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September 10, 2020

Stroock Special Bulletin

By: Richard G. Madris, Jeffrey R. Keitelman, Kim Pagotto

Executive Order

  • On August 24, 2020, President Trump signed an Executive Order[1] that instructs federal agencies to prioritize the location of facilities within distressed areas, including “Opportunity Zones” established under the Tax Cuts and Jobs Act of 2017.
  • An Opportunity Zone is a designated economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Almost 8,800 Opportunity Zones have been designated across the U.S.
  • Investors in Opportunity Zones can achieve three significant tax benefits by investing capital gains in Qualified Opportunity Funds (QOF), which are vehicles for investing in qualified OZ properties:
    • The first benefit of investing in these funds is that the investor can defer paying taxes on short- or long-term capital gains (including from the sale of securities) until as late as December 31, 2026.
    • Second, when these taxes are paid, 10 percent of the original gain is eliminated if the investment is held for at least five years.
    • Finally, any capital gains that accrue to investments in a QOF (including depreciation recapture) are tax free if the investment is held for at least 10 years.
  • The change in priority for locating government facilities may present opportunities for landlords, developers, lenders, and asset managers to acquire, develop, finance, and operate properties within Opportunity Zones and then lease such properties to GSA[2] and other federal agencies.
  • In addition, the GSA issued its own release following the issuance of the Executive Order, in which it said “We are excited to now officially include qualified Opportunity Zones in the list of priorities we formally assess when selecting sites.”
  • Although the federal agencies themselves cannot benefit from the Opportunity Zone tax benefits, the owners, investors and lessors of the properties can obtain the OZ tax benefits described above if the transactions are structured appropriately to meet the (somewhat complex) Opportunity Zone requirements.  For OZ funds, government agencies can be ideal tenants for an Opportunity Zone property. 
  • While the exact language to be promulgated by GSA remains to be developed, and how the potential availability of QOZ locations will be addressed in competitive procurements (including both prospectus level and smaller leases) remains to be seen, this development is a significant departure from GSA’s previous practice of historically selecting locations that are within central business districts.  The federal government will also need to prioritize how it meets this directive, while managing other priorities such as security level requirements, public transportation locations, and agency-specific requirements.
  • Both QOZ and Government Real Estate are highly specialized practices.  Stroock offers a one-stop shop with an integrated team that is experienced in both of these unique areas.

Opportunity Zones Team

  • Stroock’s multidisciplinary team is composed of recognized thought leaders in the QOZ program. We are actively engaged in transactional work with QOZ assets and are navigating the regulatory changes in real time as the QOZ landscape continues to come into focus.
  • We help our clients unlock the benefits of the QOZ program by developing strategies to raise QOZ-advantaged “rollover” capital, creating tax compliant QOFs and QOZBs, and maximizing the value of QOZ assets. We are actively involved with a broad spectrum of QOZ assets, including all categories of real estate, as well as operating companies and other active business projects. By creating a team that combines our understanding of the QOZ program and its requirements with our business-minded approach and experience in real estate, infrastructure, energy, private equity, fund formation and securities compliance, we are able to provide thoughtful and comprehensive advice to help our clients achieve their goals.

Government Real Estate Teams

  • Clients turn to Stroock’s highly specialized government real estate team to handle their GSA and other government-related real estate transactions and disputes. We are one of only a small handful of real estate teams that offer clients experience in both public and private sector matters.
  • When it comes to government real estate, we provide comprehensive services in the areas of government lease and lease administration, government contracting and disputes and national security, CFIUS and other regulatory matters. Our government real estate team includes lawyers and consultants formerly with the GSA and Department of Justice and assists with government lease, enhanced use lease, build-to-suit, public-private partnerships, economic development, bond or similar financing, infrastructure construction, renewable energy or any other project with both a government and real estate component. With a tremendous insight and understanding of the government’s procedures and processes, we represent developers, buyers, owners, lenders and lessors of government real estate and are familiar with the problems that repeat themselves from deal to deal and provide realistic solutions.

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For More Information:

Richard Madris

Jeff Keitelman

Kim Pagotto

Jeffrey D. Uffner

[1] https://www.whitehouse.gov/presidential-actions/executive-order-targeting-opportunity-zones-distressed-communities-federal-site-locations/   August 24, 2020.

[2] The General Services Administration (GSA) is the largest owner and user of space in the U.S. The GSA owns or leases 376.9 million square feet of space in 9,600 buildings in more than 2,200 communities nationwide.

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome

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