Officials packed more investor-friendly text into the second batch of proposed rules for the 2017 tax overhaul’s opportunity zone tax breaks during the nearly five weeks the package spent at the White House’s regulatory review office.

The proposed rules now include language that would offer more flexibility for investors, building on guidance that already gave them some wiggle room when setting up their funds and making sure they stay within the tax incentive’s guardrails, according to an earlier, pre-publication version of the document obtained by Bloomberg Tax.

The proposed rules (REG-120186-18), released April 17, would provide guideposts for investors in the 8,764 mostly low-income tracts designated for the tax break and followed an initial, separate set of proposed rules (REG-115420-18) issued in October. The law allows investors to delay or even reduce tax on profits from stocks and other assets by channeling the money toward investments in those areas, under tax code Sections 1400Z-1 and 1400Z-2.

Critics—citing a lack of guardrails and requirements for investor transparency—say the incentives could displace low-income people while enriching the wealthy, who are more likely to have the capital gains eligible for tax breaks. The investor flexibility afforded by the second round of proposed rules inflamed those criticisms.

Investors eagerly awaited the regulations, as the long wait had left some deals in limbo, said Steven Schneider, a partner at Baker McKenzie in Washington who specializes in real estate. The law, after all, was enacted nearly a year and a half ago, and the tax incentives come with multiple deadlines for investors.

“Unlike most regulations, here, I’m so time-pressured,” he said. “Overall, I’d say they were pretty helpful.”

White House Review

The White House office gained authority over tax regulations last spring under a memorandum of agreement with Treasury, reversing decades of precedent and giving investors, companies, and their lobbyists one more chance to influence the regulatory process.

“OMB and Treasury are fully committed to the implementation of the MOA,” a senior administration official said in a May 7 statement emailed to Bloomberg Tax.

During that review process, officials from the Office of Information and Regulatory Affairs and the Treasury Department held meetings with representatives of the Economic Innovation Group, whose founders engineered the incentives, and the Carlyle Group, a private equity giant.

A spokeswoman for EIG said the discussion focused primarily on issues outlined in a Dec. 27 letter the group and dozens of others sent to the Internal Revenue Service. The think tank had requested some of the changes made during the review.

The Carlyle Group didn’t respond to a request for comment.

“Treasury, the IRS and OIRA work collaboratively as part of the tax regulatory process,” a Treasury spokesperson told Bloomberg Tax in an email. “The process is an interactive team effort with a constant exchange of ideas.”

Substantial Additions

When the rule package arrived at OIRA, it didn’t weigh in on treatment of certain dividends paid to long-term shareholders of opportunity funds organized as real estate investment trusts, a form of pass-through entity taxed at the individual shareholder level and not taxed as a separate entity, like a C corporation.

One of the main draws of the incentives is the ability to avoid tax on any capital gains from the sale of the opportunity zone investment if it’s held for 10 years. Officials added language that would extend that benefit to decade-long shareholders of an opportunity fund REIT who receive certain capital gain dividends from the entity.

Stakeholders—including EIG, in its letter to the IRS—had also raised the issue of the difficulty for investors to meet a requirement for raising the fund’s capital and putting it to use. Investors must raise and deploy at least 90 percent of the fund’s capital into opportunity zone investments by semi-annual testing dates, and those deadlines can be hard to meet when there’s a sudden influx of capital right before a testing date.

During the OIRA review process, officials added language that would allow investors to apply that 90 percent test without taking into account any new money the fund received in the prior six months.

Officials also added rules that would help investors determine whether and when certain leased property qualifies for the incentives under a requirement that the opportunity fund business, in certain cases, be the original user of the property, as well as how long a property must be vacant for it to satisfy that “original use” requirement.

In the December letter, EIG and its co-signers asked for property to be vacant for at least one year to qualify, as this would allow for investors to revive more abandoned factories, storefronts, and other buildings. The proposed rules would require five years of vacancy.

The additions may reveal an effort to get as much guidance out as possible, and in doing so give more investors the green light to jump into the market, said Samantha Jacoby, a senior tax legal analyst at the Center for Budget and Policy Priorities who has focused on the tax breaks.

“It could be that Treasury was holding back for a potential third set of regulations,” she said. “It’s possible somebody—whether it was Treasury, whether it was OMB—wanted to get everything into this one.”

Treasury or OIRA?

The added substantive rules likely came from Treasury, while OIRA probably added the explanations and additional requests for comments in the rules, tax professionals said.

“I still don’t think they’ve got a lot of tax technical knowledge over there” at OIRA, said Lisa Zarlenga, a former Treasury official, now a partner at Steptoe & Johnson LLP in Washington. She represented Carlyle and EIG for their respective meetings with OMB on April 8 and April 9, according to the office’s website. She declined to discuss client matters.

Zarlenga’s colleague George Callas, Steptoe’s managing director of government affairs and public policy and a former senior tax counsel to former House Speaker Paul Ryan (R-Wis.), also represented Carlyle and EIG at the meetings. Callas didn’t respond to requests for comment. He registered to lobby on tax issues for Carlyle and began lobbying on opportunity zones for EIG last year.

Stacey Dion, Carlyle’s managing director and global head of government affairs and one of three Carlyle staff members present during the firm’s meeting with OMB, according to the website, has been lobbying Congress on the tax breaks since the third quarter of last year, disclosure forms show. She was joined by Carlyle’s Managing Director of Tax and Chief Tax Officer, Shannon Stafford, and its managing director in investor relations, Matt HoganBruen.

More Explanations, Comment Requests

An addition addressed a sticking point for many advocates of more investor-friendly rules, including EIG. If a fund sells some of its assets less than 10 years after it’s set up, the fund would still be subject to tax on those “interim gains,” even if it quickly plugs those dollars into another opportunity zone investment and doesn’t simply take home the cash from that sale.

The proposed rules include new text explaining why Treasury officials couldn’t interpret the law in a way to allow investors to avoid tax on those interim gains, but want to hear from the public on possible burdens and any “potential chilling effect” caused by this interpretation.

Added language highlights the burdens of another less-popular feature of the proposed rules, and fleshes out a related request for input from stakeholders.

Funds must “substantially improve” their opportunity zone businesses or properties if they’re not building the assets up from scratch, and the proposed rules suggest measuring this improvement on an asset-by-asset basis.

Many investors would have preferred an approach that aggregates the assets together, which may be less of an accounting headache.

Following the OIRA review, the proposed regulations included a longer rationale and request for comments on the topic. EIG and its coalition of letter co-signers had called for Treasury to take the aggregate route, allowing all of the tangible property of an opportunity zone business to be treated as a single property.

“My general reaction is that a request like that—on how it might be burdensome—sounds like it might have come from OIRA,” said Zarlenga. Referring to one of the more substantive changes, she said, “I don’t think OIRA gets that weedy.”