Leased property rules for Opportunity Zone businesses

Yes. Leased tangible property counts as qualified opportunity zone business property if the lease meets two main conditions: market-rate terms and use in the zone.

A Qualified Opportunity Zone Business (QOZB) must have at least 70% of the tangible property it owns or leases qualify as qualified opportunity zone business property (QOZBP).^1,2 The statute's QOZBP definition speaks of property "acquired by purchase," but the regulations at §1.1400Z2(d)-2 extend qualifying status to leased property that meets their own set of tests.^3,4

These rules come from the final regulations, which kept the leasing framework of the second set of proposed regulations with modest changes.^5,6,7

Because a lease avoids the two hardest requirements for existing buildings: original use and substantial improvement.

A QOZB that buys an existing building must substantially improve it, adding more than its adjusted basis (excluding land) within 30 months, or 50% in a zone made up entirely of rural area.⁸ A QOZB that leases the same building has no improvement requirement at all. Improvements the tenant makes to leased property are its own purchased property, and they are treated as original use, so they qualify too.^4,9

The original use and substantial improvement tests are covered in the original use requirement and the substantial improvement test.

Two: no prepayment of more than 12 months of rent, and a requirement to acquire matching qualifying property when leased personal property is not original use.

Parties are related under §1400Z-2(e)(2) if they fall within §267(b) or §707(b)(1), with 20% substituted for 50%.^1,10 When the lessor and the QOZB are related:

• The tenant may not make a prepayment of rent for a period of use of more than 12 months.^5,11
• If leased tangible personal property is not original use in the tenant's hands, the tenant must become the owner of QOZBP of at least equal value. Summaries of the regulations describe that period as ending at the earlier of the end of the lease or 30 months after the tenant takes possession.^4,12
• The market-rate requirement still applies and gets more scrutiny, because related parties can set rent off market.⁵

For the full related-party definition and family attribution, see related-party rules in Opportunity Zone deals.

Yes, but if there is a plan when the lease is signed to buy the real property for other than fair market value, the leased property does not qualify.

The regulations include an anti-abuse rule for real property: leased real property (other than unimproved land) is not QOZBP if, at the time the lease is entered into, there was a plan, intent or expectation that the QOZB would purchase it for an amount other than its fair market value at the time of purchase.^4,12 A purchase option at a price fixed at fair market value on the exercise date is the safer form. A purchase at a bargain price set years earlier invites challenge.

Using the applicable financial statement value, or under an alternative method, the present value of the lease payments.

If the business has an applicable financial statement (an audited GAAP statement, for example), it may use the value of the leased asset shown there, such as a right-of-use asset. Otherwise, or by choice, it can use the alternative valuation method: the sum of the present values of the payments under the lease, discounted at the applicable federal rate under §1274(d)(1), determined when the lease is entered into.^12,13 Commentary on the final regulations notes that the alternative method value is fixed at the start of the lease and used for later testing dates.⁷

The present value is $500,000 x 17.292 (the 30-year annuity factor at 4%) = about $8.65 million. QOZBP is $68.65 million of $72.65 million, or 94.5%, well above 70%. The test itself is explained in the 70% tangible property test.

It can be, but merely entering into a triple-net lease is not the active conduct of a trade or business for QOZB purposes.

This is a separate question from the leased-property rules above, which concern property a QOZB leases in. A QOZB that owns a building and leases it out must still be engaged in an active trade or business. The regulations say that merely entering into a triple-net lease does not count, and their examples treat a landlord that leases a whole building to one tenant on a triple-net basis as not active, even with an on-site office.^14,15 A landlord that actively manages and operates other, non-triple-net space through its own employees is active.¹⁴

A triple-net lease, as described in IRS guidance, is one where the tenant pays taxes, fees and insurance and is responsible for maintenance, in addition to rent and utilities.¹⁴ Data center leases are written in many forms, which is why the structure needs early tax review. See data center lease structures.

They help on the tenant side, such as ground leases and leased equipment, and they sit next to the separate triple-net issue on the landlord side.

Servers and network gear owned by a tenant in a leased hall are the tenant's property, not the QOZB's, so they do not count toward the QOZB's 70% test. A QOZB that provides power, cooling, security and remote-hands services, or runs multi-tenant colocation, has more defensible facts than a single-tenant shell.¹⁶ This is analysis, not settled law, so structure decisions should be reviewed by tax counsel. For the landlord-side analysis, see powered shell and triple-net data centers and colocation data centers.