Combining Opportunity Zones with Tax Credits

Combining Opportunity Zones with Tax Credits MODERATOR Nicolo Pinoli Novogradac & Company LLP PANELISTS Fred Copeman Boston Financial Investment Management, LP Craig Nolte Federal Reserve Bank Of San Francisco Ari Beliak Bank of America Merrill Lynch Merrill Hoopengardner NTCIC

LIHTC Investing in Opportunity Zones Fred Copeman Boston Financial Investment Management L.P.

Boston Financial Investment Management (BFIM) Overview 50 years in syndication Raised $12.4B in equity capital for affordable housing projects Syndicated the equity in more than 2,500 LIHTC developments 1,150 of which we still actively manage Identified well over 300 proposed housing credit developments located in designated opportunity zones that have received 9% and or 4% housing credits in 2018 During this quarter: will introduce our first institutional investment fund dedicated exclusively to raising equity for LIHTC projects located in opportunity zones

Marrying LIHTC & Opportunity Zones Pros Maximizing Opportunity Zone incentives = at least 10 years LIHTC investments = 15 year holding period Housing credit projects in low to medium income communities Estimate >500 housing credit properties will be developed in designated opportunity zones this year A negative tax capital account and federal capital gains taxation? Cons 80-85% of the $16B LIHTC equity market comes from commercial banks Capital gains Acquisition and rehabilitation of existing properties and substantial improvement test

Where will the equity come from? LIHTC investment and individual investors Banks and Opportunity Zone incentive? Majority of banks investing in LIHTCs + no capital gains Banks utilize OZ incentive by transferring their interest in older LIHTC deals in which they hold large negative tax capital accounts Top 10 banks with investment banking operations Large investment banks Insurance companies

Challenges We need IRS guidance on a number of critical issues: Utilizing a feeder fund structure How capital can be deployed Types of gains that can be sheltered from tax Availability of leverage to provide an additional source of financing

What kind of projects will we invest in? Most acquisition/rehab projects will not work unless they involve some type of large scale adaptive re-use program Twinning LIHTC and historic credits produces epic investment yields New construction projects that have 9% housing credit allocations or both 9% and 4% housing credits The yield in LIHTC projects located in opportunity zones varies significantly based on the amount of leverage involved

Ozone benefit for a $10mm investment Original income tax basis Additions to basis after seven year hold Adjusted tax basis Less: lower of deferred gain or 12/2026 FMV Taxable capital gain as of 12/31/2026 Capital gains tax at 4/15/2027 at 21% tax rate $0 $1,500,000 $1,500,000 ($3,200,000) $1,700,000 $357,000* *Versus $2,100,000 at 4/15/19

Typical LIHTC project without Ozone benefit Opportunity Zone Fund Benefit Schedule for Investor 1 9% New Construction (City, ST) October 2018 - December 2037 Property Cash Needs Cash Used for Federal Investment Load AMF Reserves Gross Proceeds Federal Tax Credits Total Tax Deductions Capital (Gain) / Loss on Disposition Tax Benefits at 21.0% Net Benefits Cumulative Net Benefits 20181,603,400 334,042 5,000 1,942,442-24,040-5,048 (1,937,393) (1,937,393) 20195,447,835-5,150 5,452,985 577,051 1,167,245-822,173 (4,630,812) (6,568,205) 2020965,765-5,305 971,070 900,720 458,138-996,929 25,859 (6,542,346) 2021- - 5,464 5,464 900,720 466,246-998,632 993,168 (5,549,178) 2022- - 5,628 5,628 900,720 470,820-999,592 993,965 (4,555,213) 2023- - 5,796 5,796 900,720 480,675-1,001,662 995,865 (3,559,348) 2024- - 5,970 5,970 900,720 489,150-1,003,441 997,471 (2,561,877) 2025- - 6,149 6,149 900,720 498,434-1,005,391 999,242 (1,562,635) 2026- - 6,334 6,334 900,720 503,278-1,006,408 1,000,075 (562,561) 2027- - 6,524 6,524 900,720 509,657-1,007,748 1,001,224 438,664 2028- - 6,720 6,720 900,720 513,189-1,008,490 1,001,770 1,440,434 2029- - 6,921 6,921 323,669 515,830-431,993 425,072 1,865,506 2030- - 7,129 7,129-521,459-109,506 102,378 1,967,883 2031- - 7,343 7,343-529,054-111,101 103,759 2,071,642 2032- - 7,563 7,563-535,786-112,515 104,952 2,176,594 2033- - 7,790 7,790-543,314-114,096 106,306 2,282,900 2034- - - - - - 175,493 36,854 36,854 2,319,754 2035- - - - - - - - - 2,319,754 2036- - - - - - - - - 2,319,754 2037- - - - - - - - - 2,319,754 8,017,000 334,042 100,784 8,451,826 9,007,200 8,226,317 175,493 10,771,580 2,319,754 Quarterly Effective IRR Quarterly Effective - After Tax: 5.10%

Same project with Ozone benefit Opportunity Zone Fund Benefit Schedule for Investor 1 with Opportunity Zone Incentives 9% New Construction (City, ST) October 2018 - December 2037 Property Cash Needs Cash Used for Federal Investment Load Allocable Investment AMF Reserves Gross Proceeds Capital Gains Tax Deferral Capital Gain Recognized Opportunity Zone Exemption Capital Gains Tax Federal Tax Credits Total Tax Deductions Capital (Gain) / Loss on Disposition Exempted Gain Tax Benefits at on Disposition 21.0% Net Benefits 20181,603,400 334,042 1,937,442 5,000 1,942,442 406,863 - - - - 24,040 - - 5,048 (1,530,531) (1,530,531) 20195,447,835-5,447,835 5,150 5,452,985 1,144,045 - - - 577,051 1,167,245 - - 822,173 (3,486,767) (5,017,297) 2020965,765-965,765 5,305 971,070 202,811 - - - 900,720 458,138 - - 996,929 228,670 (4,788,627) 2021- - - 5,464 5,464 - - - - 900,720 466,246 - - 998,632 993,168 (3,795,459) 2022- - - 5,628 5,628 - - - - 900,720 470,820 - - 999,592 993,965 (2,801,495) 2023- - - 5,796 5,796 - - - - 900,720 480,675 - - 1,001,662 995,865 (1,805,629) 2024- - - 5,970 5,970 - - - - 900,720 489,150 - - 1,003,441 997,471 (808,158) 2025- - - 6,149 6,149 - - - - 900,720 498,434 - - 1,005,391 999,242 191,084 2026- - - 6,334 6,334-2,672,333 (1,252,656) (298,132) 900,720 503,278 - - 1,006,408 701,942 893,026 2027- - - 6,524 6,524 - - - - 900,720 509,657 - - 1,007,748 1,001,224 1,894,250 2028- - - 6,720 6,720 - - - - 900,720 513,189 - - 1,008,490 1,001,770 2,896,020 2029- - - 6,921 6,921 - - - - 323,669 515,830 - - 431,993 425,072 3,321,092 2030- - - 7,129 7,129 - - - - - 521,459 - - 109,506 102,378 3,423,470 2031- - - 7,343 7,343 - - - - - 529,054 - - 111,101 103,759 3,527,228 2032- - - 7,563 7,563 - - - - - 535,786 - - 112,515 104,952 3,632,181 2033- - - 7,790 7,790 - - - - - 543,314 - - 114,096 106,306 3,738,487 2034- - - - - - - - - - - 175,493-36,854 36,854 3,775,340 2035- - - - - - - - - - - - - - - 3,775,340 2036- - - - - - - - - - - - - - - 3,775,340 2037- - - - - - - - - - - - - - - 3,775,340 8,017,000 334,042 8,351,042 100,784 8,451,826 1,753,719 2,672,333 (1,252,656) (298,132) 9,007,200 8,226,317 175,493-10,771,580 3,775,340 Cumulative Net Benefits Quarterly Effective IRR Quarterly Effective - After Tax: 10.31%

Open Issues How should the Ozone benefit be split between investors and developers (Good question) State taxation the ultimate benefit analysis of a LIHTC/Ozone investment needs to consider state taxation. The outcome can vary widely from a state that does not follow the current version of the IRC to a state like Ohio which is considering adding a 10% state tax credit for investments over $250k in Ohio Ozone projects

NTCIC Investment Highlights Over $1.2 billion raised in capital Over $4.9 billion in total development costs 163 successful tax credit transactions

Historic Tax Credits Basics 20% credit for investment in the substantial rehabilitation of historic buildings 5 year compliance period, beginning at placement in service Tax Cuts & Jobs Act modified to 5-year credit delivery 5-15% reduction in pricing Many project still grandfathered Opportunity Zone Overlay Equity investment opportunity both in combination with tax equity and private equity

HTC & Opportunity Zones HTC Direct Investment Structure HTC investor is 99%+ equity investor in LLC that owns and rehabilitates the building Must reduce basis by amount of credits Depending on debt structure, most investments will exit with a capital gain HTC Master Tenant Structure More common for large projects No basis adjustment but 50(d) Most investments exit with a capital loss

Historic Investment Opportunities Nationwide 46% of completed HTC projects in 2017 in Opportunity Zones 1035 total projects 475 in opportunity zones 58% of HTC projects in process, as reflected by Part 2 data 462 Part 2s pending 266 in opportunity zones

New Orleans Opportunities

HTC & Opp Zones Opportunity? Profit generating investment options Easy overlay to existing structure Market need for additional capital following tax reform 5-year deferral matches typical investment timeline possibly 7-year if counting installments during construction

HTC & Opp Zones Opportunity? Direct Investment Structure 5 Year 7 Year 10 Year Standard After Tax IRR 13.74% 15.64% 17.63% Increase in IRR from Op Zone 9.32% 11.88% 13.65% Total IRR 23.06% 27.52% 31.28% Percentage increase in After Tax Yield 67.83% 75.93% 77.40% Incremental NPV from Op Zone at 7.00% Discount $387,867 $498,882 $1,260,596 NPV of Increase in as a Percentage of Investment at 7.00% 7.64% 9.82% 24.83%

HTC & Opp Zones Opportunity? Master Tenant Structure 5 Year 7 Year 10 Year Standard After Tax IRR 12.41% 12.85% 13.32% Increase in IRR from Op Zone 5.40% 6.66% 6.44% Total IRR 17.81% 19.51% 19.76% Percentage increase in After Tax Yield 43.49% 51.84% 48.37% Incremental NPV from Op Zone at 7.00% Discount $290,260 $368,467 $350,732 NPV of Increase in as a Percentage of Investment at 7.00% 6.32% 8.02% 7.63%

Direct HTC Transaction Structure Example 1 Qualified Opportunity Fund Deferred Gain Investment 1% Ownership Historic Building LLC (Landlord) 99% Ownership Federal HTC Investor & OZ Investor Managing Member HTC Project Rehab with substantial improvement (100%)

Direct HTC Transaction Structure Example 1 HTC Investor defers capital gain tax on some/all of HTC equity investment Landlord = QOF 1. 90% of assets in QOZP Property acquired after 12/31/17 Original use or substantial improvement During substantially all of QOF holding period, sub all of use was in QOZ 2. Testing dates Last day of 1 st 6 month period of taxable year Last day of taxable year

Direct HTC Transaction Structure Example 2 Qualified Opportunity Qualified Zone Business Opportunity Zone Property Qualified Opportunity Fund Historic Building LLC (Landlord) 99% Ownership Federal HTC Investments, LLC (Partnership) 1% Ownership.01% Ownership 99.99% Ownership Managing Member Other Members HTC Project Rehab with substantial improvement (100%) Federal HTC Investor & OZ Investor

Direct HTC Transaction Structure Example 2 HTC Investor defers capital gain tax on some/all of HTC investment Invests in Partnership (QOF) that invests in Landlord Landlord = QOZB 1. Sub all of tangible property owned or leased is QOZP 2. 50% gross income derived from active conduct of business 3. Substantial portion of intangible used in trade or business 4. Less than 5% of assets - NQFP 5. No sin businesses

Direct HTC Transaction Structure Example 3 Qualified Opportunity Zone Business Historic Building LLC (Landlord) 99% Ownership Federal HTC Investor Qualified Opportunity Zone Property Qualified Opportunity Fund 1% Ownership Managing Member & OZ Investor HTC Project Rehab with substantial improvement (100%)

Direct HTC Transaction Structure Example 3 Managing Member is QOF Non-HTC member(s) defer capital gain

Master Tenant HTC Transaction Structure Example 4 Qualified Opportunity Qualified Zone Business Opportunity Zone Property Qualified Opportunity Fund Historic Building LLC (Landlord) 10% Ownership Master Tenant 90% Ownership 1% Ownership 99% Ownership Managing Member HTC Project Rehab with substantial improvement (100%) Managing Member Federal HTC Investor & OZ Investor

Master Tenant HTC Transaction Structure Example 4 HTC Investor defers capital gain tax on some/all of its HTC equity investment Master Tenant = QOF 90% of assets in QOZP Timing issues! Other Assets Landlord = QOZB

HTC & Opp Zones - Challenges Preferred structure less valuable for tax credit investor Capital contribution schedule can be unpredictable 10-year hold significantly longer than compliance period Mismatch of tax credit investor pool and likely opp zone investor Substantial rehab test vs. substantial improvement 1-year vs. 5-year HTC grandfathering and new property limitation Are QREs new property? NNN leases

NMTCs + Opportunity Zones

Tax Incentive Benefits 1. 2. 3. Gain Deferral Dec. 31, 2026 Partial forgiveness 10% - 5 year 15% - 7 year No tax on QOF investment Ten year hold 4. Original gain is limited to FMV at 12/31/2026

NMTCs + Ozones - Twinned Leverage Lender Leverage Loan NMTC + OZone Equity Investor(s) Inv Fund LLC (Disregarded) QEI (180 days) Sub-CDE (QOF) (6 mos & EOY) NMTC Project New construction Acq/rehab with substantial improvement (100%) Equity QLICIs QALICB LLC (QOZ Business)

NMTCs + Ozones Side by Side Leverage Lender Leverage Loan NMTC Equity Investor(s) Inv Fund LLC (Disregarded) QEI Sub-CDE LLC QLICIs (6 mos & EOY) QALICB LLC (QOF) OZone Equity QALICB Owner LLC NMTC Project New construction Acq/rehab with substantial improvement (100%)

NMTCs + Ozones Twinned + Side by Side Leverage Lender Leverage Loan NMTC + Ozone Equity Investor(s) Inv Fund LLC (Disregarded) QEI (180 days) (6 mos & EOY) Sub-CDE (QOF) Equity QLICIs Project Sponsor Equity (180 days) QALICB LLC (QOZ Business) OZone Equity QALICB Owner LLC (QOF) (6 mos & EOY) NMTC Project New construction Acq/rehab with substantial improvement (100%)

Benefits Sample NMTC investment: 80 cents per credit, 2% up-front CDE fee Straight-up IRR calculations: Base case After-Tax IRR: 6.16% With Opportunity Zones: 22.1% (14 cents) Modified IRR calculations: Base case After-Tax IRR: 6.16% With Opportunity Zones: 11.16% (10 cents)

Challenges! Tax credit compliance period v. OZone holding period LIHTC NMTC HTC RETC/ITC OZones 7 5 5 5 7 10 15

Challenges! Equity QLICIs can be nettlesome Reasonable expectations safe harbor may not be available NMTC structures involve finely tuned cash flows to service leverage and pay fees Preferred equity or preferred returns may help Equity with upside not favored by project sponsors Many CDEs need special approval to do equity QLICIs Basis issues may limit the amount of gain deferral to less than QEI

Challenges! 10-year hold benefit is maximized when residual economic gains are greatest! Many tax credit deals are structured so that residual economic benefits inure to the project sponsor Most traditional tax credit investors don t have a surfeit of gains

INVESTOR PERSPECTIVE Ari Beliak Bank of America Merrill Lynch

Community Development Banking What We Do Lending Investing RE Development Credit financing for development, from predevelopment to stabilization New development, acquisition and rehabilitation projects Construction Loan, Permanent Loan, Bridge Loan, Letter of Credit, Special Bond Offering Federal tax credit investments in Low Income Housing Tax Credit Program (LIHTC) for Multifamily Historic and New-Market properties for qualified projects (HTC and NMTC) Direct or syndicated investment through a Fund Banc of America Community Development Corp. (BACDC) serves as a development partner in multifaceted projects BACDC pursues multiple projects per year Recent Accomplishments In 2017, Bank of America Merrill Lynch Community Development Banking (CDB) provided a record-setting $4.53 billion in loans tax credit investments and other real estate development solutions, the most in a single year in its more than 30-year history. This translated into 13,500 housing units, of which, 12,000 were affordable, including: 2,468 green housing units, 3,063 units for seniors, and 1,688 units for veterans, individuals with special needs, and the formerly homeless. Bank of America CDB deployed $3.04 billion in debt commitments and $1.49 billion in new equity investments to help build strong and healthy communities by financing affordable housing, charter schools, healthcare and economic development across the U.S. In 2015, the CDB team lead the financing for the largest Rental Assistance Demonstration deal ever in the nation the San Francisco RAD, in which Bank of America facilitated approximately $2.1 billion in lending and investing. In 2017, CDB reached a significant milestone it exceeded $1 billion in charter school financing since 2000. This financing impacted more than 80 schools and provided educational opportunities for more than 25,000 students. *Closed deals data as of Dec 31 st, 2015 and 2017 Annual Reports. Figures are rounded. *BofA Photo Library Photo #2589, #6348, #7031, #4770

Bank Regulator Perspective and Community Strategies Craig Nolte, Regional Manager Community Development Federal Reserve Bank of San Francisco craig.nolte@sf.frb.org (206) 396-2192

Bank Regulator Perspective Community Reinvestment Act Location likely qualifies Opportunities: Loans, Services, Investments Leadership Due diligence

Property owners Civic officials Chambers Local companies Developers Financial institutions Foundations Community Strategies Identify Key Local Stakeholders Community-based organizations Social service agencies Federal agencies RD, HUD, EDA State agencies Department of Commerce, Governor s Office

Community Strategies Meet with Key Stakeholders Conduct asset mapping Assess and prioritize needs of community Listening sessions Data analysis Determine resource gaps

Community Strategies Seek Resources to Incentivize OZ Investors LIHTCs, NMTCs Banks - CRA Zoning waivers Funding Tax incentives Other investor requirements Incubators, accelerators In-kind support Loans, other assistance from banks

Community Strategies Establish an Opportunity Zone Fund Consult State OZ Coordinator for suggestions Communicate with foundations Identify companies, organizations, or individuals that may be willing to establish a fund Cast a wide net!

Community Strategies Raise Awareness of your Opportunity Zone Convenings where investors gather Website own and/or state s website Brochure - why your OZ is attractive Network with financial advisors, CPAs Consider collaborating with other OZs Promote nationally