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