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Opportunity Zone Program Conference

Opportunity Zone Program Conference. June 28 , 2018 History Colorado Center 1200 North Broadway Denver, Colorado 80203. Opportunity Zone Program Conference. PANELISTS. Kenan Fikri. Steven F. Mount. Marc L. Schultz. Economic Innovation Group. Squire Patton Boggs. Snell & Wilmer.

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Opportunity Zone Program Conference

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  1. Opportunity Zone Program Conference June 28, 2018 History Colorado Center 1200 North Broadway Denver, Colorado 80203

  2. Opportunity Zone Program Conference PANELISTS Kenan Fikri Steven F. Mount Marc L. Schultz Economic Innovation Group Squire Patton Boggs Snell & Wilmer This slide presentation is based in part on a presentation prepared by John Sciarretti, Novogradac & Company LLP, and is used with his permission. Novogradac & Company LLP is a national accounting firm with broad expertise in the Opportunity Zone program and in many tax credit programs.

  3. Opportunity Zone Program Introduction • History and Status of Opportunity Zone Program • Benefits of the Opportunity Zone Program Tax Incentives • Qualified Opportunity Zones – Qualification and Status • Qualified Opportunity Funds – What are the rules, how do you qualify? • Directand indirect investment in Qualified Opportunity Zone Business Property • Qualified Opportunity Zone Business Property • Readily Identifiable Investment Types in Opportunity Zones • Combining Opportunity Zone Program with Other Tax Incentives • Regulatory Guidance Needed • Questions and Answers

  4. Opportunity Zone Program OverviewKenan Fikri, ECONOMIC INNOVATION GROUP / Washington, DC/ @kenanfikri

  5. 52 million Americans (1 in 6) live in economically distressed communities. Prosperous Distressed Nearly 400,000 Coloradoans live in economically distressed zip codes. Source: EIG’s “Distressed Communities Index” Prosperous

  6. Today’s struggling communities have been completely sidelined by 21st century economic growth. Cumulative change in employment by quintile Change in employment from 2000 to 2015 by quintile Source: EIG’s “Escape Velocity”

  7. Traditional modes of financing do ever less for non-prime businesses in non-prime communities. Nearly one out of every four community banks has disappeared since 2008 In real terms, small business lending remains down by a quarter 75% of all venture capital concentrates in three states 75% Sources: FDIC and National Venture Capital Association

  8. Access to mission-oriented capital is just as uneven. Even philanthropies and foundations bypass many of the country’s neediest communities 27% of counties received no CDFI funding from 2011 to 2015 75% Sources: The Urban Institute and National Center for Responsive Philanthropy

  9. The idea has strong, bipartisan roots and builds on the lessons from prior federal efforts to revitalize struggling communities.

  10. What makes Opportunity Zones so unique? • It is an investorincentivethat pertains exclusively to capital gains. • It is designed to concentrate capital rather than diffuse it. • It rewards patient capital: All incentives are tied to the longevity of the investment. • It unlocks scarce equity capital. • It provides no up-front subsidyand doesn’t pick winners. • It can move at the speed of the market. • It was designed with startupsin mind. • It gives investors a stake in communities’ future: Most programs reward individual projects; this one ties investor payoff to community success.

  11. What makes Opportunity Zones so promising? Flexibility: Low-income communities have a wide range of financing needs. The flexibility of the incentive provides the potential to support a variety mutually reinforcing activities within a single community as well as across a broad spectrum of communities. Scalability: There is no statutory cap on the amount of capital that can flow to Opportunity Zones in any given year. As such, Opportunity Zones have the potential to help fuel economic renewal in distressed communities on an unprecedented scale. Simplicity: Complexity has often been the Achilles heel of policies aimed at unlocking private capital in low-income areas. Complexity adds cost, time, and risk to business transactions, biasing programs towards a narrower set of stakeholders and more risk-averse outcomes, often precluding the very types of business investments that are most likely to have transformative benefits for communities.

  12. There are three core elements to the program. Zones: States and territories designated up to 25 percent of Low-Income Community Census tracts in their state to be certified by Treasury as Opportunity Zones. Funds: Opportunity Funds are self-certified investment vehicles organized as corporations or partnerships for the purpose of investing in qualified Opportunity Zone assets. All investments that seek to take advantage of the provision must flow through Funds. Investments: Funds make equity investments into businesses and property in Opportunity Zones. Qualified assets are the stocks of qualified companies, interests of qualified partnerships, or direct ownership of qualifying tangible property.

  13. Visit eig.org/opportunityzones for more information EIG brings together leading entrepreneurs, investors, economists, and policymakers from across the political spectrum to address America’s economic challenges. WEBeig.orgEMAILkenan@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.

  14. Benefits of the Opportunity Zone Incentive

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

  16. 3 Tax Incentive Benefits 1. 2. 3. GainDeferral Partialforgiveness Forgiveness ofadditional gains

  17. Period of Deferral The period of capital gain tax deferral ends upon the earlier of: Dec. 31, 2026,or… EARLIER SALE 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

  18. Amount Recognized THE LESSER OF: 1. Amount of gain deferred or 2. The fair market value of investment in Qualified Opportunity Fund interest MINUS: Taxpayer’s basis in the Qualified Opportunity Fund interest Note: The taxpayer’s basis in the Opportunity Fund is initially deemed to be zero.

  19. Partial Forgiveness and Forgiveness of Additional Gains Basis is equal to Fair Market Value Forgiveness of gains on appreciation of investment Requires an election Basis increased by 10% of the deferred gain Up to 90% taxed Basis increased by 5% of the deferred gain Up to 85% taxed SALE INVESTMENT HELD FOR 7 YEARS HELD FOR 10 YEARS HELD FOR 5 YEARS 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

  20. 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 Qualified Opportunity Fund investment • Qualified Opportunity Fund Invests the $1MM in Qualified Opportunity Zone Property 2018 2019 2020 2021 2022 2023 2024 2026 2027 2028 2029

  21. Jan. 1, 2018 Taxpayer enters into a sale that generates $1M of capital gain June 30, 2025 (After 7 years), Taxpayer’s basis in investment in Qualified Opportunity Fund increases from $100k to $150k June 30, 2023 (After 5 years), Taxpayer’s basis in investment in QOF increases from $0 to $100k 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. 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 Qualified Opportunity Fund investment • Qualified Opportunity Fund Invests the $1MM in Qualified Opportunity Zone Property 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

  22. Opportunity Zone Incremental Benefit

  23. State Tax Implications • Opportunity Zone benefits increase if states conform to the Federal Law • Some states piggy-back off of the current Federal Law but could decouple from opportunity zones • New York decided not to decouple • Hawaii decided to decouple • Some states do not conform to Federal Law but could add opportunity zones at the state level • Colorado is considering a bill to add the opportunity zone benefit at the state level • Some states do not have a state income tax (e.g. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). • State Tax Implications of an single opportunity zone transaction may include multiple states • State where original gain was realized • State (s) where the opportunity fund has nexus • Some states are tying other State incentives to opportunity zones • Missouri proposed increased cap for state historic credits for properties in opportunity zones • California introduced a bill to exempt projects in opportunity zones from the CA Environmental Quality Act

  24. Where are the Opportunity Zones?

  25. Colorado’s Opportunity Zones 126 census tracts choosecolorado.com/oz For a list and maps of all opportunity zones nationwide go to: https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

  26. BREAKDOWN OF PROPOSED TRACTS BY ENTERPRISE ZONE REGION (% OF TOTAL PROPOSED TRACTS) 126 Proposed Tracts

  27. CO ZONES PROVIDE A DIVERSE PORTFOLIO FOR INVESTORS

  28. Designated Opportunity Zonesand Empowerment Zones Designated Opportunity Zonesand Public Housing Developments Designated Opportunity Zonesand Renewal Communities

  29. Designated Opportunity Zonesand Promise Zones Designated Opportunity Zonesand Enterprise Communities Designated Opportunity Zonesand Enterprise Zones

  30. Qualified Opportunity Zones remain in effect through December 31, 2028

  31. Qualified Opportunity Fund

  32. Qualified Opportunity Fund

  33. Qualified Opportunity Fund - Purpose An investment vehicle organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone Property.

  34. Qualified Opportunity Fund – Assets Test December 31st June 30th JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC

  35. 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.

  36. Certification Process • IRS announces self-certification process for Qualified Opportunity Funds on April 24 • Self-certification form to be attached to tax return • Form to be published summer 2018

  37. Qualified Opportunity Fund – Noncompliance Penalty Failure to meet 90% investment standard • Per month penalty for failing to meet 90% test % shortfall x underpayment rate penalty • No penalty if it is shown failure is due to reasonable cause • (Federal short-term rate plus 3%) – currently 5%

  38. 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

  39. Qualified Opportunity Zone Businesses A trade or business in which substantially allof the tangible property owned or leased by the taxpayer is qualified opportunity zone business propertyand: Tangible property that ceases to be qualified opportunity zone business property shall continue to be treated as such for 5 years or until no longer held (if earlier). • Substantial portion of intangible property used in active conduct of business • At least 50% of income derived from Active Conduct • < 5 percent unadjusted basis of property is nonqualified financial property

  40. 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. 

  41. Qualified Opportunity Zone Business Property • 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 Qualified Opportunity Zone • Original use in the Qualified Opportunity Zone 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

  42. Comparison of Requirements by Direct and Indirect Investment by Opportunity Fund

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

  44. Combining with Other Tax Incentives

  45. Combining Opportunity Zones with Low Income Housing Credits • Investment holding periods line-up nicely • Basis limitations may suspend loss benefits unless debt basis • Appreciation not likely, but there may be an opportunity for forgiveness of exit tax on excess loss benefits. • Substantial rehabilitation rules don’t line-up • LIHTC - $6,000+/Unit • OZ – expenditures in excess of beginning basis over 30 months • Tax deferral payment likely less due to diminished FMV.

  46. Combining Opportunity Zones with New Market Tax Credits • Investment holding periods do not line up with the 10-year benefit. • CDE would need to obtain Opportunity Fund status. • QALICB and Qualified Opportunity Zone Business definitions have many similarities • QLICIs must be equity under Opportunity Zone • May need CDFI Fund approval to change product strategy • Equity QLICIs could affect reasonable expectation safe harbor • Deferral election may be limited as NMTC investors will need basis to take required NMTC basis deduction • Tax deferral payment in 2026 could be less due to diminished FMV.

  47. Combining Opportunity Zones with Investment Tax Credits (RETC/HTC) • Investment holding periods do not line up with the 10-year benefit. • Basis limitations may suspend credits/ loss benefits unless debt basis • Appreciation not likely, but there may be an opportunity for forgiveness of exit tax on excess loss benefits. • For Pass-through structures- Master tenant would need to be the Opportunity Fund Otherwise NQFP issues with investment in Landlord • Tax deferral payment in 2026 could be less due to diminished FMV.

  48. Regulatory Guidance Needed from IRS • Grace periods for Opportunity Fund and Opportunity Zone Business To make investments • Safe harbors permitting cash to be held for sufficient periods to construct or improve property • Clarification of the investor when a partnership recognizes a gain • Basis for applying various tests, i.e. adjusted tax basis or FMV • Meaning of “substantially all” and “substantial portion” • Clarification of “original use” requirement especially with respect to vacant land

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