What do Opportunity Zones Mean for Brownfields Redevelopment?

Opportunity Zones (OZ) created by the tax reform that was approved by Congress in the Tax Cuts and Jobs Act (TCJA) in 2017 are present in all 50 states and allow qualified investors to defer and potentially reduce taxes on capital gains for projects within the zones which include many properties that qualify as brownfields. However, after two rounds of proposed regulations meant to provide clarifications to their implementation, questions remain regarding the extent to which OZ will benefit brownfields redevelopment beyond existing state and federal programs, since the regulations don’t provide specific detail about whether many of the costs unique to brownfields redevelopment are qualifying opportunity fund costs. 

In 2018, EPA sent a letter to the IRS encouraging them to clarify the proposed opportunity zone regulations to ensure that the assessment and remediation of brownfields properties in qualified opportunity zones are included within the scope of qualified opportunity funds. While the guidance released by the IRS in April 2019 doesn’t specifically address these issues, it does provide some clarifications to the definitions of “original use” and “substantial improvement,”  which offers at least one avenue for assessment and remediation costs to be included. However, the 30-month window under which “substantial improvement” must occur can offer challenges particularly for a redevelopment involving complex remediation of environmental contamination.  Beyond this, the reporting requirements for qualified opportunity funds remain unspecified.

Our view is that the opportunity zone incentives aren’t going to transform a project’s fundamentals but could certainly provide an additional piece to the capital stack that could increase the attractiveness of an otherwise marginal project. Like any tax incentive, the opportunity zone program is complex and potential users should consult tax professionals before participating, especially as regulations have yet to be finalized.