New Development Projects: The Reports of Demise Were Greatly Exaggerated

While many groups applauded the cut, the shopping center industry had immediate reasons to be concerned. Numerous shopping center developers use a “layer-cake” of financing, including state and federal tax incentives to reduce the costs of debt and equity financing. The industry correctly saw that the market value of the credits would drop once the Jobs Act become effective. Such tax cut could undoubtedly impact the ability of developers to raise equity, certainly for new projects not yet placed in service.

Opportunity Zones

Perhaps intentionally, Congress added a new, and initially little noticed, program by which the shopping center industry could find a supplemental source of equity. Known popularly as “Opportunity Zones,” the Jobs Act authorized each state to designate census tracts within distressed communities where the median family income does not exceed 80% of state median income or which have at least 20% poverty rate. Presumably, there will be a great deal of overlap among Opportunity Zones and neighborhoods where redevelopment projects can be undertaken with various state and municipal tax incentives.

The statutory provisions creating the program contain the following key components:

1. The gain from the sale of any type of asset can be invested in the opportunity fund, which is extremely less restrictive than the real estate oriented “like-kind” exchanges;
2. A taxpayer can defer capital gain until Dec. 31, 2026 (when the gain must be realized), if the gain is invested in a qualified fund investing in an Opportunity Zone;
3. If the investment is held for five years, 10% of the deferred gain from the original sale will be forgiven, and if held for seven years, 15% of the gain will be forgiven;
4. If the new investment is held in the qualified fund for at least ten years, the taxpayer will be entitled to adjust the basis thereof to its fair market value at the time of sale, possibly eliminating all capital gain on the new investment; and
5. The process to certify a qualified fund may consist of merely a self-certification form attached to the funds' tax return.

Obviously, the benefits from such a statute come with restrictions and obligations. The first is that the investment must be in a business in an Opportunity Zone. The Zones have been selected by each state and are being certified by the United States Treasury Department. The additional key requirements are the following:

1. The investment must be with a non-affiliate (defined to be an entity which is at least 80% owned by others);
2. The proceeds to be reinvested must be from a transaction that takes place prior to Dec. 31, 2026;
3. The reinvestment of the proceeds must occur within 180 days of the transaction generating the gain;
4. A qualified opportunity fund can be a corporation or partnership which is in a business based in the Zone which was acquired after Dec. 31, 2017; and
5. The qualified fund must have at least 90% of its assets invested in qualified opportunity zone property.

In addition, there are certain other requirements of a more detailed nature, and benefits may be lost for failure to comply with the requirements. Furthermore, permitted projects exclude golf courses; country clubs; massage, hot tub or sun tan facilities; or gambling facilities.