economic growth. As of result of this
opposition, investors are concerned that expanded Opportunity Zone regulations could reveal too
much information, thus violating taxpayer privacy laws. Lawmakers are considering legislation
that would both address and exacerbate these concerns, among others.

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 II. Legislation in the 116th Congress

Sens. Cory Booker (D-NJ) and Tim Scott (R-SC), two lawmakers who helped create the
Opportunity Zone program, have introduced legislation to help “fix” some of the program’s
problems. That legislation, and other legislation dealing with Opportunity Zones, is detailed
below:
Bill # Title Sponsor Purpose
S. 1344 A bill to require the Sen. This bill requires the Department of the Treasury to
Secretary of the Cory collect data and report to Congress on investments
Treasury to collect Booker held by qualified opportunity funds. Treasury must
data and issue a (D-NJ) also make certain information regarding the
report on investments publicly available. Qualified
the opportunity opportunity funds are investment vehicles that are
zone tax incentives organized as either a partnership or a corporation
enacted by the 2017 and receive tax benefits for investing in certain
tax reform low-income communities that have been designated
legislation, and for as opportunity zones. Identical to H.R. 2593.
other purposes.
H.R. To require the Rep. Ron This bill requires the Department of the Treasury to
2593 Secretary of the Kind (D- collect data and report to Congress on investments
Treasury to collect WI-3) held by qualified opportunity funds. Treasury must
data and issue a also make certain information regarding the
report on investments publicly available. Qualified
the opportunity opportunity funds are investment vehicles that are
zone tax incentives organized as either a partnership or a corporation
enacted by the 2017 and receive tax benefits for investing in certain
tax reform low-income communities that have been designated
legislation, and for as opportunity zones. Identical to S. 1344.
other purposes.
S. 1000 Disaster Sen. To allow the designation of opportunity zones for
Opportunity Zones Marco population census tracts affected by Hurricane
Act Rubio Florence, Hurricane Michael, and the Mendocino,
(R-FL) Carr, Camp, Woolsey, and Hill wildfires.
H.R. Disaster Recovery Rep. This bill allows the chief executive officer (e.g.,
1851 and Opportunity Mark governor) of a state to designate certain population
Act of 2019 Meadows census tracts in areas related to federally declared
(R-NC- disasters as opportunity zones. This makes
11) investments in the areas eligible for various tax
incentives.
H.R. CAPITAL Act of Rep. This bill allows opportunity zones to be designated
1852 2019 Mark every 10 years. (Opportunity zones are certain low-
Meadows income areas in which various tax incentives are
(R-NC- available for investments in the zones. Under
11) current law, the existing designations expire after
10 years, and no additional designations are
permitted.)

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As the original architects of Opportunity Zones, Sens. Booker and Scott’s S. 1344 is of particular
note. The bill is designed to “restore and strengthen reporting requirements” for Opportunity
Zones by requiring the Treasury Department to collect data on:

(1) the number of such qualified opportunity funds;

(2) the amount of assets held in qualified opportunity funds;
(3) the composition of qualified opportunity fund investments by asset class;
(4) the percentage of qualified opportunity zone census tracts designated under subchapter
Z of the Internal Revenue Code of 1986 that have received qualified opportunity fund
investments;
(5) the impacts and outcomes of zone designation in those areas on economic indicators,
including job creation, poverty reduction, new business starts, and other metrics as
determined by the Secretary;
(6) the total amount of the investment and the date on which such investment was made;
(7) the type of investment, such as whether the investment is in an existing business, new
business, or real property, and the location of such business or property;
(8) the type of activity being supported by such investment, such as single-family or multi-
family residential properties, commercial properties, or the economic sectors in which
the business operates;
(9) in the case of a business, the approximate number of full-time employees at the time the
investment in such business was made; and
(10) in the case of real property, the approximate total square footage and the approximate
number of residential units, as applicable.

Sens. Booker and Scott continue to advocate for Opportunity Zones, although at this time, none
of the legislation listed has moved out of its respective committee, and the likelihood of this
happening is low.

III. Other Action

There has been additional action on Opportunity Zones. In May, the Internal Revenue Service
(IRS) issued a notice of proposed rulemaking regarding Opportunity Zones which “provide
guidance … relating to gains that may be deferred as a result of a taxpayer's investment in a
qualified opportunity fund.” Specifically, the proposed guidance:
 Clarified the “substantially all” requirements for a holding period or use of the tangible
business property.
 Provided three safe harbors for the requirement that 50 percent of the gross income of
the Opportunity Zone business must be derived from the conduct of business or trade
within the Zone itself.
 Created a working capital safe harbor.
 Confirmed that “substantially all” or 70 percent of all tangible assets must be located in
the Opportunity Zone.
 Designated use of property that has been vacant or unused for five years as original.
 Allowed leased tangible property to be treated as an Opportunity Zone Business
Property.

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Comments were due on July 1, and a hearing was held on July 9. The United States Conference
of Mayors (USCM) submitted comments primarily supportive of the regulations, though they
offered a number of suggestions as well.

During the IRS public hearing, stakeholders and panel members discussed the vacant property
and original use problem, as well as the “substantial improvement” question. Attendees also
discussed the impact of regulations on the speed of investment, noting that without concrete
rules, investors are less likely to commit funding. Potential gentrification was broadly discussed,
as well as its impact on minority communities. Speakers noted displacement in neighborhoods
with active development. IRS officials appeared receptive to incorporating public feedback in the
final version of the regulations, but they did not announce timing as to when to expect the
regulations.

The Treasury Department is also reportedly considering changes for Opportunity Zones,
specifically regarding reporting requirements. At this time, there are no such requirements..
Treasury has asked for public input on what information ought to be collected. Suggested
categories include jobs created, poverty reduction numbers, reduction in affordable housing, and
investment in minority-owned businesses, among others.

IV. Conclusion

We will continue to monitor developments regarding Opportunity Zones and track legislation
and regulations as they progress.