Opportunity Zone Program Overview

Opportunity Zone Program Overview

• 1.
  Opportunity Zones ProgramOverview NYSEDC Long Island Manufacturers' Symposium November 27, 2018 R. Michael N’dolo Vice President
• 2.
  I. Purpose &Tax Benefits II. Definitions & Deal Structure III.OZ Designations on Long Island IV.Example for Manufacturers on LI V. Resources Agenda
• 3.
  Purpose Tax Cuts andJobs Act of 2017 Opportunity Zones Program provides tax benefits to encourage private investment in low income communities
• 4.
  Tax Benefits 1.Defer ExistingGain 2.Reduce Existing Gain 3.Eliminate Future Gain
• 5.
  Tax Benefits 1.Defer ExistingGain The Investor has a pre-existing capital gain. Instead of paying today, pays in 2027 when filing 2026 return. Time-value-of-money (@9% = overall a 50% reduction)
• 6.
  Tax Benefits 2.Reduce ExistingGain The Investor has a pre-existing capital gain. If QOF held at least 7 years, a 15% step-up in basis, therefore a 15% reduction in tax.
• 7.
  Tax Benefits 3.Eliminate FutureGain If the Investor realizes a gain on the OZ investment... Zero tax because basis raises to FMV
• 8.
  Tax Benefits What doesthis mean? IRR could be increased by 2-3 percentage points. e.g. annual return of 8% becomes 11% Marginal project becomes an investment-worthy one.
• 9.
  Definitions and DealStructure QOZ Fund QOZ Business via Partnership or Stock QOZ Business Property $ ??? Investor with a Capital Gain to Shelter $ $ Tax BenefitBusiness investment return
• 10.
  Definitions and DealStructure 1. Qualified Opportunity Zone (QOZ) – Census Tracts as designated by Treasury 2. Qualified Opportunity Fund (QOF) – Investment vehicle taxed as partnership or corporation, formed to invest in qualified OZ property. Self-certifies to IRS and meets tests annually (90% of assets in OZ property). 3. Qualified Opportunity Zone Property (QOZP) – Can be either (a) ownership of stock or partnership interest in a qualified OZ business, or (b) qualified OZ business property 4. Qualified Opportunity Zone Business Property (QOZBP) – tangible property purchased after 2017, either new construction or substantial renovation, used in OZ
• 11.
  Definitions and DealStructure 5. Qualified Opportunity Zone Business (QOZB) – Business in which: a) 70% of tangible property is QOZBP – i.e. construction/renovation after 2017 in an OZ b) 50% of gross income derived from OZ c) “Substantial portion” of intangible property used in the conduct of business d) Less than 5% of property is non-qualified financial property (think: securities, but excludes working capital held as cash or cash-equivalent) e) Not a “sin business”
• 12.
  Designated Census Tractson Long Island Tract # Community 36059517200 City of Glen Cove 36059416500 City of Long Beach 36103122501 Town of Babylon - Wyandanch 36103159103 Town of Brookhaven - North Bellport 36103110902 Town of Huntington 36103146203 Town of Islip - Central Slip 36103169800 Town of Riverhead 36103169704 Town of Riverhead - EPCAL 36059406801 Village of Hempstead 36059406802 Village of Hempstead Long Island Opportunity Zones Source: ESDC Website https://esd.ny.gov/opportunity-zones https://www.novoco.com/
• 13.
  Example Deal forLI Manufacturer 2018: Manufacturer wants to expand, needs to make a $40mm investment in real estate. Investor has a $10mm capital gain from sale of stock in Sep 2018, forms QOF in Dec 2018 and invests $10mm – can now defer tax until Dec 31, 2026 2019-2020: In March 2019, QOF creates RealEstateCo and invests $10mm. RealEstateCo borrows $30mm, buys land, builds $40mm building, leases it to Manufacturer on a gross lease (not NNN)
• 14.
  Example Deal forLI Manufacturer Dec 31, 2026: Investor pays capital gain on only 85% of original gain (i.e. $8.5mm vs $10mm) 2029: Investor sells interests in QOF for large gain. Because held more than 10 years, basis is stepped up to FMV, so gain is zero. No tax due. Return w/o tax benefits = 6%, investor says “no” Return w/tax benefits = 9%, investor says “yes”
• 15.
  Resources Phone: (518) 899-2608x103 Email: michael@camoinassociates.com Web: www.camoinassociates.com Articles and other content: www.camoinassociates.com/navigator CDFA Guidance: www.cdfa.net/cdfa/cdfaweb.nsf/resourcecenters/OZ.html Lists of New York State Opportunity Zones: esd.ny.gov/opportunity-zones Articles, Maps, Content, Investor Fund Lists: www.novoco.com/ R. Michael N’dolo Vice President