Welcome to the Land of OZ: An Introduction to Opportunity Zones

Transcription

1 Welcome to the Land of OZ: An Introduction to Opportunity Zones 2018 NPH Affordable Housing Conference, Building Momentum Diana Downton Community Economics Sarah Brundage Enterprise Community Partners Ari Beliak Bank of America Merrill Lynch Jack Tse Northern California Community Loan Fund Kevin Wilson Novogradac & Company LLP September 21, 2018

2 52 million Americans (1 in 6) live in economically distressed communities. Prosperous Distressed September 21,

3 Job and business growth fails to reach most distressed zip codes. Average Growth Rates More than half of the country s distressed zip codes contained fewer jobs and places of business in 2015 than they had in Employment 24.5% 9.4% Establishments 12.6% 4.2% -6.0% -6.3% Prosperous Zip Codes Source: EIG s Distressed Communities Index; U.S. Census Bureau United States September 21,

4 The slow winding down of the economy s dynamism is producing more geographically unequal outcomes. In the 1990s, half or more of all counties grew at the national rate. Now only one quarter do. National figures are becoming less reflective of local realities. Share of U.S. counties matching the national rate of growth Business establishments Employment Source: U.S. Census Bureau s County Business Patterns September 21,

5 How do we start to address these problems? Plugging the capital gap through Opportunity Zones. The U.S. is a capital rich country, and investors are sitting on historic gains from a record breaking stock market. The pot of potential capital eligible for reinvestment in Opportunity Zones totals $6.1 trillion.* Yet, we have a tremendous gap faced by the communities who need it most. Opportunity Zones will connect investors with low-income communities by creating a new national network of deal opportunities in much the same way that we systematically invest in foreign emerging markets now. We believe this will ultimately lead to the creation of a new industry of community-based investments - a new asset class. This could change the way investors look at opportunities outside of their bubble and how communities think about how they attract private sector investment and create jobs. *Source: EIG analysis of the Federal Reserve s Survey of Consumer Finances and Financial Accounts of the United States found that U.S. households were sitting on an estimated $3.8 trillion in unrealized capital gains in stocks and mutual funds alone at the end of 2017 and U.S. corporations held another $2.3 trillion. September 21,

6 The Opportunity Zones provision was conceived as an innovative, bipartisan solution to expand the geography of economic growth. September 21,

7 Opportunity Zones can help catalyze growth and opportunity in communities around the country. The Opportunity Zones provision is designed to spur long-term private sector investments in low-income communities nationwide. This new economic development program offers a frictionless way for investors to reinvest unrealized capital gains into distressed communities through Opportunity Funds, in exchange for a graduated series of incentives tied to long-term holdings. It is the first new national community investment program in over 15 years, and has the potential to scale into the largest economic development program in the U.S. It is specifically designed to channel more equity capital into overlooked markets. September 21,

8 Opportunity Zones were selected collaboratively and transparently. States consulted heavily with their municipalities, counties, and local and regional economic development organizations to assemble their portfolios of Opportunity Zones. The high degree of engagement nationwide is an early milestone of success for this fledgling effort. California OZ Website: September 21,

9 Taxpayers can get capital gains tax deferral (& more) for making timely investments in Qualified Opportunity Funds (QOFs) which invest in Qualified Opportunity Zone Property September 21,

10 3 Tax Incentive Benefits Gain Deferral Partial forgiveness Forgiveness of additional gains September 21,

11 Amount Recognized THE LESSER OF: 1. Amount of gain deferred or 2. The fair market value of investment in QOF interest MINUS: Taxpayer s basis in the QOF interest Note: The taxpayer s outside basis in the Opportunity Fund is initially deemed to be zero. September 21,

12 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 QOF investment QOF Invests the $1MM in Qualified Opportunity Zone Property September 21,

13 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 QOF 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 September 21,

14 Opportunity Zone Incremental Benefit 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Standard After Tax IRR Total IRR 9.08% 7.44% 8.08% 7.95% 7.71% 6.00% 6.00% 6.00% 6.00% 6.00% 4 Year 5 Year 7 Year 12/31/ Year 23.8% Tax Rate 4 Year 5 Year 7 Year 12/31/ Year Standard After Tax IRR 6.00% 6.00% 6.00% 6.00% 6.00% Incremental OZ Benefit 1.44% 2.08% 1.95% 1.71% 3.08% OZ Investment IRR % 7.95% 7.71% 9.08% Percentage Increase 35% 32% 29% 51% September 21,

15 Low Income Housing Opportunity Zone Incremental Benefit Analysis 4 Percent 9 Percent Base Case Standard IRR 6.19% OZ Incremental Return 4.28% Total IRR 10.47% Percentage Increase 69.20% Relative Pricing Increment $ % FMV Deferral Method 6.19% 5.97% 12.16% 96.44% $0.263 Incremental Return from Opportunity Zone 4 Percent 9 Percent 5.97% FMV Modified Return Method 6.19% 5.00% 11.19% 80.74% $ % Base Case 5.89% 2.48% 8.37% 42.04% $ % FMV Deferral Method 5.89% 3.72% 9.61% 63.11% $ % FMV Modified Return Method 5.89% 2.91% 8.80% 49.32% $ % September 21, 2018 Base Case FMV Deferral Method FMV Modified Return Method Base Case FMV Deferral Method FMV Modified Return Method Disclaimer: This memorandum does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. The information contained herein is general in nature and based on authorities that are subject to change.

16 Combining Opportunity Zones with Low Income Housing Credits Investment holding periods line-up nicely Basis limitations may suspend loss benefits unless debt basis Appreciation 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+/Unit per Section 42, state regulations may have larger rehab requirement OZ expenditures in excess of beginning basis over 30 months Tax deferral payment likely less due to diminished FMV. September 21,

17 Pending Interpretative Issues Does congressional intent mandate demonstration of community benefit? Is residential rental property eligible? How are operating leases treated in the 90% test? What does substantially all mean? (70%? 90%?) Can land satisfy original use test? Can vacant building satisfy original use test? How much time does business have to become OZB? Are cash reserves QOZBP? Is debt basis treated as a separate investment? What gains are eligible for deferral? (ordinary? depreciation recapture?) Impact of interim gains Impact of intermediary partnerships NOTE: OMB RECEIVED REGULATORY GUIDANCE FOR REVIEW FROM IRS ON SEPTEMBER 12. PROPOSED RULE IS EXPECTED TO CLARIFY SEVERAL ISSUES. MANDATORY REVIEW OF AT LEAST 10 DAYS ENDS TODAY. September 21,

18 Understanding California Opportunity Zones Sarah Brundage Enterprise Community Partners

19 How do California s OZs compare to other communi@es in California?

20 Higher poverty, Lower median income Opportunity Zone Explorer by Opportunity360,

21 Higher unemployment, Lower # of jobs Opportunity Zone Explorer by Opportunity360,

22 Lower ahainment Opportunity Zone Explorer by Opportunity360,

23 Greater % of Black & La@no households Opportunity Zone Explorer by Opportunity360,

24 Higher % of renter & severely cost burdened Opportunity Zone Explorer by Opportunity360,

25 OZs overlay with DACs 57% of California OZs are also Disadvantaged CommuniHes (DACs) DACs are defined as the top 25% scoring areas from CalEnviroScreen along with other areas with high amounts of polluhon and low populahons DACs are specifically targeted for investment of proceeds from CA s cap-and-trade program

26 Bay Area Opportunity Zones

27 County # of Opportunity Zones Alameda Contra Costa Santa Clara San Francisco Solano San Mateo Sonoma Napa Marin Bay Area Coun5es 107 hrp://dof.ca.gov/forecashng/demographics/opportunity_zones/

28 70% 60% 50% 40% 30% 20% 10% 0% Bay Area OZs by Resource Level (based on TCAC Opportunity Maps) 0% Highest Resource 5% 7% High Resource Moderate Resource [VALUE] Low Resource [VALUE] High SegregaHon & Poverty

29 Majority of Bay Area OZs in Oakland hrps://fundrise.com/educahon/blog-posts/the-top-10-opportunity-zones-in-the-unitedstates

30 Snapshot: OZ Census Tract 4061 in Oakland Use Opportunity360 tool to learn more about specific OZs ( opportunity-zone-eligibility-tool) 34% Low-Income and Severely Cost Burdened 13% Crowded or Over-Crowded Units 25% People in Poverty $44,485 Median Household Income 12% Unemployment Rate 86% Non-White and/or Hispanic/LaHno

31 Take-aways about understanding OZs Overall, these are low-income communihes, ofen with above average percentage of people of color Ofen at high risk of displacement In need of investments that address community needs: Affordable housing Accessible jobs Public Health and EducaHonal Investments There is a broad range of communihes designated as Opportunity Zones; important to engage local community to understand unique community needs, risks, and opportunihes

32 What can be done to equitable investments? Who has a role to play? Federal RegulaHons State LocaliHes Community Groups & Advocates Developers Investors Fund Managers

33 Affordable Housing INVESTING IN OPPORTUNITIES, TOGETHER MISSION NCCLF promotes economic justice and alleviates poverty by increasing the financial resilience an sustainability of nonprofits and enterprises. Food Systems Arts & Culture Health Services

34 OAKLAND OPPORTUNITY ZONES

35 PRIVATE CAPITAL TARGETS W.OAKLAND, UPTOWN, JINGLETOWN, COLISEUM Home value increase over the past year: 11% Home value increase over the past 5 years: 48%

36 OZ: OAK MULTI- FAMILY SITES 4-25 UNITS West Oak East Oak No. Sites No. Built after Total Units Av. Sale ($) per unit $379k $136k Under Construction 0 units 0 units Delivered last 12 months 15 units 0 units

37 OZ: IMPACT INVESTING Source:

38 OZ: SMALL SITES & MIXED USE SITES

39 OZ: POSSIBILITIES LIVE/WORK & ARTIST HOUSING