The executives at Driftwood were disappointed in the regulation
and wrote off the otherwise perfectly-suited project as an
Opportunity Zone investment.
However, the Treasury Department was not finished seeking
feedback and detailing possible regulations. In a later round of
proposed rules, Driftwood executives found a way in.
“When the second round of proposed regulations came out a few
months ago, the Treasury department did a good job of addressing
the reality that a lot of investors had been land banking or already
started some developments in these zones and wanted to take
advantage of these benefits without having to sell to a third party,”
says Jorge Gomez-Moller, general counsel at Driftwood Acquisitions
and Development. “We have relied on the provisions in the pro-
posed regulations that have allowed for related party leases.”
Now the proposed rules state that if the properties were acquired
after December 31, 2017, they can either be substantially improved
by a qualified Opportunity Zone fund or if the properties have
never been depreciated or have been vacant for five years, the
original use can start with a qualified Opportunity Zone fund, Phil
Jelsma, a partner at law firm CGS3 and an expert on the Opportunity
Zone regulations, explains. “Properties acquired prior to December
31, 2017, generally must be acquired by purchase by the qualified
Opportunity Zone fund from an unrelated party. Typically this
means the current owners must own less than 20% of the capital or
profits of the qualified Opportunity Zone fund,” he says.
A HOT PROSPECT
Opportunity Zone projects are officially underway. This new investment model has quickly become a hot prospect, largely because it
allows investors to defer capital gains taxes on qualified investments. While the total fundraising is difficult to track so far, the
most prominent funds have an aggregate fundraising target of $12
billion, according to CBRE’s research.
This capital will flood into more than 8,700 designated
Opportunity Zone markets across the country. As companies
launch projects in these areas, they are uncertain as to what the
final rules will look like against a ticking clock: December 31, 2019
is the deadline for investors to maximize tax benefits.
The uncertainty has not stopped developers from moving forward. As prospective rules continue to roll out, companies such as
Driftwood are plunging ahead as it becomes clear that their projects could well qualify after all.
Driftwood Acquisitions, along with private equity firm Virtua
Partners, are among the first movers in the Opportunity Zone
ON THE MARCH