to that interest. With respect to any remaining interests, the
percentage interest for the capital interests is based on the
relative capital contribution attributable to the qualifying
investment. For example, if a partner has a 5% capital interest
with a 10% carried/profits interest and the capital partners
have an 8% preferred return, the proposed regulations
appear to say that two-thirds of the partner’s interest is not
qualifying. More clarification is needed around these types of
interests. Perhaps, partners in this situation should consider
holding any carried/profits interests separate from their
capital interests. Leases should be reviewed to determine whether the terms
would actually be considered NNN under current law.
31 Month Working Capital Safe
Harbor However, there is a new provision in the latest set of regulations
that may provide some relief in the context of a QOF’s sale of
its assets after a 10-year hold period. Now a QOF can sell its
assets (primarily interests in project entities) after a 10-year
hold and have the gain exclusion apply. If the taxpayer has
held the interest in the QOF for at least 10 years, then the
taxpayer may make the election to exclude the capital gains
on such disposition from the qualifying investment.
The 2019 regulations clarify a Qualified Opportunity Zone
Business (QOZB) that needs more than 31 months to
comply with its written plan does not lose QOZ benefits if the
delay is caused by waiting for government action where the
application was completed within 31 months. Many believe
this extension provision should apply to other circumstances
beyond the QOZB’s control, like weather conditions, natural
disasters, supply shortages, labor stoppages, etc. Also, it is
not entirely clear how the 31-month period applies. Does the
31-month period pause for any time there is a government
delay or does the government action need to be pending at
the end of the 31 months for this provision to apply?
Triple Net Leases
To qualify as a QOZB, there has to be an active trade or
business. A triple net (NNN) lease does not rise to the level
of an active trade or business, and therefore, a NNN lease
property would not qualify for QOZ benefits.
Generally, a NNN lease has the tenant paying property taxes,
insurance and maintenance. But, what happens under these
rules if the lessor pays one of the three of these expenses
and is involved in some management/oversight? Also, what
happens if some portion of a project is NNN leased and the
remainder is not?
Gain on Sale of Assets – Prior
To and After the 10 Year Holding
Period
A QOF cannot sell its assets prior to holding them for 10
years without recognizing gain. Such sales are taxable events.
Treasury does not believe the statute gives them authority to
provide for non-recognition.
Summary
Other uncertainties exist, but the hope is when the final
regulations are issued, there will be more clarity around
more of the open questions. In the meantime, we have
received enough guidance to allow for QOZF formations
and for investors to begin investing. n
Jackie Matsumura is a Partner and Real Estate Industry
Group Co-leader at BPM. Contact Jackie at
[email protected] or 925-296-1035.
Greg Dresdow is a Senior Tax Advisor in the Real Estate
Industry Group at BPM. Contact Greg at
[email protected] or 925-296-1088.
BPM Real Estate Insights 9