What are the rules for triple net leasing when it comes to OZ investments?

Answers

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  Matt Campbell

  Hall Estill

  January 28, 2020

  I've asked that very question to Daniel Kowalksi, Counselor to the Secretary U.S. Department of the Treasury, and he at the time stated triple net leasing is categorically not allowed. The final regulations seem to open that door though and if there is a continuous and regular payroll supporting the triple leasing activity, that might qualify as a business. Until further guidance is issued, no one I know is willing to take the risk and modify leases to NN or N leases. (https://home.treasury.gov/about/general-information/officials/daniel-kowalski)

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  Matthew Rappaport

  Falcon Rappaport & Berkman

  January 28, 2020

  NNN leases are not active trades or businesses unless there is a substantial management component. For general guidance, look to Rev. Rul. 75-374 and the recent administrative pronouncements regarding NNN leases in the Section 199A context. I would probably not go with any NNN lease in an OZ project, though. I would keep the leases active, with landlords responsible for the traditional common area maintenance, snow removal, routine repairs, real estate taxes, utility bills, and so on.

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  Guy Nicio

  Windes

  January 29, 2020

  There is no bright-line test for this, but it's the same rules for meeting the standards for any trade or business without taking reference to the OZ tax law. So a true triple net lease arrangement will not qualify in general. It takes regular and continuous involvement in managing the property in some capacity. But again, these rules are not unique to Opportunity Zones, so I would suggest reviewing your detailed fact pattern with your personal tax advisor.

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  Jonathan McGuire

  Aldrich CPAs and Advisors

  January 29, 2020

  This is really a facts and circumstances test that you need to consult with your tax advisor on as there is no black and white test. Ultimately, if you have one triple net lease on one property, it will not be a trade or business. You can have one building with a mix of triple net and not triple net leases, include some management or operational activities, and have it constitute a trade or business. A case could be made that a portfolio of triple net leases could arise to a level of a trade or business. However, rather than being a rental business, you might be in the asset or investment management business.

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  Maria De Los Angeles Rivera

  Kevane Grant Thornton

  February 01, 2020

  Triple net leases are not considered an active trade or business for the Opportunity Zones program. The final regulations provide some relief when a property is a mixed-use: part triple net lease and part leases. Basically, some net triple lease will be allowed as long as it is not substantial (i. e. 1/3 to 2/3 ratio).

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