The Opportunity in Opportunity Zones Alex Flachsbart 7.10.2018 - - PowerPoint PPT Presentation

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The Opportunity in Opportunity Zones Alex Flachsbart 7.10.2018 - - PowerPoint PPT Presentation

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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

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ALABAMA | FLORIDA | GEORGIA | MISSISSIPPI | WASHINGTON DC

The Opportunity in Opportunity Zones

Alex Flachsbart 7.10.2018 aflachsbart@balch.com

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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
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Opportunity Zones have the potential to be the largest economic development program in U.S. history

Steve Glickman Co-Founder, Economic Innovation Group

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“Investing in Opportunity Act” History

Feb.: Introduced by

  • Sen. Tim Scott
  • Nov. :Added

to Tax Bill Dec.: Became Law March: First Round

  • f OZ Nominations

April: First OZ Approvals; Second Round of Nominations May: Initial IRS Guidance; All OZs Approved 2018 2017 June: EIG Letter

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By the Numbers

Governors could select

25%

  • f low-income census tracts

The 8,700 OZs comprise

12%

  • f all US census tracts

Source: EIG (https://eig.org/news/opportunity-zones-map-comes-focus)

38%

in high density areas

40%

in low density areas

22%

in medium density areas The average OZ has

59%

  • f median area income
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Map Resources

  • EIG: http://eig.org/opportunityzones
  • Enterprise:

https://www.enterprisecommunity.org/opportunity360/

  • pportunity-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

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Opportunity Zone Mechanics

  • Incentive Basics
  • Setting Up a Fund
  • Investing in Qualified OZ Businesses
  • Penalties
  • Twinning Incentives
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How the Incentive Works

Gain Event Occurs Gain Invested in QOF

$1000 $200 $800 Pocket principal ($200) T emporary Deferral

  • n Original Gain Tax

(until 2026 at latest) 10% Reduction in Original Gain Tax

Held for 5 Years Held for 7 Years

15% Reduction in Original Gain Tax

Cash Out of QOF after 10 Years or More

No Cap. Gains Tax

  • n Appreciation of

Investment $1200 Tax Benefits 1 2 3

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How the Incentive Works

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Investment in QOF ($800)

2029

Year 3 Exit ($1200) Year 5 Exit ($1200) Year 7 Exit ($1200) Year 10 Exit ($1200) Original Gain Tax Date

Tax on Original Gain $190 $171 $162 $162 [N/A] Tax on OZ Interest $95 $95 $95 [N/A] $0

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Timeline – 2018 v. 2020

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Investment in QOF ($800)

2029

Year 5 Exit ($1200)

*BUT: Still get Year 10 exit incentive in 2030

Original Gain Tax Date

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What Can We Invest In

R&D / Tech Multi‐Family Industrial Hospitals Infrastructure Commercial Housing Startups Community / Public Assets

But only if compliant with tax rules!

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Structuring Opportunity Zone Investments

Investors QOF OZ Project / Business Certain OZ Property

  • Investor Tax Considerations
  • Business Tax Considerations
  • Fund Management Structure
  • Securities Law Compliance
  • OZ Regulations Compliance
  • …And So Much More!
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Investors: Capitalizing the Fund

Investors QOF OZ Project / Business Certain OZ Property

  • Unlimited number of investors

and amount of investment

  • Capital Gains (long vs. short-

term eligibility?)

  • Ordinary Income (but no

beneficial tax treatment)

  • Debt (with equity takeout)
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Qualified Opportunity Funds

Investors QOF OZ Project / Business Certain OZ Property

  • “Self-certify” as a fund (i.e., no

“application process” to IRS)

  • Any entity can manage a QOF
  • Can only invest in “qualified OZ

property” (defined shortly)

  • Must make equity investments
  • 90% of capital gains invested

must be deployed at regular 6- month test intervals

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Failure to Meet 90% T est

Investors QOF OZ Project / Business Certain OZ Property

  • Per-month penalty
  • Based on shortfall below 90%

level x underpayment rate (federal short-term rate + 3%)

  • No penalty if below 90%

because of a “reasonable cause” (undefined)

  • No recapture or immediate

taxable event

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Direct vs. Indirect Investment

Investors QOF Certain OZ Property OZ Project / Business

  • Direct – QOF “runs the

business”

  • Indirect – QOF owns stock or

partnership interest in the business

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Direct: Qualified OZ Business Property

Investors QOF OZ Project / Business Certain OZ Property

  • Tangible property bought after
  • Dec. 31, 2017
  • During “substantially all” the

holding period, “substantially all” use was within OZ

  • Original use in OZ or

“substantial improvement” (double your cost basis over 30 month period)

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Indirect: Qualified OZ “Holdings”

Investors QOF OZ Project / Business Certain OZ Property

  • “Substantially all” property is

QOZ business property

  • 50%+ of income derived from

active conduct of business

  • Intangible property used in

active conduct of business

  • <5% of property is cash (less

reasonable reserve), stock, debt instruments, etc.

  • No “sin businesses”
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T winning Opportunities

Can be paired with almost any federal, state or local incentive

Opportunity Zone Investment

NMTC

HTC

LIHTC

Other Fed

State

Local

RETC

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Potential QOF Models and Examples

Investor QOF OZ Project / Business Inv. QOF OZ Project / Business Inv. Inv. Inv. Inv. QOF OZ Inv. Inv. Inv. OZ OZ OZ

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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
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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
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Now… How Can This Work in Your Community?

Palo Alto Downtown Seattle Vail Austin Manhattan North Miami Beach Downtown Atlanta Detroit

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Building Local Ecosystems

Develop Investor Profiles Build Opportunity Pipeline Market Opportunities & Zones Create Investment Mechanisms Develop Data Collection & Compliance

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Building Local Ecosystems

Nexus

Innovators Developers Incubators Chambers ED Higher Ed.

Nexus

Wealthy Businesses “Prodigals” Angels Foundations Local Banks

Guarantees? Master Fund? Portal? Framework?

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Place-Based Economic Development Innovation Districts Built Environment Incentives Permitting / Zoning Changes Overlay Incentive Districts

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Follow Ups

  • Informal state working group
  • Newsletter / updates
  • Opportunity Zones site
  • Fund creation
  • Local ecosystem formation
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Questions?

Alex Flachsbart Balch & Bingham (Birmingham Office) 334.425.4166 (cell) aflachsbart@balch.com