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ECONOMIC DEVELOPMENT IN OPPORTUNITY ZONES

06/26/2019. ECONOMIC DEVELOPMENT IN OPPORTUNITY ZONES. COMMUNITY INVESTMENT FUNDAMENTALS OF OPPORTUNITY ZONES AND THE EFFECT OF THE REGULATIONS. Marcy Newman Hart. Introduction.

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ECONOMIC DEVELOPMENT IN OPPORTUNITY ZONES

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  1. 06/26/2019 ECONOMIC DEVELOPMENT IN OPPORTUNITY ZONES

  2. COMMUNITY INVESTMENTFUNDAMENTALS OF OPPORTUNITY ZONES AND THE EFFECT OF THE REGULATIONS Marcy Newman Hart

  3. Introduction • The Qualified Opportunity Zone Program was established under The Tax Cuts and Jobs Act, signed into law December 2017 • Program has its roots in prior incentives for Empowerment Zones and New Markets Tax Credits • Only Bi-Partisan legislation (sponsored by Cory Booker and Tim Scott) in The Tax Cuts and Jobs Act

  4. Introduction • Codified in IRC Sections 1400Z-1 and 1400Z-2 • First set of guidance released October 19, 2018 • Second set of guidance released April 17, 2019 • Additional guidance is expected by year end • Promoting investment in “designated census tracts” • Designations have been made in all 50 states- more than 8,700 tracts in all • Heralded as a program with potential to become one of the most impactful federal incentives ever enacted to encourage capital growth

  5. Commonwealth of Pennsylvania Initiatives • https://dced.pa.gov/programs-funding/federal-funding-opportunities/qualified-opportunity-zones/

  6. City Involvement City of Philadelphia is working to promote the OZs • https://www.philadelphiadelivers.com/opportunity-zones

  7. Fundamental Tax Benefits • Deferral- Sale or 2026 • 5 years- 10% elimination of roll-over gain • 7 years-15% elimination of roll-over gain • Deferral Election: IRS Form 8949. Election is filed in the year the Taxpayer would have recognized the capital gain (absent an election) • Gain retains the character that exists on initial date of deferral. Gain taxed at capital gain rates when recognized (not rate in effect when deferred) • Gain Elimination- 10 Year Hold

  8. Fundamental Tax Benefits • Who gets the benefits: • A taxpayer that rolls over long term or short term capital gains within 180 days of realization of gain into a Qualified Opportunity Fund (“QOF”) • Taxpayer includes individuals, corporations, partnerships, other pass-through entities • The taxpayer MUST acquire the interest in the QOF by making a capital contribution to the QOF

  9. Guidance • The Act provided an initial framework • Since enactment, practitioners and industry participants were for the most part sidelined from utilizing the program due to certain ambiguities and open issues • QOF certification, timing of investment, what types of “gain” qualify, “original use”, substantial improvement test- to name a few • Industry had been looking for guidance to address these issues and in October and April Treasury and IRS issued proposed regulations

  10. Guidance • The Proposed Regulations are proposed to be effective date of publication in the Federal Register as final • Generally taxpayers may rely on the provisions of the Proposed Regulations

  11. Qualified Opportunity Funds • OZ Fund Certification • A QOF is self-certified by attaching Form 8966 with the first tax year of the QOF and then filed each year thereafter • To be a QOF must meet three tests on an ongoing basis: • Organizational Test • Purpose Test • Asset Test

  12. QOF Tests • Organization Test: To be a QOF, an entity must be organized as a corporation, or partnership, or LLC treated as a partnership for tax purposes • A pre-existing entity can self-certify and establish an initial date as a QOF • Purpose: Must be formed for the purpose of investing in QOZ Property (Form 8996 will require a description of QOZ business or businesses) • Asset Test: 90% Test

  13. QOZ Property • Stock or Partnership Interest • Business Property • Acquired after Dec 31, 2017 • From an “unrelated party” (no more than 20% common ownership) • Original Use in OZ or QOF “substantially improves”- double basis in any 30 month period • Substantially “all” QOZ Property must be located in OZ

  14. Structure • Direct Investment- in QOF (QOF owns QOF Business) • Investment in QOF that invests in 3rd entity (OZ Business or Property Subsidiary) (QOF owns subsidiary partnership or corporation that conduct QOZ Business) • Subsidiary-70% of its tangible property qualifies as QOZBP: Acquired from unrelated party Original Use or Substantial improvement Substantially all property located within the OZ 50% of gross income is derived from active trade or conduct Substantial amount of intangible property is used in active conduct or busine Less that 5% NQFP NOT a “sin” business • Typically working capital was excluded- now per Regs allowed so long as plan provided to IRS

  15. Examples of Qualifying Subsidiary Businesses • Affordable and market rate housing • Mixed use developments • Retail-grocery stores • Research facilities • Sports facilities • Hotels • Restaurants • Health clinics • Office buildings • Manufacturing

  16. Examples of Businesses that DO NOT QUALIFY • Banks • Branch of existing business (fails 50% test) • Any business if large portion of business is liquor sales

  17. Highlights of Regulations • Operating Businesses • Investor Issues • Fund Operations • Real Estate

  18. Future Proposed Regulations • Interim gains at fund level • Reporting requirements

  19. FOR QUESTIONS ABOUT OPPORTUNITY ZONESPLEASE CONTACT:Marcy Newman HartMNHart@foxrothschild.com

  20. Leslie Smallwood-Lewis

  21. Golaski Labs • Acquisition and rehabilitation of a 25,844 SF former manufacturing facilityon • 0.79 acres of land at 4537 WayneAvenue • Development includes 40,000 SF mixed-use complex with 35high-tech residential rental units occupying 21,000SF • 4Commercialtenantsoccupying19,000SFincludingrestaurant,offices and a world-class multi-cultural innovative and collaborative co-working entrepreneurialnetwork

  22. Golaski Labs – NeighborhoodImpacts • Creating 35 high-tech rental units including 26 market rate units and 9 80% AMI affordable rental units with resident social space and fitnesscenter • Retaining 15 and creating 35 high quality FTE positions with 99% of new positions paying LivingWage • Transit-oriented facility located 2 blocks from Wayne Junction,the • SEPTA Bus Depot and Commuter Railstation

  23. Project Details – CommercialTenants • LaKay Restaurant – 2,500 SF restaurant featuring open kitchen studio/restaurant and community garden operated by famed “Top Chef”, Chef SylvaSenat. • P4 Impact Hub – multi-cultural co-working space to serve as an incubator and training facility for start-ups, early stage and establishedbusinesses. • Innovation Center- a joint venture between The Business Center and Eastern Minority Supplier Development Council to operate a light manufacturing makers'space • Roof Meadow Studio and Roof Meadow Services, Inc. – new headquarters for landscape architecture and civil engineering design firm specializing in greenroofs.

  24. Before… Driving growth to every corner ofPhiladelphia

  25. Driving growth to every corner ofPhiladelphia

  26. After… Driving growth to every corner ofPhiladelphia

  27. Driving growth to every corner ofPhiladelphia

  28. Driving growth to every corner ofPhiladelphia

  29. Financing Structure - NMTC & Opportunity FundInvestment Driving growth to every corner ofPhiladelphia

  30. Sources and Uses

  31. OZ Lessons Learned • OZ Investors still expect a market rate return • The OZ designation has increased the investor pool in marginalized neighborhoods • OZ investment does not “play nice in the sandbox” with NMTCs • The use of Convertible Notes

  32. Panel Discussion Anne Fadullon, Director of Planning and Development, City of Philadelphia Marcy N. Hart Fox Rothschild, LLP Leslie Smallwood-Lewis Mosaic Development Partners Lawrence McComie PIDC Shalimar Thomas North Broad Renaissance

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