Opportunity Zone BasicsPANELISTS
Greg ClementsNovogradac & Company LLP
Allison WoodburyStinson Leonard Street
Joseph BredehoftHusch Blackwell LLP
Kristin DeKuiperHolland & Knight
Megan RiessFishman Haygood LLP
Steve MountSquire Patton Boggs
Opportunity Zones - Overview
• Designed to spur long-term private sector investments in low-income communities
• Frictionless way to reinvest unrealized gains into distressed communities
• 1st new national community investment program in over 15 years
• Potential to scale into the largest economic development program in the U.S.
• Specifically designed to channel more equity capital into overlooked markets
52 million Americans (1 in 6) live in economically distressed communities.
Prosperous Distressed
Source: EIG
Designated Opportunity Zones
Opportunity Zones
Low-Income Communities
Source: www.novoco.com
Benefits of the Opportunity Zone Incentive
Taxpayers can get capital gains
tax deferral(& more)
Qualified Opportunity Funds
(QOFs)
for making timely investments in
Qualified Opportunity Zone
Property
which invest in
3 Tax Incentive Benefits
1. 2. 3.GainDeferral
Partialforgiveness
Forgiveness ofadditional gains
Period of Deferral
The period of capital gain tax deferral ends upon the earlier of:
2018 2019 2020 2021 2023 2024 2025 2026 2027 2028
Dec. 31, 2026,or…
EARLIER SALE
2022
Amount RecognizedTHE LESSER OF:
1. Amount of gain deferred
2. The fair market value of investment in QOF interest
or
MINUS:Taxpayer’s basis in the QOF interest
Note: The taxpayer’s basis in the Opportunity Fund is initially deemed to be zero.
Partial Forgiveness and Forgiveness of Additional Gains
SALE
INVESTMENT
Basis increased by 10% of the deferred gainUp to 90% taxed
HELD FOR 5 YEARS
Basis increased by 5% of the deferred gainUp to 85% taxed
HELD FOR 7 YEARS
Basis is equal to Fair Market
ValueForgiveness of
gains on appreciation of
investmentRequires an
election
HELD FOR 10 YEARS
2018 2019 2020 2021 2023 2024 2025 2026 2027 20282022
What gains are eligible for Opportunity Fund tax deferral?• The title of Section 1400Z-2 refers to “capital gains,” but the actual statute only refers to
“gains.”
• Most sales of non-inventory or items held for sale yield capital gains, but what about: • 1231 gain.• depreciation recapture under Section 291, 1245 and 1250. Sections 1245 and 1250 include words to the
effect of “such gain shall be recognized notwithstanding any other provision of this subtitle.” Section 291 refers to 20% of gain associated with previously taken depreciation, and it provides that that it “shall be treated as gain which is ordinary income under Section 1250 …”
• Section 582(c), which provides that sales or exchanges of bonds, debentures, notes or certificates or other evidences of indebtedness by certain financial institutions are not considered the sale or exchange of a capital asset.
Sample Investment
2018 2019 2020 2021 2022 2023
Jan. 2, 2018Taxpayer 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
Sample Investment
2023 2024 2025 2026 2027 2028
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.
Incentive Benefit Examples
• Assumptions used on the following 2 slides:• $1,000,000 initial investment in a QOF• 6% IRR irrespective of Opportunity Zone• 23.8% Tax Rate• Incremental Benefit slide assumes a sale at each of the measuring points• Perishability of Incentives slide assumes a 10 year hold after the initial
investment is made
6.00% 6.00% 6.00% 6.00% 6.00%
7.44%8.08% 7.95% 7.71%
9.08%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
4 Year 5 Year 7 Year 12/31/2026 10 Year
Standard After Tax IRR Total IRR
23.8% Tax Rate 4 Year 5 Year 7 Year 12/31/2026 10 YearStandard After Tax IRR 6.00% 6.00% 6.00% 6.00% 6.00%Incremental OZ Benefit 1.44% 2.08% 1.95% 1.71% 3.08%OZ Investment IRR 7.44 8.08% 7.95% 7.71% 9.08%Percentage Increase 24% 35% 32% 29% 51%
Opportunity Zone Incremental Benefit
3.08%2.96%
2.83%2.69%
2.52%2.35%
2.17%1.99%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
2018 2019 2020 2021 2022 2023 2024 2025
Incr
emen
tal I
RR
Year of QOF Initial Investment
Perishability of Incentives
State Tax Implications
• Opportunity Zone benefits increase if states conform to the Federal Law (see next slide)
• Some states do not conform to Federal Law but could add OZs at the state level • Colorado is considering a bill to add the OZ benefit at the state level• Ohio proposed legislation to create a 10% state tax credit for Ohio-based opportunity funds
participating in the Federal incentive
• Some states do not have a state income tax (see next slide).
• State Tax Implications of an single OZ transaction may include multiple states• State where original gain was realized• State (s) where the opportunity fund has nexus• State of residency of the taxpayer
• Some states are tying other State incentives to opportunity zones• Missouri proposed increased cap for state historic credits for properties in OZs• California introduced a bill to exempt projects in OZs from the CA Environmental Quality Act
State and DC Conformity to Opportunity Zone Provisions of the IRC
Corporations (as of August 23, 2018):
•33 conforming to the Opportunity Zone provisions of the IRC
•12 nonconforming to the Opportunity Zone provisions of the IRC (2 decoupled)
•6 have no capital gains tax
For Individuals (as of August 23, 2018):
•29 conforming to the Opportunity Zone provisions of the IRC
•13 nonconforming to the Opportunity Zone provisions of the IRC (2 decoupled)
•9 have no capital gains tax
Eligible AreasWhere are the Opportunity Zones?
Opportunity Zone Designation
• More than 8,700 census tracts located in each State, DC and possessions have been designated (approx. 11% of the country by census tract)
• The Opportunity Zones meet basic low-income criteria, but some contiguous census tracts not meeting low-income requirement were also designated
• List is final and essentially unchanging • The list is available from IRS organized by state • States also have interactive websites for confirming address in a QOZ • Novogradac Mapping Tool: www.novoco.com/OZMap
Gulf Area Opportunity Zones
New Orleans Opportunity Zones
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
Some Qualified Opportunity Zone Businesses Models
• New Businesses• Joint Ventures of Existing Businesses • Subsidiaries of Existing Business (Sponsored Spin-offs)• Commercial Real Estate • Nonprofit Joint Ventures • Pairing OZ with Tax Credit Investments
• No Statutory Prohibition• Rev Proc. 2018-16, which provided the original designation rules
provides:“Investments in a qualified opportunity fund may also be eligible for other tax benefits.”
Qualified Opportunity Fund
Qualified Opportunity Fund
Statutory Requirements
•Corporation or Partnership
•Purpose
•Assets Test
Certification Process
Noncompliance Penalty
Qualified Opportunity Fund - Purpose
An investment vehicle organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone Property (QOZP).
Qualified Opportunity Fund – Assets TestMust 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
JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC
June 30th December 31st
*Note that testing dates may not be June 30 and December 31; depends on formation date, taxable year of fund and IRS guidance
Certification Process
• An eligible taxpayer self-certifies to become a certified qualified opportunity fund.
• No approval or action by the IRS is required.• Taxpayer completes a form 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.
Qualified Opportunity Fund –Noncompliance Penalty
Failure to meet 90% investment standard
Per month penalty for failing to meet 90% test
(Federal short-term rate plus 3%) – currently 5%
% shortfallx underpayment rate
penalty
No penalty if it is shown failure is due to reasonable cause
Qualified Opportunity
Zone Property (QOZP)
Qualified Opportunity Zone Stock(Qualified Opportunity Zone
Business)
Qualified Opportunity Zone Partnership Interest
(Qualified Opportunity Zone Business)
Qualified Opportunity Zone Business Property
Qualified Opportunity Zone Stock and Partnership Interests
• The investment must be acquired after December 31, 2017 solely 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
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
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.
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
ORTaxpayer 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
Comparison of Requirements by Direct and Indirect Investment by Opportunity Fund
Requirement Direct Investment Indirect Investment
Percentage of O Fund’s assets that must be invested in qualified opportunity zone business property 90% N/A
Percentage of O Fund’s assets that must be invested in stock or partnership interests N/A 90%
Percentage of O Fund’s assets that may be held in cash or other liquid investments
10% (together with intangible property)
5% plus reasonable workingcapital
Percentage of O Fund’s assets that may be held in intangible property 10% (together with cash)Unlimited, but intangibleproperty must be used in trade or business
Percentage of O Fund’s assets that must be invested in tangible property 90% No minimum
Percentage of gross income that must be derived from O Zone None 50%
Ineligible Businesses None Sin Businesses
Basic Model for Rental Real Estate
QOFGeneralPartner
Investor(s)
QOZPartnership
GeneralPartner
Investor(s)
Rental real estate• New construction• Substantial
improvement (100%)
(within 180 days of original gain)
(6 mos & EOY)
Operating Business• New business• Existing business expanding
into Opp. Zone• Improving existing business
(or direct ownership of QOZ business property)
IndirectApproach
Opportunity Fund
(Investment Vehicle)
Opp. ZoneInvestor(s)
Project Owner (Partnership)
General Partner
(Developer Team)
General Partner
1%
(similar to NMTC CDE or
Syndicated LIHTC Fund)
Opportunity Fund is an Intermediary investment vehicle and owns a partnership interest in the project owner.
(similar toNMTC Allocateeor Syndicator)
99%
99%
1%
Project(Tangible
Property, Real and Personal)
DirectApproach Opp. Zone
Investor(s)
Opportunity Fund Project
Owner (Partnership)
General Partner
(Dev. Team)
1%
Opportunity Fund is the developer of the project and owns the project’s tangible property.
99%
Project(Tangible
Property, Real and Personal)
Combining with Other Tax Incentives
Opportunity Zone
LIHTC
NMTC
HTC
RETC
1202
1031
Q&A
Common Question
I currently own property located in an Opportunity Zone (and have owned it for some time) how can I best benefit from the Opportunity Zone incentive?
Opportunity Zone BasicsPANELISTS
Greg ClementsNovogradac & Company LLP
Allison WoodburyStinson Leonard Street
Joseph BredehoftHusch Blackwell LLP
Kristin DekuiperHolland & Knight
Megan RiessFishman Haygood LLP
Steve MountSquire Patton Boggs