National Housing & Rehabilitation Association Spring Developers Forum May 7-8, 2018 Marina del Rey, CA Sponsors:
Where will “Ozone” capital come from? • Individuals – For individuals, investing in an “Ozone” fund is a superior strategy to Sec. 1031 since it will afford a wider range of eligible investments, potential forgiveness of 15% of the original gain and the potential for tax free appreciation in their Ozone fund investment. The only negative is that the Ozone investment will be limited to the gain being deferred versus 100% of the proceeds from an asset sale – Any losses from the Ozone fund will shelter income being taxed up to the 37% statutory max rate. However, most individuals will be passive investors meaning that any tax losses or credits generated by their investment will be suspended until their investment is disposed of due to the passive activity limitations
Where will Ozone capital come from? • Individuals – We expect that Ozone Funds will be offered to individual investors attracted to the idea of investing in low-income areas and building long-term appreciation on a tax-free basis. Individual investors should consider that their state tax treatment may be different – Given the absence of barriers to entry for Ozone fund sponsors, we can anticipate that this space will attract its share of “bad actors” – Developers that own appreciated assets have a significant opportunity to sell such assets to third parties and invest the gains in a self-directed opportunity fund that invests in a business or real estate project that constitutes qualified Ozone property
Where will Ozone capital come from? • Individuals – Developers that sponsor their own opportunity funds may consider raising capital from “friends and family” or institutional sources in the form of preferred equity. This would allow the developer to retain whatever tax benefits that arise during the operating phase for his/her own account – Developers may also want to consider Ozone projects that qualify for new markets and/or historic rehabilitation tax credits – We expect a variety of managed funds for individual investors will be offered by registered investment advisors
Where will Ozone capital come from? • Banks – Roughly 90% of the equity capital invested in LIHTC projects comes from banks subject to the Community Reinvestment Act and it is likely that Ozone fund investments that finance affordable housing will qualify for “CRA credit” from the banking regulators – However, it appears that most banks do not have capital gains as they are not permitted, for the most part, to own equities – Two important exceptions are banks with investment banking affiliates banks that own older LIHTC investments with large negative capital accounts. Triggering “phantom” capital gains for banks that are planning to make LIHTC investments may make sense
Where will Ozone capital come from? • “C” corporations – Publicly traded companies own lots of appreciated assets and they can be expected to be drawn to Ozone projects. However, most “C” corps will likely be attracted to commercial real estate projects, plant expansion, infrastructure and other investments with higher rates of return than are available in LIHTC investments – Life insurance companies may be a viable alternative capital source because LIHTC investments receive “gentle” risk-based capital treatment and something like 28 life companies were LIHTC investors in 2010 & 2011. As a result, these firms are familiar with the asset class, they like to make large investments and LIHTC projects located in Ozones will offer them premium yields
Where will Ozone capital come from? • Boston Financial plans to introduce a $200mm LIHTC Opportunity Fund in Q2 exclusively for housing credit projects located in opportunity zones anywhere in the U.S. • Please reach out to one of our originators: – West: Roy Faerber (310) 860-4550 Roy.Faerber@bfim.com – Midwest: Thomas Paramore (502) 212-3822 Thomas.Paramore@bfim.com – East: Rob Charest (617) 488-3530 Rob.Charest@bfim.com – Mid-Atlantic: Steve Napolitano (617) 488-3524 Steve.Napolitano@bfim.com
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