Episode 38: Tax Strategies for Data Centers

Transcript

IRIS LAWS

This episode is the second of our mini-series about data centers. We welcome Dennis Theodossis and Michael Hanger, who will be focusing on tax strategies when it comes to the space, whether you’re a developer or an investor. From your one stop for tax updates and analysis, I’m Iris.

LANCE JACOBS

And I’m Lance.

IRIS LAWS

And this is “Tackling Tax.”

The buzz about data centers is everywhere. Whether you’re in construction or real estate or private equity or, you know, just a person being impacted by AI and data center development generally. So, last week we talked about some overlooked tax aspects in the space. This week we are turning to tax strategies. So, for this discussion we are lucky to have Dennis Theodossis and Michael Hanger.

Dennis is a partner with the firm and serves as the real estate operators and developers national industry leader, as well as the southeast regional real estate sector leader. He sits just down the road from me in Asheville, North Carolina. And personally, when I think real estate tax, I think this guy. So, he works with owners and operators, private equity funds, homebuilders, family offices, you name it, he works with them.

Michael is no stranger to the show, so welcome back to him. He was the star of our episode 13 of the podcast, and I’m so happy to have him back talking about Opportunity Zones and data center investments in general. Michael has been with the firm nearly 20 years and is our firm specialist in opportunity zones. We will steer clear of talk of football, though, because he went to UVA who played Wake Forest, so, we’ll leave that out. But you know, go Deacs.

Well, Dennis, let’s start with you. There are very, you know, different perspectives when it comes to data center development at the moment, whether you’re looking at developers, the contractors, the manufacturers, right? There’s like so many different sides of this that we could be talking about. And then also there’s the investors, right?

So, basically we could go a bunch of different ways with this conversation, but I was hoping to start with the developer perspective. When you look at the rapid growth in data center development just across the country, what makes this sector particularly interesting from a tax perspective?

DENNIS THEODOSSIS

Yeah. First off, thanks for having me. It’s a pleasure to join you guys. A lot of ways, like you said, that we could take this, but what I think makes data centers particularly interesting from a tax perspective is really the scale of the investment and the mix of the assets involved. These projects can involve enormous amounts of capital going into land, buildings, the electrical and power infrastructure, cooling systems.

There’s just obviously a tremendous amount of equipment on the inside, and those different categories of investment can have very different tax profiles. You also have the location piece, which is key. And at one point, state and local jurisdictions were competing for the projects. Whereas recently the developments have fallen out of favor. So, what I think makes data centers unique is that you have several major tax planning opportunities converging in one massive project.

You need to consider your ownership structure, financing, depreciation, you’ve got your location consideration. And because the dollars are so large, decisions that might not move the needle significantly on a traditional development can become extremely meaningful on the data center project.

LANCE JACOBS

Interesting. So, Dennis, how would you describe the tax profile of a data center development, and how is that different from a more traditional real estate development or an industrial project?

DENNIS THEODOSSIS

Great question. I think the biggest difference is that a lot of times, for our typical developers, the building itself is the major investment that’s happening. So, a substantial part of your basis is really in the building and the recovery period is over a long period of time. But with a data center, you’ve got significant larger investments in utilities, systems, site work, cooling infrastructure.

You can have backup power and other specialized equipment that’s outside of even what the data center tenants going to put into the project. So, from a tax standpoint, classification becomes extremely important. What is the property? Is it tangible personal property. What’s the recovery period? And the key thing is who actually owns which asset. So, economically it kind of looks like this one big, massive project, but from a tax standpoint, we really need to break it down into its individual pieces and who the owners are.

LANCE JACOBS

Interesting. I’m going to ask a question, Dennis, that I think I know the answer to, because I don’t think it’s any different for any of us as tax people. But at what point in a data center project should tax planning really begin? And what opportunities can disappear if developers wait too long?

DENNIS THEODOSSIS

Right. Tax always wants a seat at the table, so I get where you’re coming from, Lance. But honestly, as early as possible. Ideally, tax is part of the conversation before the site and the ownership structure are finalized. That’s because some of the biggest items aren’t things you can easily fix after construction is complete.

And what I mean there is how it’s structured from the beginning, the arrangement, the tax structure, but also the activities that take place, how those are structured can have meaningful impact on how the ultimate gain is taxed: could be ordinary, could be capital. How contracts are structured, who purchased the equipment, that affects different sales and use tax, which I know was touched on in our last episode of this series. Ownership ultimately decides who gets the depreciation deductions. And as we mentioned, in these projects with the scale, those are very important and meaningful.

And, you know, the documentation matters. It’s easier to establish the intent and what was spent on particular systems and pieces of infrastructure while the project is being designed and built than it is--because these projects do have a long runway--three years after the fact. The mistake is treating tax as something that you analyze once the project is finished on a size like this, where tax should really be part of the developer’s due diligence process.

IRIS LAWS

I mean, I was just at a clean energy conference, and they were talking so much about the ways that they’re powering data centers at the moment. And a lot of that, you know, comes into play, like you’re saying, with how it’s structured and who gets the benefit of, you know, clean energy credits or whatever.

So, I completely agree with that point. To take it a little further, right, you know, you can’t get much earlier than evaluating potential sites for the data center. Like where is it going to be? What’s the best spot? You know, we’ve been hearing about all this backlash from local communities about where we’re locating these data centers. But from a tax perspective, what tax consideration should be a part of the decision when you’re looking at where to place these data centers alongside maybe power availability, land availability, and infrastructure?

DENNIS THEODOSSIS

I think you hit the nail on the head, Iris. I mean, access to power is really a driver, really the driver in this decision-making, along with the land., you know. But developers need to be thinking about the total after-tax economics of the location. It needs to be on their radar because it impacts returns and, given the scale here, can lead to surprises which no one likes.

Property taxes, particularly, can be a big amount given the real and personal property involved. Sales and use tax on construction materials and equipment can also become a very large number. Local municipality taxes and unique specific taxes need to be considered as you pencil deals. And some states just have interesting taxes. There’s about four layers of tax in the state of Ohio that you need to think through, plan for, and pencil into your deal.

Otherwise, a return that you thought could have been a 12 IRR ends up being a four IRR. What’s interesting--you kind of touched on it there--is that in past years you could consider maybe getting some negotiated economic incentives, some base abatements, maybe some infrastructure support and other specific location, kind of, negotiated incentives. But as you mentioned, times are changing and views across the country on data centers have shifted.

So, if that was part of your capital stack, you need to step back and reconsider that. So, I’d view tax as another site selection variable that needs to be considered and modeled over the expected life of the investment.

LANCE JACOBS

Well, thanks, Dennis. Your answer confirms to me something that I think I knew all along, which is that state and local tax is the center of the tax universe.

IRIS LAWS

No, we wish, Lance! We’ll give that one to you for now.

LANCE JACOBS

I’m going to turn to you, Michael, and wanted to start thinking about how this intersects with opportunity zone benefits. Can you refresh us a little bit on what an Opportunity Zone is and what the opportunities are there? I think from the earlier “Tackling Tax” episode you recorded, you had an example that really resonated and I think it would be helpful if you wanted to kind of reiterate that with our listeners.

MICHAEL HANGER

Yeah, absolutely. And as Dennis said, thank you for having us on. It is a very timely conversation, so, happy to lean into it. So, Opportunity Zones have been around since 2018. The primary objective for Opportunity Zones is to encourage long-term private investment in certain designated census tracts. So, based on the census data that was available, they create these census tracts that they designate as Opportunity Zones.

And the idea is to encourage investment within these Opportunity Zones to help spur economic activity and investment in these underperforming areas across the country. There have been some changes to the Opportunity Zone programs. Once again, it started in 2018. With the passage of OB3, they made some modifications. So, we’re quickly moving now into what we’re referring to as OZ 2.0, kind of the second iteration of the Opportunity Zones. Before I jump into the OZ 2.0 provisions, I will say real quick for any of your listeners that have an Opportunity Zone 1.0 project, there was some transition guidance that was issued over the summer. Please reach out to your tax advisor. That is pretty important guidance that was issued on existing projects.

And some of the things that are permitted for additional investment in those projects post-12/31/26. So, kind of out of the scope of this conversation today, but I would encourage you to reach out to your tax advisor to talk through that transition guidance to make sure you’re not missing an opportunity with that transition. But shifting to OZ 2.0, there are generally three benefits to the Opportunity Zone program.

The first benefit is the deferral of gain. And that’s an important net point because you do have to have gain that you can defer. Now that gain can come from a lot of different sources. It could come from the sale of your business, sale of real estate, could come from a sale of stock. But you do have to have gain that you can elect to defer as part of the program. Under OZ 2.0, beginning in—and once again, this begins January 1, 2027--you can then defer that gain for five years, meaning January 1, 2027, you elect to defer $10 million of gain. You have five years before you would have to recognize that into income. This is a five-year rolling for anyone that was invested in OZ 1.0. You will recall that we had a fixed date recognition, which was 12/31/26.

We now have a five-year roll, which is going to be beneficial to a lot of taxpayers. The other benefit that we have right now is that we now have permanency in this provision, whereas before it was a temporary provision. So, the first benefit is the deferred gain. The second benefit is a basis adjustment. Similar to what we had under OZ 1.0, the basis adjustment allows for, if you hold it--the investment--for five years, you get a 10% basis adjustment, meaning that once again, going back to same example, we elected to defer $10 million of gain, $1 million of that gain after you’ve held it for five years basically disappears. You get a basis adjustment that eliminates $1 million of that gain.

So, at the end of the five-year period, you’re only recognizing $9 million of gained instead of the $10 million that you originally invested. The third benefit is the primary benefit, and that’s the one we’re going to focus more on today. That’s the exclusion of gain after you’ve held the investment for at least 10 years. So, once again, if you make a $10 million investment January 1, 2027, and you hold that investment, remember at the five-year mark, you’re going to recognize $9 million of deferred gain, with 1 million being excluded because of the basis adjustment.

But let’s say that at the end of that 10-year period, your project is now worth $30 million. That delta between the original investment of $10 million and the fair market value of that investment at the end of the 10-year period is permanently excluded from tax. So, you basically got a $20 million gain number that’s been excluded from tax.

That’s really the big win that we’re looking at when it comes to Opportunity Zones. And that’s really the way we’re structuring these deals is to take advantage of that 10-year hold and that long-term gain exclusion.

IRIS LAWS

So, that’s a great overview. I have to tell you, Michael, I am working on a deal right now and I go back to that podcast episode that we did before just to like help with our clients explain what all the different benefits are. And that’s a great recap. So, thank you for that. You know, generally speaking, that’s Opportunity Zones in a nutshell, but thinking about how they fit into data centers, what’s sort of the play there?

MICHAEL HANGER

It’s an interesting intersection right between the rising use of these data centers, the consideration of the development and then ultimately how it fits within Opportunity Zones. I think in a lot of ways there is going to be a lot of overlap. There is going to be significant benefit. I mean, we just talked about the potential gain exclusion when you think about these data centers.

And Dennis mentioned how capital intensive the development of these projects is ultimately going to be. But ideally, when you fast forward the 10 years, you would think that those investments would be worth significantly more than the original capital spend on those. Now that’s important consideration for Opportunity Zones, and this this applies to all Opportunity Zone projects rather than just specific to a data center.

But you really have to evaluate the project overall, look at your return that you’re expecting. We generally tell clients or taxpayers that are considering an Opportunity Zone you know, you ask the question, would you do this deal if the Opportunity Zone benefits didn’t exist? If the answer is yes, then Opportunity Zones are, that’s the cherry on top.

It’s a terrific benefit and certainly would probably greenlight the project at that point if you were going to, if you would consider doing the project anyway. If you wouldn’t consider doing the project if it weren’t for the Opportunity Zone benefits, then you have to ask yourself, what is it about this project that I’m hesitant to proceed with. And considering where a lot of the Opportunity Zones are, these are areas that have historically not attracted much economic investment.

It can make it more difficult to get that return on investment that you’re ultimately hoping for with the project overall. So, we basically remind people, check out the project to begin with. Would you be willing to do the deal if it weren’t for the Opportunity Zone benefits and the data center provision--it certainly applies to data centers as well.

If you found a good location that makes sense to develop a data center and it happens to be within an Opportunity Zone, then the Opportunity Zone provisions can be a fantastic way to drive or improve that return that you were already expecting.

IRIS LAWS

So, you know, you mentioned the location of these being in underdeveloped communities, generally speaking, right? And OB3 introduced rural Opportunity Zones, right? So, the higher benefit there in rural areas. Do you see because, you know, with the location of where data centers are and the move for, for new development there, do you see there maybe being more folks pursuing Opportunity Zone and data center that overlap because of the move to rural areas?

MICHAEL HANGER

I think it’s a very real possibility. So, if we rewind and go back to the OB3 provisions that were put in place. Actually, let’s rewind a little bit further back and go all the way back to the beginning of OZ 1.0. The provisions that were in place under OZ 1.0, and we’ve already discussed those, ultimately ended up driving a lot of investment into non-rural areas.

So, we’ve had the designation of a rural Opportunity Zone since the very beginning. What we didn’t have was any separate benefit for a rural Opportunity Zone. So, what we found, a 2024 study found that about 84% of money invested in Opportunity Zones went into non-rural or urban Opportunity Zones, and only about 16% went into rural Opportunity Zones.

There was clearly, Congress was clearly looking at ways to incentivize additional investments into rural Opportunity Zones, so with OB3 they put two new provisions in place. We haven’t talked about the substantial improvement test. And it’s probably beyond the scope of the of the podcast today. But in effect, what it means is if you acquire an existing building, you have to put a certain number of investment dollars into that building to be able to treat that as a qualified asset under the Opportunity Zone rules.

They changed those requirements a little bit for rural Opportunity Zones starting with OB3. So, whereas before you had to have 100% investment in renovations, they dropped that percent down to 50% renovations, ultimately meaning, high-level, that you could acquire an existing building and the investment that you would have to put into that building to qualify that asset would be significantly reduced versus a non-rural opportunity zone.

The second benefit--if you recall, we talked about the three benefits--the second benefit of an Opportunity Zone investment is that 10% basis adjustment. With rural Opportunity Zones we now have a 30% basis adjustment. So, if we go back to the exact same example, $10 million invested, if we hold it for five years, then we get $1 million basis adjustment.

If you make that same $10 million investment in a rural opportunity zone, then that number jumps up to 30%, or $3 million of gain is wiped out so, you’re only recognizing $7 million of gain. Clearly, Congress wanted to incentivize investments in these rural Opportunity Zones. To go to your specific question, Iris, I do think that rural opportunity zones are going to play a big part in the data center development.

We certainly seen some shift. Dennis mentioned it earlier, kind of the changing political current, and where people are willing to do these data centers. We’ve seen a lot of localities that are discouraging data center investments in more urban areas. And they’re pushing those data center investments out to more rural areas. So, when you combine the Opportunity Zone benefits of these rural areas, and then you combine that with often cheaper land prices, more access to land, we certainly can see a situation where data centers will be focused in a lot of these rural Opportunity Zone areas.

Once again, we still have to go back to the same conversation about is there a return on investment? There’s a lot of infrastructure needs that a data center has. So, you can’t just drop a data center out in the middle of a rural area and expect it to be able to perform well. You still have to have connectivity, you still have to have access to power.

So, the more likely outcome is that we’re going to have to find these areas that have that mix of being in a rural area where you can fully develop the data center, but also access to existing forms of power. Otherwise, you have to consider renewable sources to be able to fund the project.

IRIS LAWS

Well, that was going to be my next point, right, was like, or do they self-fund, you know, become their own energy generators, which, you know, TBD of who, sort of, hyperscalers would be actually able to afford that and make that feasible.

MICHAEL HANGER

Yeah, we’re certainly seeing right now that because of the energy needs of these, it’s very--building the building itself, finding the land in these rural areas, that’s really not the challenge. Building the, constructing the building itself is really not the challenge. It’s how do you get enough power to these data centers that are in the rural areas to ultimately run the project?

LANCE JACOBS

So, Michael, we talked a lot about some of the benefits. One downside that I see, particularly in the data center area--we alluded to a lot of the controversies around data centers--is the 10-year holding period for the investment. Do you see that at being a significant downside in the data center sphere?

MICHAEL HANGER

It’s an interesting question with data centers, and you can see it going one of a couple of ways. Certainly, I think it’s easy to envision there being plenty of developers out there who their business model is to develop the data center, stabilize the asset, and then ultimately exit the project so that they can take their cash and move on to the next project. And I think that certainly is going to be a percentage of the investors, of the investor class, or the developers in data centers. But you can also see a scenario where there’s going to be a significant number of investors in data centers that view this as a long-term hold. There is going to be, obviously, a development period.

And so, there will, and then even after you stabilize, the question is, would these projects generate enough cash flow that people would be looking at this as a viable asset, not for the short-term development and stabilization, but instead as a long-term cash generating asset that they could hold in their portfolio for a long time to come. We’ve already talked a little bit about the need to have these considerations, or some of these considerations brought to the table very, very early on.

And this is just a really important point in that if you have a developer that wants to be able to exit was soon as it’s stable, I’d say four-or-five years out, and then you have an Opportunity Zone investor who is insisting on holding it for at least 10 years to get those Opportunity Zone benefits. Then there’s going to have to be a negotiation that’s going to have to be taking place, and you’re going to have to have that clarified at the beginning of the project.

LANCE JACOBS

Interesting. Turning back to you, Dennis. We talked a lot about, you know, location and the benefits that a taxpayer might get. Obviously, we’ve also talked about the amount of real and tangible personal property investment and the need for power infrastructure. I was hoping you could comment on the various debt and equity structures and how they, you know, that are available to these investors or these lenders and how that might affect the tax analysis.

DENNIS THEODOSSIS

Yeah. You know, I think it’s really important to recognize, because we hear about $1 billion, multibillion dollar data center investment. And that’s really a conglomeration of most likely more than one taxpayer. So, as an example--we’ve hit on some of those along the way--but you have maybe one party that owns the land and the building. You have another party that owns a servers and computer equipment.

Iris touched on alternative energy power arrangements. Potentially you have another party making significant investments in that outside power infrastructure, on top of the traditional infrastructure leading to the data center. These all lead to leases and joint ventures and different financing arrangements and capital partners layered in to make one huge project. And that really matters because the tax benefits generally follow the taxpayer that owns the asset.

And so, we need to understand who owns the asset, what they own, and the key piece is how is the property being used because that all affects the potential tax implications, not just tax depreciation, interest expense, state and local taxes. And the key piece for our developers is the tax character of the gain at sale.

So, before I think we really dive into what tax benefits are available, If I’m on the developer side, I’m really making sure, dotting my I’s and crossing my T’s on understanding who owned what aspects of the project.

LANCE JACOBS

One other question that comes to mind is, in light of OB3--if I try to say the actual name of the act, I almost always stumble over the words so, I’m going to say OB3--Section 168(n), which is the deduction for qualified production property. Is that something that could be a factor here? You know, that provision allows a 100% deduction for certain qualified production property like manufacturing facilities. Is that something that could be in play here?

DENNIS THEODOSSIS

Yeah. I just want to point out first of all, Lance, we made it through almost the whole podcast without citing any tax regulations. But you broke our streak. But no, it’s certainly a question worth considering because the potential benefit is enormous. But with data centers, I’d be careful with assuming that they’re going to qualify. And just for clarification, QPP essentially creates the opportunity to immediately deduct certain qualifying nonresidential real property that otherwise would be depreciated over 39 years.

So, when we’re talking about the scale and size of these facilities, it’s obviously a significant potential acceleration of deductions. But I really break it into two things for our traditional developers. The first off is for our traditional developers, it really isn’t going to be an option because the facility needs to be owned by the manufacturer to qualify.

So, really the tenant most likely would need to be the owner. So, in our typical build-to-suit, we build something, then we rent it. Our developers aren’t going to be eligible for this tax opportunity. And I think then, for other folks listening, second is the rule really requires the property to be used as an integral part of a qualified production activity.

And there’s guidelines around that. But really what it focuses on is it’s meant to be focused on manufacturing and substantially transforming a transformation of a tangible personal property. So, I think data centers really become a hard fit here, because I’m not sure that processing or storing data, I don’t think that’s obviously a substantial transformation of tangible property that was contemplated by these rules.

That said, there’s obviously a lot of potential here, so I wouldn’t say don’t analyze it, but I don’t I personally don’t think that necessarily you’re going to be able to get there given the current guidance.

IRIS LAWS

Well, great insight there, Dennis. I am going to move back to Michael now. So, you know, we’ve talked about a few benefits from investing in a data center, whether it be Opportunity Zone or depreciation deductions, maybe not QPP. But what else makes data centers an interesting asset class from a tax standpoint?

MICHAEL HANGER

It’s, and we’ve already hit on a couple of these things. Clearly we’ve talked about the Opportunity Zone benefits. And we even mentioned the energy. But really the energy piece is going to be, I think, a huge consideration. It’s such, a data center is such a unique asset in there, the energy requirement that is ultimately there.

And to date, most data centers have pulled off the existing grid. And that’s ultimately what’s creating a lot of the pushback from localities is the impact that it’s having on the grid. So, this is an asset that stands to benefit from energy consideration. So, I think that’s going to be a huge aspect moving forward. The other one that was previously mentioned was ultimately the state and local tax piece of it.

And Dennis has already mentioned it a couple of times but that’s going to be a huge consideration as well. And then finally, it’s the structuring piece of it. When you start to bring all of these ideas together, there’s going to be a lot of different players that may want to be involved. And so, it’s going to be how do you structure this deal so that everyone gets that return on investment they’re looking for, and ultimately the cash flow they’re looking for from the project.

IRIS LAWS

And from a clean energy credit perspective, right, I think the big question, especially in light of Tuesday’s, well, at the point of this release, it’ll be a bit farther back, but of the midterm results? You know, is there a possibility that the solar and wind credit will be extended farther than it was, you know, sort of cut off at the knees with OB3? What will that look like? Will there be a nuclear move for powering these data centers? What’s the future there? So, I think that’s going to be a super interesting thing to look at.

LANCE JACOBS

All right, Michael, I’m a potential investor in one of these things, in the immortal words of famed tax advisor Jay-Z, “I got a few dollars. How do I get in the mix?” Are the particular ownership structures or investment structures that investors should be evaluating as they look at these projects?

MICHAEL HANGER

It’s a great question. I think it’s going to be interesting to see ultimately how people decide to invest. If you have an investor who believes that data centers are going to be an asset class that are going to be incredibly successful over the next 10-to-20 years, how do you jump into that mix?

And there are several ways that we could think about making that investment. One is to develop or partner with the developer in something like a joint venture, where the investor would probably have significant control of the project itself. There’s more risk with that as well. So, there’s a balance that has to be considered.

How much control do you want of the overall project? Do you want to have control of the tax benefits if you’re considering investing in an Opportunity Zone or using the Opportunity Zone benefits to help with the overall project? Certainly it would make sense then that you would probably want to partner with a developer so you have more control of the timing of the eventual sale, but also how you develop that project. So, that would certainly be one way to do it, although it does contain a certain amount of risk to it.

Another option would be through a private real estate or infrastructure or an Opportunity Zone fund. So, there are these real estate funds out there that are starting to invest in these data centers. So, we would be taking more of a passive investment within one of these funds. There’s probably going to be less risk, but you also lose a significant amount of control. So, there’s going to be a balance once again that you’re going to have to find when you’re considering making that decision.

And finally, there’s going to be; there are ways to--maybe it’s a publicly traded REIT structure--so, if what you’re really thinking as an investor is you just want to have access to the upside potential of a data center, but you don’t want to have to put any additional thought into it beyond that initial investment, there’s going to be opportunities to invest in these, potentially through something like a data center REIT that would offer that investment to the public.

So, once again, there’s going to be multiple avenues that you could go down. And it really, you really have to evaluate how much control or how much of your own time you want to put into the development of the data center. Do you want to have that maximize your control of the project itself, or would you rather just be a passive investor in ultimately planning for the upside of these data centers?

LANCE JACOBS

So, we talked about the role of investors and we’ve talked about the role of developers. Where do those two different parties, where do their tax interests align and where do their tax interests diverge and how do you kind of address that on a broad basis?

MICHAEL HANGER

Yeah, that’s going to be interesting, and we’ll kind of hit back on some of the things that we’ve discussed a little bit. Where I think they align certainly is in the return on investment. We’ve talked about that a little bit. But your developers, your investors, they’re all looking for that return. They wouldn’t be investing in a data center if they didn’t see that being a good, strong performing asset, either in the short run or the long run.

So, I think ultimately, look, viewing data centers as a strong investment and structuring the project as a way that maximizes the return on that investment. That’s where the investors and the developer is going to align. Where they depart is what’s going to be the interesting aspect of this, because as you move forward, you can certainly see a scenario once again where a developer may want to develop the project and then exit within a short period of time after it being stabilized, with the idea being they can then take their cash from that successful project and roll it into the next project or deal that they want to do.

You can also see a scenario where a lot of your investors would say, I really don’t want to turn it over that quickly, and there could be many reasons for doing that. One of them clearly is the Opportunity Zones, where they have a required 10-year hold to be able to maximize the benefits. So, if you have an investor that is doing this as part of an Opportunity Zone project, and the developer wants to exit quickly, then you do have a disagreement there in terms of the liquidation of that project.

But even beyond the Opportunity Zone provisions, we’ve talked a lot about the depreciation deductions that you may be able to receive or likely will be able to receive early on in these projects. Those are going to reduce your investors’ capital account and ultimately potentially lead to recapture on the exit. So, potentially you would have an investor that would say, I don’t want to exit this project right away, because I’m just going to have to recapture all the depreciation deductions that I’ve already taken on it.

They may be thinking about something like a 1031 exchange in the future, so that they do not have to recognize that gain right away whereas a developer is saying I want the cash so that I can put that into the next project. The key point, I think, when you’re considering the long-term strategy is that you’re having that conversation on day one.

We talked earlier about bringing tax to the table early in the project. And ultimately that’s the goal here. You bring tax to the table on day one. You begin to have those conversations before you’ve signed the papers, before you signed the documents, you have an understanding of what the long-term goals are for the developer and for the investor. This is not a conversation you want to be having five years into the project, when the developer decides he or she wants out and the investor wants to stick around for a few more years.

IRIS LAWS

Well, all really great comments, thank you both for being here. And for our listeners, we have one more episode of our data center mini-series, where we will look into some of the maybe broader economic impacts of data centers and how clean energy is fitting into the mix. I know we referenced that a little bit today, but want to dive deeper with one of our clean energy tax specialists. So, we look forward to having you back after a brief hiatus for us to recap the results of midterm elections with one of our consultants in D.C., which I know is top of mind for a lot of us. So, take a look out for that one. Thank you both for being here.

DENNIS THEODOSSIS

Thanks for having us.

MICHAEL HANGER

Thank you.

IRIS LAWS

And that’s our show. Thanks for joining. Remember to subscribe and listen in for the next episode of the podcast. Until next time.

ANNOUNCER

The information set forth in this podcast contains the analysis and conclusions of the panelists based upon his, her, or their research and analysis of industry information and legal authorities. Such analysis and conclusions should not be deemed opinions or conclusions by Forvis Mazars, or the panelists as to any individual situation as situations are fact specific.

The listener should perform their own analysis and form their own conclusions regarding any specific situation. Further, the panelists’ conclusions may be revised without notice, with or without changes in industry information and legal authorities.

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