This article is for education only and is not legal or tax advice; confirm the application of IRC §1400Z-2, IRC §168(k), and local incentive terms with your tax advisor.
For a municipal economic-development official, an Opportunity Zone ground lease is not just a real estate control document; it can be a way to make private bids pencil by letting the developer depreciate new improvements while the city retains the land. Cost segregation belongs in that conversation because the developer’s after-tax return may depend on how much of the building is reclassified into shorter-life property after construction.
That is why a city RFP for publicly controlled land in a qualified opportunity zone should ask for a cost segregation assumption, not merely a rent schedule and a jobs narrative. A bidder that models Opportunity Zone cost segregation may be able to accept a stronger community-benefit package because IRC §168 depreciation, IRC §168(k) bonus depreciation, and IRC §1400Z-2 exit rules can change the timing of cash tax savings on the privately owned improvements.
Why would a city use a ground lease instead of selling Opportunity Zone land?
A city may use a ground lease when it wants private capital to build housing, industrial space, health care, childcare, or neighborhood retail while keeping long-term control over public land. In an Opportunity Zone project, that control can coexist with the developer’s tax model because Treas. Reg. §1.1400Z2(d)-2(c) allows certain leased tangible property to count as qualified opportunity zone business property for purposes of IRC §1400Z-2.
The municipal incentive is different from the developer’s incentive. The city is trying to turn an underused parcel into assessed value, services, and employment without over-subsidizing the transaction. The developer is trying to turn equity, debt, and construction risk into a return that clears its investment committee. Cost segregation can bridge that gap because accelerated depreciation may reduce federal taxable income earlier in the hold period, which can make a lower land price, a phased rent step, or a deeper affordability set-aside easier to underwrite.
A sale gives the developer depreciable basis only in depreciable assets, because land itself is not depreciable under IRC §167 and IRC §168. A ground lease also does not make the land depreciable, but it can let the city reserve public control while the developer owns or pays for improvements that are depreciated under IRC §168. From the municipal seat, the question is not whether the city gets to use the depreciation; the question is whether the city structures the public-private transaction so the private party can price the tax benefits into the bid.
How do the OZ leased-property rules help a municipal ground lease qualify?
Under Treas. Reg. §1.1400Z2(d)-2(c), leased tangible property may be treated as qualified opportunity zone business property when the lease is entered into after December 31, 2017, the property is used in a qualified opportunity zone, and the lease satisfies the regulatory requirements tied to IRC §1400Z-2(d). That rule matters to city staff because many redevelopment parcels are already publicly owned and the city may prefer not to sell them outright.
The leased-property rule is especially useful because leased property does not have to satisfy the original-use requirement or the substantial-improvement requirement that applies to purchased tangible property under IRC §1400Z-2(d)(2)(D). For a municipality, that means a legacy parcel, parking field, former public works site, or land assembled through redevelopment activity can remain under public ownership while the private QOF or QOZB focuses its depreciable basis on the new improvements.
If a lease is between related parties, Treas. Reg. §1.1400Z2(d)-2(c)(6) adds requirements such as market-rate terms and limits on certain prepayments that exceed twelve months. A city and a private developer are often not related, but municipal counsel should still document market-facing terms because the land lease is part of the project’s qualification file under IRC §1400Z-2. The city does not need to prepare the developer’s tax return, but it can require a bidder to state whether the lease, improvements, and operating entity are intended to fit within the QOF and QOZB rules.
For a public land RFP, the most valuable tax question is often not how much the land is worth today, but whether the transaction lets the private improvements generate depreciation benefits that can be converted into a stronger public offer.
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How does cost segregation change depreciation timing on the improvements?
Cost segregation changes depreciation timing by identifying portions of the privately owned improvements that may be depreciated over shorter recovery periods under IRC §168(e), such as five-year, seven-year, and fifteen-year property, instead of leaving nearly all project cost in the longer building category. For qualified property acquired after January 19, 2025, IRC §168(k) as amended by OBBBA (2025) provides one hundred percent bonus depreciation when the property otherwise satisfies the bonus depreciation rules.
For a municipal official, the key point is that cost segregation generally affects the developer’s improvements, not the city’s retained land. Site utilities, specialty electrical, certain flooring, decorative lighting, casework, land improvements, and other assets may be evaluated in a cost segregation study, while the nondepreciable land value stays outside MACRS depreciation under IRC §167 and IRC §168. That distinction helps the city avoid an unrealistic bid comparison where a developer appears to depreciate public land that cannot be depreciated.
The timing can be material in an OZ model. If the developer or fund acquired qualified property after January 19, 2025, IRC §168(k) as amended by OBBBA (2025) may allow one hundred percent bonus depreciation on eligible short-life assets identified through cost segregation. If the developer acquired qualified property before that date, the earlier TCJA phase-down rules under IRC §168(k) apply to bonus depreciation for that acquisition year. The same building can therefore produce different tax timing depending on the acquisition and placed-in-service facts, so the RFP should require bidders to state those assumptions.
Depreciation is also connected to the exit. After an investor holds a qualifying QOF interest for at least ten years, IRC §1400Z-2(c) permits an election to step basis to fair market value for a sale of that QOF interest, and Treas. Reg. §1.1400Z2(c)-1 provides rules for applying the exclusion to certain qualifying dispositions. If the exit is structured as an asset sale after a ten-year hold, the developer’s tax team must model IRC §1245 and IRC §1250 recapture consequences along with the OZ regulations because the character of gain can affect how much of the accelerated depreciation benefit survives the exit.
Municipal staff do not need to decide the developer’s depreciation classification, but they should ask whether the bidder has budgeted for a cost segregation study, when the study will be completed, and whether the model assumes bonus depreciation under IRC §168(k). For a city comparing proposals, the existence of a thoughtful cost segregation plan can explain why one bidder can fund more community improvements, more tenant buildout, or a lower subsidy request without changing the city’s land-control goals.
What should the RFP ask developers to model?
The RFP should ask each developer to show the tax assumptions that turn the public land transaction into a financeable private project. A useful requirement is a short schedule identifying the expected owner of the improvements, the expected taxpayer claiming depreciation, the anticipated use of cost segregation, the assumed bonus depreciation rule under IRC §168(k), and the assumed OZ hold strategy under IRC §1400Z-2.
The RFP should also ask whether the project company expects to be a QOF, a QOZB owned by a QOF, or a lower-tier partnership. If partnership allocations are part of the bid, the developer should state that partner-level loss use depends on outside basis and at-risk limits, including IRC §704(d) for partnership loss limitations and IRC §752 for liability allocations. That request does not make the city a tax advisor; it lets staff understand whether the bidder’s affordability promise depends on tax losses that investors may not be able to use.
For the cost segregation portion, the RFP can require bidders to identify whether they will use a specialty provider, when the study will be ordered, and how the resulting depreciation will be reflected in the pro forma. Municipal staff can point bidders to resources such as best cost segregation companies or the city’s procurement-neutral standards, while making clear that the developer remains responsible for its own tax positions.
The RFP should also request a plain-English explanation of how public incentives interact with the cost segregation model. A grant, tax increment reimbursement, infrastructure credit, or discounted rent can change basis, cash flow, or lender sizing depending on how the agreement is written. If the developer’s model assumes a particular federal tax treatment for public support, the proposal should say so in the same place where it describes depreciation and OZ qualification.
How should a city compare a lower land payment with higher private after-tax yield?
A municipal team should compare bids on total public value, not just headline ground rent. A developer that keeps the city’s land payment modest but uses cost segregation and bonus depreciation to fund brownfield prep, below-market space, or public realm work may be more valuable than a bidder that offers higher rent but asks for later concessions.
The practical comparison is a sources-and-uses review. Staff can ask each bidder to show base rent, contingent rent, public improvements, tenant commitments, construction schedule, and the assumed federal tax benefits from depreciation. When cost segregation increases early deductions for eligible property under IRC §168 and IRC §168(k), the developer may reduce the equity gap that would otherwise be filled by city subsidy.
The city should avoid treating the developer’s tax benefit as free money. Accelerated depreciation is a timing benefit before the exit unless the OZ hold and disposition rules under IRC §1400Z-2(c) produce a basis step-up or exclusion result after the required holding period. If the developer cannot hold for at least ten years under IRC §1400Z-2(c), the city should not give full credit to a pro forma that depends on the long-hold OZ benefit.
A strong staff memo can translate the tax mechanics into public outcomes. For example, the memo can say that the selected bid uses a ground lease eligible for the leased-property rules under Treas. Reg. §1.1400Z2(d)-2(c), privately owns the depreciable improvements, plans a cost segregation study after construction cost detail is available, and prices the expected IRC §168(k) timing benefit into specified community benefits. That kind of memo helps council members see why the transaction is not a land giveaway but a targeted use of the OZ mechanic.
What compliance traps should municipal staff flag before council approval?
The first trap is unclear ownership of improvements. Cost segregation only helps the taxpayer that owns or is treated as owning the depreciable property for federal tax purposes, so the ground lease, development agreement, and financing documents should align with the developer’s depreciation model under IRC §167 and IRC §168.
The next trap is an overbroad statement that all project costs qualify for bonus depreciation. Under IRC §168(k) as amended by OBBBA (2025), one hundred percent bonus depreciation applies to qualified property acquired after January 19, 2025, when the property meets the statutory requirements, but land, many structural building components, and nonqualifying costs do not receive bonus depreciation. A cost segregation study is the tool that separates the assets that may qualify from the assets that remain in longer recovery periods.
Another trap is ignoring later changes. If the developer places assets in service and later discovers that cost segregation should have been used, a change in accounting method may require Form 3115 procedures under Rev. Proc. 2015-13. That is a developer-side issue, but the city can reduce closing friction by asking for the timing plan before construction starts.
Finally, the city should flag qualification support without becoming the party responsible for federal tax compliance. The developer should confirm parcel location with a resource such as the Opportunity Zone qualifier, document the lease under Treas. Reg. §1.1400Z2(d)-2(c), and maintain its own records for QOF and QOZB status under IRC §1400Z-2. The municipal role is to structure a transaction that supports investment, not to guarantee the investor’s tax result.
Frequently Asked Questions
Can a municipal ground lease support Opportunity Zone cost segregation?
Yes, a municipal ground lease can support Opportunity Zone cost segregation when the developer owns or is treated as owning depreciable improvements and the leased-property rules under Treas. Reg. §1.1400Z2(d)-2(c) are satisfied. The city’s land remains nondepreciable, but the privately owned improvements may be studied under IRC §168.
Does cost segregation let the developer depreciate city-owned land?
No, cost segregation does not let the developer depreciate city-owned land because land is not depreciable under IRC §167 and IRC §168. The study focuses on depreciable improvements, land improvements, and tangible personal property that belong in the developer’s federal tax model.
Can bonus depreciation improve a bidder’s proposal?
Yes, bonus depreciation can improve a bidder’s proposal when qualified property is acquired after January 19, 2025, because IRC §168(k) as amended by OBBBA (2025) allows one hundred percent bonus depreciation for eligible property. The bidder still needs cost segregation or another asset classification process to identify which costs qualify.
Should the city require a cost segregation study in the RFP?
Yes, the city can require bidders to state whether they will obtain a cost segregation study and how depreciation is modeled. The requirement helps staff compare proposals without taking responsibility for the developer’s tax filings.
Does the ten-year OZ rule eliminate depreciation recapture for every exit?
No, the ten-year OZ rule does not eliminate depreciation recapture for every exit because IRC §1400Z-2(c), Treas. Reg. §1.1400Z2(c)-1, IRC §1245, and IRC §1250 must be applied to the actual disposition structure after the required hold. A sale of a QOF interest and an asset sale can produce different character and exclusion questions.
