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Opportunity Zone guidance leaves critical questions unanswered

October 25, 2018
By: Jason Rittenberg


The U.S. Treasury released a new set of proposed guidelines around Opportunity Zones. The new regulations would provide many clarifications about eligibility and timing, but do little to address critical concerns for potential zone-based seed and venture capital investment funds. Additional guidance is forthcoming, but there is no timetable for this release. Meanwhile, the latest regulations are subject to comment once published in the Federal Register.

Tax incentive-focused accounting firm Novogradac & Co. has published a summary of the new regulations’ usefulness and omissions. Of the defined items most relevant for potential equity investments into high-growth businesses:

  • Funds will be able to choose the month in which they wish to begin acting as a qualified opportunity fund; and,
  • Qualified businesses must hold at least 70 percent of the value of its tangible property within a qualified zone and derive at least 50 percent of its income from activities performed in the zone.

Among the items investment fund managers still need to know are:

  • Whether there will be any “safe harbor” timelines that can allow qualified opportunity funds to have some leeway for passing the 90 percent asset test when a commitment by a new investor causes the fund to fall below this threshold;
  • How long will constitute the “reasonable period” for reinvesting proceeds of a fund’s investment (such as due to a business being acquired or moving out of a zone) that will still allow investors to receive their tax benefits for making qualifying investments; and,
  • What will be the tax treatment for any gains from interim sales/events over the course of the fund’s investment cycle.

In recent testimony before the Senate, Economic Innovation Group’s John Lettieri reiterated that Opportunity Zone’s “central purpose was to drive investment into operating businesses in underserved areas — particularly new ventures and existing small- to medium-sized businesses poised for growth.” Unfortunately, this new set of guidance suggests that the Treasury is unwilling or unable to maximize the program’s ability to work alongside established equity investment models that would help such businesses.

At this time, the proposed rules have not been formally published in the Federal Register. This article will be updated to include instructions on how to submit comments once that information is available.


Image credit: Map of designated Opportunity Zone census tracts from the CDFI Fund.

opportunity zones