A QOF purchased tangible property in a QOZ, and that property is currently undergoing substantial improvement. Is the property substantially improved as QOZ business property for purposes of the 90% investment standard

Yes, the property is considered substantially improved as QOZ business property for purposes of the 90% investment standard during the 30-month substantial improvement period, provided that the QOF reasonably believes that the property will meet the substantial improvement requirements by the end of the period.

Legal Reasoning and Rationale:

1. Substantial Improvement Requirement:
   • According to § 1.1400Z2(d)-2(b)(4)(i), tangible property is treated as substantially improved if, during any 30-month period beginning after the date of acquisition, the additions to the basis of the property exceed the adjusted basis of the property at the beginning of the 30-month period.
2. Treatment During Improvement Period:
   • As per § 1.1400Z2(d)-2(b)(4)(ii), tangible property undergoing the substantial improvement process is treated as satisfying the requirements of section 1400Z-2(d)(2)(D)(i) during the 30-month period if the QOF reasonably expects that the property will be substantially improved by the end of the period.
3. IRS Guidance:
   • The IRS FAQ (Q50) confirms that if tangible property is undergoing improvement and its basis has not yet been doubled, but the QOF reasonably believes that the property will be QOZ business property after improvements are completed, then during the 30-month substantial improvement period, the property counts as substantially improved.

Conclusion:

During the 30-month substantial improvement period, the property is considered substantially improved for purposes of the 90% investment standard, provided the QOF reasonably expects to meet the substantial improvement requirements by the end of the period. This allows the property to be treated as QOZ business property during the improvement phase, ensuring compliance with the 90% investment standard.

Sources:
§ 1.1400Z2(d)-1. Qualified opportunity funds and qualified opportunity zone businesses.
§ 1.1400Z2(d)-2. Qualified opportunity zone business property.
Rev. Rul. 2018-29
Qualified Opportunity Zones: Hot Tubs and Other Hot Topics
Qualified Opportunity Zones: Final Regulations Provide Clarity
Treasury Issues Qualified Opportunity Fund Proposed Regulations