Presenting a live 90-minute webinar with interactive Q&A. Today s faculty features:

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1 Presenting a live 90-minute webinar with interactive Q&A Qualified Opportunity Zones and Tax Credits: Capital Gain Deferral Mechanisms Under New Section 1400Z IRC 45D(e) Requirements, Step-Up in Basis, Appreciation Exclusion, Tax Planning Strategies for Investors and More THURSDAY, MAY 17, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Michael I. Sanders, Partner, Blank Rome, Washington, D.C. John Sciarretti, CPA, Partner, Novogradac & Company, Dover, Ohio Steve Glickman, Co-Founder and CEO, Economic Innovation Group, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1. NOTE: If you are seeking CPE credit, you must listen via your computer phone listening is no longer permitted.

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3 Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you that you will receive immediately following the program. For CPE credits, attendees must participate until the end of the Q&A session and respond to five prompts during the program plus a single verification code. In addition, you must confirm your participation by completing and submitting an Attendance Affirmation/Evaluation after the webinar. For additional information about continuing education, call us at ext. 2.

4 Qualified Opportunity Zones and Tax Credits Presented by: Michael I. Sanders 1:00 2:30 PM ET Strafford Publications 2018 BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE.

5 INTRODUCTION EXAMPLE: Angel investor sells high tech securities generating $10 million in capital gains Tax Act allows individuals and corporate investors to defer capital gains on the sale of stock business assets or other property (wherever located) by investing in a qualified opportunity zone (which must invest at least 90 percent of its assets, directly or indirectly in businesses located in designated opportunity zones (i.e., low income communities). The proceeds must be invested within 180 days beginning from the initial sale or exchange in the amount equal to the gain to be deferred. Moreover, there is partial forgiveness of the deferred capital gain if held for 5 or 7 years; and furthermore, any future gain on the investment in an opportunity fund may be excluded if the investment is held for 10 years BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE. 5

6 The deferred portion of the gain is taxable when the investment in the opportunity fund is sold or, if sooner, on December 31, 2026 unless the date is subsequently extended. So if the opportunity fund investment is held for 10 years, the tax basis of the new investment is deemed to be its fair market value on sale. In effect, further appreciation on the investment, but not the deferred gain, is eliminated permanently. It is important to note that the original property sold need not be located in or connected in any way with a qualified census tract BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE. 6

7 This is a remarkable opportunity for high net worth individuals to defer gain (such as $10 million in the example above) and subsequently exclude further gain based upon the appreciation of their investment in an opportunity zone. Moreover, and most important, it allows and incentivizes investments in qualified census tracts BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE. 7

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9 Opportunity Zones: Where We Stand Steve Glickman, Co-Founder and CEO ECONOMIC INNOVATION GROUP / Washington, DC

10 Why do we need Opportunity Zones? For starters: 52 million Americans (1 in 6) live in economically distressed communities Minorities represent over half the population in distressed communities. Rural and very urban neighborhoods are overrepresented among the places on the sidelines of economic growth today. 10 Prosperous Distressed 10

11 Job and business growth fails to reach most distressed zip codes. More than half of the country s distressed zip codes contained fewer jobs and places of business in 2015 than they had in Average Growth Rates Employment Establishments 24.5% 9.4% 12.6% 4.2% -6.0% -6.3% Prosperous Zip Codes United States Distressed Zip Codes Source: EIG s Distressed Communities Index; U.S. Census Bureau 11

12 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 12

13 The Opportunity Zones provision was conceived as an innovative, bipartisan solution to expand the geography of economic growth 13

14 It is designed to be a simple, flexible vehicle for investors to take a bet on America s left-behind communities The Opportunity Zones provision is designed to spur long-term private sector investments in lowincome 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. 14

15 How did Opportunity Zones get designated? Governors of every U.S. state and territory could nominate up to 25 percent of their low-income/high-poverty census tracts as Opportunity Zones by April 20, Governors had broad discretion to designate zones that met the basic criteria. Most governors consulted extensively with local governments, investors, and community representatives. Transparency ranged from near-total to nearly non-existent. The best states released draft nominations to the public for feedback before submitting. Several states distributed tracts geographically. All states engaged in a rigorous analytic process. Several governors anchored their nominations in compelling visions. Governors faced a difficult task of balancing need and opportunity. 15

16 A preliminary look at the emerging map of Opportunity Zones States truly rose to the challenge and engaged in thoughtful, rigorous, and (mostly) transparent selection processes. Each state used the broad latitude given by Treasury to shape their maps according to their circumstances. With 20 states zones now certified, the characteristics of the map are coming into focus. States clearly biased their selections towards needier places. Averages across certified census tracts As of April 18, 2018 Opportunity Zones All LICs 75% 59% 64% 59% 53% 50% 32% 29% 39% 36% 25% 0% Poverty rate Benchmarked MFI Out of work rate Minority population 16

17 A number of best practices emerged throughout the nomination process MN: Inclusion IA: Competitive Applications MI: Programmatic Alignment IN: External Advisory Panel CA: Transparency VT: Vibrant Small Towns NY: Urban Renewal NJ: Poverty and Transit Access CO: Analytics + Rural Entrepreneurship SC: Demographics 17

18 Visit eig.org/opportunity zones for more information EIG brings together leading entrepreneurs, investors, economists, and policymakers from across the political spectrum to address America s economic challenges. WEB eig.org steve@eig.org facebook.com/economicinnovationgroup linkedin.com/company/economic-innovation-group twitter.com/innovateeconomy Disclaimer: This document is provided by the Economic Innovation Group for informational and educational purposes only. It is not intended to constitute legal or professional advice and should not be relied upon or treated as a substitute for consultations with professional, legal, or other competent advisers.

19 Investing in Opportunity Zones for the Strafford Publications Webinar John Sciarretti Partner, Dover Novogradac & Company LLP

20 Opportunity Zones Introduction Benefits of the Opportunity Zones Tax Incentives Qualified Opportunity Zones Qualification and Status Qualified Opportunity Funds What are the rules, how do you qualify? Direct and indirect investment in Qualified Opportunity Zone Business Property Qualified Opportunity Zone Business Property Readily Identifiable Investment Types in Opportunity Zones Combining Opportunity Zone with Other Tax Incentives Questions and Answers 20

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

22 3 Tax Incentive Benefits Gain Deferral Partial forgiveness Forgiveness of additional gains 22

23 Period of Deferral The period of capital gain tax deferral ends upon the earlier of: Dec. 31, 2026, or EARLIER SALE

24 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 basis in the Opportunity Fund is initially deemed to be zero. 24

25 Partial Forgiveness and Forgiveness of Additional Gains Basis is equal to Fair Market Value SALE INVESTMENT Basis increased by 10% of the deferred gain Basis increased by 5% of the deferred gain Forgiveness of gains on appreciation of investment Requires an election Up to 90% taxed Up to 85% taxed HELD FOR 5 YEARS HELD FOR 7 YEARS HELD FOR 10 YEARS

26 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

27 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

28 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Opportunity Zone Incremental Benefit Standard After Tax IRR Total IRR 9.08% 8.08% 7.95% 7.71% 6.00% 6.00% 6.00% 6.00% 5 Year 7 Year 12/31/ Year 23.8% Tax Rate 5 Year 7 Year 12/31/ Year Standard After Tax IRR 6.00% 6.00% 6.00% 6.00% Incremental OZ Benefit 2.08% 1.95% 1.71% 3.08% OZ Investment IRR 8.08% 7.95% 7.71% 9.08% Percentage Increase 35% 32% 29% 51% 28

29 Eligible Areas Where are the Opportunity Zones? 29

30 74,001 Census Tracts 30

31 31,680 LICs - 9,453 Contiguous Tracts Cross State Census Tracts Low-income community 31

32 ~8,000 Opportunity Zones (11%) Currently Designated Opportunity Zones As of 4/18/2018 Low-income community Opportunity Zone 32

33 Qualified Opportunity Zones CDFI Fund Opportunity Zones Mapping Tool: 33

34 Qualified Opportunity Zones QOZs remain in effect for 10 years following designation. 34

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36 Qualified Opportunity Fund 36

37 Qualified Opportunity Fund - Requirements An investment vehicle organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone Property (QOZP). 37

38 Certification Process An eligible taxpayer self-certifies to become a certified qualified opportunity fund. No approval or action by the IRS is required. A taxpayer merely completes a form (which will be released in the summer of 2018) and attaches that form to the taxpayer s federal income tax return for the taxable year. The return must be filed timely, taking extensions into account. 38

39 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 39

40 Qualified Opportunity Fund Noncompliance Penalty Failure to meet 90% investment standard Per month penalty for failing to meet 90% test x % shortfall underpayment rate penalty No penalty if it is shown failure is due to reasonable cause (Federal short-term rate plus 3%) currently 4% 40

41 Qualified Opportunity Zone Property (QOZP) Qualified Opportunity Zone Partnership Interest Qualified Opportunity Zone Stock Qualified Opportunity Zone Business Property 41

42 Qualified Opportunity Zone Stock and Partnership Interests The investment must be acquired after December 31, 2017 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 42

43 Qualified Opportunity Zone Businesses (QOZB) A trade or business in which substantially all 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 43

44 QOZB: Excluded Businesses Can t be a Sin Business A private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. 44

45 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 45

46 Readily Identifiable Investment Types in Opportunity Zones Commercial Real Estate Development and Renovation in Opportunity Zones Opening New Businesses in Opportunity Zones Expansion of Existing Businesses into Opportunity Zones Large Expansions of Businesses already within Opportunity Zones 46

47 LIHTC Combining with Other Tax Incentives Opportunity Zone NMTC HTC RETC 47

48 Investing in Opportunity Zones for the Strafford Publications Webinar John Sciarretti Partner, Dover Novogradac & Company LLP

49 PAIRING OPPORTUNITY ZONE INCENTIVES WITH NMTCS Build on the initial deferral technique by investing in OZF. Through the NMTC structure, the investor can take advantage of the leveraging structure and generate tax credits over a 7 year period. So not only can the capital gains be deferred for a 9 year period, including an increase in basis with partial forgiveness after 5 and 7 year holding period, but the taxpayer can receive incremental benefit through the tax credit regime. Investor likely to be C Corporation in view of the AMT, which was retained as to individuals BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE. 49

50 Sufficient basis needed to absorb the required NMTC basis adjustment. Accordingly OZ deferral election will be limited to the QEI less the sub CDE fees and the NMTCs that are generated. It is important to note that QALICB must also be a qualified opportunity zone business (which should be relatively easy to accomplish in view of the similarities of the programs) BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE. 50

51 Sub CDEs will need to obtain the status of a QOF, however, may now self-certify. The QLICIs need to be an equity investment under the OZ rules; as a result, the investors may not be able to rely on the reasonable expectation safe harbor test (affects issuance of tax opinions). Existing CDEs may need to get approval from CDFI Fund if the making equity QLICIs is not consistent with their approved business strategy BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE. 51

52 USE BY TAX EXEMPT ORGANIZATIONS: WIN-WIN Opportunity Funds may be purchased and sold similar to mutual funds. A fund could invest in all aspects of mixed use development in designated qualified census tracts beneficial to low income exempt organizations. It incentivizes urban renewal as well as rural development, allowing developers to create and expand communities with new multi-family housing and retail venues. It may also attract angel investors and incubators, along with venture capitalists thereby attracting companies to locate in opportunity zones, where after a 10 year hold, a liquidation may generate millions of dollars in capital gains with permanently exclusion from taxation BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE. 52

53 There are many reasons why a nonprofit should form joint ventures or a for-profit subsidiary to directly partner with the OZF, to operate in the designated low income high unemployment zones, consistent with its exempt function. Because the law favors new businesses, new construction, start-ups and incubators may be motivated by the incentives. Thus, an opportunity fund could operate or fund a new technology or healthcare business in the zone. A successful tech start-up could experience significant growth over a decade, allowing the investor a large permanent exclusion from taxation. Community healthcare and food deserts are also sorely needed in many low-income communities, and walk-in clinics and urgent care facilities, already growing in popularity, may also be attractive projects for opportunity funds BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE. 53

54 PRELIMINARY STEPS IN FORMATION OF OPPORTUNITY FUND 1. Formation of Opportunity Zone Fund (OZF) as a corporation or a partnership for purposes of investing in Qualified Opportunity Zone Property ( QOZF ): use of an LP/Query: will an LLC qualify as a OZF? 2. General Partner of the LP: formation of the limited liability company; operations of OZF. 3. Management Company: formation of the limited liability company that will act as a management company; fee structure. 4. Terms of the Investment Management Agreement. 5. Confirmation of designation as QCT by Governors, approved by Treasury 2018 BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE. 54

55 6. Self-certification of OZF based upon IRS Frequently Asked Questions. To self-certify, a taxpayer merely completes a form (to be released in summer of 2018), which is attached to taxpayer s federal income tax return. 7. Preparation of OZF Business Plan (reviewed by counsel), including land and building acquisition, timing. 8. Draft of private placement memorandum 9. Draft of the Subscription Agreement 10. Review of exemptions under the Securities Act, state blue sky laws, and the Investment Advisers Act 2018 BLANK ROME LLP. ALL RIGHTS RESERVED. PLEASE CONTACT BLANK ROME FOR PERMISSION TO REUSE. 55