Multifamily real estate has proven to be phenomenally well-suited for the OZ program. The stats are quite clear on this.
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What OZ businesses have proven better suited for this program?
Is real estate the best option for a qualified business in Opportunity Zones? How about existing businesses, particularly small family companies?
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For small family business, the following would apply- you must upgrade existing business equipment or buy new/used to meet these tests I. The “70 Percent Test” Exactly 70% or more of the tangible property owned or leased by the business must be Qualified Opportunity Zone Business Property (“QOZBP”), located in a QOZ. QOZBP is tangible property acquired by a QOZB after December 31, 2017, and either the original use of such property needs to start with the Qualified Opportunity Fund investment or the Fund investment must substantially improve the property. If this is applied to a business that is seeking investment from a Qualified Opportunity Fund, a business owner may want to consider what property would be purchased with a potential Fund investment or what aspect of its existing business property (machinery and equipment, for example) can be improved with funds from a Qualified Opportunity Fund investment. II. The “50 Percent Test” At least 50% of the gross income of the business must be derived from the active conduct of a QOZB within a QOZ. The New Proposed Regulations provide three methods that can be used to determine whether this 50% requirement has been met: Methods: 1. Hours-of-work: a minimum of 50% of the total hours of services performed by the business (i.e. by employees, independent contractors) are performed in the Opportunity Zone 2. Cost-of-services: a minimum of 50% of the total cost of the business’ services (i.e. to employees, independent contractors) paid for by the business was paid for work in the Opportunity Zone 3. Business functions and tangible property: Both the business’ management and operational functions, and tangible property, both located within the Opportunity Zone, are independently necessary to derive at least 50% of the business’ gross income. III. The 5% Test No more than 5% of the average of the aggregate unadjusted basis of the business’ property must be attributable to nonqualified financial property (i.e. financial assets). Unadjusted basis refers to the original cost to purchase an asset. A reasonable amount of working capital held in cash or cash equivalents with a term of less than 18 months is not treated as financial assets or nonqualified financial property.[1] To better understand how your business meets this test, it is highly recommended that you consult a tax lawyer or accountant because of the highly technical nature of this analysis. It may be most beneficial for a business owner to know that this criteria exists and to establish a high-level understanding of such criteria. An amount of working capital is considered reasonable if: 1. the amount is designated in writing for the development of a trade or business in a QOZ 2. there is a written schedule for the use of the funds within 31 months of the receipt of the working capital 3. the working capital is used in a manner substantially consistent with the written description and schedule. Delays caused by slow government action (i.e. zoning approvals) will not violate these. A business can use this reasonable working capital provision more than once such that subsequent funding may also rely on the safe harbor, provided that these requirements are met. IV. The 40% test A substantial portion of the business’ intangible property (at least 40%) must be used in the active conduct of a qualified business in a QOZ. It is possible for the use of intangible property in contiguous property that is not in an Opportunity Zone to count toward this test. The ownership, operation, and leasing of real property can be the “active conduct” of a business if the activity is not merely entering into a triple net lease. V. Not a disqualified business Your business may not be engaged in a “sin” business (i.e. liquor store, race track, etc.) As the IRS releases guidance to interpret the requirements of the Opportunity Zone program, business owners should understand the opportunity it may present for their businesses. Access to capital is a fundamental issue for growing small businesses, and the Opportunity Zone Program may provide a new capital resource for QOZBs.
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