What are the guidelines for “substantially improve” land in an Opportunity Zone?

Answers

• 

  Scott McIntosh

  Opportunity Zone Consulting Group

  July 07, 2021

  The "substantial improvement" requirement applies to existing buildings in the Opportunity Zone, but not to raw land. Raw land must be improved by "more than an insubstantial amount" and used in the active conduct of a trade or business. The final regulations did not assign a percent threshold for improvements to raw land, noting that the inquiry depends on the type of land and on the trade or business it will be used in. They did provide some examples in the farmland context, noting that improvements to irrigation systems or grading of the land with a sufficient nexus to the trade or business of the Qualified Opportunity Fund (QOF)/Qualified Opportunity Zone Business Funds (QOZB) would be adequate.

• 

  Joseph Luna

  OZ INVESTED

  July 08, 2021

  Land located in an Opportunity Zone must be improved by “more than an insubstantial amount” within 30 months after the date of purchase in order for the land to be considered QOZBP. For purposes of determining whether improvements to land are considered “more than an insubstantial amount”, unfortunately, the final regulations do not provide any guidance on the dollar amount of improvements that must be made to land in order for improvements to be considered “more than an insubstantial amount”. Instead, the final regulations provide two examples intended to provide guidance on this issue. In the first example, improvements to land were not considered “more than an insubstantial amount” when there was a plan to pave the land for use as a parking lot, including installing a gate to the parking area, constructing a small structure that would serve as an office for a parking attendant, and installing two self-pay stations for use by customers. In the second example, improvements to land were considered “more than an insubstantial amount” when the land was previously used for hog and pig farming, and there was a plan to conduct sheep and goat farming activities on the land that required significant capital improvements to the land, including improvements to existing farm structures, constructing new farm structures, and installing a new irrigation system. The key distinction between these two examples appears to be improvements made to land that substantially increase the economic productivity of the land and the business activities that occur on the land. Thus, it appears improvements to land will be considered “more than an insubstantial amount” if they are made with the intent to increase the economic productivity of the land for usage in a trade or business. This corresponds with the final regulations general prohibition against “land banking”, where land is purchased in an opportunity zone as a speculative investment and for the purpose of selling the land at a profit with the ability to exclude any gain resulting from the appreciation of the land.

• 

  Marko Belej

  Taft

  July 07, 2021

  Unimproved land is not required to be “substantially improved.” However, if the land is unimproved or minimally improved, and the Qualified Opportunity Fund (QOF)/Qualified Opportunity Zone Business Funds (QOZB) purchases the land with an expectation or an intention to not improve the land by more than an insubstantial amount within 30 months after the date of purchase, then such land generally will not be considered “qualified opportunity zone business property.” Unfortunately, the regulations don’t give any measure of what constitutes an “insubstantial amount.”

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