Qualified Opportunity Zones in Action

One of the most touted features of President Trump’s “Tax Cuts and Jobs Act of 2017” is the creation of so-called Qualified Opportunity Zones (QOZs), to stimulate investment in distressed communities. How does this program work in the real world?

Numerous Qualified Opportunity Funds have been established to attract investors looking to park large capital gains in order to defer and reduce their tax liability. Numerous REITS, banks, and investment companies have created these funds. While no accurate data is available, it is rumored that hundreds of millions of dollars have already been invested in these funds.

The author’s company, Conrail, recently established such a fund for a piece of property it owns in the Port Richmond section of Philadelphia. This 86 acre site was the former home of the Reading Railroad’s export coal facility – a site that has been mothballed since the late 1970s.

The site has numerous on dock piers and coal facilities that were used to transload anthracite coal mined in Northeastern Pennsylvania from rail to ship going to locations around the country and the world. With the diminution of the importance of anthracite coal over the years, this 86 acre site has sat dormant.

Today, Port Richmond is adjacent to the rapidly gentrifying Fishtown neighborhood of Philadelphia. In recent years, PennDOT has completed a new entrance from Girard Avenue off of I-95 that empties right into the site. Coupled with the recent completion of a direct connector from I-95 to the Pennsylvania Turnpike that provides a progressive move to North Jersey and New York, this location has become very attractive to numerous potential developers.

Conrail recently received a substantial capital gain from a real estate sale and created an Opportunity Fund for Port Richmond. The gain needed to be deposited into the Fund within 180 days of the gain and must further be used within 31 months of the establishment of the Fund. The QOZ provides Conrail the opportunity to defer a large tax liability for 7 years. If the investment is held the full 7 years, it actually reduces the tax liability by up to 15%. In addition, whatever gain Conrail might recognize from the actual investment in the QOZ is exempt from any tax.

By investing its capital gain in this Opportunity Fund, Conrail is provided with the flexibility to pursue a number of different investment options. It can work with a developer to build out the property and use both the land it owns and deferred proceeds in the Opportunity Fund to increase its equity ownership interest in any venture. Investments can include such things as building access roads to the site, bringing in utilities, doing land development, and addressing any potential environmental issues. Conrail has also considered the possibility of constructing a new corporate headquarters at the site – use of the Opportunity Fund could make this investment considerably less expensive and more efficient.

QOZs are a new and different vehicle for attracting investment into distressed communities. Many of the key regulations have yet to be issued by the IRS explaining the different nuances of the program. For now, the program is a “one time” event; that is, if property was not certified in early 2018 after enactment of the Tax Law – it is too late now to add any additional properties. It will be interesting to see how much needed investment in distressed neighborhoods this tax incentive plan will provide. Like its previous incarnations – Enterprise Zones, Keystone Opportunity Zones, etc. – the QOZ is somewhat controversial since it deprives the federal government of needed tax revenue from people and entities that likely need the tax relief the least. It is similarly unclear how effective such programs are in actually creating jobs and improving communities that have been left behind. Will it serve as the stimulus needed to bring back long forgotten neighborhoods, or simply act as another form of “corporate welfare”? Only time will tell.

Jonathan Broder is the Vice President of Corporate Development and Chief Legal Officer of Conrail and spearheads the Company’s real estate and economic development initiatives as well as manages its legal affairs.

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