1. Opportunity Zone LIHTC Structure Fund or Business
Opportunity Zone LIHTC Structure Fund or Business? "Active" Trade or Business Test
By: Frank A. Hoffman

2. Where Invested? Opportunity Zone
designated by the Governor
What is Invested? Capital Gain
timely (within 180 days) re-invested into
Type of Structure? Qualified Opportunity Fund
which invests in either
Investment in what?
Qualified Opportunity Zone Property
Qualified Opportunity Zone Business Property
THE DIRECT METHOD or
2. Qualified Opportunity Zone Business
THE INDIRECT METHOD

3. QOF 90% Qualifying Asset Test
A QOF must hold 90% of its assets in “qualified opportunity zone property,” which can be a combination of following three items:
"QOZ Business Property" – Direct Method
Newly issued "QOZ Stock" – Indirect Method
Newly issued "QOZ Partnership Interest" – Indirect Method
In the case #1 – the Direct Method, QOZ Business Property is tanigble property used in a any "trade or business" conducted directly by the QOF.
In cases #2 and #3 – the Indirect Method, for stock or a partnership interest to constitute QOZP, the such QOZ corporation or QOZ partnership must conduct a "QOZ Business” that owns QOZ Business Property.

4. Models for Real Estate Ownership Direct vs Indirect
Investors
QOF
Property
Investors
QOF
QOZ Business
Property

5. Qualified Opportunity Zone Property
Investment In what?
Qualified Opportunity Zone Property
Qualified Opportunity Zone Business Property
THE DIRECT METHOD

6. QOZ Business Property – Direct Method
If QOF has no "QOZ Stock" and no "QOZ Partnership" Interest QOF must hold at least 90% of its assets in "QOZ Business Property".
No Other Tests:
No "Active" "Trade or Business" test
No 5% Nonqualified Financial Property Test
No Operating "Sin Business" Limitations
Up to 10% of the assets may be held in cash (assuming other 90% qualify as QOZ Business Property)

7. QOZ Business Property – Direct Method Rev. Rul. 2018-29
Applies to the QOF direct redevelopment of an industrial site for "residential rental property".
Provides clear guidance that a QOF mutli-family real estate project (regardless of management structure) will qualify as a "trade or business."
Provides clear guidance that QOF land located in an OZ and acquired directly by QOF after December 31, 2018 does not have to be "substantially improved" by the QOF to qualify as QOZ Business Property.
Provides clear guidance the "substantial improvement test" only applies to the cost basis of an existing building and does apply or other wise include the cost basis attributable to the land upon which the building is located.

8. QOZ Business Property – INDirect Method
Investment in what?
Qualified Opportunity Zone Property
2. Qualified Opportunity Zone Business
THE INDIRECT METHOD

9. QOZ Stock or QOZ Partnership Interest
QOF can opt for an indirect invest by investing in QOZ Stock or a QOZ Partnership Interest
Can be any stock in a domestic corporation or any capital or profits interest in a domestic partnership
Must be acquired by a QOF at its original issue
Solely in exchange for cash
The Corporation or Partnership must be qualified as a "QOZ Business" at the time of investment (or was being organized for the purpose of being a Qualified Opportunity Zone)
Must continue to be a QOZ Business during "substantially all" of the QOF’s holding period

10. What is a QOZ Businesses (QOZB)?
A QOZ Business is subject to the following requirements:
Entity Test
"Substantially All" of the Tangible Property owned or leased by the Entity must be QOZ Business Property.
5% limit on "Nonqualified Financial Property" (cash and other financial assets)
Trade or Business Test
50% “Active” Trade or Business Gross Income Test
Use of a "substantial portion" of the intangible assets in the “Active” Portion of the Trade or Business.
No “sin” business investments

11. What is a QOZ Businesses (QOZB)?
There is no definition of what constitutes a "Trade or Business" under Section 1400Z-2 or the Proposed Regulations. Recent Proposed Regulations for Section 199A the IRS and Treasury generally define "trade or business" for section 199A purposes consistent with the meaning of that phrase under Section 162(a). Under prior "trade or business" IRS guidance and case law it is likely that real estate rental activity (including triple net lease structures) would constitute a "trade or business" under Section 1400Z.

12. What is a QOZ Businesses (QOZB)?
There is no guidance of what constitutes an "Active” Trade or Business for purposes of applying the 50% Active Gross Income Test in Section 1400Z-2 or 1400Z-2 Proposed Regulations. Recent IRS guidance for what constitutes an "Active" Trade or Business for purposes of Section 355 would limit "Active" Trade or Business for rental real estate to scenarios where the management of the real estate is performed by employees of the entity or employees of controlled affiliates of the entity. Entities with unaffiliated management would not be classified as "active." Recent 199A Proposed Regulations permit a passively held triple net leased property to be considered as an active business activity to the extent that the property is leased to another active trade or business that taxpayer has direct or indirect ownership, if the taxpayer and/or parties related by family attribution or common ownership of the business tenant own more than 50 percent of the business tenant. If the income comes from multiple tenants, one being a related party and the other an unrelated party, then only the portion attributable to the related party will automatically be considered an active trade or business, and the landlord will have to do more than just collect rent from the unrelated party in order for that portion to be considered an active trade or business.

13. What is a QOZ Businesses (QOZB)?
IRS Notice states that solely for purposes of Section 1400N(d)(2)(A)(ii) (Go Zone Property Bonus Depreciation), the determination of whether a trade or business is actively conducted by the taxpayer is to be made based on all the facts and circumstances, IRS Notice further states that for purposes of § 1400N(d)(2)(A)(ii) (Go Zone Property Bonus Depreciation), a partner, member, or shareholder of a partnership, limited liability company, or S corporation, respectively, is considered to actively conduct a trade or business of the partnership, limited liability company, or S corporation if the partnership, limited liability company, or S corporation meaningfully participates (through the activities performed by itself, or by others on behalf of the partnership, limited liability company, or S corporation, respectively) in the management or operations of the trade or business.

14. What is a QOZ Businesses (QOZB)?
IRS Notice also provides: Example 1. During 2006, MNO, a limited liability company, constructs and places in service a new apartment building in the GO Zone. MNO is treated as a partnership for federal tax purposes. B, a member in MNO, manages and operates this apartment building for MNO. Because B manages and operates the apartment building for MNO, MNO meaningfully participates in the management and operations of the apartment building. Consequently, all of the use of the apartment building is in the GO Zone and in the active conduct of a trade or business by MNO in the GO Zone. Accordingly, the unadjusted depreciable basis (as defined in § 1.168(b)- 1T(a)(3)) of the apartment building qualifies for the GO Zone additional first year depreciation deduction (assuming all other requirements are met). However, limitation provisions of the Code (for example, § 469) apply and may limit the amount of the GO Zone additional first year depreciation deduction that may be claimed by the members of MNO.

15. What is a QOZ Businesses (QOZB)?
Without further guidance it would be difficult to conclude with confidence that a typical Section 42 Operating Partnership Structure would be classified as an "Active" Trade or Business where:
The entity Is a limited partnership
one or more general partners that own 1% or less of the limited partnership
There are no employees
There is a management company is typically an affiliate of one of the general partners and not an affiliate of the limited partners.
There is an Investor entity that does not participate in management and owns 99% or more of the limited partnership
There is a limited partnership agreement that expressly limits the Investor's ability to participate in day to day management of the operating partnership
The Investor is a bank and all bank regulations treat the 42 operating partnership as an investment entity; not as an operating subsidiary of the bank
All related banking regulations expressly limiting the ability of a bank to take any ownership interest in an active operating subsidiary without prior regulatory approval