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WELCOME!

City of Sarasota Qualified Opportunity Zones Discussion

April 24, 2019

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Opportunity Zones (“QOZ”) Background

• Created as part of Tax Cut and Jobs Act – 2017 tax reform package.
• New Sections 1400Z-1 and 1400Z-2 of the Internal Revenue Code.
• Republicans – a promised tax cut, a market-based solution and way to put the power in the hands of

the local governments.

• Democrats – an approach that steers money into areas in dire need of funding.
• Free up latent capital gains to drive economic development in “low-income communities”

What are QOZs?

• Population census tracts identified as low-income communities
• Each state limited to designating 25% of its low-income census tracts as

QOZs

• States worked with local communities to identify specific tracts

QOZ Tax Advantage

• Deferral Benefits - defer tax on any prior gains invested in a Qualified Opportunity Fund (“QOF”) until the

earlier of the date on which the investment is sold or exchanged, or December 31, 2026.

• Exclusion Benefits – an investor’s basis in a QOF is $0 (because gains deferred), but the basis of the

investment steps up after time: ▫ If held for 5 years - basis increased to 10% of gain deferred ▫ If held for 7 years – basis increased 5% more (cumulative 15%) ▫ If held 10 years or more, basis stepped up to FMV on date investment sold or exchanged.

• Invest by 12/31/2019 for full benefits – basis in QOF is $0, unless held for 5 or 7 years (cannot hold for 7

years if not purchased by 12/31/2019)

• Even if held for 10 years, the investor will still have paid the toll tax on 12/31/2026.

Deferral Benefits

• “Eligible gain” means:

▫ Treated as capital gain under the Code (excludes gain under Sections 1231, 1245 and 1250) ▫ Would be recognized before 1/1/2027 if not for allowable deferral ▫ Does not arise from a sale with a related person

• “Eligible Taxpayers” – individuals, corps (includes REITs), partnerships, trusts and estates
• Capital gains must be invested into a QOF within 180 days of date of realization
• Special rules apply for partnerships and s-corps

▫ Partnership can rollover the gain itself within 180 days. If elects not to, then the partners can rollover the gain. 180 day period for partners begins at close of the partnership’s tax year.

Organizing and Qualify fying as QOF

A QOF self-certifies by attaching IRS Form 8996 to its tax return for the first year in which the QOF elects to be treated as a QOF and for each year thereafter.

• 3 primary tests need to be satisfied:

▫ Organizational Test ▫ Purpose Test ▫ Asset Test

Organizing and Qualify fying as QOF

Organizational Test

• Must be organized as a corporation or partnership for tax purposes (includes LLCs taxed as partnership)

▫ Can be a pre-existing entity if otherwise qualifies (likely difficult) ▫ Nothing special about the entity being used (typical choice of entity analysis would apply as between corporation/partnership)

Can be a public fund (similar to other investment funds)

Can also be as simple as a two person partnership

Organizing and Qualify fying as QOF

Purpose Test

• Must be formed for investing in qualified opportunity zone property (QOZ Property)
• Met by filing Form 8996 self-certification

▫ Certify that governing documents include provisions that purpose of the QOF is to invest in QOZ Property and description of QOZ business(es)

• Cannot invest in another QOF

Organizing and Qualify fying as QOF

Asset Test

• At least 90% of the QOF’s assets must be invested in QOZ Property
• QOZ Property includes

▫ Qualified opportunity zone stock (QOZ Stock) ▫ Qualified opportunity zone partnership interests (QOZ Partnership Interests ▫ Qualified opportunity zone business property (QOZBP)

• Investments by QOF can be directly in QOZBP or indirectly through an equity interest in another

corporation or partnership!

Organizing and Qualify fying as QOF

QOZ Stock and QOZ Partnership Interests

• Acquired at original issuance for cash after 12/31/17
• Entity was a QOZ Business when the equity was issued

▫ Can be capital or profits interest

• During time QOF owns the equity interests, the entity qualifies as a QOZ Business

Organizing and Qualify fying as QOF

Qualified Opportunity Zone Business Property

• Tangible property used in the trade or business of the QOF

▫ Acquired by purchase after 12/31/17 ▫ Original use in QOZ commences with the QOF, or the QOF “substantially improves” the property ▫ Substantially all of the use was in a QOZ for substantially all of the QOF’s holding period

• Substantial improvement means QOF makes capital improvements within 30 months of acquisition of the

property in an amount at least equal to the basis of the property when acquired.

• Working capital is not QOZBP, but proposed regulations provide safe harbor for reasonable working capital

if requirements are met.

Organizing and Qualify fying as QOF

• Raw land can be QOZBP

▫ Does not need to be substantially improved to qualify ▫ However, still need to meet active trade or business requirements

• Can lease QOZBP

Not required to substantially improve or satisfy the “original use” requirement

But need to be arms length

Can be from related parties if certain requirements met

Can’t be an expectation that the leased property will be purchased by the QOF or QOZB for an amount other than FMV at time of purchase.

Organizing and Qualify fying as QOF

Qualified Opportunity Zone Business

• Substantially all of the tangible property owned/leased by the entity is QOZBP

▫ Substantially all equals 70% in this context

• At least 50% of the entity’s total gross income is derived from an active trade or business
• A substantial portion of intangible property is used in the active conduct of a trade or business
• Less than 5% is attributable to nonqualified financial property
• No sin businesses



Golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack, gambling establishment or liquor stores

Organizing and Qualify fying as QOF

• “Trade or business”

▫ Regulations take probably highest standard possible – Section 162 ▫ Rentals on a triple-net basis don’t qualify

• 50% of income must be earned within the QOZ

3 safe harbors  50% of hours of employees/ICs in QOZ  50% of amounts paid to employees/ICs are for services performed in QOZ  Tangible property located in a QOZ and management and operational functions performed in the QOZ necessary for at least 50% of gross income of business

Organizing and Qualify fying as QOF

• Regulations appear to favor investments by QOF into a QOZ Stock or QOZ Partnership Interests rather than

QOZBP directly

▫ Note that a QOZ Business only needs to hold at least 70% of its assets as QOZBP ▫ However, some provisions only applicable to QOZ Business

 No prohibition on QOF operating a “sin business”  50% income limitation from active trade or business only applicable to QOZ Business  Working capital safe harbor only applies to QOZ Business

▫ Examples of types of business that could qualify as QOZ Business

Rental condo/apartment complex, mixed-use developments, shopping centers, grocery stores, parking facilities, sports and recreation facilities, hotels, restaurants, offices, manufacturing facilities, clinics

Examples of types of business that would not qualify

Sin businesses, banks/financial institutions, branch of existing business that is not a separate legal entity (if fails 50% test), certain rental businesses (if not active trade or business)

Tri rigg ggering Gain in/Exiting QOF

• Deferred gain is recognized on earlier of 12/31/2026 or when investment is “sold or exchanged”

Regulations clarify that gain recognition triggered when direct equity in QOF is reduced or the taxpayer “cashes out” a portion of its investment  Sales of partnership interests that own an interest in a QOF (special rule for s corps), termination of QOF, Gifts of QOF, S corp conversion, C corp redemptions

Non-inclusion events  Tax free corporate liquidations of subsidiaries, transfer at death, contribution to grantor trust, 721 transactions, making or revoking an s election

Amount of inclusion = Excess of (i) FMV X remaining deferred gain or (ii) FMV less taxpayer’s basis (which is generally $0 unless held for at least 5 years)

Different rules for partnerships/s-corps

Tri rigg ggering Gain in/Exiting QOF

• New rules for sale of assets of a QOF (if held more than 10 years)

▫ If partnership or s corp sells its assets, then the capital gain allocable to the partner can exclude the gain. ▫ Only applies to capital gains, so sales of “hot assets” don’t qualify ▫ No similar protection for c corps

• What about sales of assets prior to 10 years

QOF has 12 months to reinvest proceeds into QOZBP

Note that gain triggered as a result of the sale of will be taxable

• “Substantially all” of the tangible property owned and leased by the

taxpayer is QOZBP used in a trade or business of the QOZB and meets the other holding period requirements.

• At least 50% of the total QOZB’s gross income must be derived from the

active conduct of such business and the average of the aggregate unadjusted basis of the QOZBP attributable to “nonqualified financial property” must be less than 5%.

Trade or Business Income

Trade or business defined

• There is no exact definition of “trade or business” in the Internal

Revenue Code, Treasury Regs or IRS guidance!

• We can look to the Supreme Court decisions and case law that use the

notion of “regularity” (ie activity over a certain period of time) and a profit motive as factors that other courts have widely accepted.

• For Code Sec 199A, section 162(a) provides the most appropriate

definition of trade or business, but there is controversy because the courts and IRS pronouncements are not consistent as to the level of activity to establish the existence of a trade or business

“Substantially all” - 70% versus 90% test

• For a trade or business to qualify as a qualified opportunity zone business “it

must (among other requirements) be one in which substantially all of the tangible property owned or leased by the taxpayer is qualified opportunity zone property”

• The proposed regulations would allow “substantially all” requirement to be

met when “at least 70% of the tangible property owned or leased by a trade

• r business is QOZBP (as defined by 1400Z-2(d)(3)(A)(i)), which was

confirmed in the new guidance

• The proposed regulation note that 70% requirement will give QOFs incentive

to invest in QOZB (ie tiered partnership) rather than owning QOZBP directly, which requires at least 90% of tangible property owned or leased to be in QOZ.

QOF Investment in QOZB

QOF Investment in QOZBP

Capital Gain Recognition

• Investor has a Capital Gain of $1MM from a sale, then reinvests $1MM

into a QOF.

• The $1MM capital gain is deferred in being recognized
• The QOF can use the $1MM to invest in either a QOZB or a QOZBP
• If sold at 5 years, then basis of investment will increase by 10% of

Capital Gain deferred of $100,000. $2MM sale - $100K = $1.9MM CG

• If sold at 7 years, then basis of investment will increase to 15% (or an

additional 5%) for a total of $150,000. $2MM sale - $150K = $1.85MM CG

Capital Gain Recognition at 12-31-2026

• If the investment is held for 10 years, the basis of the investment could be

equal to the FMV of the investment on the date it is sold or exchanged (even if later than 12-31-26). Even if a QOF investment is held for more than 10 years a taxpayer will not be able to escape tax on more than 15% of the initial CG invested.

• Investment is held (not sold) and we reach 12-31-26, and was held less than 5

years then the $1MM deferred capital gain is recognized and added to basis

• Investment is held (not sold) and we reach 12-31-26, and was held at least 5

years, $1MM deferred CG - $100K = $900K Capital gain recognized and added to basis

Capital Gain Recognition – 10 years

• TCJA specifically provides that if a QOF investment is held for at least 10 years and the taxpayer makes an

election, the taxpayer will have a basis equal to the FMV of such investment on the date of sale of the

• investment. Holds the investment for 10 years would not have to recognize any post-acquisition CG (i.e.,

appreciation) on the investment.

• If a taxpayer holds the QOF investment for 10 years, makes the FMV basis election and sells his interest, here

is what will happen:

• 1) If the investment is held for less than 5 years as of Dec. 31, 2026: All of the deferred gain is recognized as of

12/31/2026. If the investment is sold or exchanged after 12/31/2026 for FMV (after being held for at least 10 years) the taxpayer recognizes no additional gain, due to the FMV basis election, even if the investment has increased in value between 12/31/2026 and the date of disposition

• 2) If the investment is held for at least 5 years by Dec. 31, 2026: 10% basis adjustment applies; 90% of deferred

gain is recognized as of 12/31/2026. If the investment is sold or exchanged after 12/31/2026 for FMV (after being held for at least 10 years) the taxpayer recognizes no additional gain, due to the FMV basis election, even if the investment has increased in value between 12/31/2026 and the date of disposition

• 3) If the investment is held for at least 7 years by Dec. 31, 2026: 15% basis adjustment applies; 85% of deferred

gain is recognized as of 12/31/2026. If the investment is sold or exchanged after 12/31/2026 for FMV (after being held for at least 10 years) the taxpayer recognizes no additional gain, due to the FMV basis election, even if the investment has increased in value between 12/31/2026 and the date of disposition

• If a taxpayer holds the QOF investment for 10 years, makes the FMV basis election and sells his interest, here

is what will happen:

• 1) If the investment is held for less than 5 years as of Dec. 31, 2026: All of the deferred gain is recognized as of

12/31/2026. If the investment is sold or exchanged after 12/31/2026 for FMV (after being held for at least 10 years) the taxpayer recognizes no additional gain, due to the FMV basis election, even if the investment has increased in value between 12/31/2026 and the date of disposition

• 2) If the investment is held for at least 5 years by Dec. 31, 2026: 10% basis adjustment applies; 90% of deferred

gain is recognized as of 12/31/2026. If the investment is sold or exchanged after 12/31/2026 for FMV (after being held for at least 10 years) the taxpayer recognizes no additional gain, due to the FMV basis election, even if the investment has increased in value between 12/31/2026 and the date of disposition

• 3) If the investment is held for at least 7 years by Dec. 31, 2026: 15% basis adjustment applies; 85% of deferred

gain is recognized as of 12/31/2026. If the investment is sold or exchanged after 12/31/2026 for FMV (after being held for at least 10 years) the taxpayer recognizes no additional gain, due to the FMV basis election, even if the investment has increased in value between 12/31/2026 and the date of disposition

Let’s put it into tax dollars!

Facts: Taxpayer has a capital gain of $1M and successfully invests in a QOF on December 31, 2018, meeting all of the technical requirements, on December 31, 2026 Taxpayer is still holding the holding the QOF and tax is due. 12-31-26 owes $170,000: Taxpayer has held the QOF for 7 years, and gets to take advantage of an increase in her basis by 15%. Therefore she will only pay tax on $850K ($1M - $150K of basis increase) of the $1M capital gain she had prior to her investment in the QOF. Resulting in a tax liability of $850K x 20% (assuming this is the taxpayers applicable capital gains tax rate) = $170K in taxes owed. Upon Sale of Property post 10 year holding – owes $0: If Taxpayer continues to hold the property past December 31, 2028 (over 10 years) and then sells the property, she will pay no additional tax on the

• sale. For example, if Taxpayer sells for $2M (due to appreciation of her QOF asset) she will have would

have otherwise had a capital gain event of $1.15M. The $2M purchase price - $850K = $1.15M in capital gains, as Taxpayer elects to treat the basis at FMV at the date of sale. She would have owed $230K in capital gains taxes assuming the 20% capital gains rate applied. As you can imagine, the greater the appreciation on the original investment, the larger the tax savings.

OPPORTUNITY ZONES

City of Sarasota Office of Economic Development General Manager Steven Stancel

• Develop strategies to identify potential investments and make those
• pportunities known to investors
• Promote local Opportunity Zones
• Create local investment prospectus
• Economic overview of each zone
• Identify key assets in each zone
• Identify projects and businesses that are ready for investment
• Develop plan to market to investors

LOCAL COMMUNITY’S ROLE IN OPPORTUNITY ZONES

29

LOUISVILLE OPPORTUNITY ZONE PROSPECTUS

A Platform for Action

Prepared by NEW LOCALISM ADVISORS in collaborationwith THE CITY OF LOUSIVILLE A projectof ACCELERATOR FOR AMERICA

November 2018

JOB GROWTH IS UP 2000-2010 +2% 2011-2018 +9%

AVERAGE MONTHLY EARNINGS ARE UP 2000-2010

• 2%

2011-2018 +8%

PAYROLL JOBS ARE UP

2000-2010

• 4%

2011-2017 +20%

EMPLOYEES UNDER AGE 29 ARE UP 2002-2010

• 8%

2011-2015 +8% UNEMPLOYMENT IS WAY DOWN January 2011 10% January 2018 3%

*2017 Adjusted

LOUISVILLE METRO ECONOMY

Louisville’s economy has performed well over the past decade

LOUISVILLE BY THE RANKINGS

CITY OF PRIDE

Human Rights Campaign perfect score four years running

2018 LENDING TREE

Highest proportion of Millennial founders among cities with the youngest entrepreneurs

4TH OUT OF 15 PEER CITIES

2016 Labor Force Participation of young workers (25-44 year- olds)

2017 & 2018 SMARTASSET Top 10 City for Lowest Start- up Costs Top city for new college grads & women in technology Top 15 cities where Millennials are moving FORBES #1 City for Manufacturing (2017) “Aging Care Capital” with Largest Cluster

• f Aging Care Businesses (2018)

Downtown hotels have nearly doubled since 2010 16.4 million visitors a year

DOWNTOWN RENAISSANCE

With a comprehensive placemaking strategy, Louisville’s downtown has become a hotbed of investment, with housing, hotels, and tourist attractions

$220 million convention center opened in 2018 State-of-the-art venue with 940,000 square feet of space

Downtown Residential 1,033 new units by 2019 (39% increase in 2 years) Downtown Retail Additional 145,000 sq. ft. by 2019 (9% increase in 2 years)

BOURBONISM

A new and rapidly growing year-round tourism draw

The Assets

• Louisville is the official start of the Kentucky

Bourbon Trail

• 1.4 million visitors a year
• Nine distilled spirits attractions in a growing

Bourbon District The Opportunity

• Invest in the “Napa Valley of Bourbon,” with distilleries,

attractions, and adjacent hospitality

OPPORTUNITY ZONE SOCIO-ECONOMIC OVERVIEW

Opportunity Zones include areas with high socio-economic need

BLACK HISPA NIC FOREI GN BORN POVERTY MEDIAN HOUSEHOLD INCOME % ED BA+ % SOME COLLEGE % NO HS DEGREE % UNDER 18 % OVER 65 UNEMPLOY- MENT (MARCH 2018)

Metro 14% 4% 5% 14% $52,437 28% 31% 11% 23% 14% 3.4% City 21% 5% 7% 17% $50,099 32% 30% 11% 23% 15% 3.6% Opportunity Zones 54% 2% 7% 43% $21,713 15% 32% 21% 22% 15% N/A State (KY) 8% 3% 4% 19% $44,811 23% 29% 15% 23% 15% 3.9% US 13% 17% 13 % 15% $55,322 30% 29% 15% 23% 15% 4.1%

OPPORTUNITY ZONE GROUPS

Louisville has eight different Opportunity Zone groups, each with distinct personalities and competitive advantages.

The Assets

• $45 million expansion of Louisville’s award-winning

Waterfront Park into the Portland neighborhood, currently underway.

• Will be a destination for tens of thousands of people from all
• ver the city, with playgrounds, concerts, and public events,

less than a 10-minute walk from downtown. The Opportunities

• Surrounding area consists of a large, historic warehouse,

industrial building stock, and surface parking lots—all ripe for redevelopment.

• Redevelopment of historic buildings could include office, retail,

restaurant, and multifamily residential units.

• Waterfront Park Phase I-III catalyzed $1.3 billion in

investment in the surrounding area and built a program of more than 150 special events per year with an annual park attendance of more than 2 million visitors.

WEST LOUISVILLE CATALYTIC INVESTMENT: WATERFRONT PARK PHASE IV

CENTRAL BUSINESS DISTRICT CATALYTIC INVESTMENT: LOUISVILLE GARDENS

The Assets

• City-owned, historic 6,000-seat performance venue—a needed middle-size space in a city where most indoor venues are under 3,000 seats or
• ver 20,000.
• Primed for restoration as an arts and entertainment venue, convention facility, and mixed-use space, at an estimated cost of $65 million.
• Located in the heart of downtown, a few blocks from 4th Street Live! and award-winning hotels, including

10 new downtown hotels since 2009. The Opportunity

• City seeking development partner to create a new mixed-use facility.
• City offering other incentives and land.

NEIGHBORHOOD RENAISSANCE / ARTISANAL MANUFACTURING CATALYTIC INVESTMENT: LOGAN STREET MARKET

The Assets

• Currently developing 25,000 square foot public market in a

former tobacco warehouse in the Shelby Park neighborhood.

• Space for dozens of local vendors to share resources, sell goods,

and incubate food ideas.

• Rotating art installations, murals, live music, and community

events.

• Microbrewery Wild Hops and roastery of Safai Coffee.

The Opportunity

• Invest in Louisville’s first public market and small businesses

adjacent to or growing out of the Logan Street Market ecosystem.

The Assets

• City-owned 16.8 acre former Rhodia site is rail-

served and zoned industrial.

• Located 1/2 mile from University of Louisville’s

Belknap Campus, 2 miles from downtown, and 7 miles from UPS WorldPort.

• Immediately adjacent to large LG&E substation.
• Embedded in a 1,400-acre industrial

corridor. The Opportunity

• Build an industrial park and research campus, with
• ffices, manufacturing, and university-linked research

capacities.

PARK HILL INDUSTRIAL CORRIDOR/CALIFORNIA NEIGHBORHOOD CATALYSTIC INVESTMENT: RHODIA INDUSTRIAL PARK

Don’t let these opportunities pass you by.

LOUISVILLE OPPORTUNITY ZONE POINTS OF CONTACT:

Mary Ellen Wiederwohl Chief of Louisville Forward maryellen.wiederwohl@louisvilleky.gov Eric Burnette Senior Policy Advisor for Louisville Forward eric.burnette@louisvilleky.gov

LOUISVILLE FORWARD WEBSITE:

louisvilleky.gov/louisvilleforward

OPPORTUNITY ZONE WEBSITE:

louisvilleky.gov/government/louisville- forward/opportunity-zones-louisville

• Identify and create additional programs and resources to leverage

positive development within Opportunity Zones

• Engage community to determine its needs
• Promote inclusive and equitable growth for existing residents

and businesses

• Implement protections that prevent displacement
• Incentivize investments with high social benefit
• Expand access to opportunity

LOCAL COMMUNITY’S ROLE IN OPPORTUNITY ZONES (cont.)

EXAMPLES OF EXISTING PROGRAMS / RESOURCES:

• Residential Multi-Modal Fees waived for very low or low income criteria
• Multi-Modal fees reduced 90% for certain commercial uses in Newtown CRA
• Multi-Modal fees reduced 75% for certain commercial uses on North Trail
• Business Grants available in Newtown CRA area
• Economic Development Ad Valorem Tax Exemption Program (EDAVTE)
• Tax Increment dollars available in Newtown CRA for land assemblage and

redevelopment of underutilized properties

• SBA Historically Under-Utilized Business Zones (HUB)

PROGRAMS / RESOURCES

• Density bonuses for attainable residential units
• Rezoning for inclusionary mixed-uses
• Tax and financial incentive linked to hiring and wage requirements
• Land / building trusts or land banks
• Expand job training programs to match investments
• Additional grant / loan programs
• Homebuyer (Down Payment Assistance)
• Organize a coalition of local builders / investors
• Leverage role of CDFI’s, Community Development Corporations, and other local

community intermediaries

• Lobby county and state officials for additional incentives

EXAMPLES OF POTENTIAL PROGRAMS / RESOURCES:

PROGRAMS / RESOURCES cont.

• Additional guidance from Treasury Department
• Develop local strategies:
• Identify potential projects within Opportunity Zones
• Market local zones
• Connect opportunity funds with eligible projects
• Create programs / resources to prevent displacement of residents and businesses

NEXT STEPS

Christy Cardillo, Partner Carr, Riggs & Ingram CPAs and Advisors ccardillo@cricpa.com (941) 747-0500 www.cricpa.com Steven Stancel, GM Economic Development City of Sarasota steven.stancel@sarasotaFL.gov (941) 365-2200 www.sarasotafl.gov Jon Skelton, Partner Shumaker, Loop & Kendrick, LLP jskelton@shumaker.com (813) 676-7211 www.shumaker.com Joel Freedman, Director of Land Planning Shumaker Advisors Florida, LLC and President of Freedman Consulting and Development, LLC jfreedman@shumakeradvisors.com (941) 780-2623 www.shumaker.com/shumaker-advisors

Questions?