January 20, 2020

January 20, 2020

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A Winning Combination: Uncle Sam’s Excess Property Inventory and the Opportunity Zone Tax Incentive

GSA Properties Open Window of Opportunity for Investors with Capital Gains

A new mandate requiring the federal government to sell property it no longer uses or needs creates significant “opportunities” for investors with capital gains to use the Opportunity Zone tax incentive to finance the acquisition and rehabilitation of the excess inventory. The General Services Administration (GSA) owns and leases over 370 million square feet of space in 9,600 buildings in more than 2,200 communities nationwide. Recent legislative reforms have ushered in a streamlined framework for the disposal of some of these undervalued and underutilized federal properties. These efforts have reduced regulatory burdens and created significant incentives for investment in the acquisition of federal properties. Coincidentally and serendipitously, several of these GSA properties fall within low-income census tracts designated as Opportunity Zones (OZs). An excess in underutilized properties combined with the abundance of incentives created by OZs is creating natural synergies for targeted investment strategies.

The GSA has a vast array of properties under its control, including many that no longer serve a necessary government function. While the federal government is required to sell these unused or underutilized properties, the process has historically been viewed as complicated and slow. Sponsored by former Congressman Jeff Denham, the Federal Asset Sale and Transfer Act of 2016 (FASTA) streamlined the process by creating the Public Buildings Reform Board (PBRB) to identify opportunities for the federal government to significantly reduce its inventory of civilian real property and thereby reduce costs. The GSA is currently seeking recommendations for up to $750 million worth of underutilized and vacant federal properties to sell in the next six months — part of an eventual $8 billion worth of opportunities the PBRB is mandated to consider.

The Tax Cuts and Jobs Act of 2017 introduced the OZ tax incentive that offers potentially significant tax benefits for investors to help to attract funding for projects and businesses in low-income census tracts, including the acquisition and rehabilitation of GSA buildings located within these tracts. Using the OZ incentive, individuals and other entities can delay paying federal income tax on capital gains until as late as December 31, 2026, if those gains are invested in OZ Funds that invest at least 90percent of their assets in qualified businesses or tangible property located in designated OZs. Investments held at least five or seven years by that date are eligible for a total 10 percent or 15 percent step-up in basis, respectively. Further, the capital gains on investments in the OZ Funds can be free of federal income tax if the investment in the OZ Fund is held for at least 10 years. There are 8,766 designated OZs throughout the United States, the possessions, and the District of Columbia.

Subject to meeting certain OZ rules and regulations, including that the properties are located in a designated OZ, the possibilities are almost limitless for utilizing the OZ incentive. These could include the acquisition and rehabilitation of GSA properties into affordable housing, commercial real estate, agricultural supply warehouses, manufacturing hubs, innovation centers, and renewable energy projects, to name just a few examples. Urban, suburban, and rural properties throughout the country can be rehabilitated and repurposed using the OZ incentive. The streamlined disposal of federal properties in tax incentivized OZs is a potential boon for well-placed investors and can reduce the cost of capital for developers and entrepreneurs.

Copyright 2020 K & L Gates

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About this Author

Mary Baker Burke, KL Gates Law Firm, Tax Attorney
Government Affairs Advisor

Mary Burke Baker is a government affairs advisor in the Washington, D.C. office. Mary focuses on federal tax matters affecting businesses—including domestic and multi-national corporations and all types of pass-through entities—and individuals. Her practice covers tax policy, tax reform, regulatory and other guidance, tax administration and technical tax issues, with particular emphasis on the OECD and the European Union, accounting methods, energy and medical device issues, and FBAR compliance matters for individuals.

Mary consults with and...

202-778-9223
Olivia S. Byrne, real estate and finance lawyer, KLGates
Partner

Olivia S. Byrne is a partner in the Washington D.C. office and a member of the firm’s Real Estate Investment, Development, and Finance group.

Olivia spearheads the firm's U.S. Economic Incentives practice along with the Real Estate and Public Finance practices in the Washington, D.C. office. Olivia has successfully obtained economic incentives for clients on a national basis including the District of Columbia and has extensive experience drafting legislation for economic incentives.  She represents clients in real estate projects relating to headquarters buildings, mixed use, retail, office, residential, manufacturing, warehouse, healthcare, hotels, restaurants, and sports arenas.  Her real estate practice involves site location for many different industries, namely technology, broadcasting, manufacturing, as well as industrial, sports, and entertainment facilities and hotels.  She and her team represent inbound companies from abroad as well as U.S. companies relocating or deciding to remain in place and expand.  Her proven track record demonstrates proposals to certain corporations such as manufacturing in excess of US$100 million dollars in economic incentives.  She served as lobbyist for The Advisory Board Company that won the “Game Changer Award” at the Washington Business Journal’s Best Real Estate Deal of the Year Awards in 2016.

1.202.778.9412