2018 Tax Cut and Jobs Act Economic development toolincentive not a program 1 st new national community investment incentive in over 15 years Promote economic recovery by driving longterm investment capital to rural and lowincome urban communities ID: 804703
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Slide1
Michigan Opportunity Zones
Slide22018 Tax Cut and Jobs Act
Economic development tool/incentive, not a program
1
st
new national community investment incentive in over 15 years
Promote economic recovery by driving long-term investment capital to rural and low-income urban communities
Uses tax incentives to encourage private investment in impact funds that connect investors with community investing opportunities
Governor’s asked to identify eligible census tracts
Slide3U.S. Stats
$6.1 Trillion in unrealized capital gains
8,761 qualified census tracts across all states, territories, D.C.
35M people – 24M jobs – 1.6M businesses
Average poverty rate – 31% (well above the 20% eligibility threshold)
Average median family income – 59% of its area median (compared to the 80% eligibility threshold)OZs split between 38.2% urban – 39.6% rural – 22.2% suburban
Slide4U.S. 8,761 OZs
Source: Economic Innovation Group, www.eig.org
Slide5Michigan Stats
288 OZs (US 8,761)
65 rural census tracts, or 23% (US 39.6%)
Average poverty rate – 32.1% (US 31%)
Average median family income – 60.3% (US 59%)
Average unemployment rate – 16.6% (US 14.4%)
Slide6Michigan’s 288 OZs
Slide7Detroit OZs
Slide8https://michigan.gov/opportunityzones
Slide9Opportunity Zones
Source: Novogradac & Company
Slide10Three Tax Incentive Benefits
Gain Deferral
Partial forgiveness
Forgiveness of additional gains
Slide11Tax Deferral –Partial Forgiveness – Forgiveness of Additional Gains
Capital gain tax deferral ends either by early sale or by December 31, 2026
Held for 5 years
Basis increased by 10% of the deferred gain, up to 90% taxed
Held for 7 years
Basis increased by an additional 5% of the deferred gain, up to 85% taxedHeld for 10 yearsBasis is equal to fair Market Value
Forgiveness of gains on appreciation of investment
Requires an election
Slide12Sample Investment
Source: Novogradac & Company
Slide13Sample Investment
Source: Novogradac & Company
Slide14OZ Incremental Benefit
Source: Novogradac & Company
Slide15Economic Development Examples
Business infrastructure real estate funds
Industrial
Retail
Mixed-use
Transit-Oriented DevelopmentVenture capital fundsSeed state investmentsSeries A investments
Slide16Economic Development Examples - Continued
Operating business private equity
Equity recapitalizations
Growth capital investments
Enhancement for other federal tax credit transaction
New Market Tax CreditsHistoric Tax CreditsLow-Income Housing Tax Credits
Slide17Affordable Housing Examples
Pairing with LIHTC or the HTC
Effective for providing housing for families at or under 60% AMI
Focus on Workforce Housing
Providing housing for families at 80-100% AMI
Anticipate a 10-year investmentNo ongoing compliance regulations unless required through local funding or zoningAbility to attract high net worth individuals or corporations as investors
Slide18No “Sin” Businesses
Private or commercial golf course
Country club
Massage parlor
Hot tub facility
Suntan facilityRacetrackGambling facilityLiquor storeFarm
Slide19Qualified Opportunity Fund
An investment vehicle organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone Property
Slide20Source: Novogradac & Company
Qualified OF – Assets Test
Slide21Certification Process
An eligible taxpayer self-certifies to become a certified qualified opportunity fund
No approval or action by the IRS is required
A taxpayer merely completes a form (to be released Fall 2018) and attaches that form to the taxpayer’s federal income tax return for the taxable year
The return must be filed timely, taking extensions into account
Slide22Qualified OF – Noncompliance Penalty
Source: Novogradac & Company
Slide23State’s Role
Official role was for Governor’s to identify eligible census tracts, no other role
BUT, here is what we are doing…
Opportunity Zone Eco-System
Regional Prosperity Initiative
9 State Agency Collaboration (META)SOM Regional Prosperity Field TeamsSense of Place Council (MML, MAP, SBAM, MAR, etc.)
Slide24State’s Role - Continued
Michigan Opportunity Zone Webpage
Michigan Opportunity Zone Referral form
Interactive Map
Sign-up for updates
ResourcesWebinarsIncentivize Best Projects
Slide25Key Points - Investors
Tax incentive is most valuable for 10 year investments in appreciating assets
Six months to invest after realizing a capital gain
Another six months to deploy 90% of capital in Zones
Capital is required to be an equity investment – loans from investors are not eligible for the tax incentive
Slide26Key Points - Funds
All capital must flow through an Opportunity Fund to be eligible for the tax incentive
Funds are self-certified via an IRS tax form
Fund must be established for the purpose of investing in Opportunity Zones
90% of fund assets must be invested in Zones to maximize the tax incentive
Slide27Key Points – Eligible Investments
Must be equity investments
Real estate investments must include substantial rehabilitation – doubling basis within 30 months
“Sin businesses” are not eligible
Other requirements include property use in “active conduct of business” and limits on assets held in cash
Slide28Key Points – State Role
Eco-system
Connector
Referral to state resources
Share information
Incentivize best projects
Slide29Key Resources
Michigan State Housing Development Authority OZ Webpage -
https://michigan.gov/opportunityzones
Economic Innovation Group -
https://eig.org/opportunityzones
Smart Growth America – LOCUS OZ Navigator -
https://smartgrowthamerica.org/program/locus/opportunity-zones/
Enterprise – 360 Opportunity -
https://www.enterprisecommunity.org/opportunity360/opportunity-zone-eligibility-tool
Council of Development Finance Agencies -
https://www.cdfa.net/cdfa/cdfaweb.nsf/pages/events.html
Novogradac & Company LLP -
https://www.cdfa.net/cdfa/cdfaweb.nsf/pages/events.html
Michigan Land Bank -
https://www.michigan.gov/landbank/0,3190,7-298-51746---,00.html
Michigan Economic Development Corporation – Community Development -
https://www.miplace.org/
Slide30Thank you!
For more information, contact:
Gary Heidel, Chief Housing Investment Officer
Ph: 517-241-7455
Email:
heidelg@michigan.gov
Website:
www.michigan.gov/mshda
or
-
https://michigan.gov/opportunityzones