Welcome to the Land of OZ: A Basic Overview of the Opportunity Zones Incentive

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2 Welcome to the Land of OZ: A Basic Overview of the Opportunity Zones Incentive MODERATOR Brent Parker Novogradac & Company LLP PANELISTS Catalina Vielma Boston Financial Investment Management Tony Alfieri RBC Tax Credit Equity Group Thomas D. Morton, Esq. Pillsbury Winthrop Shaw Pittman LLP

3 Overview Basic Structure & Incentives, Gains, Taxpayers Qualified Opportunity Funds OZ Businesses Issues Not Addressed Next Steps

4 Basic Structure & Incentives, Gains, and Taxpayers

5 Basic Structure Taxpayers can get capital gains tax deferral (& more) for making timely investments in Qualified Opportunity Funds (QOFs) which invest in Qualified Opportunity Zone Property

6 3 Tax Incentive Benefits Capital Gain Deferral Partial forgiveness Forgiveness of additional gains

7 180-Day Period Begins on the day on which gain would be recognized for Federal income tax purposes assuming no deferral 180-day period

8 Tax Incentives Timeline Maximum benefit is achieved by holding the QOZ investment for 10 years years 10% Step up in basis of deferred gain 7 years Taxes paid on deferred gain Additional 5% Step up in basis of deferred gain 10 years Investment and deferral of Capital Gain (up to 180 days after event triggering the gain) Permanent Exclusion of gains accrued in the Opportunity Fund

9 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.

10 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 8.08% 9.08% 7.95% 7.44% 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% *Rates and prices displayed in this and next slides are for demonstration purposes only and may not be indicative of actual figures available at market, depending on type of taxpayer, location of investment, and various other factors.

11 Perishability of Incentives Incremental IRR 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 3.08% 2.96% 2.74% 2.61% 2.25% 2.09% 1.91% 1.74% 0.50% 0.00% Year of QOF Initial Investment *In order to maximize benefits, gain must be invested in QOF by 12/31/2019.

12 Eligible Taxpayer A person that may recognize gains for purposes of Federal income tax accounting. Includes: C S Individuals C corporations RICs REITs S Corporations Trusts and Estates

13 Eligible Interests in QOFs Only equity interests Including preferred stock or partnership interests with special allocations Excludes debt instruments Eligible interests are not impaired if used as collateral for a loan

14 Qualified Opportunity Funds

15 Qualified Opportunity Funds (QOFs) Two requirements for eligibility: 1. Investment vehicle to be organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone Property 2. At least 90 percent of its assets is held in Qualified Opportunity Zone Property *Funds can be structured to invest in multiple assets, or as a single-asset special purpose vehicle. However, Opportunity Funds cannot be structured to invest in other funds, thereby prohibiting a fund-of-funds model. **Taxpayers eligible to invest may be a variety of additional investor types.

16 Qualified Opportunity Zone Property: Direct and Indirect Investments The investment must be acquired after December 31, 2017 solely 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 period

17 Investor(s) Structure (180 days) Investor(s) General Partner QOF (6 mos & EOY) General Partner Operating Business New business Existing business expanding into Opp. Zone Improving existing business QOZ Business Rental real estate New construction Substantial improvement (100%)

18 Qualified Opportunity Fund Assets Test Must hold at least 90% of assets in QOZP, determined by the average of the percentage of QOZP held on: The last day of the first six month period of the fund s taxable year, and The last day of the fund s taxable year June 30th December 31st JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC

19 Certification of QOF Entity classified as a corporation or partnership for Federal tax purposes is eligible LLCs taxed as corporations or partnerships OK Self-certification using Form 8996 Identify first taxable year the entity wants to be a QOF Identify the first month the entity wants to be a QOF Investments before first month not eligible for deferral

20 Special Rules for Land and Improvements on Land If a QOF purchases a building located on land wholly within a QOZ, a substantial improvement to the purchased tangible property is measured by the QOF s additions to the adjusted basis of the building. QOF not required to separately substantially improve land on which building is located. Land not subject to original use test QOZ

21 OZ Businesses

22 Qualified Opportunity Zone Businesses (QOZB) A trade or business in which substantially all (70% per Proposed Regulations) of the tangible property owned or leased by the taxpayer is qualified opportunity zone business property (QOZBP) and: 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 * *Non-qualified financial property is, generally, debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, etc. that do not relate to the OZ investment.

23 Qualified Opportunity Zone Business Property (QOZBP) Tangible property used in a trade or business Acquired by purchase from an unrelated party (20% standard) after December 31, 2017 During substantially all of holding period, substantially all the use is in a QOZ Original use in the QOZ commences with the taxpayer OR Taxpayer substantially improves the property during 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

24 Valuation of Assets for the 70% Test If QOZB has an applicable financial statement under 1.475(a)-4(h) (AFS): If no AFS: The value of each asset for QOZB purposes is the value of the asset reported on the AFS for the relevant reporting period Special Rule Applies

25 Safe Harbor for Reasonable Working Capital Working capital assets are treated as reasonable if: Amounts are designated in writing for the acquisition, construction, and/or substantial improvement of tangible property in a QOZ There is a written schedule consistent with the ordinary start-up of a business for the expenditure of the working capital assets within 31 months of the receipt of the assets The working capital assets are actually used in a manner consistent with the designation and schedule.

26 Safe Harbor Rules Applicable to Reasonable Working Capital Gross income earned on working capital during the reasonable working capital period is counted toward satisfaction of the 50% active conduct test Intangible property held during the reasonable working capital period is treated as used in the active conduct of the OZ business in the qualified opportunity zone. Planned expenditures of reasonable working capital assets that are expected to satisfy QOZBP requirements are not treated as failing to satisfy the requirements because the consumption of working capital is not yet complete.

27 Operating Businesses - Non-qualifiers What types of operating businesses are NOT likely to qualify as either a Qualified Opportunity Fund (QOF) or a Qualified Opportunity Zone Business (QOZB)? Businesses such as financial institutions - hold large amounts of NQFP Businesses holding intangible property not actively used in the trade or business Sin businesses cannot be QOZBs

28 Issues Not Addressed in Proposed Regulations

29 Issues Not Addressed in Proposed Regulations QOF: Interim gains Grace period for QOF to invest cash received from an investor Reasonable period to reinvest Conduct leading to decertification Debt financed partnership distributions Feeder Partnerships

30 Issues Not Addressed in Proposed Regulations QOZB Grace period for a QOZB to qualify Residential Rental Property Active conduct of a business Leased Property

31 Issues Not Addressed in Proposed Regulations The definition of other uses of substantially all Sub all of QOF s holding period of business interest, business is a QOZB Sub all of QOF s or QOZB s holding period of property, sub all use in OZ Concern Compounded use of sub-all must not result in a fraction too small to implement the intent of Congress Sub all of QOF s holding period of business interest, business is a QOZB, To be a QOZB, sub all of property is QOZBP To be QOZBP, sub all of holding period of property, sub all use in OZ

32 Q&A

33 Welcome to the Land of OZ: A Basic Overview of the Opportunity Zones Incentive MODERATOR Brent Parker Novogradac & Company LLP PANELISTS Catalina Vielma Boston Financial Investment Management Tony Alfieri RBC Tax Credit Equity Group Thomas D. Morton, Esq. Pillsbury Winthrop Shaw Pittman LLP