Opportunity Zone Magazine Volume 1, Issue 3 | Page 11

TREASURY RESPONDS TO THE COVID-19 CRISIS BY OFFERING RELIEF FOR THE OZ INDUSTRY
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One requested change that does
not appear to be addressed relates
to the ability to amend or modify
Working Capital Plans that were
created prior to the COVID-19
crisis.
31-month Working Capital Safe Harbor Periods for each
subsequent infusion of Working Capital Assets to the
extent that the aggregate duration of all of the Working
Capital Safe Harbor Periods do not exceed 62 months
from the date of the first infusion of cash. The regulations
provide that each single infusion needs to independently
satisfy the working capital safe harbor provisions.
Accordingly, a subsequent infusion of cash to the QOZB
occurring no later than the end of the 55-month period
(taking into account a previous infusion of cash that
obtained the additional 24-months under the notice)
and subject to a Working Capital Plan could extend the
aggregate Working Capital Safe Harbor Periods by an
additional 31 months (and beyond the 55-month period).
Notable Comments: One requested change that does not
appear to be addressed relates to the ability to amend or
modify Working Capital Plans that were created prior to
the COVID-19 crisis. Many investors that had eligible
gains allocated to them by pass-through entities on Dec.
31, 2018 invested in QOFs in June 2019 (prior to the end
of their 180-day investment period). Those QOFs were
required to invest such proceeds in QOZBs no later than
Dec. 31, 2019 and such investments required Working
Capital Plans. As a result of the COVID-19 crisis, some of
these Working Capital Plans can no longer be fulfilled. For
example, a Working Capital Plan may have designated an
amount of Working Capital Assets for the construction of a
hotel project at a certain address in an OZ. The financing
for this hotel project may no longer be available and the
QOZB may want to amend the Working Capital Plan to
change the project to the construction of a multifamily
building. The notice does not appear to address this issue.
THE REINVESTMENT PERIOD FOR THE QOF EXTENDED 12
MONTHS
Background: If a QOF receives cash proceeds from the
return of capital or the sale or disposition of some or all of
its OZP and the QOF reinvests some or all of such proceeds
in OZP by the last day of the 12-month period beginning
on the date of the distribution, sale, or disposition, then
the proceeds, to the extent that they are so reinvested, are
treated as OZP for purposes of the 90% requirement. This
prevents the QOF from incurring penalty for holding such
cash on the QOF testing dates for the 90% requirements
during these 12 months. However, the QOF must
continuously hold the proceeds in cash, cash equivalents,
or debt instruments with a term of 18 months or less. If the
reinvestment is delayed as a result of a Federally declared
disaster, then the QOF may receive up to an additional
12 months to reinvest such proceeds as long as the QOF
invests such proceeds in the manner originally intended
before the disaster.
The Notice: The notice provides that a QOF’s 12-month
reinvestment period (to reinvest in QOZP) for the
proceeds from the QOF’s sale or disposition of QOZP or a
redemption of qualified opportunity zone stock is extended
by an additional 12 months where the original 12-month
reinvestment period included Jan. 20, 2020, as long as the
proceeds are invested in a manner originally intended by
the QOF prior to Jan. 20, 2020.
This provision has limited applicability. This is due to
the fact that the QOF needed to be in the 12-month
reinvestment period on Jan. 20, 2020 in order to receive
the additional 12 months described above.
This notice has been welcomed by the OZ industry. As we
continue to deal with the COVID-19 health crisis, federal
income tax incentives for businesses will likely be necessary
for economic recovery efforts. The OZ incentive could be
a critical economic and community development tool to
assist in these efforts by incentivizing equity investments
for real estate projects and operating businesses. This
notice may be a first step in these efforts.
Marc L. Schultz He currently chairs Snell & Wilmer’s Tax Credit
Finance and Renewable Energy practices and founded and cochairs
the Opportunity Zone industry group. Schultz regularly
advises fund sponsors in forming and structuring Opportunity
Funds and drafted and provided technical advice on a number
of comment letters with respect to the Opportunity Zone
regulations.
Schultz recently served on panels at the White House and
Small Business Administration Opportunity Revitalization &
Entrepreneurship Summits. He has also been a speaker and
panelist at statewide Opportunity Zone conferences.
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