Opportunity Zone Program Conference - PowerPoint Presentation

Opportunity Zone Program Conference
Opportunity Zone Program Conference

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1 June 28 2018 History Colorado Center 1200 North Broadway Denver Colorado 80203 Opportunity Zone Program Conference PANELISTS Marc L Schultz Squire Patton Boggs Kenan Fikri ID: 804701 Download

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Slide1

Opportunity Zone Program Conference

1

June

28

, 2018

History Colorado Center1200 North BroadwayDenver, Colorado 80203

Slide2

Opportunity Zone Program

Conference

PANELISTS

Marc L. Schultz

Squire Patton Boggs

Kenan

Fikri

Economic Innovation Group

This slide presentation is based

in part on

a presentation prepared by John Sciarretti, Novogradac & Company LLP, and is used with his permission.

Novogradac & Company LLP is a national accounting firm with broad expertise in the Opportunity Zone program and in many tax credit programs.

Steven

F. Mount

Snell & Wilmer

2

Slide3

Opportunity Zone Program Introduction

History and Status

of Opportunity Zone ProgramBenefits

of the Opportunity Zone Program Tax IncentivesQualified Opportunity Zones –

Qualification and StatusQualified Opportunity Funds – What are the

rules, how do you qualify?Direct and indirect investment in Qualified Opportunity Zone Business PropertyQualified Opportunity Zone

Business PropertyReadily Identifiable Investment Types in Opportunity Zones

Combining Opportunity Zone Program with

Other Tax

Incentives

Regulatory Guidance Needed

Questions and Answers

3

Slide4

Opportunity Zone Program Overview

Kenan

Fikri

,

4

ECONOMIC INNOVATION GROUP / Washington, DC

/ @kenanfikri

Slide5

52 million Americans (1 in 6) live

in economically distressed communities.

5

Prosperous

Prosperous

Distressed

Source: EIG’s “Distressed Communities Index”

Nearly

400,000 Coloradoans

live in economically distressed zip codes.

Slide6

Today’s struggling communities have been completely sidelined by 21

st century economic growth.

6

Source: EIG’s “Escape Velocity”

Change in employment from 2000 to 2015 by quintile

Cumulative change in employment by quintile

Slide7

Traditional modes of financing do ever less for non-prime businesses in non-prime communities.

7

Nearly

one out of every four

community banks

has disappeared since 2008

In real terms,

small business lending remains

down by a quarter

75%

of all venture capital concentrates

in three states

Sources: FDIC and National Venture Capital Association

75%

Slide8

Access to mission-oriented capital is just as uneven.

8

27%

of counties received

no CDFI funding

from 2011 to 2015

Even

philanthropies and foundations

bypass many of the country’s neediest communities

Sources: The Urban Institute and National Center for Responsive Philanthropy

75%

Slide9

The idea has strong, bipartisan roots and builds on the lessons from prior federal efforts to revitalize struggling communities.

9

Slide10

What makes Opportunity Zones so unique?

It is an

investor

incentive that pertains exclusively to

capital gains.It is designed to concentrate capital

rather than diffuse it.It rewards

patient capital

: All incentives are tied to the longevity of the investment.

It unlocks scarce

equity

capital.

It provides

no up-front subsidy

and doesn’t pick winners.

It can move at the

speed of the market.

It was designed with startups

in mind.

It gives investors a

stake in communities’ future

: Most programs reward individual projects; this one ties investor payoff to community success.

10

Slide11

What makes Opportunity Zones so promising?

Flexibility:

Low-income communities have a wide range of financing needs. The flexibility of the incentive provides the potential to support a variety mutually reinforcing activities within a single community as well as across a broad spectrum of communities.

Scalability: There is no statutory cap on the amount of capital that can flow to Opportunity Zones in any given year. As such, Opportunity Zones have the potential to help fuel economic renewal in distressed communities on an unprecedented scale.

Simplicity: Complexity has often been the Achilles heel of policies aimed at unlocking private capital in low-income areas. Complexity adds cost, time, and risk to business transactions, biasing programs towards a narrower set of stakeholders and more risk-averse outcomes, often precluding the very types of business investments that are most likely to have transformative benefits for communities.

11

Slide12

There are three core elements to the program.

Zones:

States and territories designated up to 25 percent of Low-Income Community Census tracts in their state to be certified by Treasury as Opportunity Zones.

Funds: Opportunity Funds are self-certified investment vehicles organized as corporations or partnerships for the purpose of investing in qualified Opportunity Zone assets. All investments that seek to take advantage of the provision must flow through Funds

.

Investments: Funds make equity investments into businesses and property in Opportunity Zones. Qualified assets are the stocks of qualified companies, interests of qualified partnerships, or direct ownership of qualifying tangible property.

12

Slide13

Visit

eig.org/opportunityzones for more information

EIG brings together leading entrepreneurs, investors, economists, and policymakers from across the political spectrum to address America’s economic challenges.

13

WEB

eig.org

EMAIL

kenan

@eig.org

facebook.com/EconomicInnovationGroup

linkedin.com/company/economic-innovation-group

twitter.com/InnovateEconomy

Disclaimer: This document is provided by the Economic Innovation Group for informational and educational purposes only. It is not intended to constitute legal or professional advice and should not be relied upon or treated as a substitute for consultations with professional, legal, or other competent advisers.

Slide14

Benefits of

the Opportunity Zone Incentive

14

Slide15

Taxpayers can get

capital gains

tax deferral

(& more)

Qualified Opportunity Funds

for making timely investments in

Qualified Opportunity Zone

Property

which invest in

15

Slide16

3 Tax Incentive Benefits

16

1.

2.

3.

GainDeferral

Partialforgiveness

Forgiveness of

additional gains

Slide17

Period of Deferral

The period of capital gain tax deferral ends upon the earlier of:

17

2018

2019

2020

2021

2023

2024

2025

2026

2027

2028

Dec. 31, 2026,

or…

EARLIER SALE

2022

Slide18

Amount Recognized

18

THE LESSER OF:

1. Amount of gain deferred

2. The fair market value of investment in

Qualified Opportunity Fund interestor

MINUS:

Taxpayer’s basis in the

Qualified Opportunity Fund

interest

Note: The taxpayer’s basis in the Opportunity Fund is initially deemed

to be

zero.

Slide19

Partial Forgiveness and Forgiveness of Additional Gains

19

SALE

INVESTMENT

Basis increased by 10% of the deferred gain

Up to 90% taxed

HELD FOR 5 YEARS

Basis increased by 5% of the deferred gain

Up to 85% taxed

HELD FOR 7 YEARS

Basis is equal to Fair Market Value

Forgiveness of gains on appreciation of investment

Requires an election

HELD FOR 10 YEARS

2018

2019

2020

2021

2023

2024

2025

2026

2027

2028

2022

Slide20

2018

2019

2020

2021

2022

2023

2024

2026

2027

2028

2029

Jan. 2, 2018

Taxpayer enters into a sale that generates $1M of capital gain

June 30, 2018

(Within 180 days), Taxpayer contributes entire $1M of capital gain to a Qualified Opportunity Fund

Taxpayer is deemed to have a $0 basis in its Qualified Opportunity Fund investment

Qualified Opportunity Fund Invests the $1MM in Qualified Opportunity Zone Property

20

Slide21

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

Jan. 1, 2018

Taxpayer enters into a sale that generates $1M of capital gain

June 30, 2018

(Within 180 days), Taxpayer contributes entire $1M of capital gain to a Qualified Opportunity Fund

Taxpayer is deemed to have a $0 basis in its

Qualified Opportunity Fund

investment

Qualified Opportunity Fund

Invests the $1MM in Qualified Opportunity Zone Property

June 30, 2023

(After 5 years), Taxpayer’s basis in investment in QOF increases from $0 to $100k

June 30, 2025

(After 7 years), Taxpayer’s basis in investment in Qualified Opportunity Fund increases from $100k to $150k

Dec. 31, 2026

$850K of the 1MM of deferred capital gains are taxed and the basis in QOF investment increases to $1MM.

June 30, 2028

(after 10 years) , Taxpayer sells its investment for $2.0MM. Basis in the investment is deemed to be FMV. The effect is no tax on appreciation in investment.

21

Slide22

23.8% Tax Rate

4 Year

5 Year

7 Year

12/31/2026

10 Year

Standard After Tax IRR

6.00%

6.00%

6.00%

6.00%

6.00%

Incremental Opportunity Zone

Benefit

1.44%

2.08%

1.95%

1.71%

3.08%

Opportunity Zone

Investment IRR

7.44

8.08%

7.95%

7.71%

9.08%

Percentage Increase

35%

32%

29%

51%

Opportunity Zone

Incremental Benefit

22

Slide23

23

Slide24

State Tax Implications

Opportunity Zone benefits increase if states conform to the Federal LawSome states piggy-back off of the current Federal Law but could decouple from opportunity zones

New York decided not to decoupleHawaii decided to decoupleSome states do not conform to Federal Law but could add opportunity zones at the state level

Colorado is considering a bill to add the opportunity zone benefit at the state levelSome states do not have a state income tax (e.g. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming).State Tax Implications of an single opportunity zone transaction may include multiple states

State where original gain was realizedState (s) where the opportunity fund has nexusSome states are tying other State incentives to opportunity zones

Missouri proposed increased cap for state historic credits for properties in opportunity zones California introduced a bill to exempt projects in opportunity zones from the CA Environmental Quality Act24

Slide25

Where

are the Opportunity Zones?

25

Slide26

Colorado’s Opportunity Zones

126 census tracts

choosecolorado.com/

oz

26

For a list and maps of all opportunity zones nationwide go to:

https

://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

Slide27

BREAKDOWN OF PROPOSED TRACTS BY ENTERPRISE ZONE REGION

(% OF TOTAL PROPOSED TRACTS)

126 Proposed Tracts

27

Slide28

CO ZONES PROVIDE A DIVERSE PORTFOLIO FOR INVESTORS

28

Slide29

Designated Opportunity Zones

and Public Housing Developments

Designated Opportunity Zones

and Renewal Communities

Designated Opportunity Zones

and Empowerment Zones

29

Slide30

Designated Opportunity Zones

and Enterprise Communities

Designated Opportunity Zones

and Enterprise Zones

Designated Opportunity Zones

and Promise Zones

30

Slide31

Qualified Opportunity Zones

31

remain in effect

throughDecember 31, 2028

Slide32

Qualified Opportunity Fund

32

Slide33

Qualified Opportunity Fund

33

Slide34

Qualified Opportunity Fund - Purpose

An

investment vehicle organized as a corporation or a

partnership for the purpose of investing in Qualified Opportunity Zone Property.

34

Slide35

Qualified Opportunity Fund – Assets Test

35

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEPT

OCT

NOV

DEC

June 30th

December 31st

Slide36

Certification 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 (which will be released in the summer of 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.

36

Slide37

Certification Process

IRS announces self-certification process for Qualified Opportunity Funds on April 24

Self-certification form to be attached to tax returnForm to be published summer 2018

37

Slide38

Qualified Opportunity Fund – Noncompliance Penalty

Failure to meet 90% investment standard

38

Per month penalty for failing to meet 90% test

(Federal short-term rate plus 3%) –

currently 5%

% shortfall

x underpayment rate

penalty

No penalty if it is shown failure is due to

reasonable cause

Slide39

39

Slide40

Qualified Opportunity Zone Stock and Partnership Interests

The investment must be

acquired after December 31, 2017 in exchange for cash;

Must be a qualified opportunity zone business, or is being organized for the purpose of being a

qualified opportunity zone business;Must remain a qualified opportunity zone business for

substantially all of the qualified opportunity fund’s holding period40

Slide41

Qualified Opportunity Zone Businesses

A trade or business in which

substantially all

of the tangible property owned or leased by the taxpayer is qualified opportunity zone business property and

:

Tangible property that ceases to be qualified opportunity zone business property shall continue to be treated as such for 5 years or until no longer held (if earlier).

41

At least 50% of income

derived from Active Conduct

Substantial portion of intangible property used in active conduct of business

< 5 percent

unadjusted basis of property is nonqualified financial property

Slide42

Excluded Businesses

Can’t be a “Sin Business”

A private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. 

42

Slide43

Qualified Opportunity Zone Business Property

Tangible property

used in a trade or business

Acquired by purchase from an unrelated party (20% standard) after

December 31, 2017During substantially all

of holding period, substantially all the use is in a Qualified Opportunity ZoneOriginal use in the Qualified Opportunity Zone commences with the taxpayer OR

Taxpayer substantially improves the propertyduring any 30-month period after acquisition, additions to basis exceed an amount equal to the adjusted basis of such property at the beginning of such period

43

Slide44

Comparison of Requirements by Direct and Indirect Investment by Opportunity Fund

44

Requirement

Direct Investment

Indirect

Investment

Percentage

of Opportunity Fund’s assets that must be invested in qualified opportunity zone business property

90%

N/A

Percentage of

Opportunity

Fund’s assets that must

be invested in stock or partnership interests

N/A

90%

Percentage of

Opportunity

Fund’s assets that may be held in cash

or other liquid investments

10

%

5% plus reasonable working

capital

Percentage

of Opportunity Fund’s assets that may be held in intangible property

10

%

Unlimited, but intangible

property must be used in trade or business

Percentage of

Opportunity

Fund’s

assets that must be invested in tangible property

90%

No minimum

Percentage of gross

income that must be derived from Opportunity Zone

None

50%

Ineligible Businesses

None

Sin Businesses

Slide45

Readily Identifiable Investment Types in Opportunity Zones

45

Commercial Real Estate Development and Renovation

in Opportunity Zones

Opening New Businesses

in Opportunity Zones

Expansion of Existing Businesses

into Opportunity Zones

Large Expansions of Businesses already

within Opportunity Zones

Slide46

Combining with Other Tax Incentives

46

Slide47

Combining Opportunity Zones with Low Income Housing Credits

Investment holding periods line-up nicely

Basis limitations may suspend loss benefits unless debt basisAppreciation not likely, but there may be an opportunity for forgiveness of exit tax on excess loss benefits. Substantial rehabilitation rules don’t line-up

LIHTC - $6,000+/UnitOZ – expenditures in excess of beginning basis over 30 monthsTax deferral payment likely less due to diminished FMV.

47

Slide48

Combining Opportunity Zones with New Market Tax Credits

Investment holding periods do not line up with the 10-year benefit.

CDE would need to obtain Opportunity Fund status.QALICB and Qualified Opportunity Zone Business definitions have many similaritiesQLICIs must be equity under Opportunity Zone

May need CDFI Fund approval to change product strategy Equity QLICIs could affect reasonable expectation safe harbor Deferral election may be limited as NMTC investors will need basis to take required NMTC basis deductionTax deferral payment in 2026 could be less due to diminished FMV.

48

Slide49

Combining Opportunity Zones with Investment Tax Credits (RETC/HTC)

Investment holding periods do not line up with the 10-year benefit.

Basis limitations may suspend credits/ loss benefits unless debt basisAppreciation not likely, but there may be an opportunity for forgiveness of exit tax on excess loss benefits. For Pass-through structures- Master tenant would need to be the Opportunity Fund Otherwise NQFP issues with investment in Landlord

Tax deferral payment in 2026 could be less due to diminished FMV.

49

Slide50

Regulatory Guidance Needed from IRS

Grace periods for Opportunity Fund and Opportunity Zone Business To make

investmentsSafe harbors permitting

cash to be held for sufficient periods to construct or improve p

ropertyClarification of the investor when a partnership recognizes a gainBasis for applying various tests, i.e. adjusted tax basis or

FMVMeaning of “substantially all” and “substantial portion”Clarification of “original use” requirement especially with respect to vacant land50

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