What already was a finite pool of potential investment opportunists for Qualified Opportunity Zone projects has quite likely been condensed even more due to the coronavirus pandemic.
The strain created by a paused economy means reinvesting capital gains in a new project may not make as much fiscal sense now as it did three months ago.
“With the current situation, the people who weren’t thinking about investing in Qualified Opportunity Zones (QOZ) before definitely aren’t thinking about it now,” said Joseph Wutz, principal on the Buffalo tax team for The Bonadio Group.
“They have other concerns like the Paycheck Protection Program and how to keep the lights on. A lot of people have had to spend down their rainy-day funds. Others don’t want to tie up their cash for a long period of time.”
In order to reap the benefits of a QOZ, investment of capital gains must remain in the project through 2026. If investors keep the funds in the project for 10 years, it would eliminate any tax liability on the appreciated investment. But as Wutz points out, that commitment isn’t for everyone.
“Ten years is a long time and you’re putting a lot of trust in the people putting together the fund to deliver a project that’s going to perform well over a long period of time,” Wutz said.
For investors who have entered a QOZ fund, the shutdown of the construction industry and many ancillary subsets because of COVID-19 could provide an extension on project deadlines. There is a provision within the IRS regulations that applies to federally declared national disasters.
Wutz said it is wise for those connected with opportunity zones to closely document project progress and deadlines, and if there were any stoppages or delays caused by design, construction or supply shutdowns related to the pandemic.
“Keep that paper trail of those delays,” he said. “If you couldn’t do A, B or C as a direct result of the COVID-19 pandemic, document that. Make sure you can say ‘I wasn’t able to meet those deadlines and here’s why.’ ”
Another fear, of course, is how a second wave of the virus could impact construction. There could be more delays if a second wave hits in the fall and causes another economic pause.
“For opportunity zone investors and stakeholders, they have to think about things the hadn’t been required to think about,” Wutz said. “If there’s a second wave of the virus, then non-essential construction activity might have to stop again.”
Even so, a major Qualified Opportunity Zone project is underway in downtown Rochester. Peter Landers, Rob Sands and Jim Costanza bought the vacant Aqueduct Building campus along the west bank of the Genesee River for $4.7 million. The deal closed on March 17, just as the economic shutdown was beginning.
They believe in their project, however, and followed through on the closing. The first opportunities for leasing office space in what is now being called The Aqueduct District became available in late May.
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