Opportunity Zones Opportunities + Risks for Municipalities and - PowerPoint PPT Presentation

Opportunity Zones Opportunities + Risks for Municipalities and Elected Officials

OVERVIEW OPPORTUNITY ZONE OVERVIEW 01 CURRENT AND FUTURE 02 DEVELOPMENTS PLAYERS AND PARTICIPANTS 03 BEST PRACTICES FOR MUNICIPALITIES 04 QUESTIONS AND ANSWERS 05

WHAT ARE OPPORTUNITY ZONES? Low income census tracts nominated by governors (& DC's Mayor) and certified by the U.S. Department of the Treasury into which investors can now put capital to work financing new projects and enterprises in exchange for certain federal capital gains tax advantages. The country now has over 8,700 Opportunity Zones in every state and territory.

Who came up with this? SEAN PARKER Venture Capitalist SEN. TIM SCOTT SEN. COREY BOOKER

TAX ADVANTAGES 8 YEARS Deferral of Taxation on Original Gain 15% Step-up in basis on original gain if held for 7 years. 10% if held for 5 years 0% Tax rate on gain from sale of Qualified Opportunity Fund (QOF) held for 10 years

How Big is this? P E O P L E L A N D C E N S U S T R A C T S 31,500,000 12% 8,700 OF THE COUNTRY'S DESIGNATED LAND MASS LIVE IN OPPORTUNITY OPPORTUNITY ZONES ZONES* *56% are minorities

WHERE ARE WE NOW? • First set of proposed regulations issued in October 2018 (likely finalized in February 2019 ) • Second set of proposed regulations expected in February-March 2019 (likely to be finalized by late Q2/early Q3 2019 ) • The proposed regulations’ core provisions are clear enough for fund managers to begin planning and identifying projects • Real estate investments are relatively clear; more clarity is needed on small business investments • The President’s Executive Order creating the White House Opportunity and Revitalization Council directing additional federal resources to Opportunity Zones should push local governments to develop coordinated economic development and Opportunity Zone strategies that align with their federal appropriations agendas

OPPORTUNITIES FOR CITIES ATTRACT CAPITAL AND INVESTMENT INTO 1 UNDERSERVED NEIGHBORHOODS PROVIDE COMPETITIVE ADVANTAGE 2 IN APPLYING FOR FEDERAL FUNDING INCREASE PRODUCTION OF HOUSING, 3 BUSINESS PROPERTY, AND INFRASTRUCTURE INCREASE JOBS & TAX BASE WHILE 4 DECREASING POVERTY

Sample Projects Heflin High School Yards 56 Seattle Industrial B A L T I M O R E , M D H E F L I N , A L A R L I N G T O N , W A Investor : Prudential Financial Investor : Lathan & Coleman Investor : SmartCap Office : 100 , 000 Sf Renovation of a historic high 12 . 5 acre industrial project for Retail : 80 , 000 SF school into an assisted living logistics ad warehousing and memory care center $ 77 Million Phase 1 $ 12 Million $ 10 . 5 Million

RISKS FOR CITIES WE RECOMMEND THAT CITIES DEVELOP STRATEGIES AROUND 1 DISPLACEMENT IN OPPORTUNITY ZONES THAT ARE AT A HEIGHTENED RISK OF GENTRIFICATION BOTH THE DISPLACEMENT AND THE POLITICAL RISKS OF THE 2 PROGRAM STRONGLY SUGGEST TO US THAT EVERY MAJOR CITY PLAY AN AFFIRMATIVE ROLE IN DEVELOPING AND EXECUTING SOME FORM OF AN OPPORTUNITY ZONE STRATEGY AND AN ANTI-DISPLACEMENT STRATEGY INCREASE PRODUCTION OF HOUSING, 3 BUSINESS PROPERTY, AND INFRASTRUCTURE LACK OF AN OPPORTUNITY ZONE STRATEGY LEAVES ANY CITY AT A 4 COMPETITIVE DISADVANTAGE WHEN COMPETING FOR FEDERAL RESOURCES AS THE ADMINISTRATION IS ACTIVELY SEEKING TO DIRECT ADDITIONAL FEDERAL RESOURCES INTO OPPORTUNITY ZONES

POLITICAL RISKS WHAT IF OPPORTUNITY ZONES IN YOUR CITY... transfer w ealth from lando w ners IN COMMUNITIES to OUTSIDE investors ? GENTRIFIC A TION . DISP A CEMENT . EVICTION .

B I S N O W O P P O R T U N I T Y Z O N E F O R U M O C T O B E R 1 6 , 2 0 1 8 W A S H I N G T O N D C -12 PANELISTS "YIELD ENHANCEMENT" -1 WOMAN "OUTSIZE RETURNS" -0 BLACK OR LATINX "COMMUNITY BENEFIT"

CONSIDERATIONS FOR CITIES The current state of play leaves every local government with five key considerations that they have to resolve:

STRATEGY EXECUTION How can governmental entities align existing development incentives with a local OZ strategy? How can the City leverage other federal programs like the New Markets Tax Credit Program and the Low Income Housing Tax Credit in tandem with the Investing in Opportunity Act to make key investments in priority Opportunity Zones Has the City already identified projects that could provide the deal flow necessary to make an Opportunity Fund worth its time? And, is there a process in place to identify future priority projects that could be marketed to Opportunity Funds What’s the best structure to accomplish the Mayor’s affordable housing, community development and economic development goals that also reflects local political realities? How does the City intend to align its OZ strategy with its federal appropriations and federal competitive grant strategies to maximize the impact on the City’s Opportunity Zones?

HOW CAN CITIES LEVERAGE THEIR OPPORTUNITY ZONES? “BIRMINGHAM MODEL”: A MUNICIPALLY-INSPIRED OPPORTUNITY FUND T h i s i s p r i v a t e e n t i t y t h a t i s f u n c t i o n a l l y a p u b l i c - p r i v a t e p a r t n e r s h i p b e t w e e n a p u b l i c e n t i t y ( e . g . t h e C i t y o f B i r m i n g h a m ’ s D e p a r t m e n t o f I n n o v a t i o n a n d E c o n o m i c O p p o r t u n i t y ) a n d t h e F u n d i t s e l f ( w h i c h i n c l u d e s t h e F u n d ’ s i n v e s t m e n t c o m m i t t e e a n d a c o m m u n i t y a d v i s o r y b o a r d ) .

M A N A G E R M O D E L C i t y a n d / o r C i t y - a f f i l i a t e d e n t i t y i s s u e s a c o m p e t i t i v e R F P f o r a m a n a g e r t h a t m a n a g e s t h e F u n d i n c o n s u l t a t i o n w i t h t h e C i t y t o i d e n t i f y p r i o r i t y p r o j e c t s . P r o j e c t m a n a g e r h a n d l e s a l l o t h e r a d m i n i s t r a t i o n o f t h e F u n d . L O U I S V I L L E / E R I E M O D E L C i t y a n d / o r C i t y - a f f i l i a t e d e n t i t y m a r k e t s O p p o r t u n i t y Z o n e p r o p e r t i e s t o O p p o r t u n i t y F u n d s . D O N O T H I N G M O D E L City leaves Opportunity Zone strategy to private funds that constitute a de facto City Opportunity Zone strategy.

RESOURCES E c o n o m i c I n n o v a t i o n G r o u p : h t t p s : / / e i g . o r g F o r b e s : T h r e e b i g t a k e a w a y s f r o m O Z H e a r i n g : h t t p s : / / w w w . f o r b e s . c o m / s i t e s / j o s h u a p o l l a r d / 2 0 1 9 / 0 2 / 2 2 / 3 - b i g - t a k e a w a y s - f r o m - t h e - s t a n d i n g - r o o m - o n l y - h e a r i n g - o n - o p p o r t u n i t y - z o n e s / # 5 1 6 8 7 5 c f 7 8 e 8 K i n d e r R i c e : O p p o r t u n i t y Z o n e s : G e n t r i f i c a t i o n o n S t e r o i d s ? h t t p s : / / k i n d e r . r i c e . e d u / u r b a n e d g e / 2 0 1 9 / 0 2 / 2 0 / o p p o r t u n i t y - z o n e s - g e n t r i f i c a t i o n - s t e r o i d s P e n n s y l v a n i a D C E D : K e y s t o n e O p p o r t u n i t y Z o n e s h t t p s : / / d c e d . p a . g o v / b u s i n e s s - a s s i s t a n c e / k e y s t o n e - o p p o r t u n i t y - z o n e s /

Thank you. Faraji Whalen Robinson Carmen Perkins SouthBanc Civitas Commercial Real Estate Services faraji@southbancventures.com | 202.487.9565 cperkins@civitasre.com| 202.817.2800 Washington D.C. Washington D.C. Jarrod Loadholt Pine Street Strategies jarrod@pinestreetdc.com | 404.275.3099 Atlanta, GA

Appendix Additional Resources

WHAT ARE OPPORTUNITY ZONES? Low income census tracts nominated by governors (& DC's Mayor) and certified by the U.S. Department of the Treasury into which investors can now put capital to work financing new projects and enterprises in exchange for certain federal capital gains tax advantages. The country now has over 8,700 Opportunity Zones in every state and territory.

OPPORTUNITY FUNDS Overview Opportunity Funds are investment vehicles that invest at least 90% of their capital in Qualified Opportunity Zones. The fund model enables investors to pool their resources in Opportunity Zones, increasing the scale of capital going to investments selected by the manager. To capture the potential tax benefits offered by an Opportunity Fund, an investor must invest the gains from a sale of a prior investment (e.g., stock, bonds, real estate, a company) into an Opportunity Fund within 180 days of the sale of that investment. The investor only has to roll in the gain or profits from the sale of the investment, not the original principal of the investment. Moreover, only the taxable gains rolled over into an Opportunity Fund are eligible to receive the tax incentives.

TAX ADVANTAGES 8 YEARS Deferral of Taxation on Original Gain 15% Step-up in basis on original gain if held for 7 years. 10% if held for 5 years 0% Tax rate on gain from sale of Qualified Opportunity Fund (QOF) held for 10 years

HOW MUCH MONEY IS THAT? Potentially, quite a lot. Especially if you hold the investment for the long term, *Example investment assuming a 7% annual return for both traditional and OZ investments from EIG