Phil Jelsma
Partner and Chair of the Tax Practice Team
Crosbie Gliner Schiffman Southard & Swanson LLC (CGS3)
Email: pjelsma@cgs3.com
Phil is chair of the tax practice team at CGS3. He is recognized as a leading joint venture and tax attorney, with a 30-year background in real estate exchange transactions, syndications, nonprofit corporations and international tax planning.
First introduced in
2017, the Opportunity Zone program -- which offers tax incentives to investors who reinvest capital gains
into designated low-income communities -- was already a complicated maze of rules and requirements. Now, with
the passage of the One Big Beautiful Bill Act (OBBBA), the landscape has
shifted once again. The Opportunity Zone (OZ) program has been made permanent
and incentives have been recalibrated -- while opportunities remain, eligibility is tighter and compliance
obligations more demanding.
Joint ventures (JVs)
between developers, investors and fund sponsors have long been the preferred
vehicle for pooling capital into tax-advantaged Opportunity Zone investments.
For stakeholders in real estate and development, this means existing JV operating
agreements and deal structures may be out of sync with the new statutory
framework. Below, we unpack six major changes impacting JVs in Opportunity
Zones and explain why JV partners may need to reassess their strategies now.
Permanence: Rolling
10-year designations
What changed: The OZ
program no longer sunsets in 2026. Instead, every 10 years governors will
designate new zones, certified by Treasury, with rolling effective dates.
JV implications:
• JVs now face
multiple vintages of OZ designations. Some zones may phase out, new ones may
appear, and prior tracts may or may not remain eligible.
• For deals spanning
long horizons, partners must plan for how changes in zone status affect both
initial qualification and future refinancings or dispositions.
• Operating
agreements should include allocation-of-risk provisions if an asset loses OZ
eligibility midstream.
Basis step-ups: Simplified
but leaner
What changed:
Investors now get a 10% basis step-up at year five. The former 5% bump at year
seven is gone.
JV implications:
• The elimination of
the seven-year step-up compresses the benefit schedule, making five-year holds
more attractive.
• JVs should expect
investors to push for shorter hold periods or refinancing events around the
five-year mark.
• Agreements need
clear exit mechanics to resolve conflicts between long-term developers and
short-term investors.
Eligibility tightened:
Fewer qualifying tracts
What changed: The
poverty/income test for qualifying census tracts was narrowed (70% of area
median income instead of 80%). The "contiguous tract" rule is repealed. Puerto
Rico's blanket designation is revoked.
JV implications:
• Many tracts that
once qualified will no longer make the cut after 2026.
• Sponsors raising
capital for pipeline projects must reconfirm eligibility before formation -- no
more assuming adjacency will suffice.
• JV partners should
negotiate reps, warranties and indemnities allocating the risk of
disqualification to the party responsible for diligence.
Rural Opportunity
Zones: A new category
What changed: OBBBA
creates the Qualified Rural Opportunity Fund (QROF), with special incentives:
• A 30% basis step-up
after five years.
• A reduced
"substantial improvement" requirement -- only 50% of adjusted basis, not double.
JV implications:
• Rural OZ deals now
carry enhanced tax benefits that can dramatically shift returns.
• Developers with
rural projects may suddenly find themselves in stronger fundraising positions.
• JV agreements
should anticipate alternative waterfall structures that reflect outsized rural
benefits.
Thirty-year horizon:
Clarified exits
What changed: After
30 years, basis steps up to fair market value, but no further after that.
JV implications:
• Long-hold funds
must now cap planning at 30 years.
• Partners should
align on whether to exit before the 30-year basis freeze, or restructure into a
successor vehicle.
• Operating
agreements need mechanics for forced sales or rollovers at the 30-year mark.
Reporting and compliance:
Penalties with teeth
What changed:
Qualified Opportunity Funds (QOFs) must file detailed annual reports on asset
values, locations, NAICS codes, employment, housing units, and more. Penalties
for noncompliance can reach $50,000.
JV implications:
• Compliance costs
will rise. JVs must budget for accounting, tax, and legal oversight.
• The party
responsible for preparing reports must be clearly identified in the operating
agreement.
• Audit cooperation
and indemnity clauses are now essential -- one partner's sloppy reporting
shouldn't expose everyone to penalties.
Implications for
JV Stakeholders
The Opportunity Zone
program is no longer a pilot -- it's now a permanent part of the federal tax
landscape. But permanence brings structure and scrutiny.
• Investors (LPs):
Need stronger protections to ensure that promised tax benefits aren't lost
through poor compliance.
• Developers (GPs):
Gain new fundraising leverage but also face more liability for program
adherence.
• Lenders: Should
require evidence of updated JV documents as part of diligence.
At the core, the JV
agreement is the shield. It dictates who bears risk when laws shift, assets
disqualify, or compliance falters. With the OBBBA now in place, generic
partnership templates are simply not enough.
Conclusion
The OBBBA has made
Opportunity Zones permanent, leaner, and created new incentives for investors.
But for joint ventures, the stakes just got higher. Every waterfall,
distribution, indemnity and reporting clause must be carefully reexamined in light of the rule changes.
More than ever, close
collaboration with tax and legal advisors is essential -- not only to ensure tax compliance but
also to align business objectives with investor expectations. When executed
correctly, these updates can unlock substantial capital for distressed and
rural communities. Mishandled, they can turn powerful tax incentives into
costly liabilities.