The Opportunity in Opportunity Zones Alex Flachsbart 7.10.2018 aflachsbart@balch.com ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Presentation Roadmap • Program History and Zone Selection • How the Program Works • Basics of the OZ Incentive • Definitions and Parameters • Potential Examples • How to Leverage Opportunity Zones • Marketing and Promotion • Aligned Local Incentives • Placemaking as Economic Development ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Opportunity Zones have the potential to be the largest economic development program in U.S. history Steve Glickman Co-Founder, Economic Innovation Group ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
“Investing in Opportunity Act” History Dec.: Became Law April: First OZ Approvals; Feb.: Introduced by Second Round of Nominations Sen. Tim Scott 2017 2018 June: EIG March: First Round Nov. :Added Letter of OZ Nominations to Tax Bill May: Initial IRS Guidance; All OZs Approved ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
By the Numbers Governors could select The 8,700 OZs comprise The average OZ has 25% 12% 59% of low-income census tracts of all US census tracts of median area income 38% 22% 40% in high density areas in medium density areas in low density areas Source: EIG (https://eig.org/news/opportunity-zones-map-comes-focus) ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Map Resources • EIG: http://eig.org/opportunityzones • Enterprise: https://www.enterprisecommunity.org/opportunity360/ opportunity-zone-eligibility-tool • CDFI Fund: https://www.cims.cdfifund.gov/preparation/?config=confi g_nmtc.xml • PolicyMap: https://www.policymap.com/maps?i=9964345&btd=6&p eriod=2018&lind=111&cx=- 97.75981946970943&cy=38.21448287372515&cz=3&sl c=J8my6tS ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Opportunity Zone Mechanics • Incentive Basics • Setting Up a Fund • Investing in Qualified OZ Businesses • Penalties • Twinning Incentives ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
How the Incentive Works Tax Benefits Gain Event Occurs T emporary Deferral Gain Invested in on Original Gain Tax 1 QOF (until 2026 at latest) $800 $200 $1000 10% Reduction in Held for 5 Years Original Gain Tax 2 Pocket principal 15% Reduction in Held for 7 Years ($200) Original Gain Tax No Cap. Gains Tax Cash Out of on Appreciation of 3 QOF after 10 Investment Years or More $1200 ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
How the Incentive Works Investment Original Gain in QOF Tax Date ($800) 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Year 10 Exit Year 7 Exit Year 3 Exit Year 5 Exit ($1200) ($1200) ($1200) ($1200) Tax on Original Gain $190 $171 $162 $162 [N/A] Tax on OZ Interest $95 $95 $95 [N/A] $0 ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Timeline – 2018 v. 2020 Investment in QOF Original Gain ($800) Tax Date 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Year 5 Exit ($1200) *BUT: Still get Year 10 exit incentive in 2030 ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
What Can We Invest In Industrial Commercial Multi‐Family But only if compliant with tax Startups Infrastructure Housing rules! Community / Hospitals R&D / Tech Public Assets ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Structuring Opportunity Zone Investments • Investor Tax Considerations • Business Tax Considerations Investors • Fund Management Structure • Securities Law Compliance QOF • OZ Regulations Compliance • …And So Much More! OZ Project Certain OZ / Business Property ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Investors: Capitalizing the Fund • Unlimited number of investors Investors and amount of investment • Capital Gains (long vs. short- term eligibility?) QOF • Ordinary Income (but no beneficial tax treatment) • Debt (with equity takeout) OZ Project Certain OZ / Business Property ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Qualified Opportunity Funds • “Self-certify” as a fund (i.e., no Investors “application process” to IRS) • Any entity can manage a QOF • Can only invest in “qualified OZ QOF property” (defined shortly) • Must make equity investments • 90% of capital gains invested OZ Project Certain OZ / Business Property must be deployed at regular 6- month test intervals ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Failure to Meet 90% T est • Per-month penalty Investors • Based on shortfall below 90% level x underpayment rate (federal short-term rate + 3%) QOF • No penalty if below 90% because of a “reasonable cause” (undefined) OZ Project Certain OZ • No recapture or immediate / Business Property taxable event ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Direct vs. Indirect Investment • Direct – QOF “runs the Investors business” • Indirect – QOF owns stock or partnership interest in the QOF business OZ Project Certain OZ / Business Property ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Direct: Qualified OZ Business Property • Tangible property bought after Investors Dec. 31, 2017 • During “substantially all” the holding period, “substantially all” QOF use was within OZ • Original use in OZ or “substantial improvement” OZ Project Certain OZ (double your cost basis over 30 / Business Property month period) ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Indirect: Qualified OZ “Holdings” • “Substantially all” property is QOZ business property Investors • 50%+ of income derived from active conduct of business • Intangible property used in QOF active conduct of business • <5% of property is cash (less reasonable reserve), stock, debt OZ Project Certain OZ instruments, etc. / Business Property • No “sin businesses” ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
T winning Opportunities NMTC Can be paired with almost any federal, state or local HTC RETC incentive Opportunity Zone Investment Local LIHTC Other State Fed ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Potential QOF Models and Examples Inv. Inv. Inv. Inv. Investor Inv. Inv. Inv. Inv. QOF QOF QOF OZ OZ OZ Project OZ Project / Business / Business OZ OZ ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Examples • Single investor invests in single-family home development and sale in OZs. Homes are bought and sold throughout ten-year period. • “Churning” rules and 90% test • Creative structuring options • Several investors pool funds in a QOF to invest in a startup business. Three years into investment, startup moves to non-OZ. • Securities concerns • 5-year safe harbor provision ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Examples • Apple wants to build a new manufacturing facility. It sells off stock to invest in the new facility. • Related party issues • Expectation of sale of OZ fund interest? • Current owner owns property or a business in an OZ and wants to re-invest their own capital. • Current prevention • Creative structuring options • A nonprofit hospital wants to construct a new facility, but wants to benefit from OZ investment. • Joint ventures • OZ lease-purchase arrangement ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Now… How Can This Work in Your Community? Downtown Seattle Manhattan Vail Detroit Palo Alto Downtown Atlanta Austin North Miami Beach ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Building Local Ecosystems Build Develop Market Create Develop Data Investor Opportunity Opportunities Investment Collection & Pipeline Profiles & Zones Mechanisms Compliance ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Building Local Ecosystems Portal? Framework? Innovators Wealthy Higher Ed. Developers Local Banks Businesses Nexus Nexus ED Incubators Foundations “Prodigals” Chambers Angels Guarantees? Master Fund? ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Place-Based Economic Development Innovation Districts Built Environment Incentives Permitting / Zoning Changes Overlay Incentive Districts ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Follow Ups • Informal state working group • Newsletter / updates • Opportunity Zones site • Fund creation • Local ecosystem formation ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Questions? Alex Flachsbart Balch & Bingham (Birmingham Office) 334.425.4166 (cell) aflachsbart@balch.com ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC
Recommend
More recommend
