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Tax Reform’s Opportunity Zone Incentives: Making Them Work for Indian Country February 15, 2018

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Page 1: Tax Reform’s Opportunity Zone...2018/02/14  · Funds (e.g., basis step-up for appreciation in Opportunity Zone Fund investment over deferred gain amount, resulting in gain exclusion)

Tax Reform’s Opportunity Zone Incentives: Making Them Work for Indian Country

February 15, 2018

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Questions

• Email: [email protected]

OR

• Use the chat feature on the right hand panel of your screen

All presentation materials and the recorded webinar will be emailed to registered attendees.!

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Today’s Presenters

Kathleen M. NillesPartner, Holland & Knight

[email protected]

Kristin A. DeKuiperPartner, Holland & Knight

[email protected]

Nicole M. Elliott Partner, Holland & Knight [email protected]

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• Overview of Opportunity Zone

provisions in the Tax Cuts and Jobs

Act (the “Tax Act”)

• How Opportunity Zones will be

nominated and designated

• How Opportunity Zone Funds may

be formed to direct capital to the

designated zones

• How investors will be able to obtain

tax benefits for making investments

in Opportunity Zones Funds

Today’s Topics

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Overview of Opportunity Zones Concepts and Definitions

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Overview

Key Concepts Underlying Opportunity Zones

• Designed to promote economic recovery by attracting long-term investment capital into economically distressed communities

• Nominated zones must qualify as Low Income Community Census Tracts (LIC) or be contiguous to a LIC Census Tract

• State control—each governor has broad discretion to nominate a certain number of zones (the greater of 25% or 25 zones) from among the many LIC census tracts in each state

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Overview

Key Tax and Investment Concepts • Key Incentive for both corporate and individual investors -- potential deferral and

partial exclusion of capital gain on investment property they want to sell or

liquidate, to extent of capital invested in an Opportunity Zone Fund.

• Additional incentives are available for long-term investments in Opportunity Zone

Funds (e.g., basis step-up for appreciation in Opportunity Zone Fund investment

over deferred gain amount, resulting in gain exclusion).

• Structure of fund may facilitate broad pooling of capital in diverse investments,

but the statute does not require it.

• Fund managers can be private asset managers, Community Development

Financial Institutions (CDFIs), New Markets Tax Credit CDEs, developers, or

government entities, but fund itself must be structured as a taxable corporation

or partnership.

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Overview

Definitions• Opportunity Zones: Census tracts designated as eligible to

receive private investments through Opportunity Zone Funds—generally those qualifying as Low Income Community (LIC) Census Tracts.

• Opportunity Zone Fund: Private investment vehicle, organized as a partnership or corporation and certified by the U.S. Treasury, to deploy capital in Opportunity Zones for eligible uses defined with reference to “Opportunity Zone Property.”

• Opportunity Zone Property: Asset types eligible for investment under the Opportunity Zones Program.

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Overview

Opportunity Zone Program borrows certain concepts from the New Markets Tax Credit (NMTC) program, but is different in many ways:

• Both programs focus on Low Income Community (LIC) Census Tracts.

• However, Opportunity Zone statute is less complex, and it does not yet have the extensive regulations and rules that govern the NMTC or other tax credit programs.

• Like NMTC, U.S. Treasury will exercise a key role in designating Opportunity Zones (once nominated).

• Most likely, U.S. Treasury will also play a primary role in certifying Opportunity Zone Funds.

• Without a doubt, the IRS will audit Opportunity Zone Funds for compliance with rules. There may be periodic reporting requirements.

!

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Overview

How Can Tribes Ensure They Benefit? • Determine whether a particular area the tribe wants to

develop (including for housing, health care facilities, or business operations) is located within or contiguous to a LIC Census Tract.

• Determine the total # of Opportunity Zones that a Governor will be able to nominate.

• Develop the case for why the tribe’s zone(s) should be nominated (e.g., ready work-force, likelihood of business success, complimentary infrastructure investments to be made by tribal government, etc.).

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Nominations and Designations of Opportunity Zones

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Opportunity Zone Steps

Determination Period

Consideration Period

Designation Period

Governor has 90 Days from enactment to nominate (possible 30 day extension).

Treasury has 30 days from submission to approve (possible 30 day extension).

Opportunity Zone designations last for a period of 10 years.

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Getting Nominated

Governor’s Role:Nominate a certain number of Opportunity Zones within 90 days of the enactment of the Tax Cuts and Jobs Act.

March 21

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Determination Period

Consideration Period

Designation Period

Getting Nominated

Governor’s Role:• Should be establishing a process for nominating –

actively soliciting input from tribal leaders and others.

o Ex: Missouri has an RFP process

• Should have a designated point of contact

• Governors will receive directly from U.S. Treasury details on how to nominate census tracts and how to request 30 day extension of nomination period.

• No guidance on what happens if a governor does not submit recommendations.

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Getting Nominated

Determination Period

Consideration Period

Designation Period

Governors may (but are not required by the

statute or current guidance to) consider areas:

• To reinforce state, local, or private development

initiatives to attract investment and foster startup

activity;

• That have demonstrated success in geographically

targeted development programs (Promise Zones, New

Markets Tax Credits, etc.); or

• Have recently experienced significant layoffs due to

business closures or relocations.

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Getting Nominated

Determination Period

Consideration Period

Designation Period

Qualifications:

• Uses the same definition of “Low Income Community (LIC) Census Tract” as the basic NMTC definition.

• Individual poverty rate of at least 20 percent or median family income no greater than 80 percent of the area median.

• Allows 25 percent of a state’s LIC Census Tracts to be designated.

o Exception: Up to 5 percent of the tracts designated could be contiguous instead to designated LIC Census Tracts.

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Getting Nominated

Determination Period

Consideration Period

Designation Period

Census Tract Eligibility Example:

California has 3,512 census tracts eligible• 25% or 878 can be designated

• As many as 44 of these, or 5%, could be eligible due to contiguity; the other 95%, would have to be LIC Census Tracts

Quick Lookup of Total Qualifying TractsNorth Dakota = 45Alaska = 55New York = 2051Florida = 1,699

See: https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx.

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Opportunity Zone Classification Map

Source: Enterprise Community Partners

Track Opportunity Zone DesignationQualifiedQualified due to Contiguity

Determination Period

Consideration Period

Designation Period

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Opportunity Zone Classification Map

Source: Enterprise Community Partners

Track Opportunity Zone DesignationQualifiedQualified due to ContiguityDetermination

Period

Consideration Period

Designation Period

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Next Step: Zone Designation

Determination Period

Consideration Period

Designation Period

• Treasury must approve or provide feedback within 30 days of the Governor’s submission of Opportunity Zones.

• Opportunity Zone designations last for ten years.

Expected that the process for certification will parallel that of the a Community Development Entity (CDE).!

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Formation of Opportunity Zone Funds to Direct Capital to Indian Country

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Types of Investments

Treasury must certify Opportunity Funds:

• Must be organized as a corporation or a partnership

• Must be to invest in Opportunity Zones

• Must hold at least 90 percent of assets in stock or partnership interests in qualified opportunity zone businesses and/or tangible qualified business property

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Types of Investments

Opportunity Funds Could Be:

• Market solution for investors who lack the information to execute investments in rural and low-income communities

• Investment vehicle for a sophisticated corporate or institutional investor

• Combined with a LIHTC, HTC, or NMTC investment

• Single asset investment fund investing in a single project

• Entity that owns and is developing the project or an upper tier fund

No limit on the number of funds that can be created.!

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Types of Investments

Opportunity Funds Must Invest in Opportunity Zone Property:

• Stock in domestic corporation that is a qualified Opportunity Zone Business

• Capital or profits interest in a domestic partnership that is a qualified Opportunity Zone Business

• Tangible property used in an Opportunity Zone in a trade or business of the Opportunity Fund that is the first user of the property or that substantially improves the property

! Must maintain 90 percent of their asset in an Opportunity Zone Property to qualify.

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Types of Investments

Types of Investments:• Qualified Opportunity Zone Stock or Partnership Interest

must be acquired from the corporation or partnership by the Opportunity Fund after December 31, 2017 solely in exchange for cash.

• Must be stock or a partnership interest in a Qualified Opportunity Zone Business.

• During substantially all of the holding period of the stock or partnership interest, the corporation or partnership must continue to qualify as a qualified Opportunity Zone Business.

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Types of Investments

Qualified Opportunity Zone Business Property is tangible property used in a trade or business of the Opportunity if: • It is acquired by purchase (as defined in Section 179(d)(2)

related party rules) after December 31, 2017;

• The original use commences with the qualified Opportunity Fund or the qualified Opportunity Fund substantially improves the property; and

• During substantially all of the holding period for such property, substantially all of the use of such property is in an Opportunity Zone.

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Types of Investment

Qualified Opportunity Zone Business: • A trade or business

• Substantially all of its tangible property (whether owned or leased) is qualified Opportunity Zone Business Property

• Cannot be a golf course, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility, or a liquor store.

• A substantial portion of its intangible property is used in the conduct of its business in an Opportunity Zone

• 50 percent of its gross income from is from the active conduct of a trade or business in an Opportunity Zone

• Less than 5 percent of the average unadjusted basis of its assets consists of non-qualified financial property

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Opportunity Zone Investment Structure 1

Opportunity Fund is the developer of the project and owns the project’s tangible property.!

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Opportunity Zone Investment Structure 2

Opportunity Fund is an Intermediary investment vehicle and owns a partnership interest in the project owner.!

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Tax Benefits for Investors

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Tax Incentives

Temporary Deferral

A temporary deferral of inclusion in taxable income of gains from the sale or exchange of property to the extent of capital invested in an Opportunity Fund.

o Recognized at exit or 12/31/2026 (whichever comes first)

o Opportunity Zone investment is deemed to have zero basis

o The Opportunity Zone investment must be made within 180 days after the sale or exchange that triggered the gain desired to be deferred

Step-Up Basis

A partial step-up in basis for investment in an Opportunity Fund based on holding period.

o 5-year min = increased by 10%

o 7-year min = increased by an addition 5%, for an aggregate of 15%

Permanent Exclusion

A permanent exclusion from taxable income of post-deferral gain from the sale or exchange of an investment in an Opportunity Fund.

o Must be held for at least 10 years

o Exclusion only applies to appreciation/gain above the gain deferral represented by the original investment

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Q&A

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Questions

• Email: [email protected]

OR

• Use the chat feature on the right hand panel of your screen

Page 34: Tax Reform’s Opportunity Zone...2018/02/14  · Funds (e.g., basis step-up for appreciation in Opportunity Zone Fund investment over deferred gain amount, resulting in gain exclusion)

Upcoming Events

NAFOA’s 36th Annual Conference

• New Orleans, LA – April 23-24, 2018

Tribal Financial Manager Certification Program

• Arizona State University – June 12-14, 2018

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Thank you!

All presentation materials and the recorded webinar will be emailed to registered attendees shortly.