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What does the regulations say about entering into a triple net lease for real property owned by an entity in an OZ?

Is this an issue for asset classes such as office, industrial or retail that often use triple net lease arrangements with their tenants?


Answers
  • Nelly Mitford
    October 23, 2019

    NNN commercial real estate leases do not qualify as an investment under the Opportunity Zone and are not allowed to be part of the fund. The core purpose of the program is to make substantial improvements to an existing property and to be partly involved in the operation of the business. Under the terms of a triple-net lease, the investor is not directly responsible for the upkeep or maintenance of that real estate, which is the lessee’s responsibility. If the fund isn’t directly involved with property improvements or upgrades, it doesn’t meet OZ guidance. Unfortunately, the “substantial improvement” requirement within 30 months of the purchase date will disqualify most net lease assets. You must seek the advice of a CPA or investment advisor for your specific needs.

  • Jonathan McGuire
    October 23, 2019

    Triple-net leases have been a hot-button issue for the IRS recently. The question should be whether or not you are operating a trade or business. This is a facts and circumstances determination that must be determined with the help of your CPA and tax attorney (if applicable) whether or not a trade or business is in operation.

  • Brad Cohen
    October 23, 2019

    No. Everything qualifies.

  • Matthew Rappaport
    October 24, 2019

    It's potentially an issue, but there are conceivable ways to structure around it, and those endeavors are not deal-breakers when it comes to QOZ projects.

  • Maria De Los Angeles Rivera
    October 24, 2019

    The regulations state that a triple-net lease is not considered an active trade or business. Therefore, a business engaged in that activity will not qualify as an Opportunity Zone business.

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