The Opportunity Zone Project: Understanding The Process

Real estate development has historically—and continues to be—a risky proposition. Not only is it fraught with numerous challenges, but it also must be carefully balanced against the promise of rewards. When you toss in the possibility of potentially needing to rehab a historic property, that risk-reward scenario intensifies substantially.

How can you reduce that risk? By combining two powerful tax-saving opportunities like the HTC and the Opportunity Zone program which we discussed in part 1. Initially, finding this unique type of real estate sounds complicated—that’s understandable. But some estimates indicate that there can be around $3-$5 billion buildings in the United States that are certified or can be certified. For example, a building in a National Historic District needs to be certified as contributing to that district to qualify.

If the building you’re interested in purchasing isn’t on that list, it can be certified to meet those criteria. How can you do this? Register Nomination Forms are downloadable from your State Historic Preservation Office. National Register Bulletins can provide you with guidance to document and evaluate certain types of properties.

Further, Sample Nominations provide additional useful information—the basic steps for this process are as listed here:

1. The State Historic Preservation Office notifies affected property owners and local governments and solicits public comment. If the owner objects, the property cannot be listed but may be forwarded to the National Park Service for a Determination of Eligibility.

2. Proposed nominations are then reviewed by a state’s historic preservation office and the state’s National Register Review Board. At a minimum, this will take about 90 days.

3. Completed nominations that are certified recommendations are then submitted by the state to the National Park Service in Washington, D.C. for final review. Then, they’re listed by the Keeper of the National Register of Historic Places. The NPS makes a listing decision within a 45-day period.

The Opportunity Zone Project: Understanding The Combined Tax Impact

When both programs are combined and applied, the substantial rehabilitation cost that applies to the qualified Opportunity Zone investment is similar to an HTC context.

The unique point of this project is that the HTC requires a substantial rehabilitation of the historic property, which aligns well with the Opportunity Zone requirement to substantially improve the property. For the Opportunity Zone, the taxpayer needs to exceed their basis in the building for a number of qualified rehab expenses they will incur. For example, if a buyer purchases a building for $1 million, they’ll need to spend over $1 million rehabbing it and fixing it up in order to be truly eligible for this particular credit. My experience is that HTC and Opportunity Zone developers generally must spend more than the basis of the property and therefore easily meet these similar (not identical) tests.

The HTC program also requires that a taxpayer reduce the basis of their project equal to the number of tax credits that are generated. Further, the Opportunity Zone program requires the taxpayer to step up their basis to market value on sale or disposition in the tenth year.

So, in a unique way, those factors could allow for a basis reduction due to the HTC to be negated in the context of a combined deal.

The outcome of this deal will also depend on how the offerings are structured. For example, if an Opportunity Zone investment or fund occurs first, and then later on as the project continues, the sponsor can do a second offering for HTC equity as they get closer to implementation, this process could bring a lot more cash into the deal.

Historic building purchases have increased dramatically in the last few years—in other words, opportunities abound. In 2019 alone, 266 of the 462 HTC projects were found to be located in Opportunity Zones.

What does this wide overlap mean? That HTC re-development areas and opportunity zones are ripe for the picking—and that there are likely tens of thousands of other structures available across the country.

If these two concepts aren’t combined, they can prove to be complicated, but combining these tax opportunities is also very complicated, too—that’s why expert advice is necessary (and recommended). HTC developers are no strangers to layering the OZ incentive into an intricate HTC transaction. Our best suggestion? Working with a qualified, experienced HTC and OZ expert like us.

Additionally, don’t let the complexities of this process scare you—the best thing about these developmental benefit (beside the tax savings) is that they can provide a much-needed economic boost to areas that need it.