UNDERSTANDING OPPORTUNITY ZONES & HUBZONES

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1 UNDERSTANDING OPPORTUNITY ZONES & HUBZONES Wednesday, November 7, 2018, 1:00PM-2:30PM Williams County Community Offices, Conference Room A&B 1425 East High Street, Bryan OH Nate Green, Director of Economic Development David J. Robinson, Principal Raymond Graves, Lender Relations Specialist John Renner, Supervisory Business Opportunity Specialist

2 Census Tract 9506 Bryan, Ohio HUBZone Program Eligible Designated Opportunity Zone Tax abatement of up to 100 percent for 10 years on real property taxes. To be eligible, a company must be making new real property investment and formalizing an agreement with the local community prior to going forward with the qualifying project. Municipal Income Tax Rebate Qualified companies, within the city limits, may be eligible for a non-refundable income tax credit against their for-profit or individual income tax for creating new, full-time jobs. Bryan South Industrial Park Foreign Trade Zone 8 Bryan Municipal Utilities Economic Development Rate* *case by case basis

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4 Pre 1994 CRA Map Bryan, Ohio

5 Launching an Opportunity Zone Dave Robinson Nate Green The Montrose Development Advisors, LLC 5

6 Montrose Development Advisors, LLC Federal Opportunity Zone Basics IRS Regulations 6

7 Montrose Development Advisors Wrote the Book on Economic Development 7

8 Legal Disclaimer This document and information is provided by Montrose Development Advisors, LLC and the presenters for general guidance only, and does not constitute the provision of legal advice, accounting services, investment advice, written tax advice, or professional advice of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult with a professional adviser who has been provided with all pertinent facts relevant to your particular situation. 8

9 Federal Opportunity Zones Federal tax reform legislation Up to 25% of a state s low wealth census tracts and 5% of non-low wealth consensus tracts contiguous to low wealth districts 9

10 Benefits of Opportunity Zones Temporary tax deferral for capital gains Step-up in basis for capital gains reinvested A step-up in basis reflects the changed value of an inherited asset. Permanent exclusion from taxable income of capital gains from the sale or exchange of an investment 10

11 Opportunity Zone Key Terms Capital Gains Opportunity Zone Qualified Opportunity Fund Opportunity Zone Property Long-term capital gains are gains made on assets held for over a year Short-term capital gains are assets held for a year or less Long-term gains are taxed at rates of 0%, 15%, or 20%, depending on your tax bracket Short-term gains are taxed as ordinary income census tracts are designated as eligible to receive private investments through Opportunity Funds New class of investment vehicles (corporation or partnership) specializes in aggregating private investment and deploying that capital in Opportunity Zones to support Opportunity Zone Property Certified by US Treasury 90 % of Opportunity Fund invested in Opportunity Zone Property Market solution for investors & low income rural/urban regions No limit on fund numbers or investment focus or profile Pooling capital broadens investor opportunity Stock, partnership interests or Opportunity Zone Business eligible for investment under the Opportunity Zones Program Substantially all the tangible property used in trade or business Acquired after December 31, 2017 Original use substantially improves the property in the OZ At least 50% of its gross income is derived from the active conduct of business in the OZ Substantial portion of the intangible property held be used in the active conduct of its business 11

12 Capital Gain Deferral Step-up in basis for capital gains Permanent exclusion Reinvestment into an Opportunity Fund Deferred gain is recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026 Reinvested in an Opportunity Fund- Basis of the original investment is increased by 10% investment in a qualified opportunity zone fund held by the taxpayer for at least 5 years by an additional 5% if held for at least 7 years, excluding up to 15% of the original gain from taxation Investment in qualified opportunity zone Held for at least 10 years 12

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14 IRS Regulations Investors OZs are for capital gains only Deferred gain retains the same attributes in the year it s recognized as it had in the year it would be reported if tax wasn t deferred Those who are eligible for the OZ include individuals, corporations (including RICs and REITs), partnerships, common trust funds (under Section 584), qualified settlement funds, disputed ownership funds and other entities taxable under IRC Section 1.468B Allows gains recognized by a partnership by either the partnership or its partners When a partnership doesn t defer gain, a partner may elect its own deferral with respect to their distributive share A partner s 180-day period begins on the last day of the partnership s taxable year, or (if the partner chooses) on the same day as the start of the partnership s 180-day period Allows all the benefits of the program to be claimed by taxpayers through Dec. 31, 2047 which maybe after OZ expires 14

15 IRS Regulations Qualified Opportunity Funds Corporation or partnership for federal income tax purposes. Can choose their first month in a taxable year for when they officially begin The valuation method for the 90 percent asset test uses asset values on the QOF s applicable financial statement for the taxable year, or the cost of the assets if the QOF has no applicable financial statement Requires an OZ Business have only 70% of its assets invested in OZ business property Substantially all threshold of an OZ Property s OZ business property is 70 percent Working capital safe harbor for OZ businesses is 31 months At least 50 percent of the gross income of a qualified OZ business must be derived from business conduct in the OZ A substantial portion of the intangible property of an OZ business must be used in the active conduct of a trade or business in the OZ Calculate the substantial improvement test by reference to the basis of the building excluding the basis in the land 15

16 IRS Open Questions Federal tax treatment of gains recognized by a QOF, that a QOF reinvests What constitutes a reasonable period for a QOF to reinvest proceeds from a sale of qualifying assets The reasonable period for a QOF to invest cash received by a QOF from an investor The definition of substantially all in uses other than the OZ business description above How to determine the use in an OZ of an OZ business s inventory, delivery trucks and other items What conduct could lead to decertification of a QOF 16

17 Opportunity Zone Example Opportunity Zone Apollo Opportunity Fund Rich Moneybags aka Taxpayer Apollo Opportunity Fund Rex Tile, Inc. Rich Moneybags Site Certified by US Treasury as an Opportunity Zone Site Development Plan Site Prospectus Organized as a corporation or partnership for an eligible Opportunity Zone Certified by US Treasury as a Qualified Opportunity Fund Invests 90% of its investments in Opportunity Fund Property/Business Person recognizes gains from individuals, C or S corporations, mutual funds, real estate investments, partnerships, trusts & estates from an unrelated Person Realizes $1 M capital gain and immediately invests capital gain in Apollo Opportunity Fund Immediately invests in Opportunity Zone Business/Property Rex Tile, Inc. Designates investment for land acquisition, construction of a building & expenses necessary for the project 50% of gross income from OZ Retains investment for 10 years Permanent exclusion of capital gains 17

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21 Williams County Ohio OZ Henry County OZ Defiance County OZ Bryan, Ohio Industrial Park Redevelopment Napoleon, Ohio Route 24 Industrial Park Development Defiance, Ohio Commerce Industrial Area Enterprise Industrial Area Downtown Redevelopment Technology Park Development 21

22 Lucas County OZs Overland Industrial Park ProMedica Colony Project Mercy Health Cherry Street Corridor Project Uptown District Project Renaissance Senior Housing ProMedica HQ Project Hensville District Ironville Intermodel East Toledo/Marina District Project Toledo Zoo District 22

23 Prepare a Job Ready Site Opportunity Zone Local and State Policy Advocacy Launching an Opportunity Zone Market an Opportunity Zone Site Build or Recruit an Opportunity Zone Fund 23

24 Prepare a Job Ready Site Determine Highest and Best Use of a Site Industry Cluster Analysis Real Estate Market Analysis Developer Recruitment Infrastructure Plan Engineering and construction site analysis Transportation Plan Engineering and construction site analysis Land Use Entitlements Enacting zoning, easement and transportation policies Infrastructure Finance Public Finance, local, state, federal and developer financing 24

25 Highest and Best Use Industry Cluster Analysis Location Quotient Tied to Federal Occupation Data Automation Index Future of Work Real Estate Market Competitive Rent or Building Analysis 25

26 EDA Public Infrastructure Grants Tax Abatements New Market Tax Credits Tax Increment Financing Opportunity Zone Infrastructure Strategy Downtown Redevelopment Districts JobsOhio/ MEDC/IEDC Incentives Historic Preservation Tax Credits 26

27 State Opportunity Zone Infrastructure Program Local & State Opportunity Zone Policy Agenda State Opportunity Zone Tax Policy Local Opportunity Zone Tax Abatement 27

28 Opportunity Zone Public Policy Ohio House Bill 727 Creates a tax credit for investments in Qualified Opportunity Zones Taxpayers investing at least $250,000 during a taxable year in an Ohio Qualified Opportunity Fund will earn a nonrefundable tax credit equal to 10% of the investment Tax credit would be claimed against the aggregate tax liability of the taxpayer for the taxable year in which the investment is made 28

29 State Policy Efforts for Opportunity Zones Illinois Kentucky Missouri North Carolina Illinois Department of Commerce and Economic Opportunity convening forums to educate communities about Opportunity Zones and introduce them to potential investors and Opportunity Fund managers Potential creation of a state-operated Opportunity Fund with other branches of the Illinois state government Kentucky Cabinet for Economic Development dedicated a portion of its website to act as a clearinghouse for all information related to Opportunity Zones in Kentucky including a map of available industrial sites and buildings located in Opportunity Zones Planning a regional tour to provide communities with information and resources to capitalize on their Opportunity Zones Missouri Department of Economic Development created a section on its website describing the program and hosted an informational webinar for interested stakeholder S.B. 773, signed into law in this summer, reserves $30 million of the state s annual historic preservation tax credits allocation for eligible projects in Opportunity Zones State legislation introduced, H.R. 6890, would allow for the designation of new opportunity zones every 10 years, allowing the policy s benefits to build and compound rather than expire 29

30 Focus on an Industry Secure a Developer Focus on Impact Investors Market an Opportunity Zone Site 30

31 IRS Regulations Make Investments Securities Regulations Build or Recruit an Opportunity Zone Fund Recruit Investors Investment Policy Business and Credit Analysis 31

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43 Call to Action Promote Local and State OZ Friendly Public Policies Form State OZ Coalition Prepare OZ Sites for Development Site Development Plans Land Use Entitlements Fund & Build Infrastructure Create Prospectus Create Opportunity Zone Funds Prepare to incorporate Recruit investors Identify investments Connect Investors and Sites 43

44 Conclusions Thoughts Questions Contact 44