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
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Slide1
Opportunity Zone Program Conference
1
June
28
, 2018
History Colorado Center1200 North BroadwayDenver, Colorado 80203
Slide2Opportunity 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
Slide3Opportunity 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
Slide4Opportunity Zone Program Overview
Kenan
Fikri
,
4
ECONOMIC INNOVATION GROUP / Washington, DC
/ @kenanfikri
Slide552 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.
Slide6Today’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
Slide7Traditional 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%
Slide8Access 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%
Slide9The idea has strong, bipartisan roots and builds on the lessons from prior federal efforts to revitalize struggling communities.
9
Slide10What 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
Slide11What 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
Slide12There 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
Slide13Visit
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.
Slide14Benefits of
the Opportunity Zone Incentive
14
Slide15Taxpayers can get
capital gains
tax deferral
(& more)
Qualified Opportunity Funds
for making timely investments in
Qualified Opportunity Zone
Property
which invest in
15
Slide163 Tax Incentive Benefits
16
1.
2.
3.
GainDeferral
Partialforgiveness
Forgiveness of
additional gains
Slide17Period 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
Slide18Amount 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.
Slide19Partial 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
Slide202018
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
Slide212018
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
Slide2223.8% 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
Slide2323
Slide24State 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
Slide25Where
are the Opportunity Zones?
25
Slide26Colorado’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
Slide27BREAKDOWN OF PROPOSED TRACTS BY ENTERPRISE ZONE REGION
(% OF TOTAL PROPOSED TRACTS)
126 Proposed Tracts
27
Slide28CO ZONES PROVIDE A DIVERSE PORTFOLIO FOR INVESTORS
28
Slide29Designated Opportunity Zones
and Public Housing Developments
Designated Opportunity Zones
and Renewal Communities
Designated Opportunity Zones
and Empowerment Zones
29
Slide30Designated Opportunity Zones
and Enterprise Communities
Designated Opportunity Zones
and Enterprise Zones
Designated Opportunity Zones
and Promise Zones
30
Slide31Qualified Opportunity Zones
31
remain in effect
throughDecember 31, 2028
Slide32Qualified Opportunity Fund
32
Slide33Qualified Opportunity Fund
33
Slide34Qualified Opportunity Fund - Purpose
An
investment vehicle organized as a corporation or a
partnership for the purpose of investing in Qualified Opportunity Zone Property.
34
Slide35Qualified Opportunity Fund – Assets Test
35
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEPT
OCT
NOV
DEC
June 30th
December 31st
Slide36Certification 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
Slide37Certification 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
Slide38Qualified 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
Slide3939
Slide40Qualified 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
Slide41Qualified 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
Slide42Excluded 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
Slide43Qualified 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
Slide44Comparison 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
Slide45Readily 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
Slide46Combining with Other Tax Incentives
46
Slide47Combining 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
Slide48Combining 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
Slide49Combining 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
Slide50Regulatory 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