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Shutdown Delays Enhanced Opportunity Zone Guidance

The commercial real estate-investment world has been waiting with baited breath for the U.S. Treasury Department and the Internal Revenue Service to release more detailed Opportunity Zone guidance about investing and the funds that will finance development.

The protracted political battle over building a wall along the U.S.-Mexico border and the ensuing partial government shutdown – now in its second month – has postponed that release. That has some CRE professionals worried about what will happen.

Moody’s Investor Service said in a Jan. 9 news release that the shutdown is “credit negative” for the nation. That means it is affecting the economy, though it won’t affect the U.S. credit rating immediately.

The new Opportunity Zone guidance and regulations had been targeted for release in late December, then moved back to January. But the IRS, with many employees furloughed by the shutdown, has already had to postpone a Jan. 10 public-input hearing on Opportunity Zone rules, and will reschedule it only after operational funds have been restored. The IRS received about 150 comments from various groups in advance of the hearing.

“We’re waiting for guidance to come out of an organization that’s basically taking a break,” Bryan Woo, executive vice president of Youngwoo & Associates developers told the Wall Street Journal.

Dan Ryan, with the tax department of the Sullivan & Associates law firm, said the shutdown could affect the final outcome of the regulations.

“This is unfortunate because it will delay the finalization of the recently proposed regulations, and any final regulations could have significant changes or differences from the proposed regulations,” Ryan was quoted as saying. “The shutdown may also delay the anticipated issuance of additional proposed regulations, initially expected at the end of December and later thought to be issued at the end of January.”

Although funds are being created and investors are putting down money, the wait for regulations and additional guidance could put a damper on what has been a surge of investment in Opportunity Zones. Think Reality reported that Real Capital Analytics statistics showed 58% more investments in Opportunity Zones in the third quarter of 2018 than in the third quarter of 2017. The increase in the rest of the nation was 11%.

“The sooner you get regulatory clarity, the more benefit is available to investors, and the sooner they can stand up a marketplace,” John Lettieri, chief executive of Economic Innovation Group, told The Wall Street Journal. His firm is a public policy organization founded by entrepreneur Sean Parker, which played a lead role in including the opportunity zones in the tax bill.

A longer shutdown that delays Opportunity Zone guidance could shorten the window for investors to achieve the maximum tax breaks. Because Opportunity Zone investments must be financed through capital gains, investors can get a 15% cut on taxes on those gains if they hold the investment for seven years. Because Opportunity Zones are set to expire on Dec. 31, 2026, investments must be made this year.

It is possible that in the wake of further delays, Congress could extend the deadline or create a new phase of Opportunity Zone programs.

But as of now, enhanced guidance and finalization of Opportunity Zone regulations is on hold, pending a deal to reopen all functions of the federal government. Investors are hoping it comes soon.

For comments, questions or concerns, please contact Dave Sorter


Inside The Story

Read More at The Wall Street JournalConnect with Sullivan & Associates’ Dan RyanConnect with Youngwoo & Associates’ Bryan Woo

About Mark El-Rayes

Mark El-Rayes is an award winning designer and photographer from Beirut, Lebanon. El-Rayes has over 15 years in the design industry, 5 years of which he served as a Mass Communication Specialist in the United States Navy at Naval Air Station North Island, Navy Public Affairs Support Element - West (NPASE). El-Rayes is a full-stack developer, seo specialist, photographer, and artist.