Memphis Development Group Seeks Exemption Under O-Zone Regs

June 11, 2019

CC:PA:LPD:PR (REG-120186-18)
Room 5203, Internal Revenue Service
PO Box 7604
Ben Franklin Station
Washington, DC 20044

RE: 26 CFR 1, REG-120186-18, — Investing in Qualified Opportunity Funds

Dear Sir or Madam,

The Economic Development Growth Engine Industrial Development Board of the City of Memphis and County of Shelby, Tennessee ("EDGE") appreciates the opportunity to provide comments on the second set of proposed regulations relating to the Opportunity Zone program (the "Proposed Regulations") under Internal Revenue Code section 1400Z-2.

EDGE is a Tennessee industrial development board organized under the Tennessee Code Annotated (TCA) §7-53-101 et seq., created in 2011 by the City of Memphis and Shelby County Government to enhance and accelerate economic growth in the community.

The City of Memphis ("Memphis”) and County of Shelby, Tennessee ("Shelby County"), are committed to the promotion of high-quality development in all parts of Memphis and Shelby County, as well as the surrounding region, and to ongoing improvement in the quality of life for its citizens. Insofar as these objectives are generally served by the enhancement and expansion of the local economy, Memphis and Shelby County established EDGE to lead various economic development organizations, including the Industrial Development Board of the City of Memphis and County of Shelby, Tennessee and Depot Redevelopment Corporation of Memphis and Shelby County and the Memphis and Shelby County Port Commission.

In that role we are writing to express our concern with those sections of the proposed regulations that deal with a Qualified Opportunity Fund (QOF) or Qualified Opportunity Zone Business' (QOZB) treatment of leased tangible property, and more specifically the proposed requirement that such lease be a "market rate lease”. We believe situations where a state or local government entity is the lessor should be exempt from that requirement.

In general, if a state or local government is willing to lease property at below market rates to either a QOF or QOZB to assist or incentivize investment in a Qualified Opportunity Zone, that government support should not be discouraged. For example, if the City of Memphis has surplus property in a Qualified Opportunity Zone and, as part of an overall incentive and assistance package that potentially includes funding from a QOF or QOZB, agrees to lease the property at below market rates to a user that will create jobs, activate a vacant and blighting property, and otherwise contribute to a distressed Census Tract. In this example, the below market rate lease is an explicit use of public resources to leverage the impact of the Opportunity Zone program and achieve a joint objective. Denying use of that public resource eliminates a common government development incentive and is contradictory to the stated goals of the Opportunity Zone program. Exempting government entities will not impact the regulations' goal of insuring the legitimacy of private transactions.

More specifically, a primary tool that EDGE and other Tennessee industrial development boards use to promote economic development is the ability to grant a payment in lieu of (property) tax ("PILOT”) incentive. Grantees of the PILOT incentive receive discounted property taxes for a fixed number of years as incentive to locate their business operations (bringing jobs and capital investment) in a designated location. To provide the intended benefit for an approved PILOT, EDGE is required by Tennessee Constitution, Article II, and Tennessee state law, T.C.A. 75-53-101, et seq. to take title to the real and/or tangible personal property associated with the PILOT which then is leased back to the PILOT beneficiary for the duration of the PILOT term. Under these lease agreements, the original owner of the property retains all the rights and responsibilities of ownership, including the ability to depreciate the asset. EDGE has nominal ownership solely for the purpose of providing the tax incentive. The associated PILOT lease payment is a nominal amount and the cost to transfer title from EDGE back to the original owner at the end of the lease term is also a nominal amount. Similar approaches are used in other states. And while an argument can be made that a PILOT lease is not a lease as defined under sections 1400Z-1 and 1400Z-2, creating uncertainty as to the availability of complementary state and local economic development programs will not enhance investment in QOZs, it will discourage it.

EDGE has a strong interest in supporting economic development in Memphis and Shelby County and we desire to utilize all tools available in achieving a stronger local economy. Based on our understanding, the Opportunity Zone Program was designed to spur economic development in distressed Census Tracts. However, in reviewing the Proposed Regulations, we have identified requirements related to leased property that may have the unintended effect of chilling investment in distressed areas because it may require developers and business owners to choose between government incentive opportunities, rather than combining those programs to achieve sufficient rate of return to justify new investment. Therefore, in order to maximize opportunities for investment, we suggest that any property located in a Qualified Opportunity Zone held by a duly formed governmental entity, such as EDGE, be deemed to be a qualifying lease for the Opportunity Zone program. Specifically, qualifying Opportunity Zone Property held by a government agency and leased to a Opportunity Zone business should not be required to meet the rent rate and market rate transfer requirements for the transfer or leasing of the property.

We appreciate your consideration and hope that you will clarify the final regulations to catalyze public and private investment on state and municipal owned land. If you have any questions please do not hesitate to contact me at (901) 341-2101 or rdulberger@growth-engine.org.

Sincerely,

Reid Dulberger
President & CEO
Economic Development Growth Engine
Memphis, TN