Everything to know about Qualified Opportunity Zones in the United States

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So… what exactly is an Opportunity Zone?

Opportunity Zones are economically-distressed communities where new investments, under specific conditions, might be eligible for preferential tax treatment. Districts are eligible to be Opportunity Zones if they have been submitted for that classification by the state and that submission has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.

What is the purpose of Opportunity Zones?

Opportunity Zones serve as an economic development tool. Furthermore, they are modeled to stimulate economic development and higher the job rate in distressed communities.

Have Opportunity Zones been around for a long time?

No, they were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017. The first set of Opportunity Zones, covering sections of 18 states, were selected on April 9, 2018. Opportunity Zones have now been appointed covering sections of all 50 states, five U.S. territories and the District of Columbia.

What is a Qualified Opportunity Fund?

A Qualified Opportunity Fund (QOF) is an investment vehicle that is designed as either a partnership or corporation for investing in qualified property that is in a Qualified Opportunity Zone.

How do Opportunity Zones stimulate economic development?

They are designed to boost economic development by providing tax benefits to investors. First off, investors can postpone tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for more than 5 years, there is a 10% exclusion of the postponed gain.  If held for longer than 7 years, the 10% becomes 15%. Next, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is qualified for growth in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.

Do I have to live in an Opportunity Zone to gain the tax benefits?

The answer is no. You may get the tax benefits, even if you don’t work, live or have a business in an Opportunity Zone. You just need to invest a recognized gain in a Qualified Opportunity Fund and elect to defer the tax on that gain.

Is there a list of Opportunity Zones obtainable?

Definitely. This list can be found at Opportunity Zones Resources and in the Federal Register at IRB Notice 2018-48.  In addition, a visual map of the census tracts designated as Qualified Opportunity Zones can be found at Opportunity Zones Resources.

I want to form a Qualified Opportunity Fund. Can  I access a list of Opportunity Zones available in which the Fund can invest?

Yes, this list can be found at Notice 2018-48.

Is it possible for a limited liability company (LLC) to be an Opportunity Fund?

Absolutely. A LLC that decides to be treated as a partnership or corporation for federal tax purposes can classify as a Qualified Opportunity Fund.

How does a partnership or corporation get certified as a Qualified Opportunity Fund?

An eligible partnership or corporation self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return. Early-release drafts of the form and instructions are posted, with final versions due in December. The return with Form 8996 has to be filed timely, taking extensions into consideration.

How can I get more information about Opportunity Zones?

Check out this article for more details on Opportunity Zones.

The Treasury Department and the Internal Revenue Service will be giving more details, including further legal guidance, on this new tax benefit.

Need help with environmental consulting, Phase I Environmental Site Assessments, Property Condition Assessments or Phase II Subsurface Investigations?

UES Consulting and our diverse team know how thorough, time-sensitive Phase I Environmental Site Assessments and Property Condition Assessments are and can help the affair run effortless and finish on time. If you are searching for a company to partner with on your commercial real estate transactions of any sort, look to our in-house engineers and environmental consultants to relieve the stress of environmental issues and mitigate risks.

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The What, Why, and How of a Phase 1 Environmental Site Assessment

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So, what is a Phase 1 Environmental Site Assessment?

A Phase 1 Environmental Site Assessment, commonly called an ESA, or Phase 1 ESA, is an assessment done to research the historical and current uses of a property as part of a Commercial Real Estate transaction.

Why do Commercial Real Estate transactions require a Phase 1 Environmental Site Assessment?

Phase 1 ESA is needed to assess if historical or current property uses have impacted the soil or groundwater beneath the property. If so, this could pose a threat to human health and a major issue for the environment. If these problems exist, then a potential liability is present for the owner and/or lender. This also affects the value of the property.

If a Phase 1 Environmental Site Assessment is finished pre-closure of a real estate transaction, it can be used to fulfill the requirements of CERCLA’s (Comprehensive Environmental Response, Compensation and Liability Act) innocent land owner defense under All Appropriate Inquiries (AAI).

Finally, how are Phase 1 Environmental Site Assessments completed?

First, it’s important to note that Phase 1 ESA’s can be done on all types of properties; industrial, multi-family residential, commercial, vacant land, and agricultural. But all Phase I ESA’s must comply with ASTM E1527-13. (exception being properties comprised of large primarily undeveloped land, which can be researched under ASTM E2247-16).

Below are the steps commonly followed for Phase I ESA’s.
1. Completing a site visit to observe uses of the property and adjacent properties along with past and current conditions of the property.
2. Reviewing federal, state, tribal, and local regulatory databases including, but not limited to, aboveground storage tanks (ASTs), underground storage tanks (USTs), known or suspected release cases, institutional and engineering controls, and the storage of hazardous substances and disposal of hazardous wastes including petroleum products.
3. Reviewing historical records, i.e. historical aerial photographs, fire insurance maps (Sanborn maps), historical topographic maps, and historical city directories.
4. Reviewing local and state agency records including, but not limited to, state environmental agencies, Fire Departments, Health Departments, and Building Departments.
5. Interviewing past and current property owners, occupants, operators, or others well known with the property.
6. Interviewing the Report User for judicial or title records for environmental liens and activity and use limitations (AULs); specialized experience or knowledge, actual knowledge; commonly known or reasonably ascertainable information; the reason for a significantly lower purchase price; and the reason for the preparation of the Phase I ESA. It’s the User responsibility to provide this information to qualify for the innocent landowner defense.
7. Finally, the Environmental Professional (EP) evaluates all of this information to identify potential environmental risks to the property. EPs highest concerns are with properties including, but not limited to, gas stations, dry cleaners, printing operations, manufacturing, and auto/vehicle repair.
8. Once the Phase I ESA is complete, the EP will summarize what issues were identified on the property and make recommended steps to address these concerns.

In summary, Phase 1 Environmental Site Assessments identify existing or potential environmental contamination liabilities. They are done to satisfy Commercial and Residential Real Estate transactions and ensure environmentally and human safety. They are completed on all varieties of properties but all comply with ASTM E1527-13. UES Consulting Services is ready and happy to help with any and all of your Phase I and Phase II ESA needs.

 

UES Consulting and our team of inspectors would be glad to help you with your Phase 1 Environmental Site Assessment.

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Important Details to Note for Phase I Environmental Site Assessments…

“While not part of ASTM requirements, Phase I ESA reports typically include a discussion of observed suspect asbestos containing materials (ACM), potential lead-based paint (LBP), and mold growth; as well as the potential for lead in drinking water and radon.  Sampling for these non-ASTM concerns is beyond the scope of a standard Phase I ESA, but can be included upon request.“
“ASTM E1527-13 provides the guidelines for a Phase I ESA report to meet industry standard, but there are other factors to consider when ordering a report.  Projects associated with Fannie Mae, Freddie Mac, U.S. Department of Housing and Urban Development (HUD), and the Small Business Association (SBA) each have their own report requirements.  This is also true of other lending institutions.“
“A recognized environmental condition (REC) indicates known contamination or the potential for the subsurface to have been impacted by contamination (either from the subject property or possibly from an offsite source).  A controlled recognized environmental condition (CREC) identifies that the property has been impacted by contamination which has been investigated and remediated; however, contamination remains and would require additional work if redeveloped.  A historical recognized environmental condition (HREC) identifies a release impacted the subject property which has been investigated and remediated meeting unrestricted use criteria.“