1. Qualified Opportunity Zones
By Rob Howard and Matt Olhausen
Pillsbury Winthrop Shaw Pittman LLP

2. Benefits of the Qualified Opportunity Zone (“QOZ”) Program
1. Deferral 2. Reduction 3. Elimination

3. Benefits of the Qualified Opportunity Zone (“QOZ”) Program
“As laudable as the goals of the QOZ program might be, the statutory provisions enacted by Congress setting forth the program benefits and requirements were written in such haste that they suffer from a mix of poor drafting, incorrect and/or ambiguous cross references, and a general failure to think through a real world implementation of the program.”
-Thomas D. Morton
For more information please refer to Tom Morton’s excellent white paper:

4. Brief History 1. Passage of the Tax Cuts and Jobs Act of 2017
2. Designation of QOZs (2018)
Governor of each state selected QOZs from a pool of eligible census tracts
879 QOZs designated in California
California Map
3. Investment in QOZs (ongoing)
Investment period closes on Dec. 31, 2026
Pending Treasury Regulations . . .

8. Deferral and Reduction of Capital Gains
Existing capital gains are eligible if invested in QOZs within 180 days of realization event / disposition of existing asset
Reduction
5 years = 10%
7 years = 15%
Mandatory recognition of deferred gain by Dec. 31, 2026

9. Elimination of Capital Gains on QOZ Investment
Holding Period
10 years
Applicable to investments made by Dec. 31, 2026
Elimination
Applies to additional capital gain from QOZ investment, not original deferred capital gains
Accomplished by basis step-up to FMV upon disposition
Applies only to the extent investment is attributable to original capital gains

10. Dec. 31. 2026: Mandatory deferred gain recognition date
Jan. 1, 2019: Gain triggered
May 1, 2019: Fund Investment
May 1, 2024: 10% basis increase
May 1, 2026: 5% basis increase
Dec : Mandatory deferred gain recognition date
May 2, 2029+: Tax-free gain on sale of QOF interest
5 years
2 years
3 years

11. Qualified Opportunity Fund
A partnership or a corporation organized for the purpose of investing in “Qualified Opportunity Zone Property”
90% of the assets of a QOF must be QOZ Property
If the fund fails to meet the 90% test, it must pay a monthly penalty for each month out of compliance
[90% of fund’s aggregate assets / aggregate amount of QOZ Property held by fund] x [penalty (aka short-term federal interest rate plus 3%)]

12. Qualified Opportunity Zone Property
Equity – in a “QOZ Business”
Stock
Partnership Interests (includes LLCs)
Property – “QOZ Business Property”
E.g. land, buildings located in a QOZ
Direct investment can be problematic—ineligible for working capital safe harbor

13. Qualified Opportunity Zone Business
Gross Income Test
50% percent of gross income must be derived from the active conduct of trade or business (residential leases permitted)
Substantially All Test
“Substantially all” of the tangible property of QOZ Business is QOZ Business Property
Proposed Regulations: “substantially all” means 70%
Hot Tub Rule / Sin Restriction

14. Qualified Opportunity Zone Business Property Requirements
Purchased after Dec. 31, 2017 (20% related party limitation)
Substantially all used during the holding period in the QOZ
Substantial Improvement Test (for used property) – 30 Months

15. Substantial Improvement Test
Property is treated as “substantially improved” if, during the 30- month period beginning upon the acquisition of the property, additions to basis of such property in the hands of the QOF exceed its adjusted basis as of the start of the period
Renovation costs greater than acquisition costs

16. Safe Harbor
31 month grace period for cash placed in “working capital reserve”
Need written plan and schedule for use of working capital funds
No more than 5% of the assets of QOZ Business may be “nonqualified financial property” (e.g. cash)

17. Opportunity Zones and Housing in California
How can we make this work?
Challenges:
31 months to utilize capital reserve
Regulatory uncertainty
Potential solutions:
Targeting fully-entitled projects / Single project funds
SB 35 Streamlining? SB 50?
Municipal buy in

18. Rob Howard, Associate Real Estate
San Francisco
Matt Olhausen, Associate Real Estate
San Francisco