Substantial Improvement
En español: Mejora sustancial (substantial improvement)
Substantial improvement is the test an existing building has to pass before a fund's purchase counts as qualifying Opportunity Zone property. Within 30 months of buying it, the fund has to add more to the building's basis than the building was worth when the clock started. New construction does not take this test, because a building nobody has used yet qualifies on original use instead.
Substantial improvement=Additions to basis within 30 months > Adjusted basis of the building
Adjusted basis of the building=Purchase price − Land allocation
- Additions to basis
- Capitalized improvement spending on the building, not operating repairs and not the cost of carrying the property.
- Adjusted basis of the building
- The building's basis at the start of the 30-month period, with land taken out.
- 30-month period
- Any 30 months beginning after the acquisition date. It is a construction schedule, and permitting sits inside it.
- This is where the architect's question and the tax question meet. The number is a scope only a contractor can produce.
- The land allocation does most of the work and it has to be defensible. It is a tax position, made with a CPA.
- Thirty months is short once plan review is inside it. A scope that cannot be permitted and spent in that window fails.
- A sound, recently renovated building is the hard case, because its basis is high and the bar moves up with it.
A fund buys an eight-unit Little Havana building for $2.0M.
The bar is set by the building allocation, not by the price. Two buildings bought for the same money can face renovation budgets that differ by millions, and the land allocation is what decides it.
Tax mechanics change and individual situations differ. Treat this as orientation, not tax advice; the numbers on a specific transaction belong with a CPA or qualified intermediary.
Related terms
All termsOpportunity Zone (QOZ)
A qualified opportunity zone is a census tract the federal government has designated so that investors who roll a capital gain into a fund operating there get specific tax treatment.
DevelopmentHard Costs
Hard costs are the cost of the physical building: site work, structure, envelope, systems, finishes, and the contractor's general conditions, overhead and fee.
InvestmentValue-Add
Value-add describes a property whose income can be raised by doing specific work: renovating units, correcting below-market rents, fixing operations, adding a use, or curing something that keeps buyers away.
Terms arrive with the writing.
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