UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PUBLIC HEARING ON PROPOSED REGULATIONS
"INVESTING IN QUALIFIED OPPORTUNITY FUNDS"
[REG-120186-18]
Lanham, Maryland
Tuesday, July 9, 2019
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1 PARTICIPANTS:
2 For IRS:
3 JULIE HANNON BOLTON Special Counsel
4 Office of the Associate Chief Counsel (Income Tax & Accounting)
5
ROBERT CRNKOVICH 6 Senior Counsel
Office of the Associate Chief Counsel 7 (Passthroughs & Special Industries)
8 RUSSEL JONES Special Counsel
9 Office of the Associate Chief Counsel (Corporate)
10
SONIA KOTHARI 11 Attorney
Office of the Associate Chief Counsel 12 (Passthroughs & Special Industries)
13 SHARENE PFLANZ Senior Technician Reviewer
14 Office of the Associate Chief Counsel (Income Tax & Accounting)
15
For U.S. Department of Treasury: 16
MICHAEL NOVEY 17 Associate Tax Legislative Counsel
Office of Tax Policy 18
BRIAN RIMMKE 19 Attorney Advisory
Office of Tax Policy 20
Speakers: 21
WILLIAM CUNNINGHAM 22 Self
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1 PARTICIPANTS (CONT'D):
2 MARY SCOTT HARDWICK Opportunity Finance Network
3
KEVIN MATZ 4 American College of Trust and Estate Counsel
5 JAMES ROSE Rose Development, LLC
6
FRAN SEEGULL 7 U.S. Impact Investing Alliance
8 STEVE GLICKMAN Develop, LLC
9
DAN CULLEN 10 DARRYL STEINHAUSE
Institute for Portfolio Alternatives 11
BRENT CARNEY 12 Marazit Falcon, LLP
13 JILL HOMAN Javelin 19 Investments, LLC
14
REGINA STAUDACHER 15 Howard & Howard
16 MOSES BOYD Economic Inclusion Task Force
17
SARAH BRUNDAGE 18 Enterprise Community Partners
19 JOHN S. SCIARRETTI Novogradac Opportunity Zones Working Group
20
JOSEPH B. DARBY 21 CHRISTINA RICE
Boston University School of Law 22
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1 PARTICIPANTS (CONT'D):
2 JOHN LETTIERI EIG Opportunity Zones Coalition
3
STEFAN PRYOR 4 State Economic Development Executives
5 CLAYTON WYATT Alliant Asset Management Co., LLC
6
ARGYRIOS SACCOPOULOS 7 State Bar of Texas Tax Section
8 JULIA GORDON National Community Stabilization Trust
9
10
11 * * * * *
12
13
14
15
16
17
18
19
20
21
22
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1 P R O C E E D I N G S
2 (10:04 a.m.)
3 MS. BOLTON: Hello, my name is Julie
4 Hannon Bolton. I am Special Counsel to the
5 Associate Chief Counsel of the Income Tax and
6 Accounting Division of the Office of Chief Counsel
7 of the IRS.
8 Today we are here for the public hearing
9 on the proposed regulation investing in qualified
10 opportunity funds, Reg Number 120186-18. This is
11 the second proposed reg on opportunity zones and
12 it was published in the Federal Register on May 1.
13 We appreciate you all coming, traveling
14 to New Carrolton. This is new for us at the
15 Office of Chief Counsel. Most of our public
16 hearings are held in our building downtown. But
17 we had such an overwhelming group, we had a lot of
18 people come for the first NPRM so we thought that
19 we would have it at a much bigger auditorium and
20 this is what New Carrollton holds for us.
21 So I'm going to start with introductions
22 for the panel. First to my far right we have
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1 Sharene Pflanz, she is a Senior Technician
2 Reviewer from IT&A and she will be our clock
3 keeper today. Then we have Sonia Kothari, a
4 general attorney from Passthroughs and Special
5 Industries.
6 And right to my direct right is Robert
7 Crnkovich, Special Counsel to the Associate Chief
8 Counsel PSI. To my left we have Michael Novey,
9 one of our Treasury representatives on the panel.
10 He is the Associate Legislative Counsel --
11 Associate Tax Legislative Counsel, the Office of
12 Tax Policy with the Department of Treasury.
13 To his left is Brian Rimmke who is the
14 Attorney Advisor and another Treasury
15 representative. He is from the same office as
16 Mike, Office of -- oh, is it the Office of Tax
17 Legislative Counsel, I'm sorry, Brian, I have a
18 different Department of Treasury.
19 MR. NOVEY: We are all --
20 MS. BOLTON: All from the Department of
21 Treasury.
22 MR. NOVEY: All Office of Tax Policy.
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1 MS. BOLTON: And then down at the far
2 left is Russel Jones who is the Special Counsel to
3 the Associate Chief Counsel for corporate.
4 So once again, thank you so much for
5 traveling up here. There is a lot of energy
6 behind this statute. It is a very exciting new
7 area of the tax law and we appreciate all your
8 help to getting the right place for these
9 regulations.
10 We have reviewed and -- all the written
11 comments that have been submitted and we thank you
12 for those comments. Today we have 19 speakers
13 allotted 10 minutes each with possible follow-on
14 questions from our panel. Also, this hearing is
15 being recorded.
16 So the for all the speakers that are
17 here today, the black box on the lectern will be
18 green while you are speaking. A yellow light will
19 turn on when you have two minutes left and then a
20 red light will come on at exactly 10 minutes. We
21 ask that you stay within your time limit so we
22 don't have to bring out the hook.
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1 (Laughter) That will be Sharene's
2 job.
3 (Laugher) But we want to hear form
4 everyone who has asked to speak and
5 if we have time at the end we will
6 open up the lights that are out in
7 the audience for anybody else who
8 has comments.
9 We plan on breaking around noon time for
10 lunch. It depends on where we are at with
11 speakers so but around noon time. You will need
12 -- so the lunch room is actually if you go out the
13 doors to where you came in with the security,
14 there is an escalator that takes you up to the
15 next floor and the lunch room is to the left. And
16 you will need escorts to go into the lunchroom.
17 And we have some in the back, in the lobby back
18 there.
19 Restrooms are out the doors to the
20 auditorium doors to the left. It's a little
21 hallway to the left and the restrooms are down
22 there.
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1 We will call the speakers up in order on
2 our list of speakers but if there, is someone is
3 late or is not in the room we will just put you
4 towards the end so everybody will get to speak if
5 they do come.
6 And then us a reminder, please put all
7 your cellphones on mute and there is no food or
8 drinks in the auditorium but they are allowing
9 water today because they expect us to go for a
10 pretty long time. Okay.
11 So, Mike, did you want to, do you have
12 some comments?
13 MR. NOVEY: Yes. First, thank you for
14 sacrificing your time and convenience to come here
15 to help us. As I was walking in down the aisle
16 way, I overhead a couple of people saying that reg
17 hearings like this one really do much better if
18 there were some musical interlude between the
19 speakers (laughter). And I began wondering well,
20 what would be the most appropriate music? And I
21 think from our perspective, it would be that we
22 could get by only with a little help from our
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1 friends and in this respect, you all are our
2 friends.
3 Because you are here to give us some
4 recommendations, I want to start off with a few
5 recommendations about how you can be most helpful
6 to us since clearly that is why you went to the
7 trouble to get here. And this is particularly
8 important in light of Sharene's anticipated
9 draconian employment of the time.
10 One, we are governed by the language
11 that Congress enacted and the President signed.
12 As a matter of human interest, we understand many
13 people's frustration and disposition with certain
14 aspects of the language that's there. But we are
15 not legislators. And any use of your time to
16 describe how we should do something that really
17 isn't in the statute even if it was consistent
18 with what your perception of the statutes purpose
19 will be interesting but it won't help us to write
20 the regs.
21 Second, your presence here and your
22 interest in our regulations are all the
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1 credentials that you need for us to take your
2 comments seriously. Any more than a one sentence
3 introductory description of yourself and your
4 organization is using up time that would be better
5 spent from our perspective telling us what we
6 ought to do.
7 Many of your written comments in fact
8 provide very impressive backgrounds and personal
9 CB's and institutional descriptions. We have got
10 those and if you could use your precious 10
11 minutes to tell us what we ought to do, that's
12 much better. Your being here is enough for us to
13 take you seriously.
14 And then finally, if you can please try
15 to be concrete. If we should clarify something
16 and I'm sure there are of all the comments that we
17 are getting, I suspect that the largest single
18 comment is please clarify X. Give us an example.
19 Tell us what a clarification would look like.
20 Even if it's not the best one, even if you could
21 come up with something better than that after a
22 while, it is much better than saying please
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1 clarify it and we are left saying well, we knew
2 that. We had but, you know, if we had known how
3 to clarify it we might have done it back in our
4 back room. So if you can be concrete that is one
5 of the most helpful things you can do for us.
6 Thank you for your time and effort. We
7 are all ears.
8 MS. BOLTON: Okay. So let's start with
9 the speakers. And I apologize now if I mess
10 nobody's name up but we are going to start with
11 William Cunningham who is representing himself.
12 MR. CUNNINGHAM: Well, good morning. Is
13 this thing on? Outstanding. So I am Bill
14 Cunningham. I am actually here representing
15 Creative Investment Research which is a company I
16 have run for about 25 years. If you want to
17 follow along with my comments, go to
18 creativeinvest.com/oz.pdf.
19 Creativeinvest.com/oz.pdf is where this
20 presentation is.
21 Now I'm going to talk about -- I
22 testified at the first hearing that you had.
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1 Thank you very much for doing that. By the way, I
2 know this is hard work. I really do. Dealing
3 with the public, I deal with the public all the
4 time. Public is tough to deal with these days,
5 you know. So I appreciate your efforts in this
6 area, especially with a program as important as
7 this.
8 Now as you know, our concerns are that
9 the opportunity zone program seems to allow people
10 with significant capital gains a way to escape
11 their responsibility for paying taxes. And it
12 allows mainly white and wealthy taxpayers to avoid
13 their social responsibility in exchange for
14 investments via qualified opportunity funds in
15 8,700 poor communities. Mainly black and Hispanic
16 communities.
17 So our economic analysis leads us to
18 believe that the program is fundamentally unfair
19 and fiscally unsound. We conducted a survey on
20 the opportunity zone program to ask a couple of
21 questions. One to find out if people thought that
22 the opportunity zone program favored the wealthy,
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1 favored the poor, or was neutral.
2 Based on our survey, 44.74 percent of
3 the people that responded thought that the program
4 favored the wealthy, 5.26 percent concluded that
5 the program favored the poor and 50 percent
6 actually indicated that they thought the program
7 was neutral.
8 Now in terms of the impact, the social
9 impact, what we do is we create impact
10 investments. That's what we have been doing for
11 the past 25 years. And in terms of the impact,
12 projected impact of the opportunity zone on
13 communities, according to our survey, 68.42
14 percent of the people that responded thought that
15 the opportunity zone program would increase
16 gentrification. 10.53 percent thought that it
17 would decrease gentrification and 21.05 percent
18 thought that the program would have no effect on
19 gentrification in those 8700 communities.
20 Now, as we testified last time, part of
21 the issue is that the assumptions concerning the
22 opportunity zone program are very much like the
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1 assumptions that we see being utilized to justify
2 programs that take economic resources out of black
3 and brown communities.
4 We have seen this most recently with the
5 new introduction of a crypto currency called
6 Libra. Facebook is positioning this currency as
7 something that they're going to use to provide
8 banking services to 1.7 -- no, look. It's about
9 shareholder wealth maximization. It's about
10 control. So it is with the opportunity zone
11 program.
12 Marketed as a program that's going to
13 bring economic development to black and brown
14 communities. We know. We know based on the
15 history of other programs like the new market tax
16 credit program, like the CRA programs. We know
17 that these programs have a tendency to reduce
18 economic opportunity for black and brown people
19 that were resident in those geographic areas prior
20 to the introduction of these programs.
21 If you don't believe me, look at 14th
22 Street Northwest, Washington D.C. That's all you
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1 have to do.
2 So we are concerned about the negative
3 externalities that a program like this will impose
4 on black and brown people in the 8,700
5 communities.
6 Now we also know that a program like
7 this diverts needed tax revenue from public
8 programs to private purposes. We know that in
9 places like California there is a massive need for
10 investment in infrastructure to deal with climate
11 change. We know that in Illinois there's a need
12 for police and community development in minority
13 communities.
14 Taking money away from the Federal
15 Treasury will not help these regions provide the
16 service that these communities need. We know that
17 in the state of Texas there is a massive need for
18 integrating new populations into the state. And
19 we know that in New York, there are infrastructure
20 in social needs that are critical especially in
21 light of the reversal of certain private companies
22 from coming into certain parts of the state. I'm
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1 talking about Amazon.
2 Now our suggestions are twofold. The
3 first is and I understand, this may be something
4 that you cannot regulate but our first suggestion
5 would be that you be very clear that there is to
6 be no benefit to the president, to senators to
7 congressmen, to state governors and to others who
8 had a hand in selecting those 8,700 communities.
9 No benefit personally from investments that they
10 hold in those communities.
11 The second recommendation that we made
12 was that you use something called Ethereum. The
13 Ethereum block chain. Block chain technology is
14 basically a distributed public database that is
15 hard to manipulate. That you basically use this
16 new technology to report on opportunity zone
17 investment social impact.
18 And we have outlined an impact
19 measurement strategy that would basically allow
20 you to collect and analyze impact data, to
21 evaluate the data and then to possibly and again
22 this is beyond your capability but what we would
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1 like to see is we would like to see the social
2 impact data used to calibrate the tax credit.
3 You want to put a liquor store in
4 Anacostia using the opportunity zone tax credit.
5 The rules say that these types of sin businesses
6 are not allowed. But we know that the second
7 tranche of the regulations actually provide a safe
8 harbor where there are going to be companies that
9 utilize, that are able to put in sin businesses in
10 opportunity zone communities.
11 If you don't believe me, there was an
12 opportunity zone podcast that I'm happy to send
13 you that outlined exactly how that would work.
14 So what we would like to see is we would
15 like to see the opportunity one tax credit
16 calibrated to the social impact of the business.
17 So that if you put affordable housing in
18 Anacostia, you should get the entire tax credit.
19 No question about it.
20 You put a liquor store in Anacostia, you
21 should get five percent of the tax credit. Some
22 type of calibration that measures social impact
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1 and reduces or increases the tax benefit
2 accordingly.
3 Now again, complicated, hard to do but
4 we know that there are certain entities, Beeck
5 Center, Georgetown University. In the interest of
6 full disclosure, I'm a member of the faculty of
7 Georgetown. I had nothing to do with the Beeck
8 Center's social impact methodology as it relates
9 to Opportunity Zones, but I'm simply pointing out
10 that there is one, and it could be utilized to do
11 exactly what I've just suggested in the interest
12 of specificity, I guess.
13 So, those would be our main
14 recommendations. If you look at the presentation,
15 again, CreativeInvest.com/oz.pdf, at the end of
16 the presentation, you will see a social cost
17 calculation mockup -- oh, this thing is moving, I
18 don't to want to fall off the stage here -- but
19 you'll see social cost mockup that is basically
20 our idea as to how you would take the social
21 impact data from that theory and blockchain that
22 we suggested and put it into a dashboard, that
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1 anybody could utilize to see what the social
2 impact of Opportunity Zones investments are.
3 Now, this is something, again, I don't
4 know how you would regulate that. I really don't,
5 you know, but I know that it's doable. I know
6 that the technology that has been developed now
7 allows you to do things which you could not do 20
8 years ago. And I'm suggesting you use it for this
9 purpose. So, I think that about covers my
10 comments. Any questions -- No, I'm just kidding.
11 Thank you very much. I appreciate your time.
12 MS. BOLTON: Thank you, Mr. Cunningham.
13 Our next speaker is Mary Scott Hardwick, from
14 Opportunity Finance Network.
15 MS. SCOTT-HARDWICK: Good morning. My
16 name is Mary Scott Hardwick. I work with
17 Opportunity Finance Network, which is a National
18 Trade Association of Community Development Finance
19 Institutions. We have 270 members, and we are
20 CDFI, ourselves as well.
21 Collectively, our members provided over
22 65 billion in responsible lending to disinvested
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1 communities throughout the country. So, we are
2 excited about the chance for additional capital to
3 flow into these communities but are concerned
4 about whether proper regulations have been written
5 to ensure that the benefits flow through to the
6 communities and to the residents of those
7 communities.
8 In order to do that, we have three areas
9 that I'm going to cover today, first reporting
10 requirements, anti-fraud and anti-abuse
11 provisions, and then finally ensuring investment
12 in operating businesses.
13 So first, on the reporting requirements,
14 OFN is supportive of the Opportunity Zones'
15 framework that was developed by the Beeck Center
16 and the U.S. Impact Investing Alliance, and we
17 support transaction level reporting requirements
18 with impact measurements, and making that data
19 publicly available at least once a year.
20 This will allow communities to see
21 what's going on, what sort of investments are
22 being made, evaluations to be made of the program
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1 to ensure that it is worth the tax benefit, or the
2 tax loss that is occurring, and it will allow
3 people to compare zones to see if rural areas are
4 seeing more investments or urban areas, or how the
5 program is working, and where it maybe need to be
6 tweaked in the future.
7 We also believe that reporting
8 requirements are one of the best ways to deter
9 fraud and abuse. If people know that they're
10 going to have to submit, you know, transaction-
11 level data, they need to be doing what they're
12 supposed to be doing.
13 In addition, on the anti-abuse
14 provisions, we have a couple of places that do
15 need to be clarified. The first is the
16 improvements for vacant land when it is acquired.
17 Currently the regulations state that it doesn't
18 need to be substantially improved, but in a
19 different area it talks about how it needs to be
20 more than insubstantially improved, so that's
21 pretty confusing for someone trying to figure that
22 out.
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1 So, for example, we would want to make
2 sure that if somebody acquires 50 acres of land,
3 that they're not putting some small minimally
4 impactful commercial development on a quarter acre
5 and saying that they've improved the land enough.
6 If you're acquiring large pieces of
7 property, there needs to be a threshold for how
8 much you need to improve it, and having that
9 clarity will help investors move forward.
10 The conference report that passed with
11 H.R. 1 indicates that certification for funds
12 should be similar to the New Markets Tax Credit
13 Program, and we support that, including adding
14 things that are required in the New Markets Tax
15 Credit Program, such as having fund managers
16 certify that they haven't been convicted of
17 certain financial crimes within the past three
18 years.
19 We think that's a commonsense check
20 that's already in other Treasury regulations for
21 similar programs, and we would support adding
22 that.
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1 We also suggest extending the ban on SIN
2 businesses, not just for opportunity funds, but to
3 qualified Opportunity Zone businesses.
4 Currently a fund can't invest in the CIN
5 business, but the qualified Opportunity Zones
6 business does not have the same restriction on it,
7 so that creates a loophole for somebody being able
8 to pass through funding there, so we would
9 encourage you to clarify that and make it uniform
10 across the board.
11 Finally, we are looking for some
12 additional clarity around the reasonable cause for
13 a fund to fail a 90 percent ASSET Test. I think
14 there's concern that, you know, it could be too
15 broad and people would be not making those
16 investments, or if it's too narrow, you would have
17 people who are unwilling to maybe make a riskier
18 investment in a low-income community because
19 they're scared they may fail a 90 percent ASSET
20 Test, if a business plan falls apart, or something
21 like that.
22 So, it would be very helpful to have
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1 clear definitions of reasonable cause is and how a
2 fund would meet that 90 percent requirement.
3 Finally, we would like to thank Treasury
4 and the IRS for this set of regulations for
5 providing a lot more information about investing
6 and operating businesses. We believe that job
7 creation is the only way that this is going to
8 provide true economic benefit, so we are
9 encouraged that those pieces are in there.
10 We remember at the Economic Innovations
11 Group Opportunity Zones Working Group, which,
12 they're going to be testifying later, and we
13 support the recommendations in their letter, and
14 we are co-signatory of their letter with
15 recommendations on how to improve it for operating
16 businesses. So, thank you for the opportunity to
17 talk today.
18 MS. BOLTON: Do we have any questions?
19 And I apologize because I didn't ask the Panel for
20 questions for Mr. Cunningham. So, Mr.
21 Cunningham, we'll wait till the end, and if
22 anybody has a question for him we can ask then.
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1 Does anybody have any questions? I have one.
2 MS. SCOTT-HARDWICK: Okay.
3 MS. BOLTON: So, your vacant land rule?
4 MS. SCOTT-HARDWICK: Yes.
5 MS. BOLTON: Do you have another in your
6 head for commercial?
7 MS. SCOTT-HARDWICK: I don't have a
8 number in my head, but I believe it does need to
9 be more clearly defined.
10 MR. NOVEY: Excuse me.
11 MS. SCOTT-HARDWICK: Yes.
12 MR. NOVEY: If we could come up with it,
13 we would put it in the closet, so -- (laughter).
14 The proposal that you mentioned from the -- or
15 under certain occasions and there are -- for a
16 variety of arcane procedural aspects of certain
17 process of the statute as it change between that
18 time and the time it's enacted.
19 But how much time between the submission
20 for certification and receipt certifications that
21 you anticipate would be a horrible delay for all
22 of the Opportunity Zones? And if there were as
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1 few as one per zone, we're talking about staffing
2 over 8,700 hands-on certifications. Is that
3 really consistent with the speed and flexibility
4 that comes if the (inaudible)?
5 MS. SCOTT-HARDWICK: We believe, and
6 from reading the conference report and talking to
7 members on The Hill, that they do support having
8 certification in there. I don't have an exact
9 number for exactly --
10 MR. NOVEY: And so, how many FTEs
11 personally can get hit?
12 MS. SCOTT-HARDWICK: I would not know
13 that. I don't.
14 MR. NOVEY: What I'm saying is, that we
15 also bring that legislative history, and had been
16 said you must send something into an office, and
17 went to CDFI, and you need to wait until a certain
18 issue comes back. And that would have been
19 consistent with the legislative history, it would
20 have been highly problematic with respect to the
21 structure of the statue with its stress on
22 flexibility and (inaudible)?
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1 MS. SCOTT-HARDWICK: I agree that it
2 would take additional resources in order to that,
3 the position of our organization is that it's
4 worth that investment and time.
5 MR. NOVEY: And so, but with our current
6 resources should we simply slow things down, or it
7 has to be (inaudible)?
8 MS. SCOTT-HARDWICK: I believe that that
9 the Treasury has found a way to do it with several
10 other programs, and I would encourage you to do as
11 much as you can.
12 MR. NOVEY: Thanks.
13 MS. SCOTT-HARDWICK: Mm-hmm. Thank you.
14 MS. BOLTON: Thank you. Our next
15 speaker is Kevin Matz from the American College of
16 Trust and Estate Counsel.
17 MR. MATZ: Good morning. And thank you
18 for the opportunity to speak today. I'm Kevin
19 Matz. I'm a Tax Trust Estates Lawyer, and also a
20 CPA. I'm a partner at the Stroock law firm in New
21 York City, and I'm speaking on behalf of the
22 American College of Trust and State Counsel, on
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1 trust and estate specific issues under the
2 proposed regulations.
3 In our comment letter, we've identified
4 five. Just to move things along I'm going to
5 start with the second one. But just very briefly
6 by way of background, again, we are talking about
7 a trio of benefits, three different benefits to
8 investors by investing in this program.
9 Number one they get a chance to defer
10 capital gains, until the earlier two occur
11 according the statute of sale or exchange of the
12 interest in the Qualified Opportunity Fund, again,
13 they have to invest in the Qualified Opportunity
14 Fund within 180 days of that, or deemed 180 days.
15 Or, the outside date which, December 31, 2026, so
16 sale or exchange, or December 31, 2026, whichever
17 comes first according to the statute, that's the
18 trigger point for an inclusion event.
19 The second benefit to be derived, so you
20 have tax deferral, you could possibly, through
21 basis adjustments, eliminate up to 15 percent of
22 the capital gain, if you hold the interest in the
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1 Qualified Opportunity Fund for five years, you get
2 a 10 percent basis step up, if you hold it for
3 seven years, you get 5 percent on top of that, so
4 that's 15 percent in total that could be
5 eliminated.
6 And then thirdly, the (inaudible)
7 benefits. If you happen to have the investment of
8 the Qualified Opportunity Fund including tacking
9 by virtue of someone dying, and the like, and you
10 get to 10 years, and their subsequent appreciation
11 value the interest goes up in value, then that
12 appropriation is completely tax free.
13 So what are some of the issues that are
14 presented in the trust and estate field? I am
15 going t point, because I think that now -- I think
16 in terms of trust and estates means people die and
17 they pay taxes, but they also can make gifts, you
18 could lifetime transfers.
19 So what happens if you have a gift and
20 interest in Qualified Opportunity Fund? My
21 thought, when I was reading the statute was, what
22 the statute talks about what's a triggering event,
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1 sale or exchange, or December 31, 2026, is a gift
2 to sale exchange? The answer, at least according
3 to the plain and unambiguous language of the
4 statute, I would submit should be null.
5 It says sale or exchange, and that's
6 what it says under Section 102: a gift or bequest
7 is not a sale or exchange. So, under the Internal
8 Revenue Code plain and unambiguous language, it
9 should not be treated, I would respectfully
10 submit, as a taxable event.
11 However, under the second tranche
12 proposed regulations that came out on May 1st, it
13 is treated as an inclusion event, unless you
14 happen to have a gift, or actually "a
15 contribution" to a special type of trust that is
16 called a grantor trust which is treated as one and
17 the person as the person who makes the
18 contribution for income tax purposes.
19 Now, I looked at that, I compare it to
20 the statute, it does -- very respectfully -- it
21 does not squire with the statute, and that was
22 noted in the preamble to the proposed regulations,
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1 with the proposed regulations, the preambles then
2 said, they went back to the legislative history,
3 the conference report, and in the conference
4 report, it talks about a disposition, and it goes
5 off of the sale and exchange concept.
6 You'll see that in the comment letter,
7 and this begins the part two, beginning on page 6,
8 we go very meticulously through the conference
9 report, it doesn't evidence an attempt to state,
10 to basically change a very clear precept of the
11 Internal Revenue Code.
12 Again, I respectfully submit that if
13 Congress wanted to change -- wanted to have gifts
14 deemed as sales or exchanges so as to trigger
15 this, they could have done it very easily. They
16 did not. And again, there is nothing that if we
17 look at the entire legislative history and the
18 conference report. Again, I've quoted language
19 verbatim that would suggest that there's some
20 loose language, but then if you viewed in context,
21 it does not show an attempt for expansive reading
22 to override what's in the plain and unambiguous
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1 language of the statute. So, that is one point
2 that we would request revision on.
3 I talked about gifts being and
4 exception, but there's an exception as to the
5 Internal Revenue Code, we love our exceptions to
6 exceptions, and there is a case of -- instead of
7 having an outright gift, say, to an individual, I
8 gave it to my son, made a gift to my son, having
9 an interest in Qualified Opportunity Fund which
10 would be a trigger. Again, under the proposed
11 regulations, I would submit should not be the
12 position of the statute.
13 But if instead I made a gift to a
14 grantor trust, which is a trust that usually I
15 would create, that for tax purposes has certain
16 triggers in it, that cause it to be one and the
17 same as me for income tax purposes, then the
18 proposed regulations, correctly, state that that
19 is disregarded, and that will not be an inclusion
20 event.
21 If there's a further distribution from
22 the trust, and it's not by reason of death, that
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1 could an inclusion event down the road, but the
2 actual contribution of an interest in the
3 Qualified Opportunity Fund to a grantor trust
4 would not be -- would not be bad. I'm following
5 along; this is the third point that begins over on
6 page 10 of the ACTEC Report.
7 So, what are some of the issues that are
8 raised there? Well, a couple things we need to
9 bear in mind about grantor trust, the number one,
10 the grantor -- so being the example, I set up a
11 trust, I retain certain powers, including maybe
12 the power of substitute assets of equivalent
13 value, as a grantor trust triggers Section
14 675(4(c) of the Code.
15 That allows to be a grantor trust, and
16 the income that's derived from the assets
17 including the Qualified Opportunity Fund, they are
18 all taxed to me, during my lifetime as a grantor.
19 So that's one benefit. Basically it all flows
20 through.
21 There's another important provision that
22 needs to be considered, and that is Revenue Ruling
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1 85-13, Revenue Ruling 85-13. And that says that
2 if I have a transaction with the grantor trust,
3 let's say I were to sell assets to the grantor
4 trust, it could be one with some interest in the
5 Qualified Opportunity Fund, and I get back cash,
6 or a promissory note, or other property in kind,
7 it's so long, dealing right pocket, left pocket,
8 all of myself, it's a tax nothing for income tax
9 purposes.
10 Revenue Ruling 85-13 says basically:
11 Across the board it's a tax nothing. I
12 respectfully submit that the proposed regulations
13 should similarly have -- or rather, the regulation
14 as finalized, should similarly also state that, so
15 that not only a contribution of an interest in the
16 Qualified Opportunity Fund, and the proposed
17 regulations talk a contribution interest in the
18 preamble talks about a gift, presumably that's one
19 of the same that could be clarified, that would be
20 very helpful.
21 But if I were to have other transactions
22 that were within the purview of 85-13, basically
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1 anything during my lifetime, while it's a grantor
2 trust, it could be a sale, it could be a swap of
3 assets, it could be a distribution, including in
4 kind, that should not be an inclusion event, and
5 it seems to be consistent with the intent here,
6 but that needs to be clarified.
7 Importantly, because a grantor trust
8 also is treated as one and the same as me, it
9 should not matter if the source of funds that are
10 used to go to the Qualified Opportunity Funds,
11 come from the grantor trust, or come from me
12 directly. Again, Revenue Rule 85-13, the grantor
13 trust provision 671 through 679 of the code,
14 treated as one and the same, and therefore that
15 should be respected all the way across the board
16 here.
17 Now what are some of the other issues?
18 I'm going to point four, which is page 11. Here
19 are some items to consider. There were, in the
20 proposed regulations that came out, actually the
21 first tranche that came out last year, very
22 helpful relief provisions to the 180 date rule,
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1 that's basically the rule that says: if you have a
2 capital gain, you have 180 days to invest in the
3 Qualified Opportunity Fund, if you don't, you lose
4 the opportunity to defer and have possible basis
5 adjustments, and then after 10 years, if there's
6 appreciation, be able to avoid tax on that, on the
7 gain.
8 That's very helpful. Where this could
9 be problematic, let's say, and he worst of relief
10 provisions, so one relief provision is that if I
11 have to be a partner in a partnership, instead of
12 looking at the partnership, unless an election is
13 made to the contrary, it could be the partner who
14 then has the ability to defer the gain, because a
15 partner gets on it anyway based on by receiving a
16 K-1, and then unless an election is made
17 otherwise, it's the end of the tax year that's
18 used for 180-day period to start. So that would
19 be in most cases -- in many cases December 31.
20 So I could have had -- the partnership
21 could have had the sale occur February last year,
22 well over a year ago, but because it was a
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1 partnership, and because an election was made
2 otherwise, December 31, 2018, could have been the
3 trigger date to start the hundred day clock and as
4 long as the investment was made by June 29th of
5 this year, it would qualify. What are some of the
6 issues that arise partnerships, S corporations and
7 also apply to trusts and estates? This is
8 dependent on effective communication between
9 effectively the fiduciary, the manager and the
10 beneficiary or partner or S corporation
11 shareholder. And the communication device is the
12 K1. And that works wonderfully if the tax returns
13 are filed properly, the K1's are issued properly
14 and then all that gets shared.
15 But that's not how the real world often
16 works. Quite often, especially with any measure
17 of complexity, quite often with partnerships, S
18 corporations and also trust and estates, returns
19 go on extension. And if returns on extension,
20 you're talking about due dates in September,
21 October for the K1 to even have to issue. And by
22 the time the partner or S corporation shareholder
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1 or beneficiary of the trust or estate gets the K1,
2 low and behold and you'll see as described in the
3 example that provide in the materials, it could
4 well be September. And at that point, they're
5 completely out of luck because they're more than
6 180 days out from the window.
7 So, our proposal here is that just as
8 there was relief provided for the 180 day
9 situation in the case of partnerships that in
10 order to achieve the objectives here of
11 substantial economic investment, in economically
12 stressed communities, i.e. opportunity zones, the
13 capital gains and the funding mechanism. There
14 should be an allowance here that says the 180
15 period runs from the later of the 180 day period
16 under the proposed regulations. Or if later, 180
17 days from the filing of the time they filed,
18 including extensions for the tax return that
19 issued the K1.
20 My time is very short, just a couple of
21 brief points. Basis adjustments, what happens
22 upon death. Under section 691 which is
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1 incorporated by reference here, there is no step
2 up in basis. However, you'll see and this is.5,
3 if however, there is appreciation value through
4 date of death, that is not an amount that is
5 recognized under the section pursuant to the
6 language of the statute. Therefore, that amount
7 should not be tied to 691 which basically carries
8 over the deferred gain to the person who happens
9 to be holding onto the investment at the time of
10 recognition event such as December 31, 2026. And
11 that amount through date of death should be
12 subject to step up and basis.
13 And then just the last point, 15 seconds
14 and I see that I'm out of time. What happens to
15 an inheritance where someone inherits an interest
16 and Qualified Opportunity Fund and low and behold,
17 they have nothing to pay the tax on come December
18 31, 2026, request relief. Thank you for your time
19 and attention.
20 MS. BOLTON: Thank you, Mr. Matz.
21 Panel, do we have any comments or questions?
22 MR. NOVEY: Do you see in the code any
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1 mechanisms or --
2 MR. MATZ: I'm sorry I didn't catch
3 that.
4 MR. NOVEY: You suggested that gift
5 should not count as an inclusion event.
6 MR. MATZ: Yes.
7 MR. NOVEY: Are you suggesting that the
8 sale or exchange by the donee would trigger a tax
9 liability for the donor if the donor happens to
10 know of it? Or are you suggesting that the sale
11 or exchange by the donee triggers liability for
12 the donors to start capital gains?
13 MR. MATZ: Well, I think the better
14 reason result here should be that the donee upon
15 receiving it, unless we have a grant or trust.
16 So, a grant or trust would be completely
17 different. Let's say I'm making a gift to my son.
18 MR. NOVEY: Yeah. I'm talking about not
19 a grant or trust.
20 MR. MATZ: Okay. In that case, the sale
21 or exchange by the donee should trigger a tax to
22 the donee. That, I think, is a better reason.
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1 MR. NOVEY: And if the donee sells and
2 let's say hypothetically that, you know, the donee
3 may have some gain because of the basis
4 (inaudible). But you were saying that the donee
5 then picks up the start gain by the donor.
6 MR. MATZ: Right. And that would be
7 consistent with how ordinary principles work.
8 MR. NOVEY: In my opinion, that might be
9 very reasonable -- but do you think that a donee
10 who says I don't see any obligation on my part. I
11 don't get it. I don't owe anything for gains that
12 my kind uncle may have diverged before I was born.
13 MR. MATZ: Well, in that case, the donee
14 has an obligation enforceable by the Internal
15 Revenue Service.
16 Well, if the donee has property and it
17 has zero basis perhaps or maybe an adjustment
18 basis over the course of time but putting that
19 aside. So, the zero basis and it sells it, it has
20 a gain. It has a capital gain, presumably that
21 then will trigger tax costs closest to the donee
22 and the donee fails to pay it, that is tax
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1 evasion.
2 MR. NOVEY: And if the donee has loses,
3 then so be it, the donor (inaudible)?
4 MR. MATZ: Well, that is a situation
5 that applies right now. So, it could be that
6 donor has a capital gain, doesn't make a transfer
7 or an individual's capital gain does not make a
8 gift to a donee. And then in a year prior to 2026
9 has losses, sells the interest to the qualified
10 opportunity fund then and then is basically to
11 have zero tax. So, that is no change from the
12 current situation that exists.
13 MR. NOVEY: In terms of clarifying that
14 the tax nothing attribute of the grant or trust
15 that are reflected, is there anything in the
16 current proposed regulations where you see an
17 implication that we would fail to reflect
18 (inaudible).
19 MR. MATZ: Again, that's an excellent
20 point. I don't see anything that necessarily cuts
21 away at it but it isn't addressed and therefore it
22 would be very helpful to clarify it because --
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1 MR. NOVEY: There are lots of obvious
2 consequences of current law that we don't address.
3 MR. MATZ: That is true. But it could
4 be that maybe simply an example to say that if
5 there's a sale, take back the promissory note,
6 that is governed by revenue rule 85-13 and
7 therefore it affectively is the same as though it
8 were a gift because it's a tax.
9 MR. NOVEY: Finally, you raised the
10 point in your comments that the IRD rate put the
11 beneficiary in the posture of having tax liability
12 for which it has no tax (inaudible). Are you
13 suggesting something more like a as an automatic
14 with underpayment interest extension of the
15 liability pay? So, that the liability can be
16 measured at an appropriate time but there would be
17 recognition of the fact of the persons liable for
18 the IRD ought to get some temporal relief that
19 would effectively be made whole.
20 MR. MATZ: That is an excellent
21 suggestion. If some relief is needed because any
22 time you plan right now basically you almost have
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1 to plan with life insurance. You know, you have
2 to talk about that which means then you have to
3 have this additional set up and reputable life
4 insurance trust to make it tax efficient. And
5 then you have to match the trustee and the
6 beneficiaries to whoever has the interest and
7 Qualified Opportunity Fund.
8 There's a lot to take in account. Some
9 sort of relief is needed and I do completely
10 understand your point that well the statute says
11 that and how far can you go beyond the statute.
12 But if there's some sort of relief provided,
13 installment payment plan and that could be
14 administratively built and that would go a long
15 way to addressing this concern. Thank you.
16 MS. BOLTON: Thank you. All right, our
17 next speaker is James Rose from the Rose
18 Development, LLC.
19 MR. ROSE: Hello and thank you, it's
20 great to be here. I was here at the first hearing
21 back in February that was going to be in January
22 and I was here with my wife. And the reason why
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1 we were here back then was that we are, I'm not a
2 -- I am a developer, I'm not an attorney, I'm not
3 an accountant and I'm also partners with the State
4 of Utah in some of my developments.
5 And one day, I'm having one of my
6 partnership meetings and the director walks in
7 with this letter from the Governor nominating 47
8 census tracts and says can you look this up and
9 tell me what is this, you know. And it was the
10 first time I'd ever heard of anything like that.
11 It was in about April or about June 1st and boy
12 this has really changed things for us.
13 Because at first, I was like well what
14 the heck, where's the map that shows me where
15 these census tracts are. So, I can understand
16 what properties that we have with the State of
17 Utah that we're developing and giving a large
18 portion of the money to the students, you know,
19 whether or not these developments are inside an
20 opportunity zone.
21 And so, it really sent us down a certain
22 path. Then we decided well, we better, once we
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1 figured out that it had to go through a fund and
2 then it had to go to, you know, go through all the
3 regulations and the processes we decided we better
4 do a fund. Well, then it was like well we need to
5 find an attorney that knows this and can help us
6 do this the right way. So, we drafted a set of
7 documents and we found out that there were going
8 to be these regulations, these guidance comments
9 and what not.
10 So, here is the first and second regs
11 right here, right? First one came out in October.
12 It was about 73 pages and it set us back because
13 we thought well there are really so many issues
14 not being an attorney, not being an accountant
15 that I didn't even know were possible issues in
16 the first place. I mean, we're developers. I'm a
17 licensed general contractor. I was a licensed
18 general contractor, builder, in the State of Utah
19 when I got my license. I'm also a principle
20 broker in Utah and in Nevada. So, I know a lot
21 about transactions as it comes to real estate,
22 building and doing things like that.
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1 So, this process that we've bee going
2 through has kind of led us to the point where
3 we're thinking, all right how do we take something
4 so complicated and make it simple for us to really
5 be able to use. And for us to be able to explain
6 to our friends and for my wife and I to do our
7 family planning with for the next, until 2047.
8 And so, one of the funny things that
9 happened to us is that on December 7, 2017, my
10 wife and I closed on about 20 assets in an
11 opportunity zone for the purpose of improving
12 these assets, you know, for the community and
13 doing exactly what the law really helps developers
14 do. But we did it about 20 days too soon, right?
15 So, we understand how important it is to know all
16 the little nuances of this law.
17 So, what we want to do is make it as
18 simple as possible in the big ways for when people
19 can -- so that normal people can understand and
20 verify what fund managers, now we're fund
21 managers, right, we're not just developers and
22 builders. Now all of the sudden, we have to
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1 manage a fund, we're fund manager for our own
2 projects. So, that when we talk to other people
3 as fund managers that they can get the information
4 without having to hire a bunch of accountants and
5 attorneys for just the big concepts.
6 And that's why I wrote all my comments
7 about the IRS website, www.irs.gov. And it's a
8 wonderful resource and tool. I think it could be
9 updated a little bit. You know, we have these
10 regs that have been coming out and there's some
11 really great things that haven't kind of
12 transferred over onto the website that I think
13 could happen. And there could be more of the kind
14 of, you know, opportunity zones for dummies kind
15 of sections, right? And it kind of gets into --
16 SPEAKER: Maybe opportunity zones for
17 real people, right?
18 MR. ROSE: Yeah. Yeah because sometimes
19 we feel like dummies when we're kind of going
20 through this. You know, I like to print things
21 off and I've been printing off everything that
22 you've been, you know, submitting and writing to
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1 us and cross reference it and, you know, trying to
2 figure it all out. And some of the things, you
3 know, we should be able to rely on as normal
4 people. And some of the things yeah, we might
5 need to, you know, get our attorneys to give us an
6 opinion letter on. But there should be parts that
7 we don't have to do that for.
8 And so, one of the things that I noticed
9 on the website recently because I went back to
10 check before all of this came. Was that in the
11 frequently asked questions page on opportunity
12 zones, there should be more detail and
13 clarification given as to what is a Qualified
14 Opportunity Fund. Currently, the FAQ page answers
15 the question, what is a Qualified Opportunity
16 Fund. With an answer indicating that it is a
17 vehicle for investing in eligible property located
18 in a qualified opportunity zone.
19 For someone unfamiliar with the act, the
20 stated answer could be interpreted as only
21 including real property located within an
22 opportunity zone. This interpretation would miss
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1 an additional major benefit of the act which is
2 the investment in qualified opportunity zone
3 businesses. And given the potential for growth
4 and positive impact that QOZB's can bring to
5 opportunity zones is benefit of the act should be
6 more clearly stated in the answer.
7 So, as somebody from my local community
8 of Utah where we have 47 zones and my current
9 office was located by some luck inside of an
10 opportunity zone, I look at this and I start
11 speaking to people about it. And all of the
12 sudden they start looking at me in my local
13 community like I'm some kind of an expert. And
14 so, I keep saying, listen, I am not an expert in
15 this but I am the guy that just recently held the
16 first stakeholders meeting in my community with
17 the mayors of my communities and the city council
18 members and so on and so forth. And not one of
19 them knew hardly anything about this and the
20 misconceptions were just unbelievable.
21 So, articles have come out and people
22 have started calling me and I'm sitting here
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1 thinking how can we make this the most reliable
2 for everyone. And that is pointing back to the
3 IRS website. We could have these, you know,
4 little bit better pieces of clarification that
5 people can go and fact check what others are
6 telling them. Whether it's their attorney's or
7 whoever it might be.
8 And then I reluctantly bring this last
9 part up which is just about the act itself. I
10 know that you don't want to really hear that but
11 as we have gone through different revisions of
12 PPM's or, you know, private placement memorandums
13 if there's anybody else out there like me that may
14 have never been to these things before. We have
15 had revision after revision based off of the
16 guidelines.
17 But when we look at raising additional
18 funds from people, you know, we can only right now
19 bring in tax advantage or deferred capital gains
20 money. And I know that you have to change the act
21 and we're not here to do that, okay, the law. But
22 wherein you have latitude to kind of make
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1 exceptions or create possibilities where some of
2 the people that call me that want to move their
3 businesses into these zones that want to do kind
4 of like ten year planning.
5 If it's something that you can do where,
6 you know, the part where if they leave their money
7 in there for ten years, you know, and there's
8 capital gains. It shouldn't really matter, that's
9 my big point, whether that money came from capital
10 gains. If they're willing to go through all the
11 rules, yeah, they're not going to get an increase
12 in basis, none of that applies to them. But they
13 should be able to get some of those benefits and I
14 don't know all the ways in which you could make
15 that possible where there could be. Hey, they're
16 leaving their money in those funds in the fund for
17 ten years and the fund then is investing in QOZB's
18 or QOZBP's properties, project.
19 And if you're not able to in some way
20 make that happen so that that money can be tax
21 advantaged, then perhaps as we are selling or
22 making money capital gains in our QOZB's and then
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1 we're sending that money back up to our QOF's,
2 right, our Qualified Opportunity funds. Then
3 maybe there's something that we can do that
4 clarifies the ability to take those capital --
5 some of that money somehow. I mean, I don't know
6 where the latitude is here but it would be
7 extremely helpful.
8 But either way, the simpler we can make
9 this and one other point about the IRS website.
10 If you could even have a little section that said,
11 if you were a QOZB, a business and you want to do
12 a QOZB, here are the one, two, threes. Or like a
13 checklist of ten things that you need to start off
14 with, that would be incredibly helpful. That's
15 it, that's all I had to say.
16 MS. BOLTON: Any questions for Mr.
17 Rose?
18 MR. NOVEY: Just one in terms of sharing
19 your predilection for printing stuff out and then
20 coming across something that is in need of
21 clarification. When I printed your hearing
22 outline, I came across 1K3-9LAY-BB67 and then
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1 something else as well with a similar (inaudible).
2 It's comments that you say you had submitted
3 before but I wasn't smart enough to figure out
4 what timeframe.
5 SPEAKER: PRN1.
6 MR. ROSE: You know and --
7 MR. NOVEY: We would love to see them.
8 MR. ROSE: I apologize for that. And
9 there again, this is my first time ever getting
10 involved in something like this or the hearing,
11 but thank you.
12 MR. NOVEY: But, you know, I saw the
13 summary of what you said.
14 MR. ROSE: Yes.
15 MR. NOVEY: And some of it was, as you
16 recognize, in addition to --
17 MR. ROSE: Outside.
18 MR. NOVEY: -- alerting us to your
19 frustrations, which we also have some
20 frustrations. You may want to communicate that to
21 the people who actually can change the law. But
22 in addition, since you made those comments and
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1 want us to prevent it (inaudible).
2 MR. ROSE: Absolutely. There was a
3 clerical error there. I thought that was --
4 MR. NOVEY: No problem.
5 MR. ROSE: Thank you for bringing that
6 to my attention.
7 MR. NOVEY: Do you know how many
8 clerical errors I make?
9 MR. ROSE: Thank you.
10 MS. BOLTON: Thank you very much. Our
11 next speaker is Fran Seegull, U.S. Impact
12 Investing Alliance.
13 MS. SEEGULL: Good morning, folks.
14 Great to see many of you again. I'm Fran Seegull,
15 Executive Director of the U.S. Impact Investing
16 Alliance.
17 So, the U.S. Impact Investing Alliance
18 and our members represent collectively about a
19 thousand private investors and financial
20 intermediaries who are actively engaged in
21 deploying private capital to advance the public
22 good. We believe in leveraging the power of
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1 markets to create measurable social, economic, and
2 environmental benefits and that investors can play
3 an important role in achieving desirable policy
4 outcomes. Many of our members and our
5 stakeholders have particularly deep knowledge of
6 and track record in investing for community
7 economic development. They include institutional
8 investors, foundations, pension funds, university
9 endowments, high net worth individuals, banks, and
10 community development finance institutions that
11 understand the importance of place, local
12 contacts, and authentic community engagement when
13 investing in low-income communities. For this
14 reason, we have taken a keen interest in
15 opportunity funds, opportunity zones, and the
16 development of pertinent regulations, but it's
17 based on consultation with these members that I
18 offer the testimony to you today.
19 In previous comments before you and on
20 several iterations of written comments, we have
21 underscored the critical importance of timely,
22 accurate, and consistent data collection and
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1 reporting. We believe that of the remaining
2 issues to be addressed by Treasury in its
3 rulemaking, this is perhaps the most important.
4 It's certainly the most important to us and the
5 members that we represent.
6 We are heartened to see that Treasury
7 released a request for information on data
8 collection and tracking and opportunity zones and
9 we're likewise glad to see that this issue has
10 been taken up by the White House Opportunity and
11 Revitalization Council. We are grateful to those
12 of you here today and your colleagues throughout
13 the Administration for their efforts to elevate
14 this topic of impact accountability and community
15 engagement. Before I address data and reporting
16 requirements, I'd like to first quickly address
17 the issue of rules to prevent abuse.
18 It was encouraging that the Notice of
19 Proposed Rulemaking included broad authority to
20 recharacterize abuse of transactions as
21 non-qualifying. In final regulations we recommend
22 that Treasury should seek to provide greater
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1 clarity about the circumstances in which this
2 authority may be exercised. Qualified opportunity
3 funds are given great flexibility in deploying
4 capital in opportunity zones.
5 The authors of the statute were clear in
6 their goal to see a broad range of operating
7 businesses and other investments supported to meet
8 the needs of qualified opportunity zones.
9 Treasury in particular with the latest proposed
10 regulation has approached the rulemaking process
11 in a manner consistent with this intent, but this
12 flexibility also creates significant room for
13 abuse. It would be impractical to enumerate every
14 type of potential abuse. In our written comments,
15 we articulate a three-part approach to this topic.
16 First, in final rules, the IRS
17 Commissioner should maintain the broad authority
18 to recharacterize abuse of investments as such.
19 Second, Treasury should define some clear
20 potential abuse of action such as land banking to
21 immediately prevent such predictable negative
22 outcomes. And third, Treasury should consider the
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1 adoption of a safe harbor such as independent
2 certification of the community benefit practices
3 of opportunity funds to provide investors with an
4 additional degree of certainty that their
5 investments are being well managed and do not
6 violate these abuse rules.
7 We provide greater detail on all points
8 of this approach in our written comments, but on
9 this last point, I would like to underscore that
10 the private sector tools needed to implement
11 independent certification are already under
12 development. Several speakers already mentioned
13 this opportunity zone's reporting framework is a
14 private sector standard for reporting that was
15 developed by our organization, the U.S. Impact
16 Investing Alliance, in partnership with the New
17 York Federal Reserve Bank and the Beeck Center at
18 Georgetown.
19 So, a broad range of groups including us
20 have worked to develop these frameworks, tools,
21 and methodologies that could be used as a basis
22 for an independent certification program. With a
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1 safe harbor tied to independent certification, we
2 believe that significant numbers of opportunity
3 fund managers would be incentivized to voluntarily
4 take part. We believe that with sufficient
5 participation, these market-led efforts would
6 become financially viable, these certification
7 efforts. Standards would need to be instituted
8 for which certifications qualify for safe harbor
9 protection, and these certifications would need to
10 be continuously monitored over the course of the
11 program. We believe that the CDFI Fund would be
12 naturally suited to handling this task, given
13 their experience managing other effective
14 community development programs.
15 As discussed in my introduction, I want
16 to spend the balance of my time on the vital
17 importance of tracking and publicly reporting on
18 fund and transaction level data about opportunity
19 zone investments. The opportunity zones market
20 cannot function efficiently without access to
21 basic transaction data about qualified opportunity
22 funds and their investments. For this reason, we
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1 recommend the Treasury collect and report publicly
2 on basic fund and transaction level data about
3 qualified opportunity fund activities in a
4 consistent and timely manner. Doing so would
5 achieve the goal of tracking the effectiveness of
6 the policy and create multiple benefits directly
7 increasing that effectiveness. While we applaud
8 Treasury for its thoughtful RFI on this topic, the
9 time lag in aggregated data envisioned in that
10 document would be entirely insufficient to assess
11 the efficacy of the policy.
12 Fund and transaction level reporting
13 should be collected in a manner other than through
14 a tax form, likely through a web portal, and the
15 information should be made available to the public
16 in a disaggregated, anonymized, and timely
17 fashion. Such reporting would not create a
18 meaningful burden on qualified opportunity fund
19 managers. And the public benefit of such
20 reporting was articulated in a wide range of
21 public comments submitted to Treasury to its RFI
22 on the topic.
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1 The statutory language creating
2 opportunity zones gives Treasury the necessary
3 authority to collect and report basic fund and
4 transaction data. Collection of this data will
5 enable qualified opportunity fund managers to
6 track and certify their compliance with the
7 statute. The Secretary is given the specific
8 authority to promulgate regulations to facility
9 the certification of qualified opportunity funds.
10 Furthermore, while we primarily see this
11 data collection effort as a means to promote the
12 efficient formation and deployment of capital, an
13 ancillary benefit would be to inform Treasury in
14 promulgating and enforcing rules to prevent abuse,
15 another point on which the Secretary has specific
16 authority to institute reporting requirements.
17 Finally, Treasury has repeatedly and
18 clearly articulated that the purpose of the
19 statute is to promote economic activity in
20 opportunity zones. This intent is further
21 supported by the statutory language and
22 legislative history of Regulation 1400(c). In
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1 previous written comments, we have discussed at
2 length the benefits that basic and transparent
3 reporting will have for market participation.
4 To quickly summarize this point,
5 reporting will increase investor confidence,
6 enable more efficient capital matching, and
7 promote effective partnership with state and local
8 governments. Again, the Secretary is given broad
9 authority to promulgate rules that advance this
10 legislative purpose and could under that authority
11 institute reporting requirements. Such a
12 reporting process would require a minimum level of
13 staffing within Treasury to implement reporting,
14 ensure completeness and accuracy of data, and
15 prepare reports.
16 The CDFI Fund provides a model through
17 its role in implementing and overseeing the new
18 markets tax credits program, and we suggest that
19 the Secretary consider leveraging this existing
20 resource to support implementation of opportunity
21 zones' reporting requirements.
22 Thank you once more for the opportunity
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1 to testify. We've remained deeply optimistic that
2 once these remaining points are clarified, this
3 policy can be used to improve the lives of the 32
4 million residents living in opportunity zones
5 today. The taxpayers of this country have made
6 and will make a tremendous investment in the
7 economic potential of opportunity zones. I urge
8 you here today to give us the tools we need to
9 measure and affirm the impact of those
10 investments. Thank you.
11 MS. BOLTON: Thank you. Does anybody on
12 the panel have a question?
13 MR. NOVEY: It would help even if was
14 not an exhaustive list to give some examples of
15 abuses you think we ought to write into the regs
16 and, in particular, what the consequences of those
17 abuses ought to be for either the fund or the
18 ultimate (inaudible) the business, the fund, or
19 the investors.
20 MS. SEEGULL: So specific examples of --
21 MR. NOVEY: The IRS and Treasury are not
22 bashful about being concerned about abuse, but
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1 (inaudible). You referred to the importance of
2 providing for independent certification,
3 essentially of consistency with the legislative
4 history as articulation of the purpose. There's a
5 variety of questions related in part to who would
6 do this. Would such certification be conclusory?
7 In other words, you've got private actors. You've
8 got a lot of money involved. It would not be
9 unheard of for an otherwise magnificent
10 independent force to get captured by the
11 transactional process, a fascinating podcast by
12 Michael Lewis (phonetic) (inaudible).
13 So, would a positive response be
14 absolutely exclusory that IRS could not get behind
15 it to say we don't think that this was a fair
16 (inaudible)? What consequence of failure there
17 ought to be done? And are you imagining ab appeal
18 process for someone who says I should have gotten
19 my certification and you didn't give it to me?
20 And it may have been negligence. It may have been
21 a difference in judgment. It may have been
22 corrupt. But it would be unusual and possibly
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1 inappropriate for some private actor, absent
2 statutory delegation and responsibility, to get
3 this kind of control over whether or not a
4 taxpayer gets the benefits that the taxpayer
5 thinks it is entitled to.
6 In terms of the transaction and the
7 transaction tracking, you said that, well, this
8 isn't going to be collected by the IRS and
9 implicitly seemed to suggest that, therefore, it
10 would not be subject to the privacy assurances in
11 Section 6103 (inaudible) numbers instead of
12 concepts. And I'm not sure that this would get
13 the kind of granular analysis that you're
14 suggesting be made public, so you're looking to
15 whether or not that kind of granular information
16 would be collected for government evaluation of
17 what's going on. But making that kind of granular
18 analysis public, even if, as you put it,
19 anonymized, but is aggregated, if there is a
20 transaction that is described and it was in a
21 census track (inaudible), and there is only one
22 fund operating a census track there, being
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1 anonymized doesn't do much good. And so I think
2 the privacy issues are important.
3 Then finally, lacking explicit statutory
4 mandate, you said it was written for authority,
5 but not the statute, suppose somebody says I don't
6 feel like filing this information, what are the
7 consequences? Should the IRS enforce filing by
8 denying the tax benefits? Should the filing be
9 done (inaudible) under penalty of perjury? I
10 think the general desirability of taking a tax
11 incentive, which is as inviting, sort of you all
12 come, as this one is, with no aggregate limit on
13 the amount of(inaudible) that would be possible,
14 some people can take up (inaudible), the risk that
15 all of the problems that Mr. Cunningham identified
16 that might come true are there, but take concrete
17 steps to ensure that what Congress says it wanted,
18 it gets, are not simple or automatic.
19 MS. SEEGULL: Okay. I'll do my best to
20 answer those. I wish I had taken my pen up here.
21 I'll do my best and happy to take some of this
22 offline.
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1 MR. NOVEY: (inaudible).
2 MS. BOLTON: Yeah, I second the examples
3 for abusive transactions.
4 MS. SEEGULL: Okay. So, just as kind of
5 a high level thought, we believe and we're also
6 part of the EIG coalition and Novogradac coalition
7 and our members feel that in exchange for the tax
8 advantage capital that opportunity zones
9 represents, that the disclosure so that we can
10 ascertain the efficacy of the policy is a very
11 reasonable trade.
12 MS. BOLTON: Well, to that, you need to
13 go somewhere else because that's not in the
14 statute at this point.
15 MS. SEEGULL: Understood. Understood.
16 And someone else mentioned that reporting was
17 stripped out of the statutory language for
18 parliamentary reasons, and we're aware of that.
19 I'm not able to speak about live legislation
20 because I'm not allowed to lobby, so I won't opine
21 on that topic here, nor is it appropriate in this
22 forum, but I'm just saying what our members
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1 believe.
2 So, what we are communicating in a
3 testimony is two pieces around data. One is fund
4 and transaction level data disclosed to a central
5 data repository and then available to state,
6 local, federal governments, policymakers,
7 academics, as a way for us to ascertain whether
8 the opportunity zone benefit has been efficacious,
9 and again, our belief is community economic
10 development is a desired result.
11 And so, what we envision there, and I'll
12 get to this piece about certification and rules to
13 prevent abuse in a moment, but what we asked for
14 actually in our first public comment letter, and I
15 testified on this on Valentine's Day earlier this
16 year, we're asking for capital raised into an
17 opportunity fund, property acquired, amount
18 invested in each deal and deed, location by census
19 track, NAICS code sharing the business type, so
20 that we can start understanding -- and we actually
21 asked for additional information, including jobs
22 creation, percentage of units affordable where
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1 appropriate, new business starts, business
2 ownership type with a special focus on women and
3 minority entrepreneurs, and poverty reduction,
4 which many folks believe that that is an outcome
5 that should not be -- that would be burdensome on
6 the fund manager, and so we threw that in there,
7 but I think that it's really important throughout
8 all of these discussions around data to understand
9 what is appropriate use and request of fund
10 managers and what is best analyzed by policymakers
11 and academics and think tanks.
12 And so there, what we're envisioning is
13 discloser through a web portal similar to the one
14 that is used by the CDFI Fund to administer new
15 markets tax credits. I take your point about
16 privacy and if, you know, there is, indeed, one
17 investment and one opportunity zone that is
18 problematic, but we still believe that -- what was
19 suggested in the RFI from Treasury was single
20 numbers, complete, kind of programmatic
21 aggregation issued, you know, every handful of
22 years and we feel like that is insufficient. So
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1 that's kind of one topic and I'll try to wrap it
2 up. I see we have a time constraint.
3 On the issues of rules to prevent abuse
4 there what we're asking for is a certification
5 safe harbor saying that if you use a third party
6 certifier, indeed, a private sector certifier
7 those certifiers which would be certified by, say,
8 the CDFI Fund and some kind of interagency
9 agreement in the same way that there was an
10 interagency agreement between the IRS and the CDFI
11 Fund and certifying the 8,700 opportunity zones.
12 And so, you know, asked the
13 representative from Opportunity Finance Network
14 about this issue of certification. What we're
15 asking here around the rules to prevent abuse, the
16 safe harbor, a certification program where, say, a
17 CDFI Fund would certify the certifiers, so there
18 wouldn't be -- need to be a certifier and, you
19 know, just your point, your question to OFN
20 earlier today. So that's sort of what we imagine.
21 I'm happy to disclose in writing answers
22 to some of your other questions if you feel that I
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1 don't have time to answer them at this time. I
2 see you're wanting to move on. Okay. Well, thank
3 you --
4 MS. BOLTON: We would like to hear from
5 you, but we have a lot of speakers.
6 MR. NOVEY: One thing to add and that is
7 when you do a lot of people have criticized the
8 selection by governors. In some cases, census
9 tracts that were gentrified, and by the time -- in
10 fact, gentrified by the time the governors made
11 the designations. And are you suggesting that
12 there will be some impairment of investors that
13 don't always go into those tracts because there
14 really is little social benefit derived
15 particularly from the loss of tax revenue?
16 MS. SEEGULL: The Urban Institute did a
17 report, as you probably saw, that showed 3 to 4
18 percent of census tracts that were selected or
19 have experience gentrification so it's still a
20 relatively small percentage, but we know it's a
21 concern. So I'll look forward to following up
22 with greater details and examples in a written
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1 format.
2 MR. NOVEY: It may be more than 3 to 4
3 percent --
4 MS. SEEGULL: Yeah.
5 MR. NOVEY: -- of the total investment.
6 MS. SEEGULL: Pardon?
7 MR. NOVEY: It may be more than 3 to 4
8 percent of the total investment.
9 MS. SEEGULL: Yes, yes. Understood.
10 Well, thank you. Thank you very much.
11 MS. BOLTON: Well, thank you very much.
12 We appreciate it. Okay. Our next speaker is
13 Steve Glitman. He is from the Develop LLC.
14 MR. GLICKMAN: Thank you, the panel for
15 having me back to testify. I was here in February
16 testifying on the first round of regulations. I
17 will be complementary on the second round, but I
18 will also have a number of issues in line with the
19 first round of regulations which just take as
20 constructive criticism and nothing more, nothing
21 less.
22 My name is Steve Glickman. I'm the
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1 founder and CEO of Develop LLC, between 2013 -
2 2018 I was the founder and CEO of the Economic
3 Innovation Group, co-founder along with Sean
4 Parker and John Lateri which was deeply involved
5 with the architecture behind the opportunity zone
6 program. Over the past year I've spent most of my
7 time in and around the country talking, working
8 with opportunity' zone fund managers, with wealth
9 managers, with community leaders, with opportunity
10 zone businesses and developers and others trying
11 to education various parts of the country and
12 various industries about the program and how it
13 works. And working with individual client as they
14 attempt to utilize the program.
15 And so a lot of these comments are built
16 along in the spirt of how is the market
17 practically responding to some aspects of this and
18 where do I think there may be some easy areas for
19 the IRS in finalizing these rules to make this
20 more workable along the intent of the program
21 which is, one, to raise a transformative amount of
22 capital for opportunity zone communities, and
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1 being able to do that through various types of
2 fund structures. And also to ensure that the
3 deployment of the funds go both to operating
4 businesses, as well as real estate of all types,
5 and I'll get to how a few of those pieces, I
6 think, are playing out.
7 I'm a member of the EIG opportunity zone
8 coalition and the Novagratic working group and I
9 think both they, along with the ABA, have put
10 together very thorough and excellent jobs at
11 providing a very detailed look at the regulations
12 with the recommendations that are broadly, I
13 think, consistent with each other and overlapping
14 which I think is a good sign that the market's
15 coalescing around where it needs.
16 I think there are two big categories I
17 want to point out. One relates to the formation
18 of multi-asset funds, and one relates to the
19 utilization of opportunity zones for operating
20 businesses. And there's a few issues within there
21 that I think the IRS needs to be more on before
22 finalizing.
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1 The most important, I think, aspect for
2 multi-asset funds is actually a very easy one. I
3 think the IRS did a good job in the regulations in
4 April of outlining an exit strategy for single
5 assets, single asset exits out of multi-assets
6 funds. And there's, I know, some commentary
7 around different ways to structure it, but the far
8 more important, I think, issue right now is that
9 it's the only part of the regs, really, that the
10 IRS left open to speculation from the investor
11 community in saying that's the only part of the
12 regulations that investors and fund managers can't
13 rely on.
14 And the impact of that, I think, is
15 quite substantial. While there are multi-asset
16 funds in the market it's not unreasonable as a
17 multi-asset fund manager when having to address
18 questions from investors to be concerned with the
19 fact that they don't have a good answer as to why
20 that part of the statute hasn't been allowed to or
21 why investors haven't been instructed they can
22 rely on that part of the statute.
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1 My sense is that IRS assumed that this
2 would be an issue that fund managers wouldn't have
3 to address until much later on in their life cycle
4 because many of these funds were structured to
5 exit ten years or beyond. The reality is the
6 structure decisions are being made right now. And
7 without the clarity that you can exit single
8 assets without a tax event, investors are much
9 more hesitant to invest in those funds and I think
10 you're seeing that in the fund raising. I think
11 multi-asset funds, while some are having success,
12 many are facing a slower fundraising cycle then
13 they expected, in part because of this feature of
14 the regulations.
15 So I think even before the full
16 finalization of the regulations for Treasury to
17 put out an additional amendment or an additional
18 piece of regulation to make clear that the
19 existing rules can be relied up, and, of course,
20 IRS can change its mind or clarify further in
21 finalizing the structure. It would do a part into
22 getting more capital into the market.
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1 One piece though of the multi-asset fund
2 structure that I think has created some questions
3 in the marked relates to depreciation recapture.
4 Right now it's fairly clear that exiting out a
5 single asset or multi-asset real estate funds and
6 a single asset basis you would avoid depreciation
7 recapture because it would be treated as the
8 capital gains and the regs made clear that single
9 asset exits would not be subject to capital gains.
10 But if you're exiting out of, let's say, a
11 renewable energy vehicle where you're selling
12 assets that would be treated as the sale of
13 personal property and that's ordinary income out
14 of a multi-asset fund it reads right now as if the
15 tax treatment would be different, and you would be
16 subject to a tax event unless you organize those
17 assets into single asset funds.
18 And, of course, that's possible to do,
19 but quite cumbersome if the goal is to get --
20 aggregate a lot of capital for, in this case, a
21 renewable energy asset class or other, sort of,
22 business assets classes within these zones.
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1 There's no policy reason why would should be
2 treating real estate, let's say, different from
3 renewable energy, and no reason you should have to
4 enter into an exotic structure if you're
5 structuring non-real estate multi-asset funds in
6 order to get the same benefit which is to avoid
7 depreciation recapture at this sale of individual
8 assets after ten years.
9 The third piece I'd say is a little more
10 controversial, but I think important, and after
11 the October regulations the Treasury and IRS made
12 clear that there were three eligible classes of
13 investments that opportunity zone funds could
14 make. They could make equity investments, they
15 could have preferred equity interest, preferred
16 equity interest and special allocations. Special
17 allocations, I think, was read as much of the
18 market is allowing for carried interest to receive
19 the opportunity zone fund treatment. And in the
20 April regulations the IRS made clear that for any
21 interests that are not a purchase from an
22 investment in the fund as opposed to treated to by
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1 sweat out equity in the allocation that those type
2 of interests would be treated differently.
3 And I understand the rationale for it,
4 but I think it carries some unintended
5 consequences. One of which is I think you limit
6 the number of professional fund managers who are
7 going to engage in the marketplace. As a fund
8 manager the primary benefit of this program is
9 creating ease of capital raising, and for a lot of
10 fund managers that's important for professional
11 and other institutional fund managers I think it's
12 much less important. And not being able to tap
13 into the opportunity zone benefit I think will
14 limit the amount of those type of fund managers we
15 have in the market which I would argue is
16 important given, as we've all seen, the
17 complications of or the complexity of the program
18 and the rules involved, and the shared desire we
19 all have to ensure these funds meet their intended
20 purposes.
21 But maybe the far more important issue
22 is that it's starting to create, as I'm observing,
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1 a fundamental misalignment between fund managers
2 and LPs. And that especially occurs in the case
3 of opportunity style real estate funds where much
4 of the value is derived in the first years of the
5 construction or rehabilitation, and once you have
6 stabilization you start to have a diminishing
7 return in those funds. That creates an enormous
8 amount of pressure for fund managers to sell well
9 before the ten year mark. They may feel they have
10 a fiduciary responsibility cause they can meet the
11 -- they can receive at the highest price, you
12 know, five or six or seven years into the
13 marketplace when investors, you know, have a tax
14 reason to stay in and ensure they can stay
15 invested in that asset for ten years or more.
16 And there's no reason to have that
17 misalignment. I'd argue with the carried interest
18 treatment that was original envisioned in the
19 October regulations it would create a natural
20 alignment to ensure we have a long term ten year
21 plus investments in these funds where you don't
22 then have this artificial misalignment between the
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1 length of time in LP which is to say invested in
2 the fund, and like the time at GP is incentivized
3 to manage that capital.
4 On the operating business side I think
5 there's some much more fundamental questions. The
6 most important relates to how we treat the
7 substantial improvement test and whether we are
8 looking at it asset by asset or as an aggregate
9 basis. It's fundamentally not practical to invest
10 in an existing opportunity zone business and
11 expect to improve each individual asset which may
12 be a chair or a computer or a desk and, frankly,
13 doesn't achieve, you know, much of the economic
14 benefit that we were looking to achieve in this
15 program.
16 Much more important, I think take an
17 aggregate look at the value of its tangible assets
18 and ensure that opportunity zone business is at
19 least investing as much, just as you would in an
20 analogous real estate example. And, of course, in
21 the real estate context there is, I think, some
22 practical applicability here as well. Practically
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1 speaking there are purchases all the time of a
2 building and let's say an adjacent or adjoining
3 parking lot of which the building is going to
4 receive a tremendous amount of improvement, but
5 the parking lot won't and there will be not
6 economic case or business case to doubling the
7 value of that parking lot, but you're still
8 achieving the economic impact to that same area.
9 So I think there's real reasons to think
10 through the aggregate improvement test. I think
11 the ABA laid out a very good way to do it in its
12 comments which I won't go into in detail because
13 they did, but I think that will be important to
14 ensure there's investing in existing operating
15 business in the opportunity zones, as well as
16 practical investment in certain types of real
17 estate projects.
18 The second issue I think that's
19 important I think will just need a minor
20 clarification is the treatment of the gross income
21 test. So I think the IRS substantially, won't use
22 that term, I think the U.S. greatly improved its
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1 treatment of the gross income test between the
2 October and April regs. One small note though, it
3 used language that the gross income test applied
4 to activity in the zone of the business which
5 implies to some in the marketplace that they can't
6 have opportunity zone businesses that stretch
7 across multiple zones.
8 Of course, that would be the goal to
9 have large growth businesses that can grow across
10 multiple opportunity zones, and businesses that
11 meet the -- otherwise, the other criteria should
12 be able to meet the gross income test across these
13 assets, across multiple zones. I know my time is
14 expiring. I'll just make one other quick comment
15 and that is I think there's a question about
16 whether qualified opportunity zone businesses can
17 hold subsidiaries in their normal course of
18 business and not be excluded from investment
19 because of the non-qualified financial property
20 test.
21 The way that reads is it would prevent
22 partnership interest in subsidiaries. Of course,
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1 this would be a normal way of doing business as a
2 qualified opportunity zone business or an investor
3 in those businesses and there should be a rule in
4 place. I think EIG and others have laid out a
5 practical scenario of evaluating if you're wholly
6 owned that subsidiary or invest at least 50
7 percent of it that it would not be treated against
8 your non-qualified financial property test.
9 Without allowing for subsidiaries to be invested
10 in I think you're going to limit the size and type
11 of businesses that can be practically invested in
12 throughout this program. Thank you.
13 MS. BOLTON: Thank you, Mr. Glickman.
14 Any comments from the panel? Otherwise, I'll turn
15 it over to Mike.
16 MR. GLICKMAN: I'd be offended if Mr.
17 Novey did not ask me any questions.
18 MS. BOLTON: I know, right. You have a
19 time limit.
20 MR. NOVEY: I assume you're suggesting
21 that there's a workable nexus rule for aggregation
22 in the (inaudible)?
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1 MR. GLICKMAN: Yeah, of course there is.
2 It relates to assets in tracts or adjoining
3 tracts, contiguous tracts.
4 MR. CRNKOVICH: Mike, are you done?
5 MR. NOVEY: Yes.
6 MR. CRNKOVICH: Just one question. You
7 talked about exotic structures and you mentioned
8 1245 recapture. What if you just elaborate on
9 that? Are you thinking of a situation whereby if
10 you sold the partnership interest the 1245
11 recapture would escape tax, where if it's a sale
12 of assets, you know, down one or two tiers the
13 1245 would not escape tax? And then by virtue of
14 that difference in rules, if I understand where
15 you're going, there might be an exotic structure
16 whereby you have a single asset fund such as the
17 partnership interest could be sold in. Am I
18 following you correctly?
19 MR. GLICKMAN: Yes. So it basically is
20 just a different of the language of 1250 and 1245
21 and how the regulations refer to the sale of
22 single asset. So they talk to the capital gains
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1 that then the investors would not be on the hook
2 for anymore. And in other parts of the statute
3 they talk about a full step up in basis in the
4 interest. Of course, capital gains works fine as
5 a 1250 asset because it's considered capital
6 gains. So you could add language that said you
7 escape ordinary income or capital gains which I
8 think Novagretic has recommended.
9 Right now a work around is to allow for
10 interest at the feeder fund level to these
11 individual QOFs that may hold individual, let's
12 call it renewable energy assets and those -- it
13 could function in a similar way, but it's much
14 more burdensome because then you have to collect
15 investment for each individual asset and then
16 transfer those interests back up to the feeder
17 fund, and there's really no reason it should work
18 different from the real estate context. My sense
19 is it's an inadvertent wording difference that
20 could be corrected with an update in that wording.
21 MR. CRNKOVICH: Could a work around also
22 operate to eliminate all ordinary income, income
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1 other than 1245 recapture such as sale of
2 inventory?
3 MR. GLICKMAN: Yeah. Well, so I think
4 in this case you just -- the focus will be in the
5 sale of the asset itself. So you're talking about
6 selling what will most likely be an individual LLC
7 containing the asset and a full -- equivalent
8 treatment to the full step up in basis of the
9 value of that asset upon sale so that there is no
10 outstanding tax event on a non-real estate asset.
11 So I think the goal is to get to that same result
12 so that you don't have different results depending
13 on the different types of assets that you're
14 qualified opportunity zone fund may own in a
15 multi-asset vehicle.
16 MR. CRNKOVICH: But just to be clear, if
17 I start a widget making business in a qualified
18 opportunity zone are you suggesting that the
19 income from the sale of the inventory if we sold
20 it --
21 MR. GLICKMAN: Oh, no. No, no, no.
22 MR. CRNKOVICH: Okay. You're focusing
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1 your comments on the real estate aspects, the 1250
2 un-recapture, 1250 gain, and the 1245 gain. I'm
3 just trying to figure out where you would draw the
4 line as what would be permissible to be eligible
5 for the step up in basis.
6 MR. GLICKMAN: Yeah, I think it's,
7 again, to treat them in the same way as a sale on
8 the real estate components of those assets because
9 it's the, you know, again, it's the core of this
10 is the tangible property in the zone in the sale
11 of those assets at the end of the ten year holding
12 period.
13 MR. CRNKOVICH: I'm just trying to
14 understand whether the sale of a tangible could be
15 extended to deal with a sale involved in a
16 business that has a significant amount of other
17 ordinary income assets such as an inventory. And
18 you're not proposing that?
19 MR. GLICKMAN: I'm not.
20 MR. CRNKOVICH: Okay. Thank you. Thank
21 you.
22 MR. GLICKMAN: Sure.
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1 MS. BOLTON: So I just want to confirm
2 that your first comment is you believe that people
3 are sitting on the sidelines because of our
4 applicability rule where we didn't give the lines?
5 MR. GLICKMAN: Yes. I think that's why
6 some investors are sitting in the sidelines in the
7 multi-asset fund context which is I think will be
8 the majority of the source of investment over time
9 in this program because it creates the structure
10 that's most scalable. And I've talked to many
11 investors and many fund managers that are having
12 trouble confirming to the investors that they can
13 make sales, individual assets sales which is how
14 most of these multi-asset funds are structured at
15 the end of ten years and provide them some kind of
16 assurance that they're going to receive the tax
17 treatment that they're expecting because of that
18 language. And, in part, because that language is
19 different than the language of the rest of the
20 regulation -- of the rest of the regulations that
21 were released in April.
22 MR. NOVEY: And you're suggesting that
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1 what's necessary is reliance -- that a structure
2 which is created today would be able look back to
3 the proposed regulations in 2046 and apply the
4 terms of those regulations even if the final
5 regulations are different.
6 MR. GLICKMAN: Well, correct. Just like
7 --
8 MR. NOVEY: Again, I want to make sure
9 that we're communicating effectively.
10 MR. GLICKMAN: Yeah, no correct. Just
11 as you can anywhere else that's laid out in the
12 April regulations. They may also have long-term
13 consequences and the reality is there are now a
14 not insubstantial amount of multi-asset funds in
15 the marketplace that are having to essentially
16 sell on their faith and a prayer that their
17 analysis of where the regs are likely to end up,
18 that these exits are going to avoid a tax event
19 are, in fact, true. So, everyone in the market is
20 taking on some amount of liability in interacting
21 with their investors and others that this
22 structure and the tax treatment that they're
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1 committing to their investors will be there. I'm
2 confident that's where the IRS plans to go, but
3 that's not enough for many investors to feel like
4 they can deploy capital now into the marketplace.
5 MS. BOLTON: Okay, anybody else? No.
6 All right.
7 MR. NOVEY: Thank you.
8 MS. BOLTON: Thank you, Steve. All
9 right, our next speaker, Dan Cullen and Darryl
10 Steinhause from the Institute for Portfolio
11 Alternatives.
12 MR. STEINHAUSE: Good morning. My name
13 is Darryl Steinhause. I'm with DLA Piper. Dan
14 Cullen and I are here representing the Institute
15 for Portfolio Alternatives and I want to go over a
16 couple of issues today that I think we could
17 improve the regulations and provide some
18 additional guidance.
19 The first is somewhat, what Steve talked
20 about before, which is aligning exit strategies.
21 When we look at these transactions today, there's
22 three ways you can get out of these deals. The
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1 investors can sell their units; you can have the
2 qualified opportunity zone property sold, which
3 are typically partnership interests; or, you can
4 sell the underlying business/projects. In most of
5 the deals done today, we have a fund on top; we
6 have a partnership below; and the partnership
7 below owns right now, typically a piece of real
8 estate. And the problem is depending on where you
9 are and how you're exiting your transaction, these
10 don't give you the same result. So, I'm going to
11 take the typical structure, which is the fund in a
12 sub-partnership.
13 First, if you go to sell the property,
14 you cannot sell the property and get the tax
15 advantages. Second, if you want to sell the
16 partnership interests, you can do that, but you
17 have to exclude -- you can only exclude the
18 capital gain; and, third, if you sell the units as
19 an investor, you get to exclude all of your gain.
20 So, you have three different components of the
21 same transaction exiting the same deal and you get
22 different tax results.
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1 So, what's the issues and problems with
2 that? Well, first, in the real world, if you have
3 to sell a partnership interest instead of selling
4 the underlying project, you get a lower price.
5 Buyers do not want to buy partnerships that have
6 ongoing liabilities, uncertainties, reps and
7 warranties, they want to buy the real estate. If
8 you want to maximize the value to these investors,
9 you have to let them sell the real estate.
10 Second, if you are trying to gather all
11 the units held by the fund, it's difficult. You
12 might have 100, 200, 300 investors and you have to
13 gather those units and all sell them at one time.
14 And if you're going to let your investors go to
15 the marketplace, most of these deals are private
16 transactions. How you go to the private
17 marketplace without taking a significant haircut
18 on you price? So, the only way to effectively
19 make this work is selling the underlying project.
20 The third thing is, multiple asset funds are at a
21 complete disadvantage because they can't sell
22 their projects. They can only sell their
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1 partnership interests, which will be at discounts,
2 or they have to find one buyer to buy all of their
3 deals at one time.
4 This is a relatively easy fix. You
5 could just say, no matter which way you exited
6 your transaction, there's no gain that would be
7 triggered as you have with the underlying units of
8 the funds today.
9 The second issue that I'd like to talk
10 about is what happens when you have substantial
11 improvements from projects for businesses?
12 Currently, under the proposed rules, you have this
13 being done on an asset-by-asset basis. That
14 generally works okay for real estate. That,
15 however, does not work for businesses or
16 quasi-businesses. When we look at these
17 transactions and you have a business or a
18 quasi-business such as a hotel, sometimes you have
19 new assets. You can't improve a new asset. Other
20 times, you have assets that can't be improved. I
21 mean, literally, how do you improve the towel at
22 the hotel? What do you do? These things have to
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1 be done on an aggregate basis.
2 In addition, when you're looking at this
3 from an aggregate basis, the most important thing
4 is when these fields are done from a practical
5 standpoint, the business or the project, they
6 don't actually in business settings improve the
7 property. And many times, they buy new property.
8 When you're the hotel, you buy new towels; you buy
9 new linens. That has to be allowed in this
10 process, so it's got to be the purchase that
11 allows you to improve -- make the improvements, as
12 opposed to specific improvements to the individual
13 assets.
14 MR. CULLEN: Thank you Darryl. Hi, my
15 name is Dan Cullen. I'm a partner at Baker
16 McKenzie and like my friend, Darryl, I'm here on
17 behalf of the IPA. Thank you for allowing me
18 back. I had the privilege of presenting testimony
19 on the first run of regulations.
20 I would like to specifically dive into
21 two key points. The interest section of debt
22 finance distributions. In your decision to
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1 incorporate a modified disguise saleable. Second,
2 the interest section of inclusion events and
3 tax-free transactions. I raised both of these
4 issues on behalf of the IPA the last time around
5 and I want to applaud you for the manner in which
6 you've addressed them so far. I believe your
7 proposed regulations, however, in one instance,
8 took a step too far. I would ask for you to
9 reconsider your approach.
10 And in the second instance, I believe
11 the proposed regulations were drafted too
12 narrowly. So, specifically, I'd like for
13 clarification, or if I dare, modification with
14 respect for debt finance distributions. When I
15 read the regulations that came out, I was
16 extremely pleased to see that you followed the
17 inherent wisdom of Subchapter K and allow full
18 outside basis for debt financing and no impact
19 against accrued benefits to the extent there was
20 distributions to the extent of that outside basis.
21 I must say I was surprised and in part,
22 disappointed in the decision to incorporate a
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1 modified disguise saleable. When I hear testimony
2 from others who are not tax counsel or
3 accountants, and they are worried about traps for
4 the uninformed, adopting a modified disguise sale
5 rule in a manner in which you did, I believe
6 creates a trap just like they're worried about.
7 Specifically, you modified the disguise
8 sale rule so that it would apply, not just the
9 profit contributions, but to all cash
10 contributions, effectively turning into a governor
11 as to how the capital needs to stay within these
12 funds. That step, I think, is prudent. Where I
13 thought you may have made a mistake, is when you
14 turned off one of the exceptions to that normal
15 rule. Predominantly, the pro-rata distribution of
16 debt financing proceeds. I would ask that you
17 reinstate that exception and remove the trap from
18 the unaware here. I believe that there is no
19 hindrance to the policy we're looking to achieve.
20 The members of the IPA are actively gathering and
21 aggregating capital to be deployed in these
22 neighborhoods.
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1 In the furtherance of our objective
2 here, if after a period of time, they appropriate
3 substitute their capital, for the capital of a
4 bank and there's a pro-rata distribution, the
5 policy has been achieved. We have allowed this
6 for decades under Subchapter K in every other real
7 estate or other transactions. I do not feel it is
8 appropriate to narrowly limit that exception here
9 for QRZ funds. I think it's contrary to the
10 policy objectives trying to be achieved and I
11 would ask that you consider (a), either not
12 incorporating a reference to a modified to scale
13 -- disguise sale rule. I think you may have taken
14 a step too far. Or if you choose to do so, and
15 you leave that in, that you allow the exceptions
16 to be modified as well.
17 In the alternative, if you will not
18 reinstate the pro-rata debt financing distribution
19 exception, then please provide further guidance as
20 to when distributions would be accepted. The
21 reason why I ask this is I think you're stuck with
22 a bit draconian. If you violate the disguise sale
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1 rule here, you have a failure of your eligibility
2 of your investment from the beginning and you've
3 received none of the benefits. From a policy
4 perspective, I think that was a bit harsh.
5 The second thing I asked the last time I
6 was in front of you was that the intersection
7 between inclusion events and tax-free transactions
8 should be symbiotic. The reason why I asked for
9 that was rather simple. I've been practicing for
10 just shy of 20 years now, and over those two
11 decades, we experienced some interesting problems
12 for our clients between 2008 and 2012. I believe
13 that the friction filled world that we live in
14 will continue to be just that, and in spite of
15 terrific policy and the best efforts of people
16 trying to help these communities, some funds are
17 going to struggle, and perhaps fail, and some
18 funds are going to be successful. It is in
19 furtherance of our policy objective to allow a
20 more broad assistance amongst funds in those
21 circumstances empowering counsel, such as myself,
22 to allow some funds to affirmatively assist other
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1 funds that are struggling. It's going to be
2 appropriate and it's something you should
3 facilitate.
4 And I asked you to do that the last time
5 I was in front of you. I believe you did so in
6 part, but you only took a partial step. If you
7 look at your list of inclusion events, you
8 excluded a Section 721 contribution into a
9 partnership. And I thank you for doing that. I
10 do think that you will see certain UPI
11 transactions, or UPC transactions that will allow
12 combinations to take place when they're
13 appropriate, and where the QOZ requirements are
14 still being met. But I cannot contemplate why you
15 only took that half step.
16 Continue walking forward. I think you
17 should also include Section 351 transactions. I
18 think you should also include tax reorganization
19 transactions. It's in furtherance of the policy,
20 and there shouldn't be a difference between
21 whether or not a fund enters into an UPI
22 transaction, or if they do a Tax B reorganization
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1 between two weeks. Please continue to include a
2 more expansive list so that when one fund is
3 struggling and it needs the help of another fund,
4 they have all the options in the Code available to
5 themselves. Thank you for your time. I
6 appreciate your consideration of the IPA's
7 requests.
8 MS. BOLTON: Thank you. And you have a
9 comment letter for us?
10 MR. NOVEY: Yes, we have a comment
11 letter that outlines 19 suggestions. I know
12 you'll take all of them into consideration.
13 MS. BOLTON: Yes, every single one of
14 them.
15 MR. CRNKOVICH: All right, Dan, Darrell,
16 thank you. Dan, let me approach you first on the
17 disguised share rule. It's not a disguised share
18 rule, obviously. It is a rule that is designed to
19 police extractions of cash shortly after the
20 investment. So, the question I would ask you is
21 how you would police the situation I'm going to
22 lay out. Suppose Dan and Darrell, each put $100
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1 into a QOF, a Qualified Opportunity Fund taxed
2 partnership. And let's assume varying effects.
3 Don't even worry about. You each put $100 in.
4 The next day, you go to the bank. You borrow $150
5 because the bank will loan, let's say 75 percent
6 below the value and distributes it out 75 to each
7 of you. The question is, should your investment
8 -- should your qualifying investment that permits
9 a rollover gain for lack of a better term be the
10 full 100, or should that distribution, which
11 occurs say the next week, the next month, be taken
12 into account to reduce the amount that's being
13 invested?
14 MR. CULLEN: I'll answer that
15 three-fold.
16 MR. CRNKOVICH: Great.
17 MR. CULLEN: First and foremost, as Mike
18 noted earlier, both taxpayers and yourselves are
19 wedded to the legislation. In Section 1400Z-2,
20 does not modify at all, Subchapter K. So, the
21 results you're describing would be permitted under
22 Subchapter K and should technically be allowed.
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1 What you're concerned about, rightfully so, is
2 from a policy perspective. Whether or not it's
3 appropriate for private capital to get a tax
4 benefit unless their money is sticky. You want it
5 to stay in the neighborhood. You want them to be
6 invested long-term. I think that's appropriate.
7 However, the ability to put that capital in; do
8 something with respect to that project in a manner
9 that's going to allow third-party financing to
10 give you that $150 in your example so that Darrell
11 and I get to take $75 off the table is a step in
12 furtherance of the policy. And to not allow me to
13 substitute my capital with bank capital is an
14 undue restriction on capital you're trying to
15 aggregate. And I recommend that you don't apply
16 that restriction.
17 MR. CRNKOVICH: So, just to follow that.
18 If, in lieu of doing that, you each put in 25, and
19 you borrowed 150, and invested the full 200 in a
20 qualifying business, would you suggest that the
21 appropriate policy call would be to permit a full
22 rollover 100 gain for each of you? Because
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1 economically, those two transactions are virtually
2 identical.
3 MR. CULLEN: They're virtually the same
4 and the disparate treatment should not be allowed.
5 I think that in each case, if we have done
6 something for the property where a third party
7 bank is comfortable taking on that risk and
8 allowing us to take the capital off the table,
9 then we've met the objectives of the policy and
10 complied with both Section 1400-2, and Subchapter
11 K.
12 MR. CRNKOVICH: So, just to be clear,
13 you said there should be identical results with
14 those two transactions. So, is that suggesting
15 that if you each put in 25 and borrowed 150, and
16 kept the cash in the partnership, that you two
17 could each be treated as rolling over 100 in gain,
18 as opposed to limiting your rollover amount to the
19 actual cash you invested.
20 MR. CULLEN: I apologize. I
21 misunderstood your original question. I think,
22 unfortunately, the statute says that you have to
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1 invest cash into the QOF to get benefit from the
2 troika of tax benefits allowed under Section
3 1400Z-2. Getting debt finance benefits is not
4 cash that you have put in, it's the bank's cash.
5 MR. CRNKOVICH: So, the only question
6 I'm asking is, if you could enter into an
7 economically, virtually identical transaction and
8 get a much bigger result, is that something the
9 government should be concerned with and write a
10 rule to prevent? Or should the rules be drafted
11 where you each put in 100 and you borrow 150 in a
12 prearranged plan, say the very next day and
13 extract the 75 each?
14 MR. CULLEN: You are correct that in a
15 perfect world without friction that that result
16 could occur. And I think inherent in your example
17 and your question is, why would one be concerned
18 about being able to have the partnership borrow
19 the money and distribute out the funds when one
20 could put in less -- put in more and then just
21 leverage your outside position from a bank
22 directly? The world in which we live in doesn't
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1 have that inherent flexibility in all
2 circumstances. The bank may not be as willing to
3 lend to somebody individually as they would to the
4 partnership that has the collateral and the
5 assets. So, I would respectfully propose that
6 your two analogies when actually occurring in the
7 real world are not analogous.
8 MR. CRNKOVICH: And if putting aside the
9 outside borrow, and putting aside plantation
10 patterns and issues, again, you would be
11 comfortable -- or you think we should write a rule
12 that would permit the partnership, that client
13 base case to borrow shortly after the infusion of
14 cash -- extract the cash, have the partners take
15 it as a distribution, and yet not count that
16 distribution as reducing or against the
17 investment. That's the rule you would prefer.
18 MR. CULLEN: Correct.
19 MR. CRNKOVICH: Okay, I just wanted to
20 understand that. And then, I have a question for
21 Darrell, just on your buyer and seller piece,
22 again, I appreciate all your comments, so, we know
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1 that if an investor sells its interests, then --
2 under the 2C 10-Year Rule, there's that 743 type
3 rule that would eliminate all the ordinary and
4 capital gain. Right?
5 MR. CULLEN: Mm-hmm.
6 MR. CRNKOVICH: If you, in lieu of the
7 having to sell the partnership for sole property,
8 would your rule limit the benefit under 2C to just
9 capital gain? Under capture 1250 gain? Would it
10 include 1245 recapture, and would it include any
11 other ordinary invites?
12 MR. CULLEN: I think that there
13 shouldn't be a difference how you exit. I think
14 that if you sell any of the three, when you get
15 done, you have money in your pocket and you don't
16 have an investment. And to tell the investor that
17 you get different tax treatment if we sell the
18 underlying project, the underlying partnership
19 interest, or that your unit seems a little unjust.
20 MR. CRNKOVICH: Would your approach
21 require that in the event of a sale by the
22 partnership to create equilibrium or parallel
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1 structures that -- would your rule require that
2 the QOF, and ignore lower tier partnerships, would
3 the QOF take the distribution or take the proceeds
4 of the sale and distribute it out to the investor
5 so that you're in an identical position?
6 MR. CULLEN: I would think that would be
7 a fair rule because you're trying to put everybody
8 into the same economic position.
9 MR. CRNKOVICH: Okay. So, if they
10 didn't distribute it under your rule, they would
11 not be eligible to avoid any of the gain? Would
12 it be limited to the capital gain under Chapter
13 1250?
14 MR. CULLEN: If they don't distribute
15 it, maybe then you put them back in the penalty
16 box of just the capital gain. But if they
17 distribute the money, everybody is on equal
18 footing and equal treatment.
19 MR. CRNKOVICH: Fair enough. Thank you.
20 MR. NOVEY: Just a confirmation of what
21 you said. You were saying why is it that you
22 can't -- there would be an addition, or a problem
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1 with having to improve properties such as towels,
2 I think -- I just want to make -- I understood you
3 as having said that the acquisition of new
4 qualified opportunities on business property,
5 which is what those towels would be should qualify
6 as a form of substantial improvement, or some
7 other asset in need of substantial improvement
8 with which there is an asset acquisition. Is that
9 what you were saying, or am I misunderstanding?
10 MR. CULLEN: What I'm saying is if you
11 have towels, you're going to throw them out and
12 you're going to buy new ones.
13 MR. CRNKOVICH: New ones, I would think
14 would be qualified opportunities on business
15 property. Since they're new they don't need --
16 since they're new to the zone they don't need any
17 substantial improvement. So, what is the problem
18 you're trying to address?
19 MR. CULLEN: You still have to improve.
20 You have your old property that you have to
21 improve. So, you have to still make the test.
22 So, I believe you're looking at the distinction
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1 between original use and substantial improvement.
2 When you come in and you buy an operating
3 business, the FF&E, furniture, fixtures, and
4 equipment, that's your first purchase. A new
5 purchase would qualify. And so you're focused on
6 the next towel. I think we're focusing on
7 partnering clarification that the first towel
8 existing when you purchase doesn't need to be
9 improved.
10 MR. CRNKOVICH: Since you throw it out,
11 in what way is that going to impair you at the end
12 of the quarter? Or at the end of periodic test.
13 MR. CULLEN: So, there is likely going
14 to be a period of time between your initial
15 purchase and the date in which you throw out that
16 first towel. And I like that we're focusing on a
17 single example of towels, but it is a much larger
18 example. If you look at operating businesses and
19 you purchase price allocation to FF&E, we're
20 talking about a significant dollar amount. And so
21 the delta of time between your initial purchase
22 and when you ultimately would throw it out and
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1 make a qualifying purchase, we're just looking for
2 clarification of what otherwise, I think is
3 obvious, is that one cannot and shouldn't be
4 required to substantially improve those FF&Es for
5 the first initial purchase.
6 MR. CRNKOVICH: As long as you throw
7 them out and replace them.
8 MR. CULLEN: If I want to keep the towel
9 forever, I think my customers would be
10 unsatisfied, but I don't think you need to force
11 me to throw out the towel. I think you simply
12 need to clarify that I don't need to improve the
13 towel. That that initial purchase, although the
14 overall transaction is a transaction that falls
15 within the bucket of substantial improvement.
16 That some sub assets cannot be and should not be
17 required to be substantially improved.
18 MR. CRNKOVICH: Okay, so you're saying
19 then that they are never going to qualifying
20 opportunities for the property and you want to
21 keep them out of the denominator as well, or you
22 want to put it in the numerator because they can't
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1 be improved?
2 MR. CULLEN: It's a fair question. I'm
3 not sure what the best approach would be to
4 exclude them and still make it appropriate to
5 apply the 90 percent test. We'd be happy to
6 collaborate with you to figure out how one would
7 exclude them out and still meet the objectives of
8 the 90 percent test.
9 One idea, although I think it would be
10 hard to police and I think you would have to have
11 self-enforcement would be to allow a bifurcated
12 approach as a (inaudible) part. Treat them as
13 original purchases even though they've been used
14 before, and the remainder would be substantial
15 improvement. When you look at how people have
16 been saying that you should be able to buy used
17 assets that are brought into the zone here for
18 some of that FF&E, allowing it to be treated as
19 original use where it is physically impossible
20 within the world as I know it to really improve
21 certain towels, or when you look at how people
22 have been saying that you should be able to buy
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1 used assets that are brought into the zone here
2 for some of that FF&E, allowing it to be treated
3 as original use where it is physically impossible
4 within the world as I know it to really improve
5 certain towels or pillows or mattresses or
6 whatever else that you're going to have, I think
7 excluding (inaudible) the approach.
8 MR. CRNKOVICH: The stuff that's brought
9 in from outside is original use.
10 MR. CULLEN: Correct.
11 MR. CRNKOVICH: Even if (inaudible).
12 MR. CULLEN: Correct. And so what I'm
13 asking from a practical purpose is don't force the
14 taxpayers to bring in something from the outside
15 to allow them to buy the towels and (inaudible)
16 there.
17 MS. BOLTON: So I guess I'm a little
18 confused because when we talk about activation,
19 and it's had this question before, you know, I'm
20 thinking you buy a hotel and you have furniture
21 and towels and all of that. So it's all in the
22 purchase price. So let's say you buy $100 and
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1 that includes the real estate, I thought you
2 wanted to just double the 100, but not have to put
3 it into those -- the towels and stuff.
4 MR. CULLEN: Yes.
5 MS. BOLTON: You want to be able to put
6 it into the total building.
7 MR. CULLEN: Total cost. You buy the
8 building, you buy the towels, you buy everything,
9 $100, you got spend another $100. That's what
10 we're looking for.
11 MS. BOLTON: Okay. All right. Any
12 follow-up questions? Okay.
13 So thank you very much. We appreciate
14 your comments.
15 So right now it is about noon and we're
16 going to take a very needed break. So as I said
17 to you before, we have a lunch room that is up the
18 escalator to the left. And we have escorts
19 outside in the lobby that will show you where to
20 go. Let's be back here at about 12:45 and we can
21 start with Brent Carney at 12:45. Thank you.
22
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1 (Recess)
2 MS. BOLTON: Okay. Welcome back. I
3 hope you all had a nice lunch. Well, we took a
4 little bit longer than we expected. But, all
5 right. So we're just going to start up again, and
6 we've had a little change to the schedule because
7 one of our speakers has a flight to catch.
8 So, the next speaker will be Argyrios
9 Saccopoulos. Did I get it right?
10 MR. SACCOPOULOS: Anybody else has got
11 comparable problems with (inaudible).
12 MS. BOLTON: Yeah. Let us know if you
13 have comparable problems. I don't know how much
14 they can change that. But Argy is from the State
15 Bar of Texas, Tax Section.
16 So, one thing for speakers, if you could
17 make sure that you are speaking into the mic,
18 because sometimes when you're talking to the
19 Panel, the people in the back are not hearing.
20 So, we are requesting people to come down further,
21 if possible.
22 MR. SACCOPOULOS: Hi. Thank you very
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1 much for the opportunity to testify. My name is
2 Argyrios Saccopoulos. I represent the State Bar
3 of Texas, and I'm also in private practice at
4 Jackson Walker where I do fund formations. And a
5 lot of my clients are trying to set up Qualified
6 Opportunity Funds, and then advising them there
7 are a few ambiguities, and frankly potential
8 issues that I was hoping to bring to the Panel's
9 attention, respectfully.
10 And I guess before I get into the two
11 main topics I want to discuss, I just want to
12 briefly touch on the inside gain issues that a
13 couple other panelists addressed. That's
14 something that we've been wrestling with as well.
15 I've actually been advising clients to set up
16 parallel cross structures, where there's still
17 ambiguity in the rules regarding how inside gain
18 will be treated, especially where there could be
19 1245 recapture.
20 Even for real estate investments, if you
21 have, you know, cost seg and some of the purchase
22 prices allocated to depreciable assets, you would
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1 return to the same issue even with the real
2 property investment.
3 So, I would respectfully suggest that
4 given that the statute operates by excluding all
5 the gain from the investment held for 10 years by
6 increasing the basis to fair market value, 1245
7 recaptures an element of that fair market value.
8 And so in all I think the final reg
9 should address that. And in the context of
10 operating businesses I respectfully suggest that
11 if the assets of the trade or business in the
12 Section 1060 (inaudible) sold, it would
13 appropriate to have a full exclusion for that, for
14 the decision of that investment.
15 The two main topics I wanted to discuss,
16 one of which was touched on a little earlier by, I
17 think it was Mr. Glickman, regarding carried
18 interest. I have a slightly different take on
19 that, the position of the State Bar, and my
20 personal position is I think it's completely
21 appropriate for carried interest not to qualify
22 for the fair market value basis election and for a
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1 tax-free exclusion after 10 years, because that
2 amount does not represent an investment of capital
3 gain.
4 However, I think there is an issue in
5 the proposed regs regarding how a partner's units
6 or a capital account is apportioned as between a
7 section that might represent a valid capital gain
8 rollover versus a section -- a portion of the
9 capital account that represents the carried
10 interest.
11 And the example that I bring to your
12 attention which is exceptional economy in the
13 market, I think -- I would say most of the deals,
14 or Qualified Opportunity Fund offerings I work on
15 have some kind of economic deal that's similar to
16 this.
17 You have a waterfall with multiple
18 tiers, and in tier one of the waterfall -- well,
19 let me just back up. Suppose the facts are that a
20 sponsor co-invests with outside investors, the
21 sponsor puts up -- let me just look at my example
22 -- 10 percent of the capital, and the investors
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1 put up 90 percent, and the deal is that everyone
2 gets an 8 percent return on their money, and only
3 above that 8 percent IRR, does the sponsor earn an
4 incentive allocation, or carried interest.
5 And the way that works is the sponsor
6 always gets his percent of the profits, and the
7 investors get their 90 percent of the profits up
8 to a 28 percent IRR, and then any profits above
9 that go 80/20 in a typical deal.
10 But the problem that we're encountering
11 is that you have two, at least two basic ways that
12 a fund might be set up. You might have a general
13 partner that makes that capital gain investment
14 which might be a perfectly good capital gain
15 rollover just for the LPs, and then that general
16 partner also gets and inventive allocation.
17 Or you might have a separate management
18 company that gets the incentive allocation which
19 make perfectly good sense for sound business
20 reasons, because you're giving some incentive
21 allocations to different parties that rolled-over
22 capital gain, or there's Texas margin tax reasons,
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1 being a Texas lawyer, that's probably all
2 esoteric.
3 But the point is that these two
4 structures don't seem to be treated the same. In
5 particularly there is this concept of an
6 allocation percentage in the regs, which you've
7 defined as the highest share of residual profits,
8 the next fund's partner receive with respect to
9 the carry.
10 And I'm not sure if this is intended,
11 but at least the way we're all interpreting this
12 as practitioners, is that's a fixed number and
13 it's like the worst number for he carried interest
14 person. And in the example I gave just now, and
15 the facts I laid, I believe -- and correct me if
16 my math is wrong -- that that number is 64
17 percent.
18 Because above the 8 percent hurdle,
19 that's where the highest -- that's the only tier
20 in the waterfall on which that carry is earned,
21 and in that tier, you know, for every hundred
22 dollars that's earned, 10 bucks goes to the
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1 sponsor for his capital interest, and 18 bucks
2 goes to the sponsor as 20 percent of the other 90.
3 And so out of the 28, 18 out of the 28,
4 or 64 percent, is carried interest. And because
5 the regs don't distinguish between profits that
6 are earned above and below the hurdle, this
7 appears, the way a lot of us are reading it, to
8 effectively convert part of the sponsor's 8
9 percent return on its capital, the same as the
10 money partners are getting, into a deemed carry
11 that effectively causes the carry -- I apologize
12 for the metaphor -- to almost be like a cancer in
13 your capital account.
14 It causes -- it metastasizes and takes
15 over parts of the capital account it really
16 shouldn't, and as a result if a single capital
17 account represents both capital and carry, that's
18 a bad structure, and that's a bad way for a
19 sponsor to invest.
20 And so we've been advising clients to go
21 the route of having a separate carry vehicle with
22 a separate capital account, which makes the rule
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1 in the regs effectively elective, and a trap for
2 the unwary.
3 So, I'd guess we'd respectfully suggest
4 that there's a number of ways this could be
5 addressed. First, you could define the allocation
6 -- instead of using the allocation percentage
7 concept, you could say that the allocations and
8 distributions with respect to the carry are
9 defined in the negative as the allocations and
10 distributions that are not in respect of the
11 capital.
12 Alternatively, if you don't want to
13 provide guidance that people could rely on, and
14 people who are cleverer than me could think of
15 ways to abuse that. You could say something like:
16 the allocation percentage rule is a safe harbor,
17 and inappropriate circumstances, you know, and
18 other methodologies including inappropriate
19 circumstances, the kind of negative by exclusion
20 rule that I just described, could be a way to
21 handle that.
22 The second point I wanted to address was
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1 the 90 percent holding period rule, where
2 substantially all of the holding period is defined
3 as 90 percent. We don't have any issues with that
4 as a concept, but we have questions about how
5 that's administered.
6 And the example I've given in the
7 prepared bullets was, suppose that a Qualified
8 Opportunity Fund invests 100 percent of its assets
9 in a QOCB, that's intended to be a QOCB, and for
10 whatever reason, you know, pick among the many,
11 the menu of options for a QOCB could mess up, they
12 mess it up, and for six months not QOCB.
13 But then they come into compliance and
14 at all times thereafter they're a QOCB. Well, I
15 mean the observation is that 10 percent, that that
16 six-month period of non-compliance represents less
17 than 10 percent of a holding period of greater
18 than five years, and so once you hold the QOCB
19 interest for five years, retroactively you can
20 determine that you have been in compliance for the
21 entire period, and yet you have to report your
22 ASSET Test results every year.
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1 So, what do you do in year three, when
2 your holding period is three years, and that
3 six-month period is more than 10 percent, but then
4 later retroactively becomes less than 10 percent?
5 What we've suggested is that you want to
6 be able to -- given that a (inaudible) vehicle for
7 long-term investment, the statute includes the
8 concept of a 10-year holding period where all the
9 dues comes in, you should be able to take your
10 business plan into account, and your future
11 holding period, if you're going to assess a 10
12 percent standard.
13 Because otherwise you'd have to
14 seemingly report a failed ASSET Test, pay a
15 penalty tax. And then what do you do in year
16 five, when it turns out, well, now that I've held
17 it for long enough, it turns out that I was in
18 compliance all along, and I shouldn't have been
19 paying that penalty tax?
20 So, you could limit the assumed future
21 period of the lesser of 10 years or remaining
22 useful life, and I think that would be
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1 appropriate.
2 Alternatively, I want to, I guess draw
3 the Panel's attention to the fact that the statute
4 permits a Qualified Opportunity Zone business, or
5 a partnership interest to be a good asset for a
6 QOF, if it is a QOCB or if has interest in a
7 startup, or what I think it says, a new entity
8 formed for the purposes of being a QOCB.
9 And in that case I think there should be
10 a defined kind of grace period for a startup,
11 because the statute says, you know, there's two
12 ways that a partnership interest can be good, it
13 can be a QOCB or it can be new, and formed for the
14 purposes of eventually being a QOCB.
15 So I would, you know, respectfully
16 suggest that the grace period ought to be a year,
17 because in the context of the 10-year hold period
18 that the statute contemplates, that would align
19 broadly with the 10 percent standard.
20 The last couple of points that I want to
21 address very quickly, is we were hoping for
22 additional clarification on the definition of a
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1 triple net lease, there's other context in which
2 merely passing through certain costs to the
3 tenant, you know, for taxes and insurance, and
4 everything, could cause the lease to be deemed to
5 be triple net.
6 But we think that if the services in
7 respect of those expenses are being reformed then
8 the cost should be able to be passed through to
9 the tenants without causing an issue there,
10 because we're really trying to define an active
11 standard, and understanding that the statute
12 requires an active trader business, triple net
13 lease isn't enough but, you know, we don't think
14 that simply negotiating cost-sharing should cause
15 an otherwise good lease to be -- to cause you to
16 fail the active trade or business test.
17 Am I out of time? I'd like --
18 SPEAKER: Yes.
19 MR. SACCOPOULOS: Okay. Sorry. Thank
20 you. Thank you very much.
21 MS. BOLTON: All right. Thank you. Do
22 we have any question from the Panel?
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1 MR. CRNKOVICH: Thanks for your
2 testimony. That was very helpful. You talked
3 about the separate carry vehicle, and there are a
4 couple of interesting (inaudible). Do you have
5 those in your written testimony?
6 MR. SACCOPOULOS: Yes. The written
7 testimony --
8 MR. CRNKOVICH: If we could go through
9 those too and I mean --
10 MR. SACCOPOULOS: Well, we submitted two
11 documents one of which was the longer testimony
12 and the other was the bullet points for this
13 speech.
14 MR. CRNKOVICH: Great. Okay. So you
15 can do that?
16 MR. SACCOPOULOS: Yeah.
17 MR. CRNKOVICH: And just if I can just
18 spend 30 seconds or a minute and go through two C
19 issues you raised, and kind of the key, or
20 carrying on of what I asked about two prior people
21 who are testifying. So, if you own interest in a
22 partnership and you sell your interest after 10
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1 years, and assume that the look through applies to
2 a revised step up equivalent for all the assets in
3 the game, so you're aggregating, your point would
4 be the similar rule ought to apply if the
5 partnership were lowered to your (inaudible)
6 assets. Correct?
7 MR. SACCOPOULOS: Yes. Assuming that
8 that was the disposition of an investment, because
9 I think that's the statutory word is investment.
10 MR. CRNKOVICH: Right. And I guess, I
11 just want to drill down on that. How would you
12 define investment? So, again you have been -- you
13 rolled over 100 into a QOF, and then putting aside
14 the 1226 gain recognition, 1231-26, the investment
15 increases in value from 100 to 1,000 if you sold
16 your interest you pay in tax.
17 MR. SACCOPOULOS: Right?
18 MR. CRNKOVICH: Now, assume that the
19 partnership sold off some of or all of its assets,
20 assuming it's just some, how would you envision
21 your work in the new approach?
22 MR. SACCOPOULOS: I think it has to
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1 determine whether what the partnership sold was an
2 investment, and so you raised the example of
3 inventory earlier.
4 MR. CRNKOVICH: Yes.
5 MR. SACCOPOULOS: I think it's obviously
6 inappropriate, because inventory is not an
7 investment, but I think that if it's like a real
8 estate asset, or if it's a tangible asset that
9 simply, where there is capital gain, but there
10 also happens to be 1245 recapture. Or, if it's a
11 collection of assets that represent a trade or
12 business, and I think Section 1060 does a good job
13 of defining that, if goodwill attaches.
14 MR. CRNKOVICH: Okay. And so if you did
15 sell the whole business, in your view, would there
16 be a requirement to distribute the proceeds out to
17 put the investor -- and I can't pronounce your
18 name, I'm sorry.
19 MR. SACCOPOULOS: Argy, that's okay
20 (crosstalk).
21 MR. CRNKOVICH: Argy. In the same
22 position as if you had sold your interest, would
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1 you have a distribution requirement?
2 MR. SACCOPOULOS: I think it would be
3 reasonable to have a distribution requirement in
4 that case.
5 MR. CRNKOVICH: And would the benefit
6 encompass -- only recapture 1258 and 1245
7 recapture in the actual gain as well?
8 MR. SACCOPOULOS: Actual gain, if that
9 gain is in respect of an asset, that's part of the
10 trade or business under 1066.
11 MR. CRNKOVICH: Got it. Okay. That's
12 helpful. Thank you.
13 MR. SACCOPOULOS: Thank you.
14 MS. BOLTON: So, I just want to clarify,
15 for the 90 percent over the period, are you
16 suggesting it's a retroactive rule, so you
17 determine at 10 years that you've hit the 90
18 percent.
19 MR. SACCOPOULOS: Well, what I'm
20 suggesting is that we need a rule that will let us
21 report a good ASSET Test if the bad holding period
22 represents more 10 percent of the holding elapsed
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1 to date, but less than 10 percent of the holding
2 period that you assess will be the final holding
3 period when you dispose of the investment,
4 understanding that that's a hard rule to
5 implement.
6 But the fact is the holding period
7 increases at the rate of one year per year, and
8 that means 10 percent of your holding period
9 increase at the rate of, you know, 37 days per
10 year.
11 And so, if your holding period is
12 constantly going up, eventually it might encompass
13 a bad holding period that was mad initially, and
14 that's a problem that should be addressed, and
15 we've suggested a couple ways of doing it.
16 MR. NOVEY: How does that work in the
17 statute of limitations?
18 MR. SACCOPOULOS: That's a very good
19 question. And that's in fact one of the problems
20 there, because if you report a bad ASSET testing
21 in the first year, and then in year six or seven
22 you retroactively determine, well, at this point
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1 we can substantiate, we were always good, even
2 back in year one we were good.
3 There's no mechanism to get a refund,
4 and so it just seems like it's setting up a trap
5 for the taxpayer where they have to report that
6 ASSET Test even though their business plan
7 involves only -- have been compliant with the 10
8 percent.
9 MR. NOVEY: Then what happens if the
10 plan on being good after year nine, but they
11 aren't?
12 MR. SACCOPOULOS: Well, in that case I
13 think they would have to report a failed ASSET
14 Test for that year, and I mean it depends how
15 harsh you want to be, I think that if you meant to
16 be good and something happened beyond your
17 control, or that was unforeseen, and it caused
18 your prior ASSET Test reporting that you said was
19 good to be in fact wrong, then there should be a
20 consequence to that. And I frankly don't know how
21 far you could go, but certainly you could have a
22 bad ASSET Test, at least for the year that you
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1 have the changed circumstance.
2 MR. NOVEY: You seem to be suggesting
3 reasonable cause and --
4 MR. SACCOPOULOS: Thank you for the
5 prompt. Yes, I am.
6 MR. NOVEY: But if there isn't
7 reasonable cause, shouldn't the IRS try to come
8 back and say, you know, none of the original
9 investment was okay, the entire and usually one of
10 potential (inaudible)?
11 MR. SACCOPOULOS: I think that if you're
12 -- I think that a taxpayer in that situation is in
13 a perilous position because if they have a failed
14 ASSET Test I don't think there's any mechanism for
15 saying you never had a good QOF, and so there are
16 limited remedies for the IRS in that case, and
17 that is one reason why I suggested the alternative
18 of a one-year grace period for a startup QOCB,
19 which would address about 90 percent of the issue.
20 Understanding that it doesn't address
21 the issue of tangible property used in the zone in
22 some of the other -- but if you had a one-year
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1 grace period at the start that would address the
2 cases of early noncompliance in a QOCB, while
3 maintaining the spirit of the 10 percent rule.
4 MS. BOLTON: Anybody else? All right.
5 Thank you very much.
6 MR. SACCOPOULOS: Thank you.
7 MS. BOLTON: Our next speaker is Brent
8 Carney from Mariziti Falcon, LLP.
9 MR. CARNEY: Good afternoon. My name is
10 Brent Carney. I'm with the firm Mariziti Falcon.
11 We are a small law firm in the State of New
12 Jersey, where we mainly represent public bodies,
13 and we serve as a Special Redevelopment Council
14 for several public bodies in New Jersey, many of
15 which have qualified Opportunity Zone
16 designations.
17 And my public comment this afternoon is
18 going to focus on Qualified Opportunity Zone
19 business property. And the statute there, among
20 its requirements, focuses on the acquisition of
21 property in a Qualified Opportunity Zone where the
22 original use, that's what I really want to focus
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1 on, is the new proposed definition originally
2 used.
3 The original use of such property in the
4 Qualified Opportunity Zone commences with the
5 Qualified Opportunity Fund, and then this is
6 important word "or", or the Qualified Opportunity
7 Fund substantially improves the property. And the
8 statute has a very clear definition of substantial
9 improvement, and it has a timeframe, and in the
10 redevelopment world a timeframe of 30 months, at
11 least in my world, is a very tight timeframe.
12 So, for our practice and for our
13 municipalities we're focused on original use
14 because the statute does not associate a time
15 period with it. And so in the second round of the
16 draft regulations, for the first time, the IRS has
17 put in a proposed definition of "original use" and
18 I am just going to jump around in that definition.
19 The definition includes "used tangible property
20 satisfies the original use requirement if the
21 property has not been previously so used or placed
22 in service in a qualified opportunity zone." That
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1 makes perfect sense. That would be a new use that
2 is acquired by the qualified opportunity fund.
3 It's commencing with the fund, the 30 month time
4 period would not apply in that situation.
5 It follows if the tangible property had
6 been so used or placed in service in the qualified
7 opportunity zone before it acquired by purchase
8 (sic) it must be substantially improved and it's
9 using the same definition of substantial
10 improvement, that also makes perfect sense because
11 that's not really something that commences with
12 the fund. For example, if it was an apartment
13 building that was acquired by the qualified
14 opportunity fund, it's just going to continue the
15 existing use that clearly is not an original use
16 that's commencing with the fund and so it would
17 then follow under the "or substantial."
18 But we also have vacant properties and I
19 was here for the hearing on Valentine's Day and I
20 know that there was a lot of comment there about
21 what period of time would abandoned or vacant
22 property be considered to basically wipe out or
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1 delete the prior use so it could -- if it
2 commenced again, it would be considered original
3 use and at that hearing, there were a lot of
4 comments proposing basically one year, a one year
5 period of time for abandonment and vacancy -- that
6 should wipe out the prior use and it could count
7 as original use. In the federal register, the IRS
8 and the Department of Treasury commented back.
9 They disagreed with the 1 year proposal given the
10 different operation of opportunity zone to
11 intentionally cease occupancy property for 12
12 months in order to increase its marketability to
13 potential purchasers after 2017. Other
14 commentators proposed longer vacancy thresholds
15 ranging to five years.
16 In other words, I think the concern was
17 that property owners would intentionally vacate
18 their properties to get the benefit of either
19 property acquisition by a qualified opportunity
20 fund and so 12 months didn't make much sense. Our
21 proposal is rather than going to the extreme of
22 five years which was sort of the upper end I think
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1 of the public comment, that perhaps you can retch
2 that debt back down to two years because there are
3 a lot of properties, at least in some of the towns
4 I represent that do have vacancies of properties
5 that are less than five years that would certainly
6 benefit under the qualified opportunity fund
7 program if that prior use was deleted or
8 considered vacated after a vacancy of at least two
9 years so that is our suggestion and wish and
10 desire before the final regulations are proposed
11 so that's really -- I had other comments but
12 that's really what I wanted to focus on.
13 MS. BOLTON: Comments?
14 MR. NOVEY: One question about the
15 commenting in paper. You suggested that five and
16 seven year basis --
17 MR. CARNEY: Oh.
18 MR. NOVEY: Should be available at least
19 until the expiration of status as a quality
20 opportunity zone and in any event, the basis is
21 measured not by the current -- I'm sorry, the
22 stack up is measured not by the current basis but
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1 by the amount of (inaudible) so you seem to say if
2 we can get the ten year benefits until --
3 MR. CARNEY: Mm-hmm.
4 MR. NOVEY: Until 137, even if we don't
5 get (inaudible) do this. I think that there were
6 two suggestions that you made, one of which may
7 have more probable with the statute than the
8 other.
9 MR. CARNEY: Okay.
10 MR. NOVEY: The idea that one could
11 start the seven year period and the five year
12 period after 12/31/2026 would have a problem
13 because you get the benefit of that step up only
14 if the investment is associated with a deferral
15 election and a deferral election could be made --
16 MR. CARNEY: So if --
17 MR. NOVEY: The other one, where you are
18 saying if I had a good deferral election earlier,
19 maybe I should be able to continue to get my
20 (inaudible) ten percent -- subsequently, the
21 12/31/2026, as long as I started out okay, that
22 one might have less trouble with the statute.
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1 MR. CARNEY: So, actually, I wasn't
2 necessarily tying the step up and the basis for
3 the ten percent and the 15 percent cumulative
4 based on getting the deferral or not. All I was
5 pointing out there was that also in the statute,
6 in terms of the deferral, the ten year deferral,
7 that is actually statutorily defined to be
8 December 31, 2026, that we pay April 15, 2027,
9 whatever that tax rate is at that point and time
10 but unlike the sections that deal with the ten
11 percent and then the extra five percent in the
12 step up of basis, Congress did not put into the
13 statute a time period and because the proposed
14 regulations were allowing up to the year 2047 for
15 the qualified opportunity fund to actually sell
16 the property and I assume that was done partly so
17 that it wouldn't be a fire sale if it was a bad
18 market after you have been holding it for ten or
19 more years, so two, it would not be beyond your
20 ability, because you would not be -- you're not
21 constrained by the statute, it could be in your
22 regulations to also allow that sort of flexibility
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1 with the step up and gain of ten percent and five
2 percent because everywhere I go at least, when I
3 listen to panels on the -- I am going to talk
4 about the seven year step up, in order to hit
5 that, it's always talked about, well that would
6 mean that the investment has to be done before
7 December 31st of this year.
8 MR. NOVEY: By.
9 MR. CARNEY: By December 31st of this
10 year and all I am suggesting is in your
11 regulations, if you were to allow the same
12 flexibility that you are for the sale of the
13 qualified opportunity fund to sell the property
14 all the way to the year 2047, if you allow that
15 same flexibility, then it would actually enhance,
16 I think, the ability of qualified opportunity
17 funds to go into qualified opportunity zones
18 because they are not losing that seven percent --
19 not seven percent -- they are not losing that 15
20 percent step up in basis over a period of seven
21 years.
22 MR. NOVEY: I understand that point that
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1 you are making. You seem to be making an
2 additional point which was you would be able to
3 get the five percent and seven percent even --
4 MR. CARNEY: Five and ten.
5 MR. NOVEY: Even investments into a QOF
6 subsequent to I guess the latest possible date
7 would be -- the sale, you could defer something
8 that was sold in December 31st, 2026, then you
9 could make your investment as late as June of 2027
10 but beyond then --
11 MR. CARNEY: Right.
12 MR. NOVEY: You would not have a valid
13 deferral election and therefore, the five percent
14 and ten percent step ups would be unavailable for
15 investments that --
16 MR. CARNEY: Well, correct, and also the
17 zones themselves will automatically expire.
18 MR. NOVEY: So that we --
19 MR. CARNEY: Yeah.
20 MR. NOVEY: We indicated that maybe even
21 the -- since we didn't want to have a situation
22 where virtually all -- we didn't want to have a
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1 situation where virtually all of the ten year
2 basis benefits would be gone once the zones
3 expired --
4 MR. CARNEY: Right.
5 MR. NOVEY: And we also didn't want to
6 have a situation where we preserved the step up
7 but once the zones expired, it was -- there was no
8 continued requirements of complying with the
9 economic focus in the zone. We soft-peddled the
10 consequences of that exploration.
11 MR. CARNEY: Yeah, and I think that's a
12 good thing. Thank you.
13 MR. NOVEY: All right, thank you very
14 much.
15 MR. CARNEY: Thanks.
16 MS. BOLTON: All right, our next speaker
17 is Jill Homan from Javelin 19 Investments LLC.
18 MS. HOMAN: Good afternoon. Good
19 afternoon, everybody. This lunch again. My name
20 is Jill Holman and I am president of Javelin 19
21 Investments, a Washington, D.C. based development
22 and advisory firm. I have 15 years experience in
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1 real estate acquisitions and development and to
2 date, my firm has been involved with almost 200
3 million in qualified opportunities to investments.
4 I also serve on the Board of Directors of the
5 Opportunity Zone Focus Trade Association and the
6 Opportunity Zone Association of America and since
7 I last spoke to you on Valentine's day, we have
8 capitalized our opportunity zone student housing
9 project in Baltimore, Maryland and are poised to
10 start construction.
11 The project features what the OZ
12 legislation envisioned in fulfilling a need,
13 housing for students in ways that positively
14 impact the community.
15 Well, you have my working group
16 submission. In the interest of time, I will focus
17 my remarks briefly on five quick subjects most
18 likely to unlock still hesitant investors. I
19 appreciate the chance to speak with you.
20 The first topic is qualification of
21 already owned property. So many properties owned
22 by taxpayers as of December 31, 2017 are the
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1 subject of planned development extending into 2018
2 and beyond. Still unclear is whether a sale of
3 that property is needed in order for work done
4 with respect to such property to qualify as
5 qualified opportunity zone business property.
6 Said differently, if a taxpayer has
7 owned land or land in building prior to January 1,
8 2018, can improvements to that land or land and
9 building, in 2018 or later, qualify as QOZBP.
10 The question is whether improvements
11 funded by a QOF investment contribute a separate
12 item of qualified property in situations where
13 expenditures exceed 70 percent of the sum of the
14 investor's basis in the already owned property and
15 otherwise qualifying costs.
16 The regulations could treat the
17 preexisting property as one asset owned by the QOF
18 and its subsidiary entity in the improvements as
19 another and analyze the "substantially all" test
20 with respect to these two assets. I can offer
21 mathematically confirming samples but I think you
22 understand the points.
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1 Other tax credit (inaudible)
2 specifically provide for these special asset
3 treatments and I wholeheartedly support this
4 interpretation. The second topic is aggregating
5 expenditures to satisfy the substantial
6 improvement test.
7 Under the proposed regulations, the
8 substantial improvement test for used property is
9 calculated on an asset by asset basis. Issuing
10 the aggregation of related assets methodology.
11 The statutory language which calls for
12 expenditures with respect to the used property
13 seems to more logically support an aggregating of
14 eligible expenditures. Consider a single owner
15 who owns multiple residential buildings in land on
16 the same parcel in the same opportunity zone and
17 who has a comprehensive community focus
18 development plan to rehabilitate the buildings
19 while adding a new playground for the younger
20 residents in a new commercial area to satisfy the
21 retail needs. These additions are clearly, with
22 respect to the existing buildings, but the current
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1 regulations would require that the rehabilitation
2 meet these substantial improvement requirement on
3 an individual basis.
4 I recommend that the IRS adopt a
5 regulation permitting the substantial improvement
6 test to be passed for -- with three things: One,
7 if a written development plan which meets the
8 substantial improvement test on an aggregate basis
9 including both the rehabilitation of the use
10 buildings and the cost of new construction; two,
11 expenditures are made on contiguous properties;
12 and three, the written plan is approved by a local
13 governmental body responsible for authorizing
14 development activities.
15 The third topic is alternative methods
16 of gain exclusion and we have touched on this a
17 bit before with the other speakers.
18 Currently, dramatically different tax
19 treatments result from the sale of a QOF, a QOZB,
20 and a QOZBP. In fact, the selling of QOZBP
21 appears to not yield any opportunity zone tax
22 benefits.
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1 I strongly urge the IRS to synthesize
2 these three scenarios and explicitly allow for the
3 sale of QOZBPs to produce the desired OZ tax
4 benefits to its QOF investors. Right now, an OZ
5 investor may achieve gain exclusion after ten
6 years only by selling its QOF interest.
7 Gain exclusion is achieved by an
8 investor election to increase a tax basis of the
9 QOF. QOF interest to its fair market value
10 immediately before the sale or exchange.
11 If the QOF is a partnership, the
12 proposed regulations also provide that the QOF
13 increase its basis in the partnership by the same
14 amount. This can benefit a QOF partnership that
15 owns assets that otherwise would generate ordinary
16 income upon disposition but a different result
17 occurs if the QOF sells its interest in the QOCB.
18 In that instance, the proposed
19 regulations provide that if a QOF partnership or
20 S-Corporation recognizes gain upon the disposition
21 of its QOZB investment, an investor that has held
22 its interest in the QOF for at least ten years,
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1 may elect to exclude form income some or all of
2 its share of such gain attributed to the
3 qualifying investment.
4 The election only permits the QOF
5 investor to exclude from income, capital gain from
6 the result of the -- from the sale of the
7 qualified property.
8 It does not specifically or explicitly
9 apply to innate ordinary income resulting from the
10 qualifying sale such as depreciation recapture.
11 I appreciate that there is language in
12 the proposed regulations to suggest that the ten
13 year asset sale applies to sale of property by a
14 QOZB but I do not believe that it explicitly
15 states so.
16 Most QOFs are being structured with
17 subsidiary entities owning the underlying
18 property. For business reasons, not tax reasons,
19 most buyers prefer to purchase property assets
20 rather than interest in entities which own the
21 property.
22 With these observations in mind, I
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1 recommend that the IRS extend the exclusion
2 provision to the entirety of the sales of property
3 held by the QOFs, not just capital gain, as well
4 as the sale of QOZBP held by subsidiary entities
5 in which the QOF invests to the extent such gain
6 is allocated to the QOF.
7 And finally, the tenure asset sale
8 election is not one in which the investors may
9 rely. This chills many potential investors who
10 make investment decisions based on certainty of
11 tax results.
12 Looking at dispositions ten years or
13 more into the future, investors are extremely
14 reluctant to commit dollars today without having a
15 sense of what the rules will be applied when they
16 may dispose of the investment.
17 Investors are being told the no tax
18 after ten years rule may apply and may be
19 available depending on what the IRS ultimately
20 decides with no particular commitment to publisher
21 rule before their investment is made.
22 The proposed regulations should be one
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1 in which the investor may rely. And fourth,
2 triple net lease and active conduct of a trade or
3 business. The proposed regulations confirm that
4 the business of leasing real estate can qualify as
5 an active trade or business for opportunities and
6 purposes.
7 Treasury then muddy the waters a bit by
8 saying however, merely entering into a triple net
9 lease is not enough to be the active conduct of a
10 trade or business. Opportunity zone investments
11 are naturally aligned with the preservation and
12 rehabilitation of communities historically
13 significant buildings and many rehabilitations
14 supported by historic tax credits utilize a master
15 lease structure for credit delivery.
16 With the industry -- with we in the
17 industry are struggling as I think you've heard,
18 in the uncertainty of the word "mere" as Treasury
19 use didn't ask for guidance through the use of
20 examples in clarifying language. For example, you
21 could use section 199(a) in the context of the
22 qualified business income deduction and to keep it
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1 short, I won't keep that and the fifth topic is
2 QOF investor relief if proposed financing or other
3 conditions fail.
4 There are many instances where an
5 investor is admitted into a QOF but the proceeds
6 are not deployed into the project until certain
7 conditions precedent are met so the sponsor is
8 comfortable or financially able to move forward
9 with the -- on the OZ project.
10 Satisfying these conditions may be
11 subject to actions of third parties, force
12 majeure, or the inability or ability of the
13 developer to raise capital equity or receive the
14 financing in which case the sponsor of the QOF may
15 choose to simply return the investor's money if
16 they are not able to meet those conditions.
17 Similar to reinvestment following
18 dispositions, Treasury should allow taxpayers who
19 have returned their gain investment dollars
20 through no fault of their own, 180 day window to
21 reinvest into another QOF.
22 Lastly, I know others are going to speak
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1 on the concern with the netting rule applicable to
2 1231, gains and losses. We provided commentary on
3 that as well and add my voice to reconsideration
4 of that rule and this concludes my remarks and I
5 appreciate the opportunity to share with you today
6 and on what I think will encourage more
7 investments in the zones. Thank you.
8 MS. BOLTON: Thank you, Jill.
9 MR. CRNKOVICH: Jill, thank you for your
10 helpful points. Just the -2C ten year rule, would
11 you envision a rule, as I asked the others, that
12 would require a distribution of the proceeds in
13 order to -- for the QOF to avail itself of the ten
14 year elimination?
15 In other words, if there is a sale
16 outside --
17 MS. HOMAN: Mm-hmm.
18 MR. CRNKOVICH: That's one thing the
19 investor has the cash and the buyer of that can
20 never get the benefit.
21 MS. HOMAN: Mm-hmm.
22 MR. CRNKOVICH: So the question is
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1 should you have something between that and the
2 situation where the sale is inside, such that
3 there would be a requirement to distribute the
4 proceeds.
5 MS. HOMAN: I think that is fair. And
6 ultimately, from a business perspective, I -- most
7 investors I have spoken with who are investing, or
8 considering investing significant amounts of
9 capital, do not understand that there is different
10 treatments at the different tiers and I think
11 whatever gets us to the parity and synthesizing
12 those three outcomes, I am fine with.
13 If that means the distribution, I would
14 be fine with that.
15 MR. CRNKOVICH: Thank you.
16 MS. HOMAN: All right, well, thank you.
17 MS. BOLTON: Okay, our next speaker is
18 Regina Staudacher from Howard and Howard.
19 MS. STAUDACHER: Good afternoon and
20 thanks for having us back. It is a pleasure to be
21 here. One of you said this is a sacrifice of our
22 time and it's really not. It is really a
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1 refreshing experience to have the opportunity to
2 talk with all of you and to listen to all of our
3 colleagues so thank you for listening.
4 My name is Regina Staudacher. I am a
5 partner with Howard and Howard attorneys. I, as
6 well, was back here on Valentine's day and you are
7 correct. There is a lot of energy in this space
8 right now. We have established more than 20
9 opportunity funds in qualified opportunity zone
10 investments and frankly I think -- we're at 25 as
11 of June 30th. From everywhere from Las Vegas to
12 Flint, Michigan and what I am bringing to you
13 today are just a few of the challenges that we
14 have noticed in setting up those structures and a
15 couple -- many of them have been addressed today
16 so I will try not to go in too deep on those
17 comments specifically but some of those
18 challenges, is the way I would describe them,
19 would be with the debt finance distributions that
20 appear to be trapped in the April regulations
21 associated with the modified disguised sale rules.
22 The use of tangible property outside OZ
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1 locations, as it relates to qualified opportunity
2 businesses, the ability to recycle gains and we've
3 talked about this a tad as it relates to the
4 multi-asset funds, but the ability to recycle
5 gains that are triggered from the sale of
6 underlying assets during the ten year holding
7 period continues to be what we view as a --
8 continues to be an area of great disparity in
9 terms of investors that want to come into these
10 funds as opposed to family offices that might be
11 utilizing targeted investments to set up their own
12 funds so I think we are achieving different things
13 by not allowing this recycling of gains within the
14 ten year hold period.
15 Next would be the ability utilized.
16 Related party transactions and I haven't heard a
17 comment on this because it seems to be pretty
18 settled in but in working with family offices and
19 closely held businesses, one of the things that we
20 have identified -- and these were not in my
21 prepared comments so I am happy to prepare
22 something separate on this, is that related party
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1 sales where businesses have sold out or bought out
2 family members or individuals within that are
3 related purely because of sibling relationships or
4 other type of relationships, those are precluded
5 from doing investments into opportunity zones.
6 In particular, what's interesting, we
7 are finding is that a lot of those same type of
8 family offices are no longer -- are not able now
9 to contribute those gains into high qualified
10 community projects that would be unrelated to the
11 transactions or the parties that created that
12 related party gain so I would compel you to give
13 that some consideration.
14 And I also have two additional comments.
15 I am not much of a policy person but I have -- we
16 have gotten comments back from many of our
17 investors as it relates to the need for an
18 intermediary to connect investors with projects
19 and opportunity funds. Essentially a match maker
20 of sorts to put projects and investors together.
21 I know this is not the time and place but I bring
22 it up that we are often asked about this very
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1 concept. We attempt to do that, we can't be part
2 of the promote, that's not what we do but there is
3 definitely a gap between the community and the
4 investors in terms of how to find each other for
5 qualified projects and investors looking for
6 qualified projects.
7 Lastly, we are working with some social
8 impact investment funds who are specifically
9 looking for advantages to invest in women owned
10 businesses and minority owned businesses
11 throughout opportunity zone locations. This is
12 completely absent from the regulations and again,
13 I understand, this is not your place but I
14 mentioned that in terms of if there could be a way
15 to align other incentives for those types of
16 entities within the opportunity zone legislation
17 or an ability to coach the communities on how to,
18 again, match make some of these minority
19 businesses and/or women owned businesses with
20 investors. I think aligning some of these
21 incentives would make this legislation that much
22 more powerful to the people that need access to
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1 capital that currently don't have that.
2 So, the debt finance distribution
3 comment. I'll address that quickly. I know Mr.
4 Colin and a couple of others addressed that
5 comment. I can speak to a specific example of an
6 investor with a $48 million gain from 2018 that
7 had a fund set up.
8 We actually -- as of the week before
9 June 30th, abandoned that transaction for a large
10 development in Minneapolis, specifically because
11 of the new debt finance distribution language
12 associated with the disguised sale modification.
13 That created a big problem. We had
14 banks that were willing to take part of that
15 transaction and so I was very interested in the
16 conversation earlier in terms of looking at what
17 the third party market will do with an opportunity
18 zone investment and their willingness to
19 participate and I think this is a perfect
20 opportunity for us to enlist established banks
21 that want to work with these developers and work
22 with these investors to leverage that interest so
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1 that we can do distributions and then subsequent
2 projects along within that structure.
3 So I think that's one that definitely
4 needs further contemplation and I did go into some
5 more detail on my prepared comments on that.
6 Second to that is the use and location of tangible
7 property. I think Mr. Glickman made comments
8 regarding use and we again -- this is one of the
9 areas, as it relates to qualified opportunity zone
10 businesses where we are finding the 70 percent use
11 of tangible property is a bit prohibitive as it
12 relates to businesses with mobile units, for
13 example, mechanical contracting companies with
14 vehicles that run across -- the use of the
15 tangible property is often used outside of the
16 opportunity zone so the 70 percent test of the
17 tangible property creates a problem if we want to
18 relocate or acquire a mechanical contracting
19 company or even a technology company where they
20 have portable laptop or things of that nature.
21 So the ability to better utilize the
22 testing for businesses would be very helpful. If
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1 we really want to put headquarters and businesses
2 in zones, and still allow them to service their
3 customers outside the zone.
4 The last comment I would make -- as I
5 mentioned earlier as the game rollover within the
6 ten year holding period, I won't address that
7 anymore other than again stating that I think that
8 is what is preventing multi-asset funds from
9 really getting off the ground, at least in terms
10 of our investment base and the funds that we have
11 set up. The inability to reinvest and have gain
12 transactions throughout the life of the tenure
13 holding period seems to be the primary issue that
14 investors are staying back and the lack of clarity
15 around what would be that taxing event during the
16 ten year holding period.
17 Lastly, again, from a policy standpoint,
18 just make the comment that we represent U.S.
19 Hispanic Chamber of Commerce and Executives from
20 one of the only Latina SBICs in the country who
21 served to corporate sponsors such as the Billion
22 Dollar Roundtable and it's there where we feel
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1 that there is a need for additional incentive to
2 support investments with minority businesses and
3 women owned businesses.
4 So with that, I'll reserve the rest of
5 my time for other speakers.
6 MS. BOLTON: Do you have a suggestion on
7 the 70 percent use test? How we would clarify
8 that?
9 MS. STAUDACHER: Yeah, I think there
10 it's really looking to the nature of the business,
11 really needs to be contemplated and I keep going
12 back to when we talked to our clients that looked
13 at the intent of the statute and so it's really
14 about the fact that if we go on an asset by asset
15 basis test and do the testing, we run afoul of
16 that testing so I would think something -- really
17 the percentage is challenging when you think of a
18 mechanical contracting business, with let's say
19 200 or so service professionals and I bring that
20 one up just because it's one that we are working
21 on right now where they actually constructed a
22 facility in an opportunity zone and they have all
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1 of these vehicles that are out running around and
2 service professionals and they do some business on
3 water repair, frankly, in Flint, Michigan and some
4 outside of that zone.
5 They will fall outside of that 70
6 percent test, or fall beyond the 70 percent test
7 as it relates to their tangible asset yet the
8 heart of the company is in the zone and that's
9 where their revenues are generated and all of
10 these others so I don't -- I think that the
11 linkage of 70 percent to tangible assets is what
12 the issue is so I don't know if it's the amount as
13 much as it is looking to the underlying business
14 and what is really driving the business and why
15 it's located in that zone.
16 MR. CRNKOVICH: Regina, thank you for
17 your comments. What if we drill down on that
18 example. I want to make sure we are not missing
19 something with -- something referred as the
20 disguised sale rule. It's really a rule that
21 limits the amount that is being invested. Looking
22 at the disguised sales rules as a handy mechanism
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1 for that determination.
2 So if you could just tell us a little
3 bit more about that fact pattern -- so someone was
4 going to invest 48 million?
5 MS. STAUDACHER: Yeah, so we had a 48
6 million dollar gain transaction in 2018 that was
7 ready to be deployed by June 30, 2019 --
8 MR. CRNKOVICH: So let's call the
9 individual at 48 million.
10 MS. STAUDACHER: It was a partnership
11 but yes.
12 MR. CRNKOVICH: Okay, and that
13 partnership was going to invest 48 million?
14 MS. STAUDACHER: Into their own
15 opportunity fund.
16 MR. CRNKOVICH: Okay.
17 MS. STAUDACHER: And invest into a new
18 development in Minneapolis.
19 MR. CRNKOVICH: Okay, so 48 million
20 down?
21 MS. STAUDACHER: Yes.
22 MR. CRNKOVICH: And they had financing
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1 lined up?
2 MS. STAUDACHER: Financing lined up with
3 a single bank that has banked them for a number of
4 years.
5 MR. CRNKOVICH: Right, and that bank was
6 going to loan money to the QOF?
7 MS. STAUDACHER: Exactly. And,
8 interestingly, looking to the underlying asset,
9 which would be the new development.
10 MR. CRNKOVICH: Right, and was there an
11 intended distribution of some of those proceeds?
12 MS. STAUDACHER: That's where we got
13 caught up, right? There was intended distribution
14 initially because they roll over and do additional
15 investments.
16 MR. CRNKOVICH: So just to --
17 MS. STAUDACHER: It's really the two
18 year period that's the issue.
19 MR. CRNKOVICH: Well, it's a disguised
20 sale.
21 MS. STAUDACHER: Yeah.
22 MR. CRNKOVICH: And then also if you're
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1 comfortable under the normal facts and
2 circumstances with all the disguised sale rules
3 then you get comfortable with this. Within a
4 short period of time, we are going to distribute
5 say half of that amount so 48 million was
6 invested, they are going to borrow 24 and
7 distribute it out immediately?
8 MS. STAUDACHER: What's interesting
9 about that is it wasn't -- that part of the plan
10 was not defined. It was the normal business
11 process would have been for there to be a
12 distribution.
13 MR. CRNKOVICH: Well, I know operating
14 -- yeah, but they are under the disguised sale
15 rules --
16 MS. STAUDACHER: It could have been as
17 much as half, yes. It could have been -- in terms
18 of the question being what would the plan have
19 been because we abandoned it, it would have been
20 as much as half of the 48 million to go back.
21 MR. CRNKOVICH: And just so I am not
22 missing the obvious point here, the source of the
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1 proceeds say 24 that would be distributed, the
2 source was -- was it the borrowing? Was it
3 operations or a combination thereof?
4 MS. STAUDACHER: It would have been the
5 borrowing itself, yes.
6 MR. CRNKOVICH: And that was prearranged
7 from day one?
8 MS. STAUDACHER: Yes, and what's
9 interesting about that project specifically is
10 that they have a track record of developing
11 projects within 12-25 -- in fact they do
12 government contracts and so they have defined
13 projects that must be constructed within a period
14 of time.
15 MR. CRNKOVICH: Mm-hmm.
16 MS. STAUDACHER: So their project would
17 have been completed before the end of this year
18 which is why the bank was very comfortable with
19 that transaction.
20 MR. CRNKOVICH: So --
21 MS. STAUDACHER: So in our mind, it's
22 all about there being economic substance to the
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1 underlying transaction --
2 MR. CRNKOVICH: Right.
3 MS. STAUDACHER: -- that makes that --
4 so our request is -- the way it's currently
5 written, it appears that there is a presumption of
6 a disguised sale and if we can get over there
7 being a presumption of a disguised sale, I think
8 we could have gotten them comfortable.
9 MR. CRNKOVICH: And just to be clear, we
10 are not within the disguised sales rules, that's
11 the mechanic for purposes of determining the
12 amount of the qualifying investment so 48 was
13 going to go in, and maybe we can clarify this and
14 thank you for your accounts, if 48 goes in and
15 let's say there's a prearranged deal with the bank
16 to borrow 24 and immediately distribute that out
17 but the rules intended to deal with is to take the
18 $48 million investment and say that if this would
19 be a disguised sale based on the rules we put in
20 the regs, then the 24 million distribution would
21 actually reduce the amount of the qualifying
22 investment.
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1 It would have no impact on the
2 underlying fund. It would just say that
3 effectively you've put in 24 and the other 24 came
4 from borrowing so again, it would just (inaudible)
5 down the amount of the investment. That's all
6 (inaudible).
7 MS. STAUDACHER: Yeah, what's
8 unfortunate about the way it resulted for us is
9 that instead of doing then the quality opportunity
10 fund, what they did is split it up between some
11 1031 and other transactions but otherwise, they
12 were looking to do with that 48 probably 3 OZ
13 developments, right?
14 MR. CRNKOVICH: Mm-hmm.
15 MS. STAUDACHER: But instead they didn't
16 have the clarity, at least we weren't able to find
17 the clarity that they needed to be able to pull it
18 out without that being treated as, you know, a not
19 eligible gain.
20 MR. CRNKOVICH: Okay, thank you.
21 MR. NOVEY: Okay, sorry, I just want to
22 make sure that I am not missing an opportunity.
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1 Your concern about the transaction between
2 siblings.
3 MS. STAUDACHER: Mm-hmm.
4 MR. NOVEY: Would like to invest in a
5 quality opportunity fund? That would appear to be
6 facially inconsistent with the statute.
7 MS. STAUDACHER: Correct.
8 MR. NOVEY: Do you have anything that
9 lets us satisfy what you need?
10 MS. STAUDACHER: I don't see it there
11 either. I think it's an unfortunate result and I
12 understand the intention of it.
13 MR. NOVEY: Again, I am not saying that
14 it's a perfect statute --
15 MS. STAUDACHER: Yeah.
16 MR. NOVEY: -- but in terms of where we
17 have elbow room to try to accommodate things that
18 everybody wants to see, when the statute is this
19 clear, that doesn't seem to be a constructive use
20 of our brain power to find a way around.
21 The next, the idea of essentially the
22 QOF being a little bit like an IRA --
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1 MS. STAUDACHER: Mm-hmm.
2 MR. NOVEY: -- in terms of free
3 redeployment of assets into their most
4 economically productive location. It's great
5 economics but unless there is a general and
6 explicit provision that realized gain does not get
7 recognized --
8 MS. STAUDACHER: Mm-hmm.
9 MR. NOVEY: -- as there is with an IRA,
10 as there is with a variety of other cases where
11 Congress, if they want it to be tax free, they
12 know how to say it --
13 MS. STAUDACHER: Mm.
14 MR. NOVEY: -- and there doesn't seem to
15 be an opening here for that however desirable you
16 feel it would be, other than our saying
17 (inaudible) with the code.
18 MS. STAUDACHER: Mm-hmm.
19 MR. NOVEY: Is there an option that we
20 could go with other than ignoring the (inaudible)?
21 MS. STAUDACHER: Well, we have given
22 that some thought as well in terms of the way that
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1 the step up and basis works for the first seven
2 years. If there would be some corollary to even a
3 recovery of bases on that second investment as
4 opposed to a complete non-recognition of gain,
5 that would be the only -- that would be a
6 mechanism that would could demonstrate that there
7 could be some recycling of the original --
8 MR. NOVEY: You are suggesting that the
9 basis step would get sacrificed and extra bases
10 could go in and show some --
11 MS. STAUDACHER: Yes.
12 MR. NOVEY: And then finally, is there
13 something that we have done that makes the ozone
14 incentive less hospitable than it could otherwise
15 be to these other goals? In other words, we tried
16 to make it available to a variety of other kinds
17 of taxpayers -- for example (inaudible) we can
18 imagine being a (inaudible) we could put that in
19 there because it's a responsibility (inaudible).
20 The absence of a back end gain, which would be an
21 unusual development for a real estate investment
22 that has been (inaudible) affordability.
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1 Is there anything that we have done that
2 makes this regime less hospitable than it could be
3 or is it simply that we haven't manhandled the
4 natural consequences (inaudible) that could be --
5 MS. STAUDACHER: I don't -- I think --
6 again, I come back to the spirit of the
7 legislation when we are looking at -- advising our
8 clients so I definitely am hearing your comments
9 in the regulation about the spirit of legislation
10 and that's where I can find comfort with our
11 clients in terms of steering them in the right
12 direction. It's when we get into some of the
13 particulars --
14 MR. NOVEY: The tax lawyers --
15 MS. STAUDACHER: I understand that
16 (laughter) but I think it's when we get into the
17 nuances and the traps that aren't obvious that
18 then three months go by trying to figure out
19 what's the right answer and now we've lost another
20 year of an investment.
21 MR. NOVEY: Mm-hmm.
22 MS. STAUDACHER: So I think to the
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1 extent that we can embrace the spirit of the
2 legislation and I am not concerned about the table
3 sitting here.
4 We are all concerned about five, seven
5 and ten years from now, sitting in front of an IRS
6 exam and having to explain the spirit of the
7 intent was appropriate and yet is being
8 interpreted differently. Right?
9 MR. NOVEY: We will try to make it
10 explicit when we are able to further the intent
11 within the constraints of (inaudible), but the
12 basic structure was caused by enactment and it
13 wasn't something that otherwise (inaudible).
14 MS. STAUDACHER: Understood.
15 MS. BOLTON: Thank you.
16 MS. STAUDACHER: Thank you.
17 MS. BOLTON: Our next speaker is Maurice
18 Daniel of Economic Inclusion Task Force.
19 MR. DANIEL: Good afternoon. Thank you
20 for the opportunity to speak to you today. My
21 name is Maurice Daniel, I am here as a replacement
22 for my colleague Moses Boyd, who was originally
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1 scheduled to give this presentation, but he had
2 unforeseen travel complications. So I am a poor
3 substitute, but I am here nonetheless.
4 Moses and I are a part of the Economic
5 Inclusion Task Force, a stakeholder group whose
6 aim is to see the proper implementation of the
7 opportunity zone legislation. We're committed to
8 assisting the rollout of this new investment tool
9 that was, of course, created by the 2018 Tax Cut
10 and Jobs Act.
11 The Economic Task Force is composed of
12 African American men and women entrepreneurs,
13 formed following the White House meeting with Vice
14 President Pence and U.S. Senator Tim Scott in the
15 spring of 2017. The Economic Task Force advocates
16 for advocating the economic growth in urban
17 communities, and we have worked hard for the
18 passage of the opportunity zone legislation.
19 We believed then, as we believe now,
20 strongly and resolutely, that the opportunity zone
21 law for the first time in decades opens the door
22 for much needed major capital investments in the
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1 urban role and heavily African American
2 concentrated communities. In this regard we are
3 keenly interested in two vital goals, ensuring
4 that the program operates to the benefit of the
5 intended communities, and ensuring that there is
6 significant diverse participation at every level
7 of the program, including at the fund formation
8 levels, ownership and management levels, and with
9 the business enterprises that will be the subject
10 and recipients of these capital investments. The
11 specifics of the Treasury's regulations are
12 crucial to achieving these outcomes.
13 We would like to express our support for
14 certain provisions that we believe are critical
15 for these objectives, and we applaud Treasury for
16 its tremendous work in implementing the
17 regulations for advancing this law.
18 We also believe that the Department has
19 achieved much needed progress in clarification
20 matters that are providing more confidence to
21 investors who are eager to engage in this new
22 national investment tool. However, we do remain
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1 concerned about several issues. The regulations
2 regarding the investment in operating businesses
3 and substantial improvement tests, and the
4 proposed 31-month requirement for determining
5 active trade of businesses.
6 Regulations regarding investments in
7 operating businesses and the substantial
8 improvement test application. This issue concerns
9 the determination of substantial improvement tests
10 either on an asset basis or an aggregate basis.
11 The Department's notice of proposed rulemaking
12 indicates that this test will be applied on an
13 asset by asset basis. However, given the nature
14 of the target communities and what it's going to
15 take to attract capital and realize successful
16 investments in these communities, it is vital that
17 the Department allow for the meeting the 31-month
18 substantial improvement test on an aggregate basis
19 as opposed to an asset by asset basis.
20 For example, if a QOF determines to
21 build a healthcare business part in a qualified
22 opportunity zone, the assets will likely include
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1 adjoining commercial structures and parking lots.
2 On an asset by asset basis, each of these assets
3 would have to meet the test individually.
4 However, no rational investment strategy would
5 operate this way. Only allowing for accounting on
6 an aggregate basis do we believe that such
7 investments are more likely?
8 The proposed 31-month requirement for
9 determining an active trade of business, the
10 notice of proposed rulemaking suggests that the
11 new investment and a new operating businesses and
12 acquires and must be an active trade or business
13 after 31 months of the deployment of capital.
14 However, given that these investments are
15 incurring in distressed and in many ways
16 (inaudible) markets for the purpose of major
17 private capital investments, it is highly probably
18 that it is going to take longer than 31 months
19 before such an enterprise will meet the test of an
20 active trade or business.
21 Consequently, we agree with the position
22 of others who have commented on this issue, that
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1 the Department strongly allow for the satisfaction
2 of this requirement in the event of clear evidence
3 of advancement of the investment for the active
4 trade or business has been made, and on other safe
5 harbor requirements for the capital have been met.
6 I would like to raise one other point as
7 it relates to concerns that have been expressed to
8 our group from local community groups, local
9 organizations, and NGOs play a strong role in
10 attracting investments in these targeted areas.
11 They've struggled with achieving clarity from the
12 complex regulations in a plain and English manner.
13 They're concerned about finding what they need in
14 the regulations, understanding what they find, and
15 being able to interpret what they find to meet
16 their needs.
17 We at the Economic Inclusion Task Force
18 would ask that the regulators consider these
19 concerns, and in the future clarifying statements.
20 Thank you for the opportunity to speak
21 to this hearing. And in addition we would like to
22 comment that we are co-signers with the Economic
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1 Inclusion Task Force and with the Economic
2 Innovation Group Coalition as well.
3 MR. NOVEY: There is an asset in the --
4 is it the cluster of O zone communities in
5 (inaudible) that needs substantial improvement.
6 And the company puts a fair amount of program
7 money into that, but not the (inaudible).
8 MR. DANIEL: But not that.
9 MR. NOVEY: But there is additional
10 moneys that by the same business, in let's say
11 downtown Silver Spring, right near the D.C. line,
12 (inaudible). It doesn't seem to be consistent
13 with the purpose that those two expenditures would
14 be put together as a single qualifying substantial
15 improvement. So we need help deciding when an
16 aggregation rule, if we were to adopt one, should
17 be accommodated so that it really is meaningful in
18 terms of substantially improving a particular
19 asset, even if we don't do it on an asset by asset
20 basis. So we need that help.
21 And we try to write as clearly as we
22 can, but we have to write technically and
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1 specifically. And we hope that others such as
2 your organization can have experts like you who
3 read it and can then help translate it to the
4 people that are waiting for it.
5 MR. DANIEL: I certainly appreciate the
6 dilemma and the restrictions that you are
7 operating within, and don't take them lightly.
8 We always go to the mission of the
9 legislation as our guiding light. And I don't
10 know if I have all the answers, but I know that
11 there's an answer and we're willing to work very
12 closely with the regulators to find it.
13 MS. BOLTON: We have Sarah Brundage from
14 the Enterprise Community Partners.
15 MS. BRUNDAGE: Hello. My name is Sarah
16 Brundage, I'm the Senior Director of Public Policy
17 for Enterprise Community Partners. And on behalf
18 of Enterprise I want to thank you for this
19 opportunity to offer comments.
20 Enterprise is a leading provider of the
21 development capital and expertise it takes to
22 create decent affordable homes and rebuild
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1 communities. Since 1982 we have raised and
2 invested $43.7 billion in equity, grants, and
3 loans, to help build or preserve nearly 585,000
4 affordable homes in diverse thriving community.
5 And Enterprise is launching our own family of
6 qualified opportunity funds intended to advance
7 equitable and inclusive growth in the communities
8 where investments are made.
9 To ensure the tax benefit fulfills its
10 intent, Enterprise recommends that the IRS modify
11 proposed regulations to 1) Clarify the treatment
12 of vacant land to prevent land banking, 2)
13 Encourage paring with the low income housing tax
14 credit and new markets tax credits, and 3)
15 Implement requirements to collect and publicly
16 share meaningful data on qualified opportunity
17 fund investments.
18 To the first point regarding the
19 treatment of vacant land to prevent land banking.
20 We believe that is subtracting the value of land
21 from qualified opportunity zone property for
22 purposes of the substantial improvement test would
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1 be conducive to efforts to preserve affordable
2 housing. However, that same provision could
3 unintentionally result in predatory land banking
4 and long-term landholding. Such an outcome would
5 contradict the goal of making improvements to
6 acquire QEZ property. This is particularly true
7 in areas experiencing rapidly rising costs, and
8 the potential for abuse would be especially
9 problematic in the case of land that is vacant,
10 significantly underdeveloped, or with
11 significantly depreciating assets.
12 We therefore recommend that the IRS
13 clarify that in the circumstance where property is
14 being used for long-term housing tax credit
15 properties, the requirement to substantially
16 improve property comply with Section 42
17 requirements, which are 20 percent. And with the
18 exception of circumstances with the housing
19 credit, we recommend that the IRS provide a
20 threshold above which land would have to be
21 substantially improved, regardless of any assets
22 or buildings on the property. Without such
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1 clarification it is possible that investors would
2 be able to receive a significant tax benefit for
3 holding valuable land for 10 years without making
4 improvements.
5 And I imagine that you might ask me what
6 a specific number for such a threshold would be.
7 And Enterprise did not provide a specific number,
8 however, we would be happy to default to our
9 partners at Novogradac who are speaking after me,
10 but I believe also recommended that at least 20
11 percent as well.
12 On the second point, Enterprise believes
13 that the true potential of opportunity zones lies
14 in the ability to pair this new source of private
15 capital with existing programs to generate social
16 impact. In particular the low income housing tax
17 credit and the new markets tax credit are proven
18 powerful tools with long track records in
19 community revitalization.
20 This round of proposed regulations
21 included provisions that could inhibit the
22 industry's ability to pair these tools however.
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1 The original legislation allows investors to elect
2 between paying the tax on either the original
3 deferred capital gain or the fair market value of
4 the qualified opportunity zone investment in 2026.
5 However, the proposed regulations differ
6 from the original legislation and instead require
7 investors to elect between paying the tax on
8 either the original deferred capital or the
9 capital gain that would result from the sale or
10 transfer of the QEZ investment.
11 So we strongly urge the IRS to ensure
12 the viability of pairing these incentives, and in
13 particular ask that the IRS clarify that the fair
14 market value, excluding debt, plus any cash flow
15 distributions to investors, be the standard for
16 calculating a deferred tax bill in 2026 for
17 long-term housing tax credit projects. And we
18 believe clarification on these regulations would
19 allow housing credit projects to compete with
20 market rate projects and help us maximize the
21 impact that we can have in low-income communities
22 by leveraging other Federal programs.
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1 We also recommend adjustments to the
2 proposed regulations stating that the actual
3 corporate subsidiary with the capital gain has to
4 be the one that makes the investment in a QOF.
5 This could be problematic for banks that invest in
6 housing credits through a community development
7 corporation but which may have capital gains in
8 another corporate affiliate. Therefore we
9 recommend that the IRS allow taxpayers investing
10 in qualified opportunity funds that then invest in
11 low-income housing tax credit partnerships to use
12 capital gains from consolidated affiliates of the
13 taxpayer.
14 Lastly, we once again urge the IRS to
15 collect and publicly share meaningful data on QF
16 investments. We thank the Treasury for its prior
17 RFI on data collection and tracking for qualified
18 opportunity zones, which we are very pleased to
19 provide our recommendations to. We believe the
20 collection and public reporting of meaningful data
21 on QFs and their investments into designated
22 opportunity zones are critical first steps towards
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1 ensuring that the opportunity zones tax incentive
2 is fulfilling its intended purpose. We provided
3 detailed recommendations on requesting
4 requirements that we hope you take into
5 consideration.
6 So with that, thank you, and we
7 appreciate your time and consideration.
8 MS. BOLTON: Thank you. MR: CRNKOVICH:
9 No questions.
10 MR. NOVEY: Is there something other
11 than the debt finance issue which you think we
12 could do to facilitate the pairing of the tax
13 incentive here with (inaudible) and NCC.
14 MS. BRUNDAGE: Yeah. Good question. So
15 as I stated, I am on our Public Policy Team, and
16 we ask this of our loan fund team, and as it has
17 been proving difficult at times to pair the two.
18 And this was the only technical recommendation
19 that we were able to identify.
20 MR. NOVEY: Okay. Because when you look
21 at it one of the things you notice was that there
22 are some of the benefits that many get excited
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1 about for O Zones, which I would be surprised if
2 private investors were looking forward to. Unless
3 the person who has worked with new markets, but
4 there were also changes. There were aspects which
5 didn't seem -- at least no low hanging fruit in
6 any number had to be there. The other one, in
7 terms of what the amount to be included in 2026
8 is, I assume that you would not say that the QOF
9 could load up with debt, distribute that out, do
10 so because of the basis of their debt, and there
11 would be no income to the investor. And then the
12 start-up amount would be reduced close to zero
13 because of the presence of the obligation of the
14 debt. That didn't seem to be something we were
15 thinking would be advocating and not everything is
16 really consistent with what the --
17 MS. BRUNDAGE: Yeah, I don't believe
18 that's our intent, yeah.
19 MR. NOVEY: So in other words the
20 heartache, if I could call it that, which is
21 produced by looking at what would be the result of
22 getting rid of the debt that is internal to your
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1 entity, is the necessary concomitant of a generous
2 rule which allows, at least after that first two
3 years, a distribution without tax based on the
4 predicated, the tax-free nature of that
5 distribution would be predicated on the basis that
6 it is derived from the internal borrower. And I'm
7 willing to bet that we are not getting requests
8 saying that we give up the ability to make those
9 distributions if you would give us a net of debt
10 rule for 2026.
11 MS. BRUNDAGE: Yes, that is not our
12 intent. Thank you.
13 MR. NOVEY: Okay. Thanks.
14 MS. BOLTON: Thank you, sir. Okay. So
15 next up is John Sciaretti from Novogradac
16 Opportunities Working Group. And once John is
17 done we're going to take a 10-minute break.
18 MR. NOVEY: Anybody that has got
19 airplanes to catch and things like that, come up
20 and --
21 MS. BOLTON: You're up, John.
22 MR. SCIARETTI: Good afternoon,
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1 everyone. I'm John Sciaretti from Novogradac
2 Company. And today I'm representing the
3 Novogradac Opportunity Zone Working Group. On
4 behalf of the Working Group we are pleased and
5 want to thank you for our opportunity to give our
6 testimony today.
7 Today I'm going to discuss three topics,
8 none of which are original, going 13. But I think
9 it's great that we're aligning in our interests
10 today. The three topics I will be discussing will
11 be the special not includable rule in the case of
12 an inclusion event for investments in QOF
13 partnerships and S Corps. The second topic is the
14 special 10-year exclusion election, which has been
15 talked about a lot today. And then lastly I'll
16 talk about a grace period for QOFs and QOZBs to
17 use property in a trade or business.
18 So with respect to this special not
19 includable rule, just a little overview. The
20 regulations provide a special rule for an
21 inclusion event, the inclusion amount, with
22 respect to passthroughs. It's a little different
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1 than the statutory provision in that in the
2 statutory provision you take the lesser of the
3 fair market value or remaining deferred gain less
4 the basis in investment. Where with passthroughs
5 you take the lesser of the amount of the deferred
6 gain less basis or the gain that would be
7 recognized on a fully taxable dispositioned
8 investment.
9 We understand why this rule was
10 proposed, that it is intended to prevent taxpayers
11 from avoiding recognizing deferred gain when the
12 fair market value of their investment is
13 diminished due to debt finance distributions.
14 That's what we understand why the rule was
15 presented.
16 However, as Sarah indicated, it is
17 adversely affecting the investment and affordable
18 housing and other high impact community
19 investments. With the 10-year gain exclusion, as
20 Mike's referred to, it is generally less valuable
21 to them as they don't expect to have appreciation
22 in their investment, or much appreciation in their
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1 investment, at the end of 10 years. However, they
2 were pretty excited about the 2026 inclusion rule,
3 the statutory rule, because it did provide value,
4 and that they could recognizes this sort of
5 typical loss in value over time at a certain date.
6 So it gave them an accretion and basis. In my
7 experience in working with a lot of these
8 low-income housing investors, they were excited,
9 we were seeing non-traditional investors coming to
10 the table. And, you know, a lot of plans were
11 being made for funds with syndicators and the
12 like, and as soon as the proposed regs came out
13 it's been quiet. You know, folks have sort of
14 walked away or stepped back from the opportunity
15 zone. And so as a result, I think we have
16 inspiring investors have actually turned away from
17 the program.
18 And so we're recommending, as I think
19 Sarah referred to we're aligned in this, that we
20 make the inclusion rule in 2026 consistent with
21 the mechanics of the statutory rule. But that we
22 modify the definition of fair market value. And
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1 that we use the net value of investment, excluding
2 debt, and then add to that distributions that were
3 made. So it means distributions that folks may
4 have made to reduce the value of their investment.
5 We propose that we add these distributions back.
6 Which we think prevents this artificial reduction
7 in investment without adversely effecting
8 affordable housing and other community impact type
9 investments in these zones. So that's our first
10 issue.
11 The second issue is with respect to the
12 10-year exclusion election, which, as I said, many
13 people presented this issue today, and that this
14 proposed rule only applies to capital gains. It
15 only applies to the sale of property by a QOF, not
16 the business. It excludes gains realized from the
17 sale of property that's characterized as ordinary
18 income, like 1245 appreciation recapture. And it
19 also excludes any gains that are attributable to
20 the sale property at the business level.
21 And so it's not on the same page. We
22 think that the rules should be synthesized with
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1 the rule for selling your QOF interest, where all
2 gains attributable to the appreciation of
3 property, all property, whether capital or
4 ordinary, or whether the property is held by the
5 QOF or the business, are eligible for exclusion.
6 It's common, as it's been said much
7 today, it's common, especially in multi-asset
8 funds, to exit by selling assets. There's also
9 likely to be a significant amount of operating
10 businesses that will sell assets that produce
11 ordinary gains. We see that in the market,
12 especially in the renewable energy space. And
13 then because most of the qualified opportunity
14 zone property, in our experience, is going to be
15 held by a business, not the QOF, simply because we
16 have this flexibility of time to make our
17 investment. And with the working capital rule, we
18 think that it's important that we synthesize these
19 two rules and expand the gain exclusion to apply
20 to all gains attributable to the sale, any
21 property used in a trade of business by a QOF or
22 QOZB. With the exception of inventory or assets
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1 that are held for sale in the ordinary course of
2 business, which is inventory. That was our
3 recommendation.
4 And then lastly, which was sort of
5 hinted on today, with respect to a grace period
6 for QOFs and QOZBs on the use of property in the
7 trade or business. And generally I think folks
8 have talked about it, grace period for a qualified
9 opportunity zone business to become a business.
10 And the statute does sort of allude to that in
11 that the statute says that new businesses must be
12 organized for purpose of being an opportunity zone
13 business. So they're acknowledging that there is
14 sort of this start-up period at the business
15 level. But we know that qualified opportunity
16 zone business property must be used in a trade or
17 business to be considered qualified.
18 And we do have some sort of safe harbor,
19 within the working capital of safe harbor, that
20 allows you to sort of treat tangible property as
21 existing, even before you bought it. But there's
22 really no discussion on use, and there's no
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1 discussion on how much time a business gets to use
2 the property. So if a fund invests in equipment,
3 let's say, and, you know, there's a period of time
4 before they can actually put that in production,
5 you know, does that disqualify property at that
6 point in time, or do they actually have to have it
7 in production. Or even in the case of real estate
8 where if a business kind of satisfies the safe
9 harbor, but in 31 months it's not placed in
10 service yet, and so do they fail the qualified
11 opportunity zone property at that stage because
12 it's not placed in service yet.
13 And so we think the Treasury should
14 consider a rule where a business is not treated as
15 failing to satisfy the use requirements solely
16 because the tangible property is not used in a
17 trade or business before a reasonable start-up
18 period. All businesses are different, it's
19 probably, you know, 12 months might be good for
20 some, but some it may be different based on the
21 nature of the business. And so before a
22 reasonable start period based on the facts and
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1 circumstances is sort of what we're recommending,
2 that a business should have time before they have
3 to use their property.
4 Alternatively, if you do want to provide
5 a safe harbor, provide that businesses have 12
6 months, but that 12 months doesn't start until
7 after the 31 months. So that's our suggestion.
8 And we're really suggesting this both as a QOF and
9 the QOZB level because even at the QOF level we
10 have to use this property in a trade or business.
11 So that completes my testimony today on
12 behalf of the Working Group.
13 MS. BOLTON: Thank you, John, for your
14 comments. There's one thing that keeps popping up
15 for me. I was on a panel with Mr. Novogradac, and
16 there seems to be a lot of push to have sort of
17 special rules for affordable housing areas, just
18 to make it work. I know Jill talked about
19 historic credits, and I've been asked about new
20 markets.
21 So I don't know if someone could provide
22 me, or provide all of us, something with specific
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1 rules that you're looking for just for this
2 industry. Because it keeps coming up and it's all
3 over the place.
4 MR. SCIARETTI: Well I think that -- I
5 mean in my experience I think affordable housing
6 worked well with this program, at least certain
7 types of affordable, you know, bond probably
8 worked better than, the four percent probably
9 worked better than nine percent. But I think that
10 investors are sort of relying on the fact that
11 they are losing value in their investment and the
12 benefit that they don't get at the end of 10
13 years, they can sort of accelerate this loss in
14 value in 2026 and it provided enough incentive to
15 encourage non-traditional investors in the space.
16 Because we saw it happen, I mean there were,
17 people were pretty excited about it.
18 And so it's not what you can do to help,
19 it's what you did do to hurt. By giving us that
20 rule, you know, and I think you modify that rule,
21 and I understand why you did that rule, because
22 generally folks could reduce the value of their
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1 investment by taking distributions before 2026.
2 And so we suggested one way to modify that. There
3 may be some other ways that don't hurt folks, you
4 know, that are not trying to lose the value of
5 their investment, but naturally the value may, you
6 know, not be appreciating, at least at 2026.
7 MS. BOLTON: Well the reason why I ask,
8 Mike and I are very familiar with this space, but
9 a lot of us on the panel, and decision leaders,
10 might not be so familiar with the space. And so I
11 think it would be helpful to highlight those
12 issues.
13 MR. SCIARETTI: Yeah. That's the one
14 thing I can think about, but I think it's
15 something that as a working group we could convene
16 and come up with some written response to answer
17 that question.
18 MS. BOLTON: Thank you.
19 MR. CRNKOVICH: Thanks, John. Two
20 really quick hits. First, on the calculation of
21 the game, I just want to make sure I'm
22 understanding where you're coming from. But
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1 suppose I invest 100, or roll over 100 or whatever
2 term you want to use. So my outside basis is 100,
3 I look at the statute, look at the deferred gain,
4 100 bucks over the basis.
5 MR. SCIARETTI: Wait a minute --
6 MR. CRNKOVICH: I have 100 of gain that
7 I --
8 MR. SCIARETTI: Outside would be zero.
9 MR. CRNKOVICH: So my outside basis is
10 zero, I put 100 in.
11 MR. SCIARETTI: Yeah.
12 MR. CRNKOVICH: So my turnaround and it
13 was suddenly 12/31/2026, putting aside ten and
14 five percent bump ups, I'd have to pay tax on the
15 100 gain though?
16 MR. SCIARETTI: Right.
17 MR. CRNKOVICH: So I want to make sure I
18 understand where you're coming from with the
19 borrowing. If my gain is 100 and it's tied into
20 that gain, less the basis, and there's a borrowing
21 without a debt for the distribution, I am now
22 going to have a basis in my partnership interest
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1 of $100. Right?
2 MR. SCIARETTI: If there's a borrowing
3 --
4 MR. CRNKOVICH: If there's a borrowing,
5 100 of which is allocated to me, 100 borrowing is
6 allocated to me.
7 MR. SCIARETTI: Right, on the inside.
8 MR. CRNKOVICH: Borrowed $100, borrowed
9 that is allocated to me.
10 MR. SCIARETTI: Yeah. You have a
11 hundred, yeah, that's correct.
12 MR. CRNKOVICH: Now do I have a
13 preferred gain of 100, I have a basis of 100 in my
14 partnership interest, right, and I don't think
15 you're suggesting it but I just want
16 clarification. One way to read the statute,
17 literally, is to say the excess of the gain,
18 deferred 100, over the basis of 100, is the amount
19 you pick up on 12/31/26.
20 MR. SCIARETTI: No, I think you have to
21 go net, net on that. You can't include that in
22 your basis.
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1 MR. CRNKOVICH: So the question really
2 is when you walk through your calculation, adding
3 back distributions and so on, is that written in
4 your testimony?
5 MR. SCIARETTI: It is. It is. Yeah.
6 MR. CRNKOVICH: Okay, good. Okay. And
7 then back to the same old question on the -2C
8 10-year rule. It sounds like you're trying to get
9 parody between a sale outside and sale inside,
10 right? Except that to the extent there's any of
11 the gain is attributable to property held
12 primarily for sale on a sale outside of that
13 clearly would be excluded?
14 MR. SCIARETTI: That's true.
15 MR. CRANKOVICH: But inside it would not
16 be?
17 MR. SCIARETTI: That's right.
18 MR. CRANKOVICH: Right. So you're not
19 looking for total parody.
20 MR. SCIARETTI: Not total parody. I
21 mean you could always just make a big inventory
22 sale after 10 years and get it excluded, you know.
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1 MR. CRNKOVICH: Right. And again, I've
2 asked others, but would you be in favor of a rule
3 that would require the distribution in order to
4 avail yourself of -- I don't know if it's a
5 10-year rule for sales inside?
6 MR. SCIARETTI: Yeah. The first I
7 thought about that was when you asked others. And
8 I'm trying to figure out, other than creating
9 parody, what else does that -- it doesn't solve
10 anything.
11 MR. CRNKOVICH: Okay. I just wanted to
12 --
13 MR. SCIARETTI: Yeah. Right, right.
14 MR. CRNKOVICH: Okay. Thank you.
15 MR. SCIARETTI: Okay. Thanks.
16 MS. BOLTON: Okay. All right. So let's
17 take a 10-minute break. It is now about 2:29, so
18 be back here at 2:40.
19 (Recess)
20 MS. BOLTON: All right, why don't we get
21 started for the last half of this public hearing?
22 So we have five more speakers. And so our next
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1 speakers are Joseph Darby and Christina Rice from
2 the Boston University School of Law; my hometown.
3 SPEAKER: We had that Professor Atlas
4 was the co- author of the --
5 MR. DARBY:: Right, Professor Atlas is
6 -- she decided not to have it look like the the
7 Mamas and the Papas.
8 But anyway, my name is Jay Darby. I'm a
9 tax attorney, proud of it. On behalf of Boston
10 University School of Law we're going to make a
11 presentation. Joining me is Christina Rice, who's
12 the director of the BU Graduate Tax Program, the
13 LLM Program for the School of Law. Also joining
14 us is Professor Susan Atlas, who helped pull the
15 submission together.
16 We teach at BU what I'm positive is the
17 first full credit course specializing exclusively
18 on the Opportunity Zone Act, you know, code
19 sections.
20 MR. CRNKOVICH: Please send us your
21 syllabus.
22 MR. DARBY:: We will. We're making it
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1 up as we go, but it's the first semester,
2 obviously.
3 MR. CRNKOVICH: Modifying it after.
4 MR. DARBY:: Oh, yeah. Well, you'll
5 appreciate this. I was helping with the ABA and
6 with the Novogradac Group and with the Real Estate
7 Round Table, all answering questions and saying,
8 you know, these are the things that Treasury
9 specifically asked for comments on, which there's
10 a long list. And I said this is perfect, my work
11 is done. So I sent it out to the students and
12 said everybody pick a question to answer. And so
13 we got back, you know, 12 answers from 12
14 students, we put it together in 48 hours. It's
15 got a few typos in there, but it was kind of fun.
16 So we're going to talk about a bunch of
17 things fairly quickly. I'm going to talk about
18 1231, which is a particular important issue that
19 I've been sort of advocating for in every group
20 I've been part of. And then Christina is going to
21 talk about vacant land and I'll come back and do
22 kind of a drive-by presentation on the rest of the
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1 topics.
2 The 1231 issue you're familiar with.
3 The treatment of capital gain came out in the
4 first set of regulations and was treated in a very
5 generous, reasonable way with the special rules
6 for partnerships. The 1231 rules kind of create a
7 lot of stress and tension in the real-world
8 marketplace.
9 I have two people who in April sold
10 businesses. When you sell a business, you'll have
11 often capital gain and 1231 gain on the same day
12 from the same transaction. And for these people I
13 suddenly -- after the regulations came out, they
14 did this before the regulations came out, I said,
15 oh, my gosh, they got 180 days from April 1st to
16 invest the capital gain and they can't invest the
17 1231 gain until, you know, December 31st at the
18 earliest. And it just didn't -- it doesn't work
19 in the real world of reinvesting capital
20 investment.
21 I think that I understand the issue of
22 1231 gain being netted against 1231 loss. If it's
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1 a negative number, it's an ordinary loss. If it's
2 a positive number, it's a capital gain. There is
3 an issue about splitting in there, but I think the
4 statute itself is very clear that it's the sale of
5 property, you know, the gain from the sale of
6 property to an unrelated party. It doesn't
7 distinguish between what kind of property it is.
8 We have identified it should be capital in nature,
9 but obviously, investment into capital assets,
10 which is what 1231 property is, is the kind of
11 capital we're talking about, redeploying capital
12 from other parts of the economy into the
13 opportunity zones.
14 And I think it makes all the sense in
15 the world to have the exact same rules match up as
16 between capital gain and under 1221 -- 1222 of the
17 code and the 1231 assets. And I think it's a very
18 reasonable statute. It seems to suggest that
19 there is -- on the issue of the splitting of the
20 capital -- of the 1231 gain and the 1231 loss,
21 there's a very clear provision in Code Section
22 1231(c), which I think, Mike, we've even talked
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1 about in the past, about treating the -- if you've
2 got a capital -- a 1231 loss, it carries forward
3 for five years. And it converts future 1231 gain
4 into ordinary gain and it's designed to match up.
5 And one of the things we have in our
6 suggestion, which I think is a very good one, is
7 to the extent that there's any possible
8 game-playing where you're sort of, you know,
9 rolling over a 1231 gain tax-free for seven years
10 and harvesting a loss, if we just extend it as one
11 of the elements of electing to have that benefit,
12 you know, extend the rule till 2026, so that when
13 you have to recapture your 1231 gain, I think,
14 again, we all agree if you have a 1231 gain being
15 reinvested, you recognize 1231 gain in December
16 31, 2026. I think that's logical. If you've got
17 sort of split losses, you had ordinary losses
18 you've claimed in the meantime, this would come
19 back as ordinary gain, and so there wouldn't be
20 any mischaracterization or game-playing.
21 There's only a timing issue, which is
22 what 1231 is all -- what the 2026 rule's about
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1 anyway, really, is a forbearance of the tax until,
2 you know, December 31, 2026. So I think that that
3 rule is solvable, and it's pretty necessary.
4 There's just a lot of transactions where people
5 are having, you know, capital gain and 1231 gain
6 the same day. And they really don't even have an
7 overlapping day in the year when they can invest
8 it into a single thing.
9 One other thing I'll teach you -- I'll
10 count as a teacher is people don't know the
11 difference between capital gain and 1231 gain.
12 They don't understand what really is the nuance
13 between them. If you have a -- there aren't that
14 many kinds of property that actually produce 1231
15 gain. Real estate does; tangible property almost
16 never does. When you're buying machinery it does
17 down in value, not up.
18 The only other kind of property you see
19 besides real estate that goes up in value is
20 typically intellectual property, patents and the
21 like. And I teach taxation of intellectual
22 property at BU and I can tell you that patents can
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1 be ordinary assets, capital assets, or 1231 assets
2 depending on who created them or how they're
3 acquired. And the fact that a patent can have all
4 three characterizations just bespeaks to the fact
5 that having complicated exchanges between 1231
6 property and 1221 capital assets strikes me as is
7 going to only cause creation.
8 People are going to make mistakes all
9 the time, and I'm not just talking about
10 taxpayers, I'm really talking about tax advisors,
11 tax professionals, who are at the moderate to low
12 to mid levels of practice aren't really going to
13 know the difference. So it doesn't make any sense
14 to have a distinction that's only going to cause
15 noncompliance on a massive scale.
16 So that's my thoughts on 1231. Let me
17 have Christina come on and comment on the vacant
18 land issues.
19 MS. RICE: Thanks, Jay. So I will be
20 representing the students in this class. I am
21 sort of a quasi-student myself, talking about the
22 vacant property.
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1 So the second set of proposed
2 regulations provided that vacant structures or
3 other tangible property other than land will
4 satisfy the original use requirement if the
5 properties have been vacant or abandoned for at
6 least five years. We agree that some quantifiable
7 minimum period of vacancy is necessary to prevent
8 potential abuse of this favorable guidance
9 allowing vacant property to qualify as original
10 use property. However, we believe an
11 uninterrupted period of five years is
12 unnecessarily long and that a shorter period of
13 one year is sufficient to achieve the anti-abuse
14 goals.
15 There is also a strong public policy
16 need to reduce this period. Cities and towns
17 across the U.S. have recognized the negative
18 impacts of vacant and abandoned properties,
19 including increases in crime and vandalism,
20 decreases in surrounding property values,
21 increased risk to health and welfare, and
22 escalating municipal government costs. We cite
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1 several studies in our report that have found a
2 correlation between the length of vacancy and
3 increased crime, decreased property values, and
4 higher municipal government costs. Local
5 government officials, community organizations, and
6 residents across the country recognize the value
7 in putting vacant land and abandoned properties
8 back into productive use as quickly as possible.
9 It's extremely doubtful that property
10 owners who held vacant property prior to
11 designation of zones in early 2018 intentionally
12 arranged a vacancy with any future tax incentive
13 in mind. We, therefore, recommend that Treasury
14 adopt a standard similar to that applicable to
15 enterprise zones, which states that if property is
16 vacant for at least a one-year period, including
17 the date of zone designation, use prior to that
18 period is disregarded for purposes of determining
19 original use.
20 For property that was not unused or
21 vacant before the designation of the tract as a
22 qualified opportunity zone, we anticipate that
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1 few, if any, property owners intentionally sought
2 to make otherwise productive properties vacant in
3 2018 or 2019 in expectation of favorable
4 treatment, especially in light of the proposed
5 five-year rule put forth by Treasury in the second
6 guidance. Therefore, we think a one-year rule is
7 also appropriate for property that became unused
8 or vacant after 2017.
9 To the extent that prospective one-year
10 rule provides an incentive to abandon property, it
11 will be mitigated by the reduction in tax benefits
12 for anyone waiting at least one year from the
13 issuance of final regulations to act on a vacancy
14 strategy. There is a tradeoff in policy
15 objectives in this case and we favor a policy that
16 helps rescue vacant buildings to the greatest
17 extent possible.
18 MR. DARBY:: Okay. And then as they say
19 on the TV game shows, this is the lightning round.
20 I've got quick comments.
21 Unimproved land, I thought you guys did
22 a great job; 162 is the exact right way to test
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1 whether it's being pulled in and used in a good
2 way. It's not being held as an investment asset,
3 it's being used.
4 A quick observation. You were concerned
5 about somebody buying agricultural property, you
6 know, growing grapes or whatever and doing the
7 exact same thing, you know, haven't really done
8 much to improve it. I agree with that, as well.
9 I think there's two things you could do
10 as an addendum. One is it has to be used in the
11 trader business and then either it has to be a
12 different trader business, meaning you're taking
13 flat farmland and turning into parking lots or
14 swimming pools or something else, or there's some
15 level of improvement. And you had a good
16 standard, it was improvements that are not
17 insignificant. I think you're probably having
18 some kind of safe harbor. It's a minimum of 20
19 percent, it's a safe harbor, but a facts and
20 circumstances test.
21 For people, as you pointed out, with
22 land in general, there's all kinds of reasons
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1 people acquire it and use it. Is this a bona fide
2 use to acquire it included into an overall
3 improvement to the community? I think that that
4 was extremely well handled. That's the only sort
5 of small tweak I'd make there.
6 On leasing rules, you nailed it. The
7 leasing rules are fabulous. The only thing I'd
8 comment there is that on the market rate lease,
9 you proposed a 42 standard. I wouldn't use 42 for
10 unrelated parties. As you pointed out about real
11 estate, there's a very diversified world out there
12 and if people are at arm's length negotiating a
13 lease relationship, it should be respected.
14 I did agree with you on the 12-month
15 minimum -- maximum on prepaid leases for related
16 parties and the other rule of related parties. I
17 thought all those rules plus the alternative
18 valuation method were just absolutely perfect.
19 On the trader business issue under 162,
20 I think you're wrestling with it like everybody
21 else is because 162 is the right standard for
22 trader business. The active conduct is a ringer
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1 for all of us. It gets pulled in out of 1397(c).
2 It isn't even in the O Zone Act anywhere. The
3 active trader business gets pulled in by reference
4 to 1397(c), which itself doesn't define what
5 active trader business is, just to start out,
6 making it as ridiculous as it could possibly be.
7 You got a range of stuff. It could be the very
8 low threshold of the new markets credit, which is
9 basically any effort to make a profit basically is
10 an active trader business. Go Zone has got a much
11 higher thing on -- I think triple net leasing is
12 really the -- where it is.
13 I think 162 is the standard. And we
14 look at the Hazard case the General Counsel
15 Memorandum 38799. And the IRS has acknowledged
16 it's a very low threshold to turn leasing plus a
17 little bit more into an active business for tax
18 purposes. And if that's where we end up, that's
19 okay. It's just that the issue of -- I'm sorry,
20 I've got to be quiet. The -- merely engaging in
21 triple net leasing has got everybody sort of
22 rattled that if you can't do triple net leasing,
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1 you've identified I think 162 as the standard. So
2 it's triple net leasing plus a little bit more.
3 That'd make the world turn in the leasing world.
4 Thank you very much for giving us the
5 time.
6 MS. BOLTON: Thank you. Any questions
7 for the panel?
8 MR. NOVEY: One quick question on the
9 1231 issue.
10 MR. DARBY:: Yes.
11 MR. NOVEY: One of the pain points, I
12 guess you would call it, that we've been hearing
13 about is that if the seven-year basis bump is
14 available only prior to 12-31-26, we were hearing
15 a lot of folks having only one day on which one
16 can make investments with respect to 1231 gain
17 deferral that would be available for the
18 seven-year benefit was pretty tight (inaudible).
19 Some of your predecessors at that podium have
20 suggested that the seven-year and five-year
21 benefits put appropriately within the statute
22 ought to be available beyond 2026, even though the
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1 deferral had ended.
2 To what extent would that relieve part
3 of the challenge of the 1231 timing question? And
4 it would relieve your concern about your capital
5 gains and 1231 being triggered on the same day,
6 but having the different 180-day period.
7 MR. DARBY:: Yeah. I don't really see
8 that as the driver of this issue. There's two
9 kinds of gains in this world: Capital gains and
10 1231 gains. And they're both gigantic amounts, in
11 the potentially trillions of dollars. And having
12 them have dramatically different rules -- and I
13 will guarantee you, people can't tell the
14 difference.
15 Ordinary taxpayers, forget it. Every
16 one of them told me they sold a capital asset and
17 it was real estate. Okay, depreciable real
18 estate, so it wasn't, it was 1231. And so I talk
19 to accountants, they got, oh, yeah, that's right.
20 You know, the accountants aren't even that sharp
21 on it. Okay? So we're going to have mistakes all
22 over the place.
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1 The logic of being able to treat them
2 consistently I think is in the statute is a sale
3 of property. They're both property sold by a
4 taxpayer to an unrelated party. So that's why I
5 really advocate. We're going to have a lot of
6 errors otherwise.
7 MR. NOVEY: So somebody who has a 1231
8 gain let's say in the first half of the year makes
9 the investment in the QOF within 180 days
10 (inaudible).
11 MR. DARBY:: Right.
12 MR. NOVEY: If it turns out when they're
13 filing their return that they don't have capital
14 -- that they have some 1231 losses and, therefore,
15 their net 1231 gain is less than what they had
16 thought they were going to have, they simply
17 cannot defer that much. They will end up with a
18 mixed investment and that's okay?
19 MR. DARBY:: No, I like having the 1231
20 gain be eligible because it says in the statute --
21 you had it exactly right on capital assets. When
22 you sell, then you have 180 days from the date of
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1 the sale, and that's just clear in the statute.
2 It's clear it's an asset-by-asset sale.
3 Same rule because they want to drive
4 capital into investments and opportunity zones.
5 It's already a slow enough train as it is. You
6 got 180 days, plus you got the QOF level plus the
7 QOZB level of 31 months. But, you know, being
8 able to invest it as quickly as people want to
9 after they have -- they recognize a gain event and
10 roll it over is the right way to start it rather
11 than pushing it as much as a year later.
12 And I think the logic of it is -- I'm
13 not so worried about the net. I mean, you net
14 capital gains and capital losses, and we're not
15 worried about the fact you may have, you know,
16 less capital gains at the end of the year than the
17 amount that you invest from a specific
18 disposition. Likewise with 1231, if you have a
19 1231 loss you can claim it. But, again, I'm
20 proposing, first of all, you've got a five-year
21 wait. Any capital -- any 1231 gain you recognize
22 for the next five years is converted to ordinary
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1 gain.
2 And I think it's entirely appropriate to
3 say if you have 1231 losses in a year when you
4 roll over 1231 gains, you know, you're effectively
5 instead of netting it and then rolling over the
6 lesser amount, just have it be recaptured as 1231
7 gain in 2026 and extend the loss rule. You know,
8 but by your election you agree to have the subject
9 of the loss recaptured under 1231(c) through
10 December 31, 2026. It all matches up. It really
11 does nicely.
12 MR. NOVEY: So your proposal basically
13 is that 1231 gains, you treat them the same as
14 capital gains.
15 MR. DARBY:: Exactly the same, including
16 the partnership --
17 MR. NOVEY: Regardless of whether or not
18 for that year there was only a penny of net loss
19 or net gain.
20 MR. DARBY:: That's right. And it
21 reconciles December 31, 2026. And if you've had
22 1231 losses and gotten ordinary losses, you'll
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1 recapture it as ordinary gain, which is exactly
2 what the 1231(c) rules do, which is fair. You've
3 got a deferral. They recognize a deferral
4 throughout the concept of the first of the three
5 tax benefits. And it comes back begin recaptured
6 in the right character at the right time. So I
7 think that'd be a fair rule for all concerned.
8 It'll drive deals. It really will make things
9 happen.
10 Thank you very, very much. Anything
11 else?
12 MR. NOVEY: Thank you.
13 MR. DARBY:: Good.
14 MS. BOLTON: No, I think we're good.
15 Thank you very much.
16 Our next speaker is John Lettieri from
17 EIG Opportunity Zones Coalition.
18 MR. LETTIERI: Good afternoon now. It
19 seems like just yesterday we were together on
20 Valentine's Day, so it's great to see everybody
21 again. Thanks for having me back.
22 My name's John Lettieri. I'm the
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1 president and co- founder of the Economic
2 Innovation Group, a bipartisan research and
3 advocacy organization. We were deeply involved in
4 the idea behind opportunity zones and worked
5 closely with the policymakers to get it passed, so
6 we have a deep interest in today's proceedings.
7 EIG also works with a broad coalition of
8 stakeholders around the country and it's that work
9 that's informed the detailed comment letter that
10 we submitted in response to the latest proposed
11 rules. I want to speak to some of those
12 recommendations here today. And one of the
13 casualties of being I think 15th in the lineup is
14 that it has all been said, so I'll try to skip
15 over pieces that are particularly redundant, but
16 also emphasize a few things that I think are
17 particularly important.
18 First, I just want to take a step back.
19 I think we've already seen the fact that
20 opportunities on this -- unique opportunity.
21 Let's overuse that word, to make progress in
22 expanding beneficial outcomes and economic
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1 activity for long- term residents around the
2 country. Even today, as we sit here without full
3 regulatory clarity, this policy's already
4 supporting investments as wide ranging as clean
5 energy investments, (inaudible) workforce housing,
6 manufacturing companies, agribusiness, food
7 start-ups, technology incubators and the list goes
8 on and on. And I think that speaks to some of the
9 potential of this policy, particularly once we
10 have regulatory clarity in a mature marketplace.
11 But also underscores why this proceeding is so
12 important because to one of the questions that was
13 asked earlier, if we want investment to go far and
14 wide around the map; if we want it to go to non-
15 traditional places; and if we want to go into
16 deals that are particularly difficult to execute,
17 the rules are going to have a lot to say about how
18 much risk investors are willing to take with
19 committing their capital over a 10-year period or
20 more.
21 Particularly, in areas that are
22 dis-invested and have a stroll with long-term
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1 decline. So, the work you do and are doing is
2 critical to expanding that of investment and
3 economic opportunity and we commend you on work
4 you've done so far.
5 So, as I mentioned, while the incentive
6 was designed to support a wide array of needs
7 across communities, we believe its central purpose
8 really was to facilitate investment in local
9 operating businesses. Particularly, new ventures
10 and small to medium-size local businesses in need
11 of growth. This central goal must be thoroughly
12 reflected in the final rulemaking in order for
13 opportunity zones to achieve the success that they
14 could achieve over the next decade.
15 To this end, a second round of proposed
16 regulations made enormous strides in addressing
17 key structural questions and definitional issues
18 particularly those related to operating business
19 investment that had been holding back the
20 formation of the opportunities known as
21 marketplace nationwide. So, our coalition
22 applauds the efforts of Treasury and the IRS to
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1 resolve a wide range of complex issues so that
2 opportunities can work as intended. For example,
3 the proposed safe harbor's for the gross income
4 test, the extension of the working capital safe
5 harbor provide much greater certainty for
6 operating businesses and will serve the underlying
7 goals of this statute quite well (inaudible).
8 However, I want to focus my comments on
9 areas we believe require additional clarification
10 of the final regulations, so I want to get
11 upfront, we were very pleased and thought that
12 second round did an exceptionally good job of
13 addressing the key questions. So, don't take
14 these comments as anything but, let's just narrow
15 the playing down to the issues we think really
16 require some additional attention. And because
17 the second tranche proposals covered so much
18 ground, most of the recommendations I'll make
19 today really amount to relatively small technical
20 clarifications or tweaks, minor refinements or
21 clarifications, but I hasten to add while
22 relatively minor in scope and complexity, these
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1 changes are nevertheless critical to the real
2 world success of this policy and the communities
3 depending on it.
4 First, I want to talk about the
5 Substantial Improvement Test. This is a central
6 feature, as you know of the opportunities on
7 statute. Now, its purpose is to ensure that
8 investments made under this incentive lead to new
9 value creation and new economic activity in the
10 designated areas. In the preamble, Treasury asked
11 for comments on the advantages and disadvantages
12 of applying this test on an aggregate rather than
13 asset-by-asset basis. As many others have already
14 commented, we believe the aggregate basis test
15 approach has many practical advantages and is
16 consistent with the meaning and purpose of the
17 statute. It is also consistent with the manner in
18 which business actually expand their operations in
19 the real world.
20 On the contrary, the asset-by-asset
21 approach is deeply impractical. We believe it
22 imposed massive and unnecessary compliance burdens
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1 and would reduce the economic benefits to the
2 designated communities by discouraging investment
3 in those local businesses. So, we believe
4 strongly that the final rule should adopt a
5 substantial improvement test on the aggregate
6 basis. This, perhaps, no more important --
7 unresolved issue to our minds to date than this
8 one. It will otherwise be nearly impossible to
9 operate businesses to satisfy substantial
10 improvement tests. So, we recommend two potential
11 safe harbors as have, I believe, the ABA and other
12 commenters in our comment letter that reflect a
13 real world utility of an aggregate basis test.
14 First, assets purchased as part of the
15 same investment decision and located within the
16 same track or contiguous tracks should be treated
17 as an aggregate asset for the substantial
18 improvement test. Second, for either operating
19 for real estate businesses, assets operated as an
20 integrated unit should be aggregated.
21 Next is time and flexibility. This is a
22 key issue for the practical application of this
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1 policy in terms of raising capital from investors
2 to pooling capital into qualifying investments and
3 returning capital to investors after exiting
4 investments held for 10 years or more. While the
5 six-month exemption period for newly received
6 capital included in MPRM, is a big step in the
7 right direction. We recommend extending the
8 six-month period to at least 12 months, which is
9 particularly important for the formation of
10 multi-asset funds. In the same vein, funds need
11 time to wind down and liquidate their investments
12 after 10 years and guidance should permit
13 opportunity funds sufficient time to do so without
14 facing the penalty for failure to meet the 90
15 percent asset test. We provide detailed
16 recommendations in our comment letter on how to do
17 this.
18 Next is non-qualifying property.
19 Clarity is needed regarding how to treat
20 non-qualifying property for the purposes of the 70
21 percent substantial threshold. For example, many
22 projects contain some modest amount of non-
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1 qualifying property, such as land or a structure
2 that was purchased before 2018, or purchased from
3 a related party, or a pre-acquisition development
4 cost incurred by a related party and capitalized
5 to the property. We do not believe that the
6 presence of non-qualifying property should taint
7 the entire project, but rather should be treated
8 as a separate asset for the purposes of the
9 substantially held threshold. In addition, if
10 property is overwhelmingly improved, we support
11 treating it as entirely new originally used
12 property. In our comment letter, we discuss a
13 potential 80/20 standard and safeguards for
14 achieving this.
15 Next is the working capital safe harbor.
16 Our coalition has supported the regulations
17 expansion of the 31- month working capital safe
18 harbor to include activities related to the
19 development of a trader business. We raise two
20 issues in our comment letter that we urge you to
21 consider with respect to this safe harbor.
22 First, the extension provided for delays
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1 related to governmental action is welcomed, but
2 should be broadened further to provide relief for
3 other events beyond the business' control, such as
4 natural disasters, delays in obtaining permitting
5 or licenses, supply shortages and so on. Second,
6 we ask the Treasury to clarify in the final
7 regulations in an active trader business, need not
8 exist at the end of the first 31-month safe
9 harbor, but rather as long as the quas-business is
10 making progress towards the active trader business
11 and is still within the safe harbor, it satisfies
12 the requirements outlined in the statute.
13 I'm going to skip over 1231 again
14 because I associated myself with everybody else's
15 comments on this. It's a big issue, it's a big
16 concern and we hope that you'll take a close look
17 at that.
18 Look, next, we want to look at
19 quas-business subsidiary sales. We applaud the
20 proposed regulations providing clarity on the
21 ability to exit opportunity fund investments after
22 10 years, either by selling opportunity fund
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1 interests or assets. However, the additional
2 clarity is needed for the assets sold by the lower
3 tier opportunities' own business. We suggest
4 extending both the role permitting the sales of
5 assets by the opportunity fund and the rule
6 protecting against hot asset treatment to assets
7 held by the lower tier opportunities' own
8 business. In addition, we have strongly agreed on
9 the need for the proposed rules to permit reliance
10 on the exit rules. This is a big issue that is
11 holding back formation of multi-asset funds.
12 Lastly, I want to report on two things,
13 reporting requirements and anti-abuse rules.
14 Well, not the scope of the MPR under question
15 today, I want to note that we appreciated
16 Treasury's issuance of a clarifying reporting
17 requirement and urge the adoption of data
18 collection framework to govern opportunity fund
19 investments and to track those over time. We
20 believe such reporting requirements are essential
21 in preserving the integrity and demonstrating the
22 efficacy of opportunities on the coming decade of
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1 the (inaudible). And lastly, we support the use
2 of broad anti-abuse rules to ensure the integrity
3 of the emerging opportunities on this market and
4 note that these rules should be sufficiently clear
5 so as not to discourage real economic investment
6 of low-income communities. Our comment letter
7 includes several recommendations to curb abuse
8 while providing clarity to investors that they are
9 in compliance.
10 For example, we believe that final
11 regulation should require that a greater
12 percentage, 90 percent, of the tangible property
13 owned or leased by a real property quas-business
14 must either be located within an opportunity zone
15 or contiguous to an opportunity zone. This 90
16 percent threshold would be in addition to the 70
17 percent asset test which would remain otherwise
18 unchanged for all purposes of the section. And
19 this would help ensure that the economic activity
20 of real estate businesses is truly benefitting the
21 opportunities on its surrounding area.
22 So, in conclusion, our coalition
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1 recognizes and appreciates the hard work of the
2 IRS and Treasury in establishing a regulatory
3 framework for this nation's policy and look
4 forward to answering your questions.
5 MS. BOLTON: Thanks very much. Next up,
6 we have Mark Troppe from the State Economic
7 Development Center.
8 MR. TROPPE: Good afternoon and thank
9 you for the opportunity to testify today. My name
10 is Mark Troppe. I work with the Center for
11 Regional Economic Competitiveness in Arlington,
12 Virginia. And I'm here representing the State
13 Economic Development Executives Network where the
14 S-E-E-D, the SEED Network. The Network is made up
15 of stop state economic development leaders from
16 across the country who gather on a bipartisan
17 basis to discuss issues of mutual interest and it
18 won't surprise you one bit to hear that they're
19 very interested as one of their top priorities in
20 learning about and being involved in and engaging
21 their states in the opportunities that come with
22 opportunity zones.
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1 At your February hearing, the SEED
2 network was represented by Stefan Pryor who was
3 from Rhode Island, the Secretary of Commerce and
4 Kurt Foreman, the president and CEO of the
5 Delaware Prosperity Partnership. The SEED Network
6 did submit a letter commenting on the second
7 tranche of proposed guidance. It was signed by 16
8 state economic development directors and today,
9 I'll summarize some of the comments that were
10 submitted and going number 16, on the day it
11 really does feel like some of this is going to be
12 repetitive, but I'll -- I want to make sure to
13 emphasize these five points in particular that
14 they thought were especially important. And I
15 want to add that while some of the SEED Network's
16 membership had the privilege to select opportunity
17 zones in their respective states and others had
18 inherited the zones from a prior Administration,
19 all of them are equally and actively, eagerly
20 engaged in working on operationalizing opportunity
21 zone program.
22 In the main, we would like to express
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1 today the Network's hope for changes that enable
2 the program to serve both real estate development
3 and the fostering of operating businesses and a
4 number of other folks have stressed that point in
5 particular. It's critical to make sure we -- that
6 the regulations support, track investment to both.
7 So, the five main points that we wanted to convey.
8 Number one, the rule should provide
9 additional flexibility in determining the
10 substantial improvement requirement has been met
11 through applying the requirement on an aggregate
12 basis. The preamble in the proposed regs provide
13 that the requirement is determined on an
14 asset-by-asset basis. The determination of the
15 requirement on an asset-by-asset basis rather than
16 aggregated by especially burden operating
17 businesses. And this could make the ozone
18 investment process difficult in ways that were not
19 necessarily intended. We encourage that the
20 substantial improvement requirement be applied on
21 an aggregate basis rather than asset-by-asset
22 basis with respect to operating businesses which
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1 we expect will decrease the burden for those
2 operating businesses.
3 Number two, the rule should provide
4 sufficient flexibility for opportunity funds to
5 reinvest in interim gains in qualified opportunity
6 zone property in a timely manner without incurring
7 a penalty or trigging a taxable event. The
8 proposed regs provide that the proceeds from the
9 sale of qualified opportunity zoned property that
10 generates gains may then be reinvested, but the
11 gains subjected to income tax and while we
12 understand that the regs indicated the IRS doesn't
13 have the regulatory authority to exempt those
14 gains, we strongly encourage revisiting the issue.
15 Because we're concerned, the main concern that
16 preventing opportunity funds from reinvesting
17 capital proceeds from the sale of qualified stock
18 and partnership interest without triggering a
19 taxable event would reduce the incentive for
20 opportunity funds to invest in operate businesses
21 specifically.
22 Under the draft regs, the incentive for
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1 opportunity funds to invest in operating
2 businesses could be diminished due to the taxation
3 of those interim gains even if the gains are
4 reinvested into qualifying ozone properties. And
5 some states have noted from among our members that
6 the current regulations' treatment of interim
7 gains as significantly curtailed interests in
8 their states in investment and operating
9 businesses when compared to interest that's being
10 expressed and shown in real estate investment.
11 This topic was raised by the Network in
12 previous comments. We believe that the regulation
13 should reflect the kind of basis investment
14 practices where a diverse portfolio of investments
15 is wise. There's an ebb and flow to the
16 investment. We're particularly concerned that
17 opportunity funds be given the ability to reinvest
18 capital proceeds from the sale of qualified stock
19 in partnership interests in the ozone businesses
20 without triggering a taxable event. Future regs
21 or modifications to the regs could provide further
22 flexibility for opportunity funds to reinvest
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1 interim gains in qualified ozone property in a
2 timely manner without subjecting to income tax on
3 such gains.
4 Number three, the rule should provide
5 sufficient flexibility for new opportunity funds
6 to meet the requirements of the 90 percent asset
7 requirement. Allowing recently contributed
8 property a minimum of 12 months before it counts
9 against the 90 percent asset; would provide
10 additional flexibility for funds to thoughtfully
11 establish their investment portfolios. And under
12 the proposed rules and opportunity to finally
13 apply the 90 percent asset requirement without
14 considering any investment received in the
15 preceding six months.
16 In practice, this means that a fund has
17 a minimum of six and a maximum of 12 months to
18 deploy new capital raised before being subjected
19 to a possible penalty for failure to satisfy the
20 requirement. In a typical investment timeline, it
21 takes the fund a minimum of 18 to 30 months to
22 raise capital for investors and to appropriately
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1 deploy it across the balance portfolio.
2 So, the network is very grateful that
3 the most recent tranche of regulatory guidance
4 provides a degree of flexibility with respect to
5 cash held by an opportunity fund regarding the
6 90-day 90 percent requirement as well as the
7 flexibility that the 31-month working capital safe
8 harbor provides as well. However, as we stated in
9 earlier comments, we recommend a change to allow a
10 minimum of 12 months for investments to be made
11 before incurring a penalty under the 90 percent
12 asset requirement and we ask that you consider
13 extending the option to disregard recently
14 contributed property to contributions or exchanges
15 that occurred not more than 12 months before the
16 test from which it is being excluded, rather than
17 the six months in the current regs, establishing a
18 minimum of 12 months for those investments to be
19 made. While the working capital safe harbor is
20 beneficial to newly established funds, the
21 suggested change would also afford multi-asset
22 funds additional flexibility and allow for a more
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1 realistic investment timeline for the funds.
2 Number four, the rule should encourage,
3 but un- intrusive public reporting requirements
4 for COIF. And due to the unique aspects of the
5 program, it's important to track the efficacy of
6 opportunity zones and identify areas of
7 improvements and modification for the future. So,
8 we suggest that opportunity funds be required to
9 provide a set of simple information, enough to
10 give the public confidence about the initiatives.
11 We encourage the adoption of some simple reporting
12 requirements to collect data on funds and their
13 investments. In our December, 2018 letter, we
14 proposed that they be required to report at least
15 on the specific opportunity zones in which there
16 is capital deployed, the amount of capital
17 deployed; the eventual appreciation of that
18 capital. Beyond that, we're very interested in
19 the RFI process and the responses that come
20 forward in that and we look forward to some of the
21 insights that those responses may provide.
22 Last, but not least, under additional
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1 opportunities, one issue that we did not address
2 in our written comments, but some states have more
3 recently raised as a potential area for
4 improvement, and I know there's many other groups
5 that have also submitted written comments to focus
6 on how the regulations could better encourage
7 affordable housing development. And while the
8 Network has not recommended specific regulatory
9 changes, we support creative approaches that would
10 enable investments in affordable housing projects
11 and make it easier for opportunity funds to invest
12 in LITEC projects. Some states have expressed
13 concerns that there may be issues with the regs
14 around compatibility with the development of
15 low-income housing, so the SEED network would
16 encourage you to explore this and we would be very
17 interested in having further dialogue with you on
18 that particular topic.
19 In closing, defenses tracks were
20 selected because they are, in many case,
21 struggling. Facing challenges in attracting
22 investment, is extremely important to the network
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1 that we recognize that the important -- that the
2 purpose of the program is to attract investment.
3 Both for real estate and for operating businesses
4 and that the regulations support both purposes and
5 we really appreciate the progress that we've seen
6 in the subsequent versions of the regs and
7 appreciate the opportunity to share the thoughts
8 of our networks with you here today.
9 MS. BOLTON: Great. Any questions?
10 MR. NOVEY: One. What were two of the
11 limitations do you see that we should address in
12 election pairing deals on incentives --
13 MR. TROPPE: LITEC, so this is an issue
14 that has just come to our attention in recent days
15 and I would be happy to talk with the members in
16 the states that have expressed those concerns to
17 come back with some specific items. I noticed you
18 raised that earlier today, so we'll check with
19 some of our members and get back to you on that.
20 MR. NOVEY: Okay. Thanks.
21 MR. RIMMKE: You had mentioned that you
22 were looking on the 90 percent asset on the
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1 initial testing date going from six months to 12
2 months, but then I think you also said, or at
3 least I wrote down that it takes an average of
4 between 30 months to actually deploy capital in
5 many cases. Is 12 months going to be sufficient,
6 or just like increment how (inaudible) working
7 capital would that be sufficient?
8 MR. TROPPE: Good question. Yeah, I
9 don't know. I -- our members expressed the
10 concern that 12 months would be more -- the
11 sentiment that 12 months would be certainly more
12 workable than what we have now. Will it be
13 sufficient? We didn't broach that. I'd be happy
14 to get feedback on that point as well.
15 MS. BOLTON: Great, thank you.
16 MR. TROPPE: Thank you.
17 MS. BOLTON: Thank you very much. Okay,
18 number 17, Clayton Wyatt of the Alliant Asset
19 Management.
20 MR. WYATT: Afternoon. Something about
21 being in an auditorium with no cell service for
22 five hours with all you. I feel like I know you
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1 all better. So we're happen to be here. My
2 name's Clayton Wyatt. I'm chief capital officer
3 of the Alliant Companies and our affiliate is
4 Alliance Strategic Investments and our partner
5 Eddie Lauren is here. We've been following this
6 legislation very closely as part of the EIG Group
7 and the Novagratic Working Group and so we echo
8 those statements that were given earlier and I'll
9 keep this very quick because I know we're very
10 close to being done here.
11 There was a couple of things that we
12 just wanted to highlight. And a quick background
13 on Alliant. We're a 20 year plus tax credit
14 syndicator, so we've been in the lytic business as
15 an assets manager, developer, fund manager, and
16 now in these preservation funds, and the funds in
17 the opportunity zones are of particular interest.
18 So we actually, I think, had done the first, if
19 not one of the first tax credit ozone deals which
20 was done in Florida with a bank we were lucky
21 enough to have an investor partner in Sun Trust
22 that had an episodic gain from a division that
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1 they had sold. So they had a capital gain that
2 they could put in and we actually structured it.
3 We don't see that as the norm, and unfortunately,
4 in the regs, you know, the type of gains that
5 these banks are going to have are not going to
6 qualify for investment.
7 So I know there was a couple options
8 that were given earlier and some ideas. We'd love
9 to, you know, converse a little bit more on ideas
10 on how to attract things and because I do think
11 that it's a big miss if we don't have banks that
12 are interested in investing in these areas. So
13 one of those areas I wanted to hit I know it's not
14 necessarily in the purveyance here or in the scope
15 of what you guys can do, but the CRA credit. If
16 there was a way to attract these banks in by
17 giving them CRA credit in these areas. I think
18 that would go very far to helping to attract more
19 capital into this space.
20 So the other two items that I wanted to
21 cover was on impact reporting and then on the
22 substantial improvement test. Again, you know, I
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1 think this has been covered generally here, but
2 one of the things that we really feel strongly
3 about as an affordable housing developer and a tax
4 credit syndicator is that one of the most
5 impactful investments you can make is to give
6 residents in these areas a safe, a clean, you
7 know, place to live that they can afford.
8 And so as part of that I think that
9 requiring, you know, some sort of reporting at a
10 project level would be very helpful which should
11 include things like the address, the number of
12 units that were created at an affordable level,
13 population served, and the average incomes of the
14 residents that occupy those units.
15 As far as the, you know, drawing the
16 banks and, again, I think as I mentioned under
17 CRA, you know, banks have been a driving force in
18 the tax credit housing space and, unfortunately,
19 we don't see them coming into this space in scale.
20 That's going to be episodic investment, so I think
21 if we can figure out, you know, again, this isn't
22 a letter to you guys, but being able to get that
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1 CRA credit would go a long ways.
2 And then lastly just to hit the
3 substantial improvement test as it relates to
4 existing multi-family housing it's been very
5 difficult, as you would imagine, to substantially
6 improve an existing property. And, unfortunately,
7 that's a lot to the product that actually needs
8 some of the improvement. These are, you know, old
9 buildings that have a high occupancy. And even
10 though you could come in and do a very large
11 improvement you're not going to probably spend 100
12 percent of what you bought these products for.
13 So if there was a way to under the
14 change of use rule to figure out that you could
15 take an unrestricted multi- family housing project
16 and change the use by putting in use restriction
17 on that property, and you could do that through
18 the form of a land use restriction. So if you
19 could have a lura and, again, this is done --
20 negotiated state and local levels, but if there
21 was a template for that nationally that could come
22 "off the shelf" and we could apply that to
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1 existing unrestricted properties and under the
2 statute and the definition of change of use
3 restrict the use on that property, and then you
4 wouldn't have to spend 100 percent of the property
5 that you purchased.
6 I think you could create and preserve a
7 lot more units in these areas. I echo the
8 statement about the aggregate test on substantial
9 improvement. There's definitely opportunities
10 where you go buy a property with some adjacent
11 land and put a new building on that land and
12 operate those two buildings as one unit and
13 qualify the aggregate test, but being able to do
14 something a little more creative where we can take
15 the existing housing stock where you don't want to
16 remove tenants in a building for five years, or
17 even one year to qualify that would really open up
18 what we call this naturally occurring affordable
19 housing or NOAH so that we could use the existing
20 housing stock that we have. I'll stop there if
21 there's any questions.
22 MS. BOLTON: Any questions?
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1 MR. NOVEY: In terms of attracting ozone
2 investment by having a CRA (inaudible) very, very
3 little opportunity. So are you talking about
4 investing in CRA even if (inaudible).
5 MR. WYATT: Correct. So, you know, as
6 you may know as a tax credit syndicator we have
7 economic funds and we have CRA driven funds, and
8 so we see that banks will invest for that CRA
9 need, particularly in certain areas where it's
10 difficult for them to get that requirement met.
11 So if there was a -- and, again, I would go back
12 to this land use restriction. If we could have a
13 template that was off the shelf so if you say
14 you're creating housing in these areas and maybe
15 you're serving 60 to 120 percent of AMI and you
16 have this use restriction that would meet the, you
17 know, the regulators' threshold I truly believe
18 banks would invest just for that, without getting
19 the benefit of the OZ incentives they would invest
20 to meet the need of their CRA requirement.
21 MR. NOVEY: I see, so you aren't
22 suggesting that somehow we find some subset of
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1 banks gain from sales of debt which would you say
2 for this purpose be treated as a capital gain?
3 MR. WYATT: I mean, listen, if there's a
4 way to do that it absolutely would help. I think
5 this could be an easier way to do that that might
6 be lowering it for --
7 MR. NOVEY: But we can't control CRA.
8 MR. WYATT: Agree, but you asked the
9 question.
10 MR. NOVEY: Okay. Fair enough. Fair
11 enough.
12 MS. BOLTON: Just real quick on your
13 issue of unrestricted versus restricted use. I
14 mean, my thought was always that we could deal
15 with this at a lower local that they would be
16 doing for zoning, but what you're asking is for a
17 national level?
18 MR. WYATT: Yeah. The problem that
19 we've seen and we've taken existing properties.
20 We're working on one here in the D.C. area where
21 we're trying to put a use restriction on a
22 building and that helps, you know, from our
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1 investor base, help for a number of things, for
2 our impact, you know, mission. But it's hard to
3 negotiate on a one off basis what that use
4 restriction is. And so, again, having this
5 generic template that banks would have confidence
6 in knowing that if this template is set on this
7 building it's just efficient, it's quicker, it's
8 easier. It just becomes a standard. There's a
9 lot of those things that we'd know early.
10 You've seen investors that are hesitant
11 to invest because there is no standard. There's a
12 lot of uncertainty. Eliminate some of that
13 uncertainty with a standard that can be duplicated
14 and used all the time.
15 MS. BOLTON: Anybody else?
16 MR. WYATT: Great. Thanks.
17 MS. BOLTON: All right. Thank you very
18 much. Last, but not least, Julia Gordon from the
19 National Community Stabilization Trust.
20 MS. GORDON: Hi. Good afternoon. Thank
21 you so much for the opportunity to testify today
22 and it is sort of fitting that I go last because
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1 I'm going to talk about the thing that is either
2 last or non-present in conversations about
3 opportunity zones which is single family
4 residential housing, particularly in the home
5 ownership context.
6 My organization, the National Community
7 Stabilization Trust focuses exclusively on single
8 family residential properties in distressed
9 neighborhoods nationally with an enormous amount
10 of overlap with opportunity zones. We've been
11 doing this for ten years. During that time we
12 have facilitated that transfer of 26,000 vacant
13 residential properties and put them back into
14 productive use, mostly for home ownership, some
15 for affordable rental. So that's where we're
16 coming from.
17 Typically when I testify I, like many of
18 the folks you've heard of today, am a subject
19 matter expert and I can talk statutes and regs
20 with anybody. I come to you today to say I have
21 no idea what I'm talking about. I don't do
22 lytech. We don't have any tax credits, you know,
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1 beyond, I guess the mid which doesn't really apply
2 to the affordable folks that we deal with. We
3 don't have a tax credit program that helps us
4 finance the acquisition and rehab of these
5 properties.
6 When we saw opportunity zones happen it
7 was not a conversation we had been in previously,
8 and it is a conversation that's taking us a long
9 time to figure out how to break into. But we are
10 hoping two things, first, we would love to find a
11 way for these funds to provide the kind of
12 well-priced capital to our developers that make
13 the difference between being able to do this rehab
14 and not do this rehab. But if we can't achieve
15 that we want to advance the principle of first do
16 no harm.
17 So I want to speak a little bit to some
18 of what we're already seeing as what may be some
19 unintended consequences of the opportunity zones
20 program. We are seeing, basically, a speculative
21 land grab in opportunity zones, and we are seeing
22 that that is not confined only to either
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1 commercial or multi-family rental properties.
2 We're seeing it in the single family context too.
3 If you look at Zillow prices you'll see that in
4 opportunity zones you've seen something like a 20
5 percent rise in home values or, you know, Zillow
6 generated home values, for what it's worth, in
7 those neighborhoods.
8 We hear from our local partners, we have
9 local partners all over the country, community
10 development corporations, folks like that. We
11 hear from our local partners that they're seeing
12 new behavior in opportunity zones. For example,
13 they're seeing tax lien holder foreclose on these
14 liens at unprecedented rates within an opportunity
15 zone when that behavior isn't changing outside the
16 opportunity zone. So we are a little bit on alert
17 about this whole thing.
18 Something that may not be that familiar
19 to you because it's not what you do every day is
20 that since the financial crisis in 2008 not only
21 did we see close to 10 million home foreclosures
22 on families, but the vast majority of those
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1 properties have never become reoccupied by an
2 owner occupant. They have transformed into single
3 family rental properties. The single family
4 rental industry has become turbo charged in the
5 last decade. It's being helped along, you know,
6 not only by the fact of all of these foreclosures
7 and the availability of those properties in, sort
8 of, the normal course of business events, but by
9 massive sales of pools of distressed mortgages, by
10 FHA, Fannie Mae and Freddie Mac, by technology
11 advances that have enabled investors to purchase
12 residential properties without ever seeing them,
13 and without living anywhere near them. You can
14 have, you know, I can tell you stories about
15 people with laptops in China buying properties
16 from the Detroit land bank and then they find
17 someone to go look at the property and they're
18 like can we give it back?
19 So this is really threatening to us.
20 Everything that folks are trying to do to try to
21 advance the interests of affordable home
22 ownership. I don't need to tell the folks here
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1 that home ownership and the extent of home
2 ownership in the neighborhood can often be the
3 difference between successful revitalization
4 versus, kind of, predatory and displacement
5 oriented gentrification.
6 And I think if what we're really trying
7 to do is to provide the kind of public benefits to
8 these neighborhoods that we're talking about in
9 this program we have to be very mindful of any
10 effects on the single family market and anything
11 we do that makes it far easier to deploy these
12 properties as rental, rather than home ownership,
13 and anything that undermines the requirement to
14 properly rehab these properties. It is a little
15 known fact that most vacant single family
16 residential properties are not so called zombie
17 foreclosures stuck in the foreclosure process.
18 That only accounts for maybe 2 percent of them.
19 The rest are investor held properties, something
20 they're rented out, something they're just sitting
21 vacant.
22 So I'm going to talk about two specific
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1 things related to the rule. And, again, I
2 apologize that this really isn't an area where I'm
3 a subject matter expert. First, vacancy. A
4 number of folks have addressed this today and I'm
5 going to address it as someone who is dealing with
6 vacant properties every single day.
7 The first thing is we need a definition
8 of vacancy. We have problems all the time in the
9 work we do because of the multiple definitions of
10 vacancy out there. The census, the United States
11 Postal Service, Fannie Mae, Freddie Mac, pretty
12 much every municipality, and pretty much every
13 other lender out there has a different definition
14 of vacancy. And this can cause a lot of problems,
15 especially when it comes to property preservation
16 and maintenance. And it certainly could cause
17 problems with respect to basing an exemption of
18 substantial improvement on vacancy.
19 Another terminology topic that I wanted
20 to cover is the term land banking. You've used
21 that term with respect to unimproved land to mean
22 kind of the, you know, acquisition of land with,
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1 sort of, no intention to do anything in
2 particular. I do want to note that land banking
3 has really become a term of art in the last decade
4 with the municipal land banking movement. Land
5 banking is now really a process or policy by which
6 local governments acquire surplus properties and
7 convert them to productive use or hold them for
8 long term strategic purposes. This is a public
9 purpose organization and we don't really want to
10 see the term land banking associated with a
11 behavior that we're more likely to describe as
12 warehousing or even squatting or, you know,
13 whatever. So I just wanted to make that point.
14 In terms of the number of years a
15 property should be vacant before it's eligible for
16 the exemption. If the property -- everybody has
17 already made this point. There is nothing worse
18 for a community than a vacant property. Nothing.
19 You know, the problems that come along with
20 vacancy are legion, so for a property that was
21 vacant prior to the opportunity zones program I
22 don't see any need for any period at all. That
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1 property should be able to be put back into
2 productive use.
3 Similarly, in the single family context
4 and only in the single family context after a
5 property goes through foreclosure it should be
6 able to be eligible immediately. On the other
7 hand, since what we have in many of these
8 neighborhoods are hundreds, thousands, you know,
9 hundreds of thousands collectively single family
10 homes held by investors that have done nothing to
11 improve these properties and really have just
12 become slum lords. These are investors who will
13 have absolutely no qualms about kicking out their
14 tenant so they can sit around and wait for a
15 period of years before they get the exemption.
16 I'm a little concerned that the five
17 years is both too long and too short. You don't
18 ever want to say out loud in a reg that something
19 should be vacant for five years for any purpose.
20 Because vacancy for five years is just, frankly, a
21 disaster. It may be that, again, I can only speak
22 for single family and the situation is very
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1 different for apartment buildings, for larger
2 buildings that if you have a property that's being
3 rented out like that it is highly likely it is
4 need of the kind of investment where you really
5 want to see substantial improvement in that
6 property, and you may not want to exempt it at
7 all. So, again, just for single family I'm going
8 to put that out there.
9 The last thing I want to say because
10 this is not my area of expertise, but we would
11 like to see these funds to be able to be used for
12 for-sale development. You've already put -- you
13 know, you have the 12-month recycling ability now,
14 but that doesn't necessarily cover all of the
15 taxable events that occur if you're running a
16 business that's rehabbing and selling
17 single-family residential properties.
18 We would suggest that there be -- that
19 you consider having a section of the reg that
20 specifically addresses single family, because lots
21 of these issues, you're kind of putting, you know,
22 a square peg in a round hole when you're trying to
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1 talk about either vacancy or reinvestment periods,
2 or the amount of time it takes either to deploy
3 capital or to actually do the rehab, completely
4 different for a single family than for a
5 multi-family. So I don't -- you know, I will be
6 happy to work with you on that as well.
7 I'm running out of time, but I did wait
8 a long day, so I will just -- my last point is, I
9 just want to underscore what everybody said about
10 the importance of data collection.
11 You know, I have data that I've
12 collected on 26,000 properties from hundreds of
13 different single-family developers. It has been
14 an enormously useful database for developing other
15 statutory and other proposals related to single
16 family. It is imperative that you collect,
17 assemble, track and disclose at least some minimum
18 set of data.
19 I agree that the CDFI Fund may be the
20 appropriate entity with the capacity to do this,
21 and they could probably do it with information
22 that is largely already being collected by the
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1 Funds and just needs to be reported.
2 Thank you so much for this opportunity
3 to speak.
4 MS. BOLTON: Thank you. Do we have any
5 questions?
6 MR. NOVEY: Just one. Which definition
7 of vacancy, or vacant would you recommend that we
8 adopt because there are several in terms of
9 (inaudible)?
10 MS. GORDON: So, I'll be honest with
11 you, it doesn't matter that much, you just have to
12 have a definition. The Postal Service definition
13 is very expansive and includes vacancy, you know,
14 it might be -- and this is true for the census
15 too, it might be vacant because somebody is on
16 vacation, or on some kind of long-term medical
17 care situation.
18 So, it has be to be a vacancy definition
19 that's really oriented toward -- what we're
20 thinking of right now is vacancy when we talk
21 about it, you know, I always think that Fannie and
22 Freddie definitions are good ones, because they
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1 really cover so much of the industry. But again
2 what matters more is to have an agreed-upon
3 definition than particularly which one it is.
4 MS. BOLTON: All right, thank you very
5 much.
6 MS. GORDON: All right. Thanks so much.
7 MS. BOLTON: So, this concludes our
8 formal presentations. What we usually do in
9 public hearings, is we allow anybody else who
10 wants to speak, who has anything to say, they can
11 say it now.
12 MR. CRNKOVICH: Including one of the
13 opposites.
14 MR. HAWKINS: So, as Mike just mentioned
15 -- my name is Shay Hawkins. I was one of the
16 drafters of the Opportunity Zone Provision and Tax
17 Reform that was based on the bipartisan Investing
18 in Opportunity Act, which brought us all here
19 today.
20 I'm here today in my capacity as
21 President and CEO of the Opportunity Funds
22 Association. We work with funds, investors and
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1 entrepreneurs to abdicate for reasonable
2 expansions, the ultimate extension and
3 preservation of the Opportunity Zone Provision.
4 And, you know, in my former role I had a
5 good view towards congressional intent behind the
6 program, and the intent was to get as much capital
7 in the 8700 distressed census tracts is possible,
8 and have as many investors and a range of
9 different type of investors, as many
10 entrepreneurs, a broad range of entrepreneurs are
11 able to utilize this policy and benefit from it,
12 as possible.
13 So, we want that far-reaching,
14 far-ranging utilization was really key to rest my
15 (inaudible) on this. And so as an example, you
16 know, there may have been -- been brought today,
17 our association just like the other 200 people in
18 the room were all part of the EIG's Coalition, so
19 we echo a lot of what's been mentioned today, but
20 I want to emphasize just as an example the -- you
21 know, the aggregation versus the asset-by-asset
22 substantial improvement standard.
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1 You know, I think that's a great example
2 of if we hold to the aggregation standard that
3 will bring in that broader range of entrepreneur,
4 the broader range of business types that will
5 utilize the policy, and a broader range of
6 investment frankly that can ultimately get
7 involved. And so, I'd like to hold that out as an
8 example.
9 And finally, you know, I'd just like to
10 thank Julie, and Mike, and your teams, I'd like to
11 thank you for everything you guys have done in
12 terms of the implementation thus far. But then
13 even beyond that, I wanted just to express
14 appreciation the past year, and that we were, and
15 in this year, and both an example of how seriously
16 you take this process, how seriously you take this
17 critical, critical policy, and how seriously you
18 take those of us, who've taken the time to come
19 here and testify today.
20 So I just want to express our
21 appreciation. And anything you need from our
22 association, and anything you need from the rest
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1 of us in the group, just let us know, because we
2 are here to make sure this policy works for the
3 people.
4 MR. NOVEY: Thank you.
5 MS. BOLTON: All right. Thank you very
6 much, Shay. Anybody else?
7 SPEAKER: Yes.
8 MS. BOLTON: Go ahead, right here.
9 MR. LORIN: Hello. My name is Eddie
10 Lorin, and I just want to emphasize one thing
11 that, I got involved in the EIG and, you know, the
12 Relic Coalition, for one reason. Primarily a
13 rehabber of apartments, currently take like and
14 make like. The problem with this legislation from
15 day one, is that this 100 percent test is going to
16 do the opposite of what I believe this legislation
17 was intended to do.
18 If we can do what Clayton suggested, if
19 we're going to change the use, and I got this idea
20 over dinner with (inaudible), so this is something
21 I've been milling over, and trying to figure out
22 how to make this work for almost a-year-
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1 and-a-half.
2 If we can take the same regulation
3 interpretation of a change of use from vacant to
4 operational, and take that change of use from an
5 unrestricted property to a restricted property
6 with some form of (inaudible), which has to be
7 off- the-shelf, because it's not so easy to come
8 up with a template to create affordable housing.
9 But there's millions and millions of
10 units that are going to continue to atrophy as the
11 brand new buildings are built next door, because
12 of the way this legislation is set up.
13 So, I strongly beg you to please
14 consider the change of use from an unrestricted to
15 restricted affordable housing so we can take those
16 millions of units that are getting atrophy, and
17 transform them into a good product.
18 Because if you can buy it, let's say in
19 a major urban area at 200 a door, and you're
20 building at 500 a door, what makes more sense?
21 Well, that all makes more sense, but we still need
22 to preserve that existing stock, or that stock is
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1 going to, again, just dilapidate.
2 And my suggestion is 20 percent. If you
3 change the use from an unrestricted to restricted
4 affordable housing, and you spend 20 percent of
5 the capital on renovations that should suffice as
6 a safe harbor for affordable housing.
7 Let's that the example of in D.C., you
8 can buy something for let's say 200 a door, old
9 product -- the best- case scenario is 40 a door,
10 is going to be the equivalent of your appraisal on
11 your land.
12 So, now you're stuck with 160 a door, so
13 20 percent of that would be 32,000 a door, very
14 significant renovation. But certainly you're
15 never going to spend 160 a door, never. And that
16 property will sit there and over the years will
17 atrophy and become more blinded because there's no
18 incentive to rehab.
19 So, sorry to bang this drum so hard, but
20 I think it's critical that people realize this
21 legislation may backfire for that very reason.
22 Thanks.
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1 MS. BOLTON: Thank you.
2 MS. HARRINGTON: Hi. My name is Ashley
3 Harrington. I'm the Director of Social Justice at
4 UNCF, the United Negro College Fund. We are the
5 largest provider of -- the private provider of
6 scholarships in this country, and we also
7 represent 37 of the private historical Black
8 colleges and universities in this country.
9 We got into this discussion, and we were
10 interested in this work because half of our
11 institutions are located in Opportunity Zones, and
12 these are institutions that have been historically
13 underfunded, and not invested at the levels that
14 they should be.
15 And so if you're thinking about ways of
16 encouraging business to work, not just with
17 minority owned businesses, we also think there
18 should be encouragement to work with our
19 institutions because they're better off in their
20 communities.
21 For those who are not familiar with the
22 story of the Black colleges and universities,
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1 there are 100 or more accredited HBCUs, public or
2 private, concentrated in 19 states, the District
3 of Columbia in the U.S. and U.S. Virgin Islands.
4 They enroll almost 300,000 students, approximately
5 80 percent of whom are African-Americans and 70
6 percent come from low-income families.
7 Only 10 percent of undergraduates alone
8 in non-HBCUs is African-Americans. And we account
9 for only 3 percent of public and not-for-profit
10 private institutions, but we award 17 percent of
11 Bachelor's Degrees to African-Americans, and 24
12 percent of (inaudible) goes African-Americans.
13 We annually generate over 109,000 jobs
14 in our communities, and almost $15 billion in
15 total economic impact. So, we think there are
16 excellent ways to invest in their communities, and
17 we think there's a reason most of them are in
18 Opportunity Zones, and they are those bedrocks.
19 So, if you're going to affect the
20 community around an HBCU in an Opportunity Zone,
21 you can do that through our institutions. There
22 are usually our largest employer, and not just for
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1 being agitator. So, thinking about that, for
2 everyone in this room, but also and to think about
3 how you do that in the regulations. Thank you.
4 MR. NOVEY: Thank you. What have we
5 done or failed to do, that if we do or didn't do
6 would better encourage the results that you're
7 looking for?
8 MS. HARRINGTON: So, I'm also not an
9 expert on this, but I think the normal type
10 incentives that you use to encourage people to
11 partner with certain folks I think, extra credits,
12 extra --
13 MR. NOVEY: We're stuck with the statute
14 bill because (inaudible) --
15 MS. HARRINGTON: Right.
16 MR. NOVEY: -- and they did a wonderful
17 job even though it was (inaudible). (Laughter)
18 MS. HARRINGTON: Yeah.
19 MR. NOVEY: But that's the sort of rules
20 of the game that we have to operate in, and
21 clearly encouraging not just the communities
22 around vacancies, but also encouraging the
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1 institutions themselves would be a wonderful good,
2 but the question though is to what extent does
3 this statute give us a scope to do that?
4 MS. HARRINGTON: So I -- again I'm not
5 an expert in that -- I'm happy to think more about
6 this in the (inaudible), but one problem that I'll
7 say from the institutional side that we've
8 encountered, is that our institutions, because
9 they are often so low-resourced, right, they are
10 very risk-averse. And so much of this process
11 represents a concern because it's new, but also
12 there's potential risk not just for the investors
13 but also for the institutions that they're working
14 with the investors.
15 So, it's clarifying and thinking about
16 ways to -- the statute cannot giving the risk to
17 everyone, but when you're thinking about HBCUs in
18 particular, how to mitigate that risk because they
19 do offer the public good beyond just somebody who
20 needs, and they are definitely in the lead to
21 probably a reduction in economic growth in their
22 communities. And so I think to help we can -- we
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1 are happy to help think about more specific ways
2 you could do that in the regulations.
3 MR. NOVEY: Would love to hear it.
4 MS. HARRINGTON: Thanks.
5 MS. BOLTON: Thank you. Anybody else?
6 Okay, right here. Let me get one right here.
7 SPEAKER: Hi. My name is Alan Walwork.
8 And what I wanted to ask -- I want to thank the
9 panelists and the speakers for their insightful
10 questions and comments. Particular, I was
11 heartened by Mr. Novey's statement at the outset
12 about how we could help Treasury and the IRS in
13 its rule-making process, like focusing comments on
14 regulations that clarify rather than modify and
15 otherwise supplement, or supplant the statutory
16 directives that Congress set forth in 1400Z-2.
17 With that in mind, I'd like to address
18 my questions and comment to the juxtaposition of
19 the proposed regulations, Anti-Abuse Rule with
20 provision in Section 1400Z-2, Z3A. The bias terms
21 defines a range of business activities, the
22 Qualified Opportunity Zone business can engage in,
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1 but not those of the Qualified Opportunity Fund
2 engages in certain businesses directly. For
3 example, at a golf course, or a hot tub facility,
4 a country club, or a liquor store or something of
5 that nature.
6 Now, I think today that difference, the
7 difference between the Qualified Opportunity Zones
8 businesses and the statutory restrictions on the
9 type of "SIN" businesses that it's allowed to
10 engage in. And the fact that there's no statutory
11 restriction on Qualified Opportunity Funds has
12 been referred to as a loophole of some sort.
13 But, you know, it's only one of many,
14 many differences between the rules that apply to
15 Qualified Opportunity Zone businesses, including
16 substantially all requirements or the amount of
17 property advance, the whole -- which Treasury and
18 the IRS are deploying; 70 percent plus 90 percent
19 requirement that Qualified Opportunity Funds would
20 have to, you know, have if they invested directly
21 in the Qualified Opportunity Zone.
22 And so there is this difference in the
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1 statute, and it seems to be reflected --unless I'm
2 mistaken -- in the proposed regulations, which
3 restrict the SIN business rules under
4 144(c)(6)(b), to the part of the regulations that
5 deals with Qualified Opportunity Zone businesses.
6 However, a number of hotel chains,
7 resorts, and obviously, you know, taxpayers who
8 would otherwise engage in one of the enumerated
9 types of businesses are concerned that the
10 anti-abuse provision could be used even though
11 there's no restriction in the statute of
12 regulations against what would seem to be a fairly
13 straightforward application, where Qualified
14 Opportunity Fund engages directly in, for example,
15 the management of the golf course.
16 And so, you know, the question is
17 whether you consider it abusive for an opportunity
18 fund to engage directly in the acquisition, maybe
19 substantial improvement or development of a new --
20 let's just keep it with golf course -- whether
21 that could be Qualified Opportunity Zone property
22 in the hands of that, or Qualified Opportunity
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1 Fund.
2 And sort of as an ancillary issue which
3 sort of applies just to the Qualified Opportunity
4 Zone business, whether you would consider applying
5 a rule similar to the one in Notice 2006-67 for
6 Qualified Opportunity Zones where there's a 10
7 percent -- where there's a 10 percent prohibitive,
8 you know, business safe harbor whereby your gross
9 receipts are under 10 percent, you wouldn't have
10 to -- you know, you wouldn't be disqualified.
11 So, for example, you know, a physical
12 therapist that also engages in massages, you know,
13 or a rehabilitation center, or something of that
14 nature. So those are the three questions.
15 MS. BOLTON: Any questions? I mean, we
16 appreciate your comments. I would suggest writing
17 them in a comment letter to us.
18 SPEAKER: Then I think the New York
19 State Bar Association has --
20 MS. BOLTON: Yeah, but I could -- the
21 SIN business question has been brought to me a
22 number of times, so it's something that we're
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1 actively thinking of.
2 SPEAKER: And would you consider
3 including example in the Anti-Abuse Regulations
4 one way or the other?
5 MS. BOLTON: We will definitely think
6 about it.
7 SPEAKER: Thank you.
8 MS. BOLTON: Yeah. Okay. Anybody --
9 MR. NOVEY: As a matter of Reg drafting,
10 examples are nice but if there's a clean rule that
11 we could articulate, that would be better. Yeah.
12 SPEAKER: Or, I think that's worth the
13 10 percent derivative -- derivative business rule
14 and in the, you know, the Notice 2006-67 is
15 useful.
16 MS. BOLTON: Was that part of the New
17 York Bar comments?
18 SPEAKER: No. No. I'll write it up
19 separately in an article.
20 MS. BOLTON: Okay. All right, thank
21 you. Anybody else? All right then, on behalf of
22 the Panel, we thank you very much for all your
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1 comments and suggestions.
2 And this concludes the Hearing for
3 Investing in Opportunity Zone Funds, Reg Number
4 120186-18. Thank you.
5 (Applause)
6 (Whereupon, at 4:06 p.m., the
7 PROCEEDINGS were adjourned.)
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CERTIFICATE OF NOTARY PUBLIC
STATE OF MARYLAND
I, Thomas M. Watson, notary public in and for the State of
Maryland, do hereby certify that the forgoing PROCEEDING
was duly recorded and thereafter reduced to print under my
direction; that the witnesses were sworn to tell the truth
under penalty of perjury; that said transcript is a true
record of the testimony given by witnesses; that I am
neither counsel for, related to, nor employed by any of the
parties to the action in which this proceeding was called;
and, furthermore, that I am not a relative or employee of
any attorney or counsel employed by the parties hereto, nor
financially or otherwise interested in the outcome of this
action.
Notary Public, in and for the State of Maryland
My Commission Expires: December 2, 2021Commission No. 127812
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