1 / 12

John B. Levy

OPPORTUNITY ZONES VML Policy Committee Meeting July 18 th , 2019. John B. Levy. Jay Beekman. Passage of the Tax Cut & Jobs Act in December of 2017 established the Opportunity Zone tax incentive program. The Basics

tgilcrease
Download Presentation

John B. Levy

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. OPPORTUNITY ZONES VML Policy Committee Meeting July 18th, 2019 John B. Levy Jay Beekman

  2. Passage of the Tax Cut & Jobs Act in December of 2017 established the Opportunity Zone tax incentive program • The Basics • Designed to spur economic resurgence, job creation, and wealth building in low income and distressed communities • Taps into trillions of passive wealth in the form of unrealized capital gains • Tax incentive program without limits that can supplement/pair with other tax credit programs (e.g. NMTC, LIHTC, HTC, Empowerment Zones, etc…) • First large-scale new community development policy enacted since the new millennium

  3. Opportunity Zones offer investors tax benefits over a long horizon for equity investments in qualified businesses & property Opportunity Zones • 212 low income census tracts in Virginia • Mix of rural and urban communities • Tracts overlay with other place-based tax credit programs • Designations remain in effect until 2028 and no ability to change designations Opportunity Zone Funds Investors get tax benefits from investing via a “Qualified Opportunity Fund”: • Deferral of a capital gains tax until 2026 • Reduction in the capital gains tax up to 15% • Permanent exclusion of gains from initial investment if held for at least 10 years Opportunity Zone Business & Property Ninety percent of the funds must capitalize: • Stock of qualified Opportunity Zone corporation • Interest in a qualified Opportunity Zone partnership • Tangible property used in an Opportunity Zone $$$

  4. At this point, the Opportunity Zones are set – and the key clarifying rules have been released Dec. 2017 Today At the end of 2017, Congress passed the Tax Cuts and Jobs Act, which included the Opportunity Zone tax incentive meant to spur economic development and revitalization in communities lacking access to capital. The incentive is the largest new federal economic development program enacted in years. In early 2018 The Virginia Department of Housing and Community Development (DHCD) and the Virginia Economic Development Partnership (VEDP) gathering local, state and other stakeholder input to assist the Governor in nominating 212 tracts as Opportunity Zones. Virginia’s zones represent local, regional and state priorities. Treasury released the first round of clarifying rules and regulations in the Fall of 2018. This tranche solidified the investor friendly approach to the program. This included the release of a two page self certification IRS form, preserving the 10-year basis step-up benefit until 2047, and a working capital safe harbor of 31 months. The second round of clarifying rules and regulations dropped in April of 2019. This tranche included focus on ensuring non-real estate operating businesses could leverage the program with clarification on aspects like the 50 percent gross income test.

  5. Virginia took a deliberate and well-informed process to designate Opportunity Zones • Based on the statute requirements for income levels, the Governor of Virginia determined 901 census tracts within the Commonwealth were eligible. • Governor sought input from Cities, Towns, Counties and investors, as well as general comment. • Localities submitted ranked order of eligible census tracts to the Governor with supporting information. This included: • Market conditions and revitalization efforts (rezoning, transit, infrastructure improvements, etc..) • Investment potential and capital readiness (project pipeline, incubators, venture capital, etc..) • Potential local business incentives (tax abatement, fast track permitting, fee reduction, etc…) • DHCD and VEDP evaluated nominations to ensure fairness across the state among rural, urban and suburban localities. • Of Virginia's 901 eligible census tracts, the Governor nominated 212  opportunity zones (23.5% of total), the maximum number allowable. U.S. Treasury Secretary certified all these census tracts. Virginia Opportunity Zones Map

  6. CASE STUDY:THE SUMMIT APARTMENTS

  7. THE SUMMIT OVERVIEW • Scott’s Addition: the hottest area of town • Liked the deal before learning about the Opportunity Zone designation • Perfect example of an area that would be developed regardless of OZ • $34,000,000 in equity and debt in an Opportunity Zone Fund financing • 166-unit project including street-level retail and structured parking • Combination construction and permanent loan and long-term equity to invest alongside sponsor

  8. BENEFITS OF OPPORTUNITY ZONES • Deferral, Reduction (Step-Up), Avoidance • Can be used in both real estate and operating companies • “Crossing the streams,” unlike a 1031 exchange, which requires investment back into a similar asset, an OZ investment allows for an investment into a different asset class. • Sell Amazon stock and invest in Real Estate 8

  9. THE SUMMIT: CONCLUSION • Loan closed • Equity grossly over-subscribed • Construction underway • OZ funds – less than 10% expectation • OZ funds – need good deals, not just tax incentives 9

  10. OPPORTUNITY ZONE OBSERVATIONS

  11. While a potentially massively impactful community economic tool, the Opportunity Zone program has obstacles Key Challenges • Lagging Opportunity Zone energy and knowledge in the communities themselves • Outside of large, urban-centric real estate pipeline, shovel-ready project demand is not prepared for Opportunity Zone capital inflow • Investors & business interests lack technical Opportunity Zone legal and tax expertise • Rural Opportunity Zone tracts and non-real estate businesses getting relatively minimal attention • Primary focus on financial returns rather than also community revitalization and wealth generation • Established connections between community business interests and investors largely do not exist in the Opportunity Zones • Unclear how to gather and combine additional Federal, State, and local incentives

  12. The Virginia Opportunity Zone Market will have three key features Capital Attraction Pipeline Development Clearinghouse Ongoing outreach and proactive information sharing to local government, community interests, businesses and investors Large national convening in Virginia to build network of investors focused on inclusive model, with Virginia seeking to share best practices of inclusive opportunity zone marketplace Periodic convenings across state to generate energy, educate, and help build working relationships between stakeholders Tools and investment resources for local community, business and economic development leaders to encourage and drive funding to Opportunity Zone projects Identification of community impact investments and steering to additional non-profit, philanthropic, and technical assistance resources Connections to Federal, Commonwealth, local incentives and complimentary programs Inventorying of project pipeline and investors with parameters to help matching Online place for stakeholders to learn, interact and engage with projects Tracking and reporting on Opportunity Zone impact & trends to inform additional market-making activities

More Related