Opportunity Zone Program

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1 Opportunity Zone Program 1

2 Agenda Welcome and Remarks, Mayor Mark H. Luttrell, Jr., Mayor Jim Strickland, Mayor Terry Jones Discuss the What regarding the Opportunity Zone Program, Paul Young Discuss the How regarding Opportunity Funds, Reid Dulberger Discuss the Where regarding Opportunity Zones, John Zeanah Q&A and Comments 2

3 Purpose The Opportunity Zones program was established through the Tax Cuts and Jobs Act in December It is a community development tax incentive program for private investors. The program is designed to drive long-term capital to rural and low-to-moderate income urban communities throughout the nation, and uses tax incentives to encourage private investment in impact funds. Investors are eligible to receive certain tax benefits on unrealized capital gains reinvested in Opportunity Zones through pooled Opportunity Funds. 3

4 Features Opportunity Zone designations last for a period of 10 years. U.S. Treasury will release guidance on the process of certifying Opportunity Funds. U.S. investors are eligible to receive a temporary tax deferral and other tax benefits when they rollover unrealized capital gains into Opportunity Funds for a minimum of five years. A minimum of 90 % of Opportunity Fund assets must be invested in Opportunity Zones. The program provides an incentive for investors to reinvest unrealized capital gains into Opportunity Funds in exchange for a temporary tax deferral and other long-term holdings. Designed to generate benefits for investments such as, but not limited to: low-income housing, manufacturing rehabs, infrastructure, startups, existing businesses, rural development, commercial development, colleges, etc. All incentives are tied to the longevity of the investment (graduated series of incentives tied to long-term holdings) 4

5 Post Designation City and County leaders should develop a strategy for attracting investment and connecting to projects within qualified Opportunity Zones. Opportunity Zone strategy should be tied with community development goals in order to leverage growth potential, investment in infrastructure, funding sources and incentives, and business and workforce development efforts. U.S. Treasury will turn its focus to providing guidance on Opportunity Fund certification. U.S. Treasury must follow formal administrative procedures to finalize the law, which will dictate ongoing administration of the Opportunity Zones Program. Implementation is anticipated in Q or Q1 2019, however, a number of factors could influence this timeline. 5

6 Key Term Opportunity Zone A census tract which has been designated by the federal government. Poverty rate of at least 20 % and median family income no greater than 80 % of the area median. Recommended by the Governor. 6

7 Key Term Opportunity Fund Private investment vehicle (partnership or corporation) to aggregate and deploy long-term capital in Opportunity Zones that receives federal tax incentives. Those investing their capital gains in an Opportunity Fund get stock or a partnership interest. Minimum 90% of assets held in Qualified Opportunity Zone Property 7

8 Key Term Qualified Opportunity Zone Property Asset types eligible for OZ Fund investment: Opportunity zone stock Opportunity zone partnership interest Opportunity zone business property 8

9 Qualified Opportunity Zone Property cont. Qualified Opportunity Zone Stock stock, purchased after 12/31/17 for cash at its original issue, in a Qualified OZ Business (QOZB) Qualified Opportunity Zone Partnership Interest any partnership interest, purchased after 12/31/17 for cash at its original issue, in a Qualified OZ Business (QOZB) partnership 9

10 Qualified Opportunity Zone Business Property Tangible property used in a trade or business: Acquired by purchase after 12/31/2017 by the QOZF Use in OZ either begins with the OZ Fund or the OZ Fund substantially improves* the property. Must remain in the OZ during substantially all of the Fund s holding period. * Within 30 months, Fund 2x adjusted basis in property. 10

11 Key Term Qualified Opportunity Zone Business A trade of business where substantially all the tangible property owned and leased, is Qualified Opportunity Zone Business Property. Minimum 50% of gross income from such business. Less than 5% of tangible property in nonqualified financial property. No sin business (including golf courses!) 11

12 Tax Benefits of Investing in Opportunity Zones 1. A temporary deferral of inclusion in taxable income for capital gains. The deferred gain must be recognized on the earlier of: the date on which the OZ investment is disposed of or 12/31/ A step-up in basis for capital gains. The basis in increased by 10% if the investment in the OZ Fund is held 5 years, and by an additional 5% if held for 7 years. 3. A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an OZ Fund held for 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Zone Fund. 12

13 Opportunity Zone Investment Example Hold Asset for 5 Years Assume: $100 capital gain in 2018 Combined Tax Rate: 23.8% New Investment 7.0% Not in Opportunity Zone 1. Value of asset in 2018 $ Pay capital gains in 2018 ($23.80) 3. Invest balance $ Sell asset after 5-years. $ Tax on increased value ($ $76.20) $7.30 $99.57 In Opportunity Zone 1. Defer capital gains in 2018; invest in Opportunity Zone Fund 2. Sell stock in Opportunity Zone Fund after 5-years. $ Tax on original $100 of capital gains - basis is $90 $ Tax on increased value ($40.26) $9.58 ($31.00) $ Opportunity Zone ROI is 1.9% per year higher 13

14 Opportunity Zone Investment Example Hold Asset for 7 Years Assume: $100 capital gain in 2018 Combined Tax Rate: 23.8% New Investment 7.0% Not in Opportunity Zone 1. Value of asset in 2018 $ Pay capital gains in 2018 ($23.80) 3. Invest balance $ Sell asset after 7-years. $ Tax on increased value ($ $76.20) $10.99 $ In Opportunity Zone 1. Defer capital gains in 2018; invest in Opportunity Zone Fund 2. Sell stock in Opportunity Zone Fund after 7-years. $ Tax on original $100 of capital gains - basis is $85 $ Tax on increased value ($60.58) $14.42 ($34.65) $ Opportunity Zone ROI is 1.8% per year higher 14

15 Opportunity Zone Investment Example Hold Asset for 10 Years Assume: $100 capital gain in 2018 Combined Tax Rate: 23.8% New Investment 7.0% Not in Opportunity Zone 1. Value of asset in 2018 $ Pay capital gains in 2018 ($23.80) 3. Invest balance $ Sell asset after 10-years. $ Tax on increased value ($ $76.20) $17.54 $ In Opportunity Zone 1. Defer capital gains in 2018; invest in Opportunity Zone Fund 2. Sell stock in Opportunity Zone Fund after 10-years. $ Tax on original $100 of capital gains - basis is $85 $ Exempt from capital gains on increased value ($96.72) $0.00 ($20.23) $ Opportunity Zone ROI is 3.0% per year higher 15

16 Source: Economic Innovation Group 16

17 Process State requested County Mayors submit requested census tracts by March 7, Census tracts countywide were evaluated on criteria such as population density, population and income stability, level of investment, availability of incentives, and presence of anchor institutions Ten zones (each comprised of multiple census tracts) were identified and prioritized based on the following goals, aligning with vision of Memphis 3.0: 1. Build up by focusing opportunity zones in the heart of eligible municipalities; 2. Anchor on strengths by targeting areas where markets are poised to grow and additional incentives are available to further support that growth; 3. Connect disinvested places to opportunity by drawing zones to include historically disinvested communities in close proximity to areas poised for growth; and 4. Diversify opportunity by designating zones across urban, suburban, rural, and industrial areas. 17

18 Eligibility Eligible areas defined as new market tax credit census tracts Of the 701 total qualified new market tax credit census tracts in the state of Tennessee, 128 are located in Shelby County State allowed to designate up to 25% of the total number of eligible census tracts as Opportunity Zones Shelby County s pro rata share equaled 32 census tracts (51 submitted) Eligible census tracts in Shelby County were predominantly in the city of Memphis; some areas of Millington, Bartlett, and unincorporated county were also eligible 18

19 Millington Opportunity Zone This zone is comprised of two census tracts that make up the City of Millington. Millington is home to a US Naval Command Center and recently received $30 million through HUD s National Disaster Resilience Competition for a 1,200 park to protect the naval base and low- to moderate-income communities from chronic flooding. The city and county recently established a TIF district within this zone. Census tracts: ,

20 Shelby Rd. US- 51 N. Edmund Orgill Park Millington Opportunity Zone Miles Park

21 Whitehaven Opportunity Zone This zone is comprised of two census tracts that make up greater Whitehaven. The Whitehaven Opportunity Zone is adjacent to Memphis International Airport; part of the Airport City, core of America s Aerotropolis. This zone includes medical device firms (Smith & Nephew) and entertainment and tourism (Graceland). Significant investment has been made to the Graceland area and along Elvis Presley Boulevard. A TIF district has also been established within this zone. Census tracts: ,

22 E. Brooks Rd. Winchester Rd. Airways Blvd. Whitehaven Opportunity Zone Elvis Presley Blvd. E. Raines Rd. Methodist South Hospital E. Shelby Dr.

23 University Opportunity Zone This zone includes eight census tracts anchored by the region s largest university. This zone includes well-established, low- to moderate-income neighborhoods such as Orange Mound, Binghampton, Glenview, and Cooper Young. There are several public-private initiatives planned or completed in the area, including TIF districts established in Binghamton and the University District. This zone includes the Mid-South Fairgrounds site, the subject of a 160-acre redevelopment plan eligible for Tourism Development Zone (TDZ) designation Census tracts: , , , , , , ,

24 Southern Ave. Summer Ave. Poplar Ave. U of M University Opportunity Zone

25 Core City Opportunity Zone This zone is comprised of 20 census tracts across the following areas of Memphis Downtown, Medical District, Crosstown, North Memphis, and South Memphis. This zone has some of the highest density in the city. Anchoring this zone are institutions such as St. Jude Children s Research Hospital, Crosstown Concourse, University of Tennessee Medical Center, Methodist Hospital, Southwest Tennessee Community College, Stax Museum and Music Academy, and LeMoyne Owen College. The northern and southern portions of this zone include areas of high poverty that stand to gain through greater connectivity to opportunity. This area contains a portion of the Uptown Tax Increment Finance (TIF) area and payments in-lieu-of-tax (PILOT) are available in much of this area through the Center City Revenue Finance Corporation. Census tracts: , , , , , , , , , , , , , , , , , , ,

26 Levee Rd. Chelsea Ave. AutoZone Park St. Jude Regional One Health N. Parkway Core City Opportunity Zone Fed Ex Forum Union Ave. E. McLemore

27 Other Incentives New market tax credits Historic preservation tax credits Low income tax credits State economic development programs EDGE PILOTs, TIFs, loans DMC PILOTs, TIFs, loans CRA TIFs HCD Federal housing funds And others 27

28 Q&A and Comments 28

29 References and Additional Resources

30 Contacts Division of Planning and Development John Zeanah, Director EDGE Reid Dulberger, President & CEO Division of Housing and Community Development Paul Young, Director

Opportunity Zone Forum. October 23, 2018

Opportunity Zone Forum. October 23, 2018 Opportunity Zone Forum October 23, 2018 Welcome Janet Owens Executive Director LISC Jacksonville Kathleen Shaw Vice President of Programs Community Foundation of Northeast Florida The Jessie Ball dupont