How new Opportunity Zone rules will impact commercial real estate
The Treasury Department released the second tranche of rules governing the Opportunity Zone program, opening up possibilities for commercial real estate developers
The Treasury Department last week released new rules for the U.S. Opportunity Zone (OZ) program that will make it easier for fund managers to raise capital and for developers to begin construction.
The long-awaited guidance document offers flexibility that should encourage participation in the program, boosting commercial real estate in designated areas targeted by the policy, says Jonathan Paine, who leads efforts to create OZ development deals at JLL.
“While a few investors have charged forward into the space, most investors have eagerly awaited the more complete guidance needed to invest before the close of 2019 in order to secure the maximum tax benefits from the program,” Paine says. “This clarifying guidance should remove many of the barriers that have kept large pools of capital on the sidelines.”
Rules ease concerns
The first set of regulations, released last October, were generally deemed too vague. For instance, investors were concerned that they could be penalized if they sold an OZ asset and did not reinvest the proceeds immediately.
This was especially concerning for multi-asset funds, which typically require the flexibility to sell properties without long holding periods. As a result, many of the funds sprouting up in early days were single asset funds, Paine says.
But under the new regulations, Qualified Opportunity Funds (QOFs) have a 12-month grace period to sell OZ property and reinvest the proceeds into another OZ.
“This will help create multi-asset fund strategies that can offer investors greater product diversity because it allows them to have a rolling investment strategy and not be tied to holding one specific property for 10 years,” Paine says.
The rules also give QOFs more time to hold investors’ money before reporting their compliance tests that require 90 percent of the investments fall in an OZ.
The Treasury’s new guidance also clarifies what happens if a property straddles the border of an OZ, with some property falling within the zone and some outside of it. If the majority of the building’s square footage falls within the zone, it qualifies, as long as the “property outside of the zone is contiguous to part or all of the real property located inside the zone,” the regulations state.
The rules also specify that land and vacant buildings are eligible investments for a QOF.
“These rules open up a lot of options for developers,” Paine says. “They’re likely to speed up the process of shovels hitting the dirt.”