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  • Writer's pictureHoward Kline


Blake Christian, a Tax Partner with Holthouse | Christian | Van Trigt LLP discusses the top 4 things that owners of preexisting assets in Opportunity Zones can do to take advantage of the Opportunity Zone tax benefits.

This was originally presented at the Las Vegas Opportunity Zone Investor’s Meetup on January 8, 2020. By preexisting, we mean persons or entities that owned assets in Opportunity Zones prior to the effective date of the legislation on January 1, 2018.

I have included in this post, the video of the presentation along with the PowerPoint as well as an edited transcript with timestamps, below.

The level of material presented will be for an audience with, more than the basic knowledge of Opportunity Zones but simplified enough for an audience of all levels of knowledge and experience.

The 4 options that Blake discusses in this video, include:

1. Selling the Land to a Qualified Opportunity Fund (QOF) or a Qualified Opportunity Zone Business (QOZB);

2. Contribute the Land to the QOF;

3. The Landowner can Enter into a Ground Lease with the QOF or QOZB; and

4. Land Swaps / Section 1031 Like-Kind Exchanges The audio only podcast, PowerPoint and an edited summary transcript is also available at


Blake Christian [00:03:43] So there’s really a minimum of four ways that you can get this pre 2018 asset into your qualified opportunity fund and eventually down into the Qualified Opportunity Zone Business, (“QOZB”). Each one has some pretty unique tax ramifications and so it’s good to understand the pros and cons of each one of the ways to get it into the Qualified Opportunity Fund, (“QOF”).

Blake Christian [00:04:24] (1) The most normal would be you would sell the land to a qualified opportunity fund or directly to a QOZB, (2) You could contribute the land to the QOF, (3) The landowner can enter into a ground lease with either the QOF or more likely to QOZB, or (4) You could do what we call a land swap, which could be a 1031 exchange or it might not, may not meet the criteria. The last two generally are not going to provide you any of the tax advantages of the Opportunity Zone program as far as the step ups and the ultimate exemption. But it gets you in the game and you may end up forgoing the step up on those assets, but you might have some cash from another transaction that would give you the tax advantages of directly investing into the QOF.


Blake Christian [00:05:39] Selling the land the first and most normal structure, you have to watch out for the related party rules. The related party rules kick in whenever the owner or group of owners of the property, if they sell it and then end up owning cumulatively more than 20 percent of the QOF, then the related party rules kick in. There are two ramifications of that rule getting triggered.  One is the gain that you generate on that sale is not an eligible gain. It gets a little more complicated. The IRS actually in the final regs basically said if a condition of selling is that you’re going to put the money right back into the QOF. That’s just a circular flow of cash IRS going to just collapse the whole transaction and there’s no taxable gain on it. It’s just a tax-free contribution you made. You don’t even have a a qualified investment because you didn’t create a gain from that property. Now, you could have a gain from another transaction, We’ll get to that when we make just a straight contribution of the asset. Once you trigger this 20 percent and you’re investing into that QOF, from the investor side, you’re not going to get any benefit for that sale and reinvestment.

Blake Christian [00:07:45] Now, the other ramification is to the QOF itself, which will affect the other investors. So, again, if you trigger that more than 20 percent test now the other shareholders or owners of the QOF, that QOF upholding an asset that is a non-qualified opportunity zone asset. That that should scare you, but it’s not fatal because the qualified opportunity zone business, the subsidiary entity, can hold 30 percent, non-qualifying assets or what we call bad assets.

Blake Christian [00:10:06] In most cases, if it’s a development project, the project itself is large enough and in the future, investments to build the building on the property is going to be big enough that it deflates the land value sufficiently that you don’t violate the 30 percent test. But the caution is in let’s say it’s a residential project, single family or a duplex or something often times the building costs are not 70 percent or more of the total project.


Blake Christian [00:11:12] If the investor is just taking those proceeds from the sale of pre-2018 property and reinvesting them into the QOF for the same property, the IRS, based on some old revenue rulings from the 80’s, say that’s just a circular flow of cash, it’s no different than you contributing that asset to the QOF and it’s a nontaxable event in most cases. Now, if you had liabilities in excess of your tax basis, you could still generate a gain. In that case, you would you would be OK. But in most fact patterns you’re going to have a transaction that is not going to give that investor any benefit.

20% RULE

Howard Kline [00:12:01] What’s the 20 percent rule?

Blake Christian [00:12:04] The 20 percent rule is to determine if you are a related party. So the difference between staying under the 20 percent test is, the property when it goes into the QOF is still a good asset if the selling owners of the land or the land and building stay under 20 percent, then that is a good, it’s a qualified opportunity zone assets sitting in the fund. That’s really the only difference between violating the 20 percent or not violating it.

Howard Kline [00:12:45] But for the seller, even if it’s 20 percent or less, it still is not a taxable event or, at least IRS won’t treat it as a taxable event, so you’re actually buy keeping that 20 percent there are no capital gains generated

Blake Christian [00:13:04] Correct, but like I said, if you if you generated a gain from some other transaction, you still could be in the game.


Blake Christian [00:13:22]  So the potential results would be, if the non-qualifying or the bad assets in the QOZB exceed 30 percent, then your QOF is not going to meet the test and you QOF wont and then you’ll have penalties which run at 5 percent per year and are assessed every six months. And if you don’t fix this over time, you could blow the whole QOF. It just limits your ability to reinvest tax gains on the sale of land or any other property that’s going to go back into the same project.


Blake Christian [00:18:08] The second way to get your property into the project is just a straight contribution to the land. The great thing about this is if you contribute the land, the related party rules have no application and you can have more than 20 percent ownership in the QOF. And so this is, again, a very common situation where somebody is sitting on a piece of land they want to co-develop it with somebody else, but they want more than 20 percent, they want 51 or 75 percent in some cases. This is a great work around of the related party rules, but there’s a couple of issues that you have to watch out for.


Blake Christian [00:19:01] On the positive side, no gain is triggered on the transfer unless there’s a mortgage or other liabilities that are higher than the contributors tax basis and the property and that can happen if they’ve done a cash out refinance or something, but in most of the fact patterns I deal with they don’t have large mortgages and often they don’t have any mortgage on the land. They’re dealing with some legacy piece of land they’ve had for a decade or two.

Blake Christian [00:19:42] Since you’re not triggering a gain on this, you’d have to

have a capital gain from some other investment. What I find with dealing with developers and things, they’ve always got some deal and are in this cycle of selling deals, five years out from the time they built them. They’re always dealing with gains popping up. Contributing this under the second set of regulations is just like just like reinvesting cash, with the exception of the, basis, issue that you have to watch out for.


Howard Kline [00:20:50] You’ve got to have capital gains from some other transaction. It doesn’t have to be specific. It’s just if you’ve got capital gains and you’ve realized them within 180 days, that’s how you would apply.

Blake Christian [00:21:06] Right, so I had somebody in this exact situation. They had a bunch of portfolio gains from their stocks and bonds and they were a little short, so they just had their broker sell off another hundred thousand dollars of of capital gain property and made it made it all work.


Blake Christian [00:22:20] If you are in a state that’s nonconforming, like California or Massachusetts, Mississippi or North Carolina. Those are the four states that that didn’t adopt at the state level. If you’re in that situation, this is a great structure because you don’t generate any federal or state gain, but you still you’re still in the in the game.

Blake Christian [00:23:14] The best assets to contribute. if you’re using this strategy, you want you want your basis very close to fair market value. That’s where you’re going to get the most juice out of the program. We were working on a project. Actually, it was Utah developers, but a California project. The person that owned the land had three parcels, two of them had a big difference between tax basis and fair market value, and those we decided he would just sell. The asset that was very close to fair market value in basis that when we decided to contribute and to give him the best benefit out of the deal.

Blake Christian [00:24:03] This area is so fact specific. Probably each intake on a new client takes at least an hour because, you have to go back and find out what’s the source of your original gain? What were you investing in? Who are all the parties? Just when you think everything’s okay, you know, somebody has to ask more questions some other issue pops up. So you have to be very careful about the specific facts on every deal.


Blake Christian [00:24:37] Now moving on to ground lease the third way to get the asset in you have a lot of times you have a family has owned this this asset for a long time. If they don’t need to really monetize it and they want to hold on to it, they’re not generating a gain. Again, they’re not going to participate in all of the Oz benefits they’re still in a in a very valuable project. This works out pretty well in situations where people like to collect rents and things. They can still participate. They could invest up at the QOF level with cash from other gains and they’d just collect rents on the land.

Blake Christian [00:26:00] If the taxpayer, lessor ends up owning more than 20 percent of the QOF, then the second set of related party rules apply and the QOF needs to, which isn’t really a problem in a real estate deal they would have to lease or purchase a like amount of other properties, so they don’t want a related party lease and the QOF not to make other investments. In a real estate deal, it’s a slam dunk.


Blake Christian [00:26:52] Probably 30 percent of my projects are operating businesses. We’ve had a couple of situations where there was going to be a related party lease on machinery and equipment and in a manufacturing plant. I told them you could do that but anything you lease, the new owner is treated as the first owner of that property is treated as new, so you don’t have to make improvements or anything to it. But again, if it’s a related party, you they have to go out and either buy that same amount of value or lease the same amount of value so it doesn’t look like a sham transaction.

Blake Christian [00:27:43] A couple of requirements for the lease to be good is you can’t have any lease prepayments beyond one year. I had an East Coast project, Massachusetts, a multibillion-dollar real estate deal, and they started describing this structure to me and they said, oh, yeah, we prepaid all of the rent on a 40 year lease. That was part of the thing. I made it clear that you can’t do that.


Blake Christian [00:28:13] Any options to purchase must be at fair market value. Let’s say it is a billion dollars, but it’s a 20-year lease. You can’t sit there and go, OK, I’m going to buy it in 20 years, but I get credit for all the lease payments that I’ve made. That’s not a fair market value deal. They will look at the fair market value at the end of the lease. What we are building in is just a right of first refusal at least, that the QOF that owns the building, would have a right of first refusal to buy the underlying ground. What you don’t want to have happen is the lessor sells that from out from under you and you could you could have some party that you really don’t want to deal with in the next 20 years.


Blake Christian [00:29:25] Land swaps in Section 1031. Again, this is not that different than the contribution. If you’re just putting property in there or or somehow structuring a 1031 type transaction within an Oz because you’re not buying into that opportunity zone, you’re not going to get all of the step ups and things. But we were working on a project in Long Beach, and we’ve got a combination of three different parcels involved, one will get sold, one is going get contributed to the project and then there will be a ground lease. Then they’re going to do a 1031 on another piece of property on one of the parcels. You can really use all of these different structures for optimal effect. But you really need to do an analysis on each one of these.


Blake Christian [00:30:32] But I did have a point here that you also want to just pay attention to the semiannual testing, especially when an asset is going to be a bad asset in there. When you’re in the development stage, sometimes those percentages will move on you and you just make got to make sure that you’re under the 30 percent threshold. One provision that came in the final regulations is that they have a six-month cure period, so even if you mess up and miss the 30 percent and the QOZB or 10 percent bad assets in a QOF, you have six months to fix it in which case you really sidestep the five percent annualized penalty.


Blake Christian [00:31:58] The OZ program is such a perfect fix for a blown 1031. In a 1031 exchange, you’ve got 180 days to close and you’ve got 45 days to identify. Many of those do not go very smoothly and a lot of a blow up. So let’s say you’ve got a five million dollar gain, you’re rolling over in a 1031, in day 179 you find out that, you just can’t get the financing to close it or there’s some environmental issue and now you’re sitting there with a five million dollar gain. Oz is a perfect fix. You just you should say, OK, fine. Within 180 days, I’m going to roll that gain into to an OZ fund. Now you can do a total development. You can’t you can’t develop a project in 180 days and you have to buy something that’s already done. Right. Y can you then can go out, buy raw land and you will have as long as 62 months to fix that. Whenever you hear somebody pulling their hair out because their 1031 didn’t work you know. Tell them Oz is the fix.

90% TEST

Blake Christian [00:34:43] The qualification requirements for QOF, 90 percent of the assets must be qualified OZ property. There are three types of OZ property.


Blake Christian [00:34:53] Opportunity zones stock. The 30 that we’ve done, no stock involved, you know, we’re using, almost exclusively, limited partnerships. If you’re dealing with California, you want to do a limited partnership so you don’t get tagged with the LLC fees on gross income, which can add up a lot over 10 years.

Blake Christian [00:35:25] Or it can be an Oz Partnership Interest LLC taxed as a partnership or it could be direct to Oz business property which can land, building, et cetera.


Blake Christian [00:35:35] Keep in mind you can only have two tiers of legal entities, a partnership above a partnership or you could have a corporation holding a partnership or another corp. You can have a disregarded entity down below, so technically you could have an LLC disregarded entity, you could technically have three. But from a filing standpoint, you can only file two tiered returns.


Blake Christian [00:36:07] Another thing that people overlook is that a QOF may not invest in another QOF.


I am a California licensed attorney of 43 years, focused on commercial real estate matters and is also a Nevada, real estate agent with KW Commercial in Las Vegas. My primary focus is on commercial real estate leasing and landlord tenant relations. I’ve been doing a deep dive into Opportunity Zones and looking to educate and advise investors with capital gains, as well as developers and owners with assets located within opportunity zones. As an attorney, I have many years of experience advising businesses how to maximize their assets and revenue as well as mitigate risks. I’ve also negotiated probably upwards of a thousand commercial real estate leases for both landlords and tenants. If you’re interested in more information on how I can help you, contact me at Nevada Real Estate License No. 0185884 and California Bar #071516


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