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Changes to California HOBR

The “Big” Guys, “Little” Guys, and Those In Between by T. Robert Finlay, Esq. During the height of the Financial Crisis, California passed its landmark legislation intended to help homeowners facing foreclosure — the Home Owner Bill of Rights (HOBR). In short, HOBR required loan servicers to follow certain procedures when putting defaulted borrowers on notice of foreclosure prevention alternatives and prevented servicers from “dual tracking,” i.e., simultaneously proceeding with foreclosure while the homeowner is being reviewed for a loan modification. The law was limited to owner-occupied consumer loans in first position (In response to COVID’s impact on landlords, California’s Legislature amended HOBR in 2020, extending its application to certain tenant occupied properties. Those extensions have since expired). HOBR intended to put loan servicers into two buckets for compliance purposes — the “Big Guys” who annually handle 175 or more annual qualifying foreclosures and certain “Little Guys” who do not meet the 175 threshold. While servicers in both buckets are prohibited from dual tracking, the more detailed and onerous HOBR provisions only applied to the Big Guys, including, but, not limited to:  »         Civil Code § 2923.7, requiring a Single Point of Contact; and  »         Civil Code § 2923.6, mandating certain notices and procedures when the borrowersubmits a complete loan modification. The Little Guys “exception” to the more detailed requirements was limited in Civil Code § 2924.15 to: (A) A depository institution chartered under state or federal line law, a person licensed pursuant to Division 9 (commencing with 3 Section 22000) or Division 20 (commencing with Section 50000) of the Financial Code, or a person licensed pursuant to Part 1 (commencing with Section 10000) of Division 4 of the Business 6 and Professions Code, that, during its immediately preceding annual reporting period, as established with its primary regulator, foreclosed on 175 or fewer residential real properties, containing no more than four dwelling units, that are located in California. But, what if you are a retired couple who occasionally invests in Trust Deeds, but are not a “depository institution” or someone “licensed” by the Financial or Business and Professions Codes? The answer — small investors must comply with the more detailed and onerous HOBR provisions intended by the Legislature to only apply to the Big Guys doing over 175 annual foreclosures! Hard to believe, but an investor who buys one loan a year, must comply with the same HOBR provisions as the largest loan servicers in the country. Since HOBR’s enactment in 2013, the private lending industry has looked for a solution to this obvious unintended oversight by the California Legislature. Unfortunately, for years, there was no appetite in Sacramento to re-open the heated discussions over HOBR. Fortunately, enough time has finally passed, which allowed the California Mortgage Association (“CMA”) to sponsor Senate Bill 1146, which, among other things, puts a small investor “that makes and services seven or fewer loans” a year in the same compliance bucket as loan servicers who conduct less than 175 annual foreclosures. SB 1146 recently passed both houses and is waiting for Governor Newsom’s signature. If signed, the “Really Little Guys” will still have to comply with HOBR; but, starting on January 1, 2025, only its less detailed provisions. Note — The anticipated changes to HOBR do not exempt investors who make and service seven or fewer loans a year. These investors must still comply with HOBR. The new law just reduces the HOBR provisions that need to be complied with. If you have any questions about what provisions must be complied with or need help complying with HOBR, please feel free to reach out to Robert Finlay at rfinlay@wrightlegal.net.

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California’s Recently Passed SB 567

What to Understand Before Jumping into the Fire By Todd E. Chvat, Esq. and T. Robert Finlay, Esq. SB 567 directly impacts two sets of property owners — fix-and-flip investors planning to substantially remodel or rebuild a property for resale AND property owners planning to move into an occupied property either themselves or by a family member. To Understand the New Laws, We Must Understand the Old Laws Civil Code § 1946.2 prohibits a property owner from removing a tenant who has continuously lived in the property for 12 months without just cause. “Just cause” is broken into two groups — “at-fault just cause” and “no-fault just cause.” As you can imagine, “at-fault just cause” generally involves a tenant’s failure to pay rent, breach of lease, waste, running a meth lab or other criminal activity. For our purposes, we are focused on the “no-fault just cause” grounds to remove occupants, which include: (i) the property owner or family member moving into the property; (ii) completely removing the property from the rental market; (iii) complying with certain government orders, e.g., code violations; or (iv) substantially remodeling the property. Beginning April 1, 2024, SB 567 will add a significant hurdle to any “no-fault just cause” eviction where the property owner (or the owner’s direct relative) desires to occupy the residential real property or an investor seeks to displace the tenant for a substantial remodel. New Rules for Property Owners Planning to Move Into the Property It is very common for prospective owners to buy rental property with the goal of moving in or for existing property owners to remove occupants to move their children or parents into the property. Historically, this was a fairly easy process with no restrictions or guidelines on when the owner must occupy the property or for how long. Effective April 1, 2024, SB 567 will require that the property owner or family member (spouse, domestic partner, parent, child, grandchild, grandparent) actually move into the property within 90 days AND continuously occupy the property as their primary residence for at least 12 months. In other words, property owners cannot just use the “move in” provision as an excuse to get rid of a tenant they do not like or to increase the rent. In addition to the new requirements in SB 567, property owners should also pay close attention to City and County restrictions on asking tenants to move out so you or your family can move in. Many Cities and Counties have conflicting or more restrictive requirements. Before buying a property with the plan to remove the occupants and move in or before acting to move your family into one of your rental properties, we suggest contacting your attorney to understand all applicable laws. See below for what happens if you get it wrong. New Rules for Investors Planning to Tear Down and Rebuild Previously, investors could relatively easily remove occupants by citing the “substantial remodel” grounds of the “no-fault just cause” grounds. Starting April 1, 2024, those same investors will have to jump through several more hoops before they can remove the tenants. Specifically, SB 567 will require the investor to provide the tenant with written notice, which includes a description of the substantial remodel to be completed and the expected duration of the repairs, or the expected date by which the property will be demolished, and a copy of permits required to undertake the substantial remodel or demolition. The Bill further requires that the remodel or demolition actually be done. Again, please keep in mind that some Cities and Counties have different and often more restrictive requirements when removing tenants to demo or substantially remodel the property. What Happens if You Get it Wrong? SB 567 gives wrongfully displaced tenants the right to sue property owners for violating either of the above provisions. In addition to recovering actual damages, the wrongfully displaced tenant can recover punitive damages, treble damages (i.e., triple actual damages) and attorneys’ fees and costs. On top of that, a property owner who wrongfully displaces a tenant to demo or substantially remodel the property, must also offer the property back to the displaced tenant at the same rent and lease terms along with reimbursement for reasonable moving expenses. And, if that’s not enough, the Attorney General could also sue you for the same violations. And Don’t Forget When using any of the “no-fault just cause” grounds for removal, the tenants are entitled to relocation costs equal to one month’s rent. And, you guessed it – many Cities and Counties require more substantial relocation costs. Lastly, don’t forget to check to see if there are any local rent control restrictions! Do the New Laws Mean That Property Owners Can Never Move In or Remodel Their Property? No. SB 567 is not so onerous that it prevents property owners from moving their kids into a rental property or investors from remodeling and reselling property. Nor does it make the process so complicated that it is no longer cost-effective to do so. SB 567 merely changes the rules by which property owners may remove tenants. If done properly, investors and property owners can still take advantage of these “no fault” grounds to get possession. But, if not done properly, SB 567 creates significant financial exposure for these property owners and investors. To reduce that risk, we recommend consulting with your counsel prior to venturing down either path to remove occupants. Disclaimer: The above information is intended for information purposes alone and is not intended as legal advice. Please consult with counsel before taking any steps in reliance on any of the information contained herein.

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California’s Assembly Bill 1033

May be a Game Changer for the Development of Accessory Dwelling Units By Kathryn Moorer, Esq. and T. Robert Finlay, Esq. You may have read or heard a lot about Accessory Dwelling Units or ADUs (also colloquially known as Mother-in-Law Suites) recently as building restrictions have been relaxed over the last several years allowing property owners to take advantage of additional lot space, or space within the primary residence, to add value to their property. Let’s not forget the benefits of getting the in-laws out of your personal space. However, what you may not know is that when the California legislature recently passed Assembly Bill 1033, it opened up a whole new world of opportunity to home-owners, developers, and investors by allowing for the ADU to be partitioned and sold separately from the primary dwelling unit on the property. For those unfamiliar with the evolution of laws governing ADUs or ADUs in general, this article provides a quick recap before examining the implications of the new statutory amendments set to take effect January 2024 concerning ADU sales. Accessory Dwelling Units ADUs are fully functional, separate housing units that can be attached to, or wholly detached from the primary residence, such as a guest house, casita, or converted garage. Typically, homeowners create ADUs to provide income opportunities or for family reasons (i.e., to care for loved ones while still maintaining a sense of independence and a level of privacy for all involved). Prior to 2020, cities adopted regulations that greatly restricted ADUs and, in effect, often made it impossible for homeowners to build them. However, multiple bills were signed into law since, preventing municipalities from imposing such harsh restrictions on ADUs with the aim of addressing the housing crisis in California. For example, cities cannot impose minimum lot size requirements, minimum ADU square footage requirements, maximums on unit size less than 850 square feet for a one-bedroom or 1,000 square feet for a two-bedroom, parking requirements, and height limits under 16 feet for detached ADUs. Cities cannot mandate that the ADU be owner-occupied or require that all existing structures be brought up to code as a condition of permit approval. Further, cities are required to ministerially approve or deny a permit application within 60 days without a discretionary hearing, and if the permit is denied, the city must identify the deficiencies in the application and describe how those can be remedied. Moreover, if the city fails to render a timely decision, the application for permit is deemed approved. Finally, homeowners’ associations, try as they might, cannot block an owner from building an ADU. Given the recently relaxed standards, many homeowners have taken the initiative to build an ADU, or two, on their property. Indeed, the current law mandates that local agencies must allow at least two ADUs — one standard and one junior ADU (an ADU no larger than 500 square feet located within the primary residence). Similarly, investors and developers have used this opportunity to construct ADUs on multiple family lots, thereby increasing the property’s value and maximizing income production. New Opportunities However, come January 2024, a new opportunity arises: the ability to sell one or more ADUs separately from the primary residence. AB 1033 amends Government Code section 65852.2 to allow property owners with ADUs to sever and convey the real property interests by creating condominiums. Currently, the separate sale of an ADU is only permitted under very limited circumstances involving an ADU constructed by a qualified non-profit corporation, a low- or moderate-income buyer, and a recorded tenancy in common agreement. Further, the sale must be accompanied by significant deed restrictions, namely, both the primary residence and ADU must be preserved for low-income housing for 45 years. Thus, the current state of the law does not present significant investment opportunities. Beginning January 1, 2024, private owners, investors, and developers may be able to take advantage of the new law and sell separate interests in ADUs without the burdensome deed and buyer restrictions concerning low-income housing. At the outset, it is important to note that, while existing law requires local agencies to allow a separate sale or conveyance of an ADU under the limited circumstances referenced above, the amendment is permissive as to whether a local agency can adopt an ordinance allowing for the private party separate sale of ADUs and only provides for the minimum requirements for such regulations, meaning that this opportunity may vary greatly from city to city. However, if a municipality adopts such an ordinance, there are mandatory minimum prerequisites that an owner must tackle. First, the separate property interests must be created as condominiums pursuant to the Davis-Stirling Common Interest Development Act and in conformity with the Subdivision Map Act. The Davis-Stirling Common Interest Development Act The Davis-Stirling Common Interest Development Act governs the creation of residential real estate developments in which exclusive rights to use/ownership of land are coupled with undivided interests in land that is owned or enjoyed in common with others, such as condominiums. Here, the ADU(s) and the primary residence will have exclusive rights and the remainder of the lot (or at least a portion thereof) would be a common interest area to allow ingress and egress to the occupants. In creating these interests, the act requires that a declaration and a condominium plan be recorded. Further, a homeowners’ association must be created to manage the property. The Subdivision Map Act The Subdivision Map Act grants local governments the power to regulate how their communities grow by requiring them to enact local ordinances that property owners must comply with to obtain approval to divide their land into smaller parcels. Thus, regulations will vary by county or city. The act prescribes the form of the subdivision map and the general approval process after which the city clerk delivers the map to the county recorder. If a landowner fails to obtain approval, the act allows local agencies to prohibit the sale, lease, or financing of a parcel until approval is obtained and

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The Mid-Pandemic Battle of Legal Interpretation

Centers for Disease Control Eviction Order and Constitutionality Dilemma by Jenna Baum, Esq. and Justin Ortega, Esq. Early September of 2020, six months after the pandemic began and while many state eviction moratoriums had already come to an end, the Centers for Disease Control and Prevention stepped in with an added protection to the landlord tenant eviction process, issuing their own “Temporary Halt on Residential Evictions” (85 FR 55292). The background of the Order provides that purpose of the CDC eviction moratorium is to prevent homelessness and thus the spread of the novel Coronavirus, as well as reinstate some of the eviction protections of the CARES Act with extra protections put in place. Who is covered under the CDC Order? “Under this Order, a landlord, owner of a residential property, or other person with a legal right to pursue eviction or possessory action, shall not evict any covered person from any residential property in any jurisdiction to which this Order applies during the effective period of the Order. This Order does not apply in any State, local, territorial, or tribal area with a moratorium on residential evictions that provides the same or greater level of public-health protection thanthe requirements listed in this Order.” Furthermore, the “covered person” that shall not be evicted prior to March 31, 2020, is defined as: “Any tenant, lessee, or resident of a residential property who provides to their landlord, … a declaration under penalty of perjury stating that they meet the criteria laid out within the CDC Declaration form.” Very distinct details of what must be attested to in the CDC declaration in order for an occupant to be protected by the Order include: the occupant must declare that they can not make housing payments due to substantial loss of income, that they have made best efforts to obtain assistance for rent or housing, that they expect to earn less than $99,000 in 2020 as an individual or no more than $198,000 if filing a joint tax return, and finally that an eviction would render the individual as homeless. It is also important to note that under this Order, occupants may still be evicted for reasons other than not paying rent or making a housing payment. The Order specifically mentions that evictions may still move forward based upon whether the tenant engaged in criminal activity on the property, is threatening the health or safety of other residents, is committing damage to the property, or is violating building codes. The moratorium is not automatic; in fact, the Order requires the tenant to trigger their own defense by delivering the completed CDC Declaration form to the owner of the property. The owner must then review to ensure the tenant meets the outlined criteria and once verified immediately halt all eviction efforts until after March 31, 2021. Since the original sunset of December 31, 2020, the CDC moratorium has been extended two times—once by federal legislation through January 31, 2021 (134 Stat. 1182, 2078-79) and the other extension by the CDC through the current sunset date of March 31, 2021 (86 Fed. Reg. 8020). Financial penalties for an individual could result in fines of $100,000 to $250,000, with corporations being fined anywhere from $200,000 to $500,000 for violations. Out of an abundance of caution, some landlords have taken affirmative actions to add CDC language into their rent demands to avoid these possible fines and to provide a mitigating factor should Courts make a finding against them. Courts in Confusion The courts have varied on how to interpret the CDC order. While some courts have requested attestations from tenants, other courts are using their equitable powers to not require an affidavit or showing from the tenant while still providing relief pursuant to the CDC order. Other courts have refused altogether to hear a case upon a tenant eviction. In Spicliff, Inc. v. Steven Cowley, the County Court in Escambia Country Florida held that the CDC’s order violated the Fifth Amendment based upon a taking, and that the government cannot force landlords to house persons in a pandemic without due process and just compensation. (2020 Fla. Cty. LEXIS 1) In contrast, Brown v. Azar, a landlord argued that the CDC order was arbitrary and capricious, tantamount to a taking of their residential property, and denied homeowners access to the courts. In Brown, the United States Court for Northern District of Georgia, Atlanta Division, the court reasoned that the CDC had the authority for the order and further that the landlord did not satisfy the standards to obtain a preliminary injunction from the order. (Brown v. Azar, 2020 U.S. Dist. LEXIS 201475) Arguments have been made that the ability for the federal government to issue this halt onresidential evictions was based upon the Commence Clause, Article 1, Section 8, Clause 3 of the U.S. Constitution, granting the government the ability to regulate commerce among the states. Contrary to this is the 10th amendment which provided state government powers not specifically given to the Federal Government. “Although the COVID-19 pandemic persists, so does the Constitution,” – United States District Judge J. Campbell Barker The larger question still loomed—does the CDC even have the authority to create such an order restricting the rights of a homeowner to evict during a pandemic? On February 25, 2021, the United States District Court Eastern District of Texas made a ruling in a tenant eviction case Lauren Terkel v. Centers for Disease Control and Prevention (Terkel Case) that the CDC (Federal government) did not have the powers to enforce an eviction moratorium. The court elaborated that the CDC’s argument of halting evictions via the Commerce Clause through regulating interstate commerce was insufficient and too attenuated as there are more interstate movements by divorce in comparison to foreclosure and evictions. Finally, the Court stated that the CDC order exceeds the power granted to the federal government via the Commerce Clause and held unlawful as contrary to constitutional power. (2021 U.S. Dist. LEXIS 35570) Where we stand today

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Finding Value in the Intellectual Property Assets of Distressed Companies

Buying Intellectual Property as an Investment Opportunity by Jennifer McLain McLemore Last year’s wave of retail bankruptcies will have a long-lasting impact on the structure of modern shopping centers. However, the businesses that sought bankruptcy protection and the diverse outcomes can be instructive beyond the struggles of retailers. These bankruptcy cases provide examples of investment opportunities that arise when distressed companies seek liquidity by selling some or all of their assets, including their intellectual property. The intellectual property assets that may be sold range from brand names to e-commerce platforms to back-room software and infrastructure. In the next economic cycle non-retail entities may seek bankruptcy protection and will provide a similarly meaningful opportunity for investors seeking intellectual property assets. Intellectual property asset sales are important because this asset class can have overlooked value, which can be missed as distressed liquidations move quickly. For the aware and prepared, such expedited sale processes can be an opportunity and provide an advantage. This article will focus on (i) the investment opportunities that arise when distressed businesses seek to create liquidity through intellectual property asset sales, (ii) the means by which strategic business opportunities can be realized through distressed processes, (iii) the potential risks and rewards present when such assets are sold in a distressed environment, and (iv) the strategies for maximizing opportunities to capture such assets in a distressed sale context. Opportunities Await the Aware and Prepared—Examples of Liquidating Intellectual Property Assets in Bankruptcy Cases Covid-19 disrupted the plans of numerous retail businesses that already were in bankruptcy and forced numerous retail operations into bankruptcy. While some brands ended their operations quickly, liquidating all assets (from intellectual property to clothing hangers), some parent companies of brands chose to restructure debts and emerge from bankruptcy with a stronger balance sheet. Still other retail debtors engaged in strategic sale processes, closing brick and mortar stores for some brands, and selling other brands entirely. In the Stage Stores, Inc. bankruptcy cases, which filed as a result of the Covid-19 shutdowns, the debtors sought a buyer for their 700 department stores while simultaneously trying to wind down operations. The debtors sought to liquidate in-store assets as soon as government shutdowns were lifted, as a buyer for the physical stores did not immediately emerge. After several months of effort, the debtors found a buyer with a name related to one of the debtors’ operating entities. This buyer was willing to pay to take the debtors’ intellectual property. With this acquisition, the Stage Stores’ buyer was able to purchase full, national control of its own brand name. Case No. 20-32564-DRJ, Docket No. 861 (Bankr. S.D. Tex. October 9, 2020). Stein Mart, Inc. filed for bankruptcy protection after most of the Covid-related shutdowns were concluded. Quickly after filing, the debtors announced that all stores were liquidating their inventory and closing. Contemporaneously, the debtors announced the sale of the debtors’ brand name, domain names, private label brands, social media assets and customer data. A subsidiary of Retail Ecommerce Ventures was the stalking horse bidder and ultimately the winning bidder for the debtors’ remaining assets at auction. Case No. 20-2387-JAF, Docket No. 738 (Bankr. M.D. Fla. November 19, 2020). Retail Ecommerce Ventures was able to make similar acquisitions in bankruptcy cases across the country, including, for example, in the cases of Radio Shack, Linens ‘N Things, Modell’s Sporting Goods, and numerous others. In addition to preserving brand recognition, e-commerce presence, and the related intellectual property, in some instances, Retail Ecommerce Ventures even has been able to keep brick and mortar locations open. Opportunities Presented—When and How do Such Asset Sales Arise? While distressed businesses determine the best strategic means to create liquidity, there is immense pressure to make such decisions quickly in a bankruptcy setting. This pressure is created by lenders and compounded by the intense costs of bankruptcy. Further, debtors have just 210 days to decide which leases to keep and which to sell or reject. Yet, in order to satisfy the other requirements of the Bankruptcy Code, a proper sale process must include real marketing of the assets and must provide enough notice of such sale(s) for potentially interested parties to undertake proper due diligence. Further, the sale process must not be so quick as to frustrate potentially interested bidders from participating. Debtors and lenders will always prefer to pursue a sale with a stalking horse bidder, which party will set a floor-price for the assets. Thereafter, an auction is a preferred method to set the ultimate value of the assets, because it is hoped that an auction will involve a competitive process between at least two interested purchasers. Courts have come to accept auction results as the fairest way to realize value in a distressed context. Similarly, even if no other bidders assert an interest in a debtor’s assets, a stalking horse bidder buying the assets without an auction process is also perceived to be a fair outcome for the creditors and other parties with an interest in a debtor’s estate, so long as the pre-auction marketing process was robust. The Stage Stores and Stein Mart cases are just two of many possible examples that make clear that an interested purchaser needs to be attentive to case developments early on, or even in advance of a filing, in order to capture desirable intellectual property assets. Risk/Reward Analysis for Buyers to Consider Distressed retail cases show that an established brand name alone can be a meaningful asset. Similarly, a distressed company’s established e-commerce presence has value. An integrated and vetted infrastructure of functional business software can be a separate, strategic acquisition. When these assets come pre-assembled, as in the Stein Mart case, they present a real opportunity for a prepared purchaser. Such assets may have alternative value to the right purchaser. Beyond the example presented by the Stage Stores purchaser, that sought rights to use a brand name nationally, another type of buyer may be looking to eliminate a struggling competitor, or another buyer may seek to keep a

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The Future of Opportunity Zone Tax Benefits for Real Estate

A Legal Perspective on Benefits, Requirements and Criticisms by Jenny Connors The opportunity zone (“OZ”) tax incentive, which was enacted as part of the Tax Cuts and Jobs Act, has been a major catalyst for real estate investment over the past three years. Initiated as a bipartisan effort for economic growth and job creation, the incentive was intended to promote long-term, private investment in America’s low-income communities. The incentive, however, has long come under criticism for failing to meet its objectives. This article includes a brief summary of the incentive’s tax benefits and its requirements for qualification, as well as a discussion of the future of OZs and foreseeable changes under the Biden administration.    OZ Tax Benefits There are three primary components of the OZ tax incentive. First, the incentive offers electing taxpayers an opportunity to defer tax on eligible capital gains if they invest those gains on a timely basis in an entity taxed as a corporation or partnership that self certifies as a qualified opportunity fund (a “QOF”). Generally, the applicable QOF investment period is 180 days following a gain recognition event. However, there are several regulatory exceptions to this rule. For instance, the 180-day period for partners allocated partnership gains begins on the last day of the partnership’s taxable year or, if a partner so elects, on the due date of the partnership’s tax return (without extensions) or the partnership’s recognition date. The deferral period for all taxpayers, though, regardless of the date of investment, ends as of December 31, 2026.  Any gains recognized after that date are ineligible for OZ tax benefits. Second, taxpayers can qualify for a partial tax reduction on their deferred capital gains if they invest in QOFs by certain dates. Specifically, taxpayers who hold their qualifying QOF investments for at least 7 years prior to December 31, 2026 get the benefit of a 15% tax reduction on their deferred eligible gains. To satisfy this timeline, taxpayers needed to invest eligible capital gains in a QOF on or before December 31, 2019. Taxpayers who missed this deadline may still be eligible for a 10% tax reduction, so long as they invest such gains in a QOF prior to December 31, 2021 and continue to hold that investment as of December 31, 2026.  After 2021, the partial reduction benefit expires, and there is no option for taxpayers to reduce the tax owed on their deferred capital gains.   Lastly, taxpayers who hold their qualifying QOF investments for at least 10 years and make a valid election can benefit from a tax exclusion on the appreciation of their QOF interest. Basis adjustments taken over the life of the QOF interest facilitate this exclusion. When a taxpayer makes a qualifying investment in a QOF, he or she takes a $0 basis in the QOF interest to preserve his or her unrecognized capital gains. As of December 31, 2026, when the deferral period ends, the taxpayer’s basis is increased by the then-recognized gain, plus the tax reduction amount, if any. Upon a sale or exchange of the taxpayer’s QOF interest, and after a 10-year hold, he or she can elect to increase his or her basis in the QOF interest to its fair market value immediately prior to the sale or exchange. In so doing, the taxpayer’s amount realized (i.e., gain less basis) is equal to $0, and the taxpayer recognizes no gain on the transaction.  Treasury Regulations extended the 10-year gain exclusion election to sales of QOF assets, including sales of qualified opportunity zone property (“OZP”) and qualified opportunity zone business property (“OZBP”). In those instances, the taxpayer may elect to exclude the asset sale gain, provided that he or she has held his or her QOF interest for at least 10 years. OZ Requirements At least 90 percent of a QOF’s assets must be OZP. OZP includes OZBP or equity interests in subsidiary businesses.  Typically, QOFs investing in real estate opt for the latter, specifically holding qualified opportunity zone partnership interests.  Referred to as the “indirect” structure, the QOF holds the partnership interests in satisfaction of the 90 percent OZP requirement. Those partnership interests must be acquired after December 31, 2017, and the underlying partnership must be a qualified opportunity zone business (an “OZB”). While OZBs are subject to additional requirements, the indirect structure, which necessitates an OZB, ultimately provides QOFs with greater flexibility in deploying cash and satisfying asset thresholds.   An OZB must derive at least 50 percent of its total gross income from, and use a substantial portion of its intangible assets, if any, in, the active conduct of a trade or business within a designated OZ. Less than 5 percent of its assets may constitute nonqualified financial property, including, among other things, cash (other than reasonable working capital, including amounts to be deployed within a 31-month period pursuant to a written plan), debt, stock and subsidiary partnership interests, and no part of the OZB’s business can constitute a “sin” business. Most importantly, though, substantially all, or at least 70 percent, of the tangible property owned or leased by an OZB, if any, must be OZBP.  OZBP includes tangible property, real or personal, that is acquired or leased after December 31, 2017.  For purchased OZBP, its original use in the OZ must commence with the OZB, or it must be substantially improved within a 30-month period. Substantial improvement generally requires an OZB to spend at least the amount of the property’s acquisition cost (less, in the case of real property, amounts allocated to land) on improvements. Finally, for at least 90 percent of the OZB’s holding period, OZBP must be used within an OZ.  OZ Criticism and Potential Changes The OZB and OZBP requirements lend themselves to realty, which is stationary within an OZ.  Consequently, most OZ projects are real estate based. Critics of the OZ incentive have noted that its heavy real estate usage leads to problems of gentrification and results in few, if any, jobs for residents of low-income communities. While

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