BREAKING NEWS: Public Hearing on Proposed QOZ Regulations Scheduled
EPA Brownfields Office Submits Comments on Proposed Regulations
This Thompson Hine Qualified Opportunity Zone Alert covers two important topics: The scheduling of the long-awaited hearing on the first round of proposed IRS regulations and comments on the regulations submitted by the EPA Brownfields Office.
BREAKING NEWS: Public Hearing Scheduled
On January 29, the IRS issued a notice announcing that the public hearing on the proposed Qualified Opportunity Zone (QOZ) regulations, which was originally scheduled for January 10 but postponed by the government shutdown, has been rescheduled for February 14 at 10:00 a.m.
A transcript is usually available within two days following the hearing. Typically, there is minimal cross-exchange of points with government representatives, but rather only a restatement by those who have submitted written comments and request to speak.
In addition, at the U.S. Conference of Mayors meeting on January 24, Treasury Secretary Steven Mnuchin stated that the second round of proposed regulations would be issued “shortly.” This second set of regulations was expressly anticipated by the proposed regulations issued in October 2018, which are the subject of the February 14 hearing, and the scope of the second guidance document may include addressing the points in the comments from the EPA Brownfields Office discussed below.
EPA Brownfields Office Submits Comments on Proposed Regulations
In an unusual move, a federal agency has submitted comments on another agency’s proposed regulations. Patricia Overmeyer, Acting Deputy Director of the U.S. EPA Office of Brownfields and Land Revitalization, states that the proposed Investing in Opportunity Act has the “potential to spur investment in communities where neighborhoods have long been plagued by concentrated distress … in part due to the challenges of remediating and redeveloping their brownfield sites.” She further indicates that “brownfield sites often stigmatize neighborhoods and perpetuate blight and socio-economic distress.”
The comments’ main purpose is to urge the IRS to include in future guidance provisions that will encourage investments in brownfield sites located in QOZs, particularly to better support remediation efforts. Overmeyer states that brownfields are important in redeveloping QOZ areas because:
- Brownfield remediation is often one of the important first steps to revitalization.
- Distressed communities frequently have poorer health outcomes, and environmental conditions are often a factor.
- Brownfields in the United States are statistically shown to exist in higher concentrations in marginalized areas, including lower-income areas and places populated primarily by people of color.
- Brownfield revitalization has been shown to transform communities, and can usually do so without sprawl, by using existing infrastructure.
- Brownfield remediation and revitalization can take considerable time, often longer than the 31-month safe harbor during which a Qualified Opportunity Zone Business must deploy its investment, as currently included in the proposed regulations.
Overmeyer goes on to suggest specific clarifications in the regulations that the EPA believes can provide investors with the confidence to invest in brownfield areas, including:
- Original use. The EPA proposes a definition of “original use” that incorporates brownfields within QOZs. This would facilitate the assessment and remediation required to make previously unsuitable property “ready” for investment and redevelopment. This means brownfield redevelopers could use a 31-month safe harbor just to clean up a property, then sell it to another developer to complete a new project on the property as a separate original use.
- Vacant and underutilized properties. The EPA urges the IRS to use existing regulatory definitions to define “vacant” and “underutilized” properties and to allow the redevelopment of such properties to be considered a “new use.”
- Foreclosed and tax-reverted properties. The EPA suggests that property that has reverted should qualify as vacant or underutilized for purposes of the QOZ program, regardless of how long the property has been vacant, abandoned or underutilized.
- Substantial improvements. The EPA proposes that improvements to land on a brownfield site should be classified as expenditures that meet the “substantial improvements” test. Currently, the IRS has proposed that improvements to land do not count in the substantial improvements test. The EPA approach recognizes that, for the brownfield clean-up phase, the critical improvement is to the land.
- Carryover of gains from QOZ investments in brownfields. The EPA wants the IRS to allow a deferral of recognition of gain for a developer who cleans up and sells a brownfield property to a “vertical developer” (one who will then further develop the site for a QOZ business) without requiring that developers engaged in brownfield clean-up hold property for 10 years. Instead, the proposal would allow a brownfield developer who purchases a replacement property within 12 months with the full proceeds of a sale to apply the same 10-year QOZ hold period that commenced for the first brownfield site for both the gain from sale of the initial brownfield that is QOZ property and any gain realized from the sale of a subsequent brownfield site that has been remediated. In effect, it allows the developer to stack more than one project into a single 10-year period, so long as any gains from sale of one site are then invested into a second brownfield site.
- Safe harbor period. The EPA requests that a separate 31-month safe harbor period be established for each of the remediation and vertical construction phases, citing time periods typically needed for large-scale brownfield clean-ups and weather-related factors that can disrupt the remediation schedule in colder areas.
FOR MORE INFORMATION
For more information, including a list of our Qualified Opportunity Zones team members, please visit our Qualified Opportunity Zones page.
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