MIT Modular is an Opportunity Zone Fund/ESG-focused business and offers investors and certain customers various Opportunity Zone tax benefits.

What is an Opportunity Zone?

An Opportunity Zone is a designation and investment program created by the Tax Cuts and Jobs Act of 2017 allowing for certain investments in lower income areas to have tax advantages.

The purpose of this program is to put capital to work that would otherwise be locked up due to the asset holder's unwillingness to trigger a capital gains tax. MIT Modular is one of the leading authorities on Opportunity Zones.

Click on the map to see if there are Opportunity Zones in your area & a full list of city locations with Opportunity Zones.

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OPPORTUNITY ZONE INVESTING IN THE COVID-19 ERA,
an in-depth Q&A with MIT Modular Founder Blake Christian. 

Q1. The government has tried to help millions of taxpayers and small businesses during the Covid-19 crisis. Do you think Opportunity Zone investors and funds will receive any relief?

 

BLAKE CHRISTIAN: Actually, the final OZ regulations provided extremely liberal rules regarding when the 180-day reinvestment for funding a Qualified Opportunity Fund (QOF) period starts. In the fairly common situation in which a gain is flowing through to a taxpayer on a schedule K-1 from a partnership, S Corp or a trust, the reinvestment period for calendar 2019 capital gains begins on March 15th and runs through September 10th, 2020, provided the taxpayer elects an early application of the final regulations.

Q2. Why hasn’t the IRS done more?

BC: Actually, it did. In early April, the IRS issued Revenue Procedure 2020-23, which provides a sliver of an extension for investors who had a direct capital gain in the last quarter of 2019 (that did not flow through on a K-1). If a normal 180-day reinvestment period was set to expire between April 1, 2020 and July 14, 2020, the Revenue Procedure extends the deadline until July 15, 2020 – a small crumb for a handful of OZ investors. Various OZ trade groups are continuing to push for a longer extension. 

Once the OZ Funds are dropped down into the QOZB subsidiary, the investors receive a minimum of 31 months, and as long as 62 months to, acquire Qualified Opportunity Zone Business Property (QOZBP). The regulations also provide for the possibility of an additional 24 months when there is a national disaster declared in the taxpayer’s business location. 

Q3. Do you think that’s going to hurt OZ investing during this difficult economic climate ahead?


BC: Uncertainty creates indecisiveness and inaction. Many people I’ve talked to in the OZ community believe we will see delayed investing by QOF’s and QOZB’s and a slowing of OZ real estate and operating business projects. However the extreme flexibility and long-term tax advantages for the OZ investor makes OZ investing even more valuable in light of the COVID-19 economic challenges.


Q4. If the government does not explicitly act to postpone certain deadlines, some experts say investors may face penalties or may even pull out of OZ investments, which would hurt the communities the program is designed to help. Do you agree?


BC: This is certainly a possibility and it will be unfortunate if redevelopment in these economically depressed areas slows down or stops. Residents in these communities are generally at-risk economically. They’re the ones who will be the most negatively impacted by the COVID-19 economic downturn.


Q5. Can anything be done about this situation?


BC: I am working with various municipalities and chambers of commerce to encourage Congress and states to expand the OZ program and to allow taxpayers to secure a 50 percent gain exemption for investing after-tax dollars (vs. capital gains) into a QOF after 10 years and by expanding the OZ census tracts to include the hardest hit communities following the COVID-19 crisis.


Q6. It’s no secret that many investors made sales or exchanges of capital gains right before year-end 2019 to take advantage of the maximum 15 percent tax basis step-up after a 7-year QOF holding period. If their 180-day window to reinvest will begin closing toward the end of June, is that going to be enough time to find suitable investments given all the uncertainty we have today?


BC: In the current environment the general June 27th deadline for funding a QOF, applicable to 2019 K-1 and IRC Section 1231 gains, is a tight deadline to make a major investment decision. However, taxpayers who elect to apply the final regulations earlier than their March 13, 2020 effective date will have until September 10, 2020 to reinvest their gross 1231 gains or calendar 2019 capital gains flowing through K-1’s into a QOF. As discussed below, care must be exercised in evaluating the source of each gain and the 180-day rules to ensure that the funding deadline is met.


Q7. QOFs must hold 90 percent of their assets in qualified property, (as measured every six
months), or face a penalty (currently 5% annualized). But even if the fund is successfully formed,
it is now harder to make sure 90 percent of the assets in the fund are good assets considering 
how many projects and permits have been delayed by the government-imposed shutdowns of
non-essential businesses?


BC: We’re advising the vast majority of our OZ clients to drop at least 90 percent of their QOF
assets into a Qualified Opportunity Zone Business (QOZB) within six months of forming the QOF.
This gives investors at least 31 more months to deploy the cash into Qualified Opportunity Zone
Business Property (QOZB). In fact, they will have up to 62 months if at least another significant
capital infusion into the QOZB occurs during the initial 31-month period. Once the funds are down
in the QOZB subsidiary, as long as at least 70 percent of the QOZB assets are QOZBP (and this
includes the QOZB’s documented Working Capital needs), then the penalty will not apply.


Q8. What about the rules requiring QOZBs to derive 50-percent of their gross income from
customers and clients located within their opportunity zone? Isn’t that going to be especially
tough with businesses being forced to shut down and/or use remote workers or contractors who
don’t live within the QOZ.


BC: The so-called “gross income sourcing rule” could present a challenge in limited situations, but
since we’re talking about a relative income comparison, many QOZBs would be expected to see a
proportionate drop in income in BOTH their OZ census locations and their non-OZ locations.
However, if a QOZB had a retail location in an OZ census tract and also a warehouse outside the
OZ that distributed its goods via on-line sales, then the COVID-19 impact could cause the QOZB to
fail the 50-percent test. However, the final OZ regulations include a one-time 6-month “cure
period” to fix such a failure and this provision will likely protect most funds from failing the test.


Q9. While QOFs may find it difficult to invest capital gains within 180 days or meet the 90
percent asset test, do you think two-tiered QOZ business structures may receive some relief since
President Donald Trump declared a national emergency?


BC: While QOFs must hold 90 percent of their assets in QOZBP or face a floating annualized
penalty of 5 percent, the first set of OZ proposed regulations relaxed the six-month test by
providing a Working Capital Safe Harbor to allow a subsidiary QOZB to hold cash and documented
working capital for up to 31 months. That assumes the cash was held to acquire, construct or
substantially improve tangible property in an opportunity zone. The second set of proposed
regulations expanded this rule to apply to operating businesses. Then, final regulations doubled
the 31-month Working Capital Safe Harbor to 62 months provided that the QOZB received more
than one “substantial” infusion of cash during the initial 31-month period.
There is also a 6-month “cure” period contained in the final regulations that will allow a taxpayer a
one-time fix to resolve any issues at the QOZB level and qualify the QOF under the 90% rule.


Q10. Suppose a QOZB is in a federally declared disaster area? Does that help or hurt the
business? 

BC: The OZ regulations include a provision stating that if a QOZB experiences a delay caused by a
government agency’s action (or inaction) then the QOZB can get up to an additional 24 months on
top of the initial 31-month Working Capital Safe Harbor. While not completely clear at this point,
President Trump’s Federal Disaster designation should trigger this 24-month extension, but
further guidance will be needed to ensure this result. Please make sure you consult with a
qualified advisor, before taking action here.


Q11. If tax rates go up between now and 2026 (to help pay for all the bailouts and
stimulus programs), will investors be less inclined to use OZ funds to defer gains since
they would risk paying more in taxes later?


BC: An interesting and common question. This really depends on an investor’s specific facts. If a
taxpayer invests in a QOF before December 31, 2021, he or she will receive a 10 percent tax basis
increase when the deferred gain is recognized on December 31, 2026. Therefore, if capital gains
rate go up 10 percent or less, the investor is in good shape. If short-term (or long-term) rates go
up more than 10 percent, then a taxpayer will pay more taxes in 2027. However, they’ve had the
use of those tax dollars for five years or longer, so hopefully they’ve put it to good use.
If a taxpayer foresees a significant jump in capital gains tax rates in the middle of their investment,
then they will need to decide between:


(a) Using the ultimate tax exemption after holding the QOF for 10 years, or
(b) Foregoing the exemption and accelerating the gain before 2026 if they expect tax rates to be
rising dramatically.


In such a case, a QOF investor can simply pull their money out, distribute the QOZB, or liquidate
the QOZB and trigger the deferred gain any time they want. Generally, this should be done only if
investors are not seeing significant appreciation in their investments and are not expecting a large
gain after 10 years.


Q12. With all the uncertainty in our world, is now a great time to be investing in real
estate generally and QOZ’s specifically?


BC: In light of the unprecedented economic challenges presented by the COVID-19 virus outbreak,
taxpayers with short- or long-term capital gain income that was generated in calendar 2019 (or
early 2020), can use the OZ program to “park” their qualified gains in a QOF temporarily. This will
give them enough time to perform due diligence on various investments and to make QOZB
and/or QOZBP investments. Once the capital gains have been re-invested into a QOF and then
dropped into a QOZB, taxpayers have up to 62 months to reinvest the proceeds into various OZ
projects.


This “parking” strategy provides investors with some level of access to the QOF and QOZB cash
during the 62-month period. With tremendous uncertainty in the current market, taxpayers will 
generally view this extended re-investment period as a godsend. With this once-in-a-century crisis
and the highly erratic stock market, investors often rush to real estate as a more stable store of
value. For investors with a long-term investment mentality and a strong desire to minimize taxes,
the OZ program offers many flexible options.


Q13. Many would argue that underserved neighborhoods have a disproportionate
number of people working in hospitality, retail, restaurants, etc. – sectors that have been
particularly hard hit by the stay-at-home rules. Could the OZ Program fill a void longterm that the government and banks are not filling?


BC: This is absolutely the case in the vast majority of OZ census tracts! The 8,700 census tracts
were hand-picked by each state governor based on statutory criteria which included higher than
average poverty rates. The COVID-19 impact has had a devastating impact on restaurants, hotels,
entertainment venues and other hospitality businesses, all which rely on many employees who
reside within OZ census tracts. These employees typically have little savings and are already
feeling the brunt of our country’s self-induced economic coma.


The OZ program’s nationwide (and territorial) architecture offers an excellent foundation that can
be easily expanded by adding another layer of qualifying census tracts that are losing the highest
percentage of employees due to the COVID-19 impact. I have also contacted South Carolina
Senator Tim Scott’s office and suggested to him that Congress expand the OZ program to give
taxpayers a 50 percent tax exemption on a sale after 10 years if they invest after-tax dollars into a
QOF (not just their capital gains).


Q14. Or, taking it a step further, do you think the OZ program could help drive public or private partnerships?


BC: Yes, the OZ program is well suited for public-private partnerships. Cities, counties, states and
government agencies have identified various priority projects in their jurisdictions and have
engaged private companies to partner with. Combining resources can yield a win-win and also
address other key issues such as: increasing affordable housing, reducing homelessness,
developing workforce training programs and creating green projects.
I am working with a several counties and cities in California to utilize the OZ program for projects
ranging from: hospital re-use, affordable housing for workers and students and an incubator for
bio-tech and technology startups.


Q15. If you’re not satisfied with the projects or QOFs in your area, how hard is it to start
your own QOF and how much capital do you need?


BC: If an investor has a capital gain of at least $500,000 and has real estate development or
business development expertise – or a trusted family member or business associates with such 
expertise--I generally suggest forming your own QOF. However, you can form a QOF or a QOZB for
as little as $10,000 as long as you are not raising funds from the public, which will generally triple
the base cost. 

Q16. Blake, tell us a little more about your background. What first got you so interested
in the OZ program?


BC: I have been a practicing tax CPA for nearly four decades. For over half of my career I have
specialized in various tax incentives and credits. When the OZ program was introduced as part of
the 2017 Tax Cuts and Jobs Act, I received a flurry of calls from my partners and contacts around
the country wanting to know about the new “OZ Credits” and program. I had to explain to them
repeatedly that the OZ program did not involve credits, but that the program’s tremendous
flexibility, long-term tax deferral and ultimate tax exemption is the most powerful tax provision I
have seen in my career. That view hasn’t changed. With the unprecedented virus havoc likely to
continue into the foreseeable future, the OZ program is even more valuable for investors.


Q17. In addition to being a trusted advisor to OZ investors, you also have operating
experience, correct?


BC: That’s true. I have started, or been a very early investor in, over 25 business ventures during
my career and I have several personal OZ investments in the works. I really appreciate being able
to use the OZ program for active businesses, not just for real estate projects. The ability to
structure public-private partnerships with cities, counties and government agencies fits within my
long-term experience. Finally, the OZ program’s focus on improving economically challenged
neighborhoods and improving the lives of those living in these regions through workforce training,
education improvement and quality job creation is the most satisfying part of the program. 

Related Topics for download

Opportunity Zone Funding Timeline

IRS Notice 2021

Opportunity Zone Federal Gov. Guide

Top 10 Qualified Opportunity Zones