Qualified Opportunity Zones Korb Maxwell kmaxwell@polsinelli.com Ruben Alonso ruben@alt-cap.org

AltCap Certified CDFI Kansas City Metro 5X NMTC allocatee ($213MM) $200MM deployed $165MM active portfolio $8MM small business & micro loan portfolio Small business development programs

Why Opportunity Zones and Why Now? 52 million Americans (1 in 6) live in economically distressed communities1 Prosperous Distressed 1 - Source: EIG’s “Distressed Communities Index”

…and distressed communities are being left behind Cumulative change since 20001 1 - Source: EIG’s “Escape Velocity”

Opportunity Zones are an innovative, flexible, and bipartisan solution for catalyzing private sector-led economic growth Opportunity Zones were established by Congress in the Tax Cuts and Jobs Act of 2017. The new provision is based on the bipartisan Investing in Opportunity Act, which was championed by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI) and attracted nearly 100 bipartisan cosponsors. Economic Innovation Group (EIG) originally developed the concept in a 2015 working paper authored by Jared Bernstein and Kevin Hassett.

Opportunity Zones aims to connect low-income communities with much-needed capital Capital – U.S. households and corporations were sitting on an estimated $6.1 trillion in unrealized capital gains at the end of 2017. Connect – Opportunity Zones offer a frictionless way for investors to dedicate all or a portion of their winnings to seeding the next generation of enterprise in distressed communities all across the country. In exchange, investors get a graduated series of federal tax incentives tied to long-term holdings. 1 - Source: EIG analysis of the Federal Reserve’s Survey of Consumer Finances and Financial Accounts of the United States

3 Tax Incentive Benefits Deferral of Capital Gain Partial Exclusion of Deferred Gain Exclusion of Additional Gains Time value of money – Deferral of capital gain lasts until the earlier of: Date the investment is sold or exchanged; or December 31, 2026 Gain recognition in 2026 (or at earlier disposition) Lesser of (i) amount of deferred gain or (ii) current FMV Less: the taxpayer’s basis in the fund Amount excluded: 10% if held for 5 years before 2026 or earlier disposition 15% if held for 7 years before 2026 or earlier disposition If Qualified Opportunity Zone Fund (QOF) interest has been held for 10 years, additional gain realized on disposition of OZ Fund interest (above the amount recognized in 2026) is tax free Presenter: Genni 10-15% 100% Up to 8 years of deferral 5-7 years 10+ years

Key Terms QOZ Qualified Opportunity Zone An economically distressed census tract designated as a QOZ by the U.S. Treasury. QOF Qualified Opportunity Fund An entity classified as a corporation or partnership in which the investors reinvest their capital gains realized in the 180 days prior to the investment. QOZB Qualified Opportunity Zone Business An entity classified as a corporation or partnership that is owned by a QOF that, among other things, operates the qualifying business. Presenter: Genni QOZB Property Qualified Opportunity Zone Business Property Tangible property purchased in 2018 or later from an unrelated party, the property is used within an opportunity zone, and the QOF/QOZB either has the original use or has substantially improved the property.

Basics of Qualified Opportunity Fund (QOF) Timing Assets Testing Types 180 days from date of capital gain event to reinvest into a QOF Fund must hold at least 90% of assets in QOZB Property Can hold qualified property directly, but generally more favorable for Fund to own a QOZB, which is a lower-tier partnership or corporation Twice per year Fund must be domestic corporation or partnership (cannot be a disregarded entity) No limit on the # of QOFs that can be created QOZB Property must be purchased by Fund in 2018 or later for cash. QOF Capital gain realized by flow-through entity (partnership or S corp), owners have additional 180 day window beginning on last day of entity’s taxable year Presenter: Brian Example $10 million sale $10m sale results in $3M gain, only $3M gain needs to be invested to obtain full QOZ benefits For flow-through entity gain, if calendar year partnership sells a capital asset on May 1, 2018, the partnership and the partners have until Oct 28, 2018 to invest. Partners have additional window between Jan 1 and Jun 2019 to invest in QOF No tracing of funds, money used to fund QOF I does not have to be the same money generated in the sale. Unlike a 1031 like-kind exchange, a flow-through entity making the sale does not have to be the entity that reinvests the capital gain proceeds (partners can go their own way).

70% Tangible Property Test Qualified Opportunity Zone Business (QOZB) Tests 70% Tangible Property Test Substantially all (70%) of its tangible property (whether owned or leased) is QOZB Property Intangible Test A substantial portion of its intangible property must be used in the active conduct of its business in an Opportunity Zone Gross Income Test At least 50 percent of its gross income must be derived from the active conduct of a trade or business [in an Opportunity Zone] 5% NQFP Test No more than 5 percent of the average unadjusted basis of its assets may consist of “non-qualified financial property” (NQFP) Presenter: Genni No Sin Business Cannot be a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility, or any store the principal business is the sale of alcoholic beverages for consumption off-premises

Substantially All Test QOZB Property Tests New Property Test 20% Related Party Standard It is acquired by purchase from an unrelated party (using a 20% related party standard) after December 31, 2017 Qualifying Asset Test Original Use: The “original use” in the QOZ commences with the QOZB OR Substantial Improvement: The QOZB substantially improves the property Presenter: Pat Substantially All Test During substantially all of the holding period for such property, substantially all of the use of such property is in an QOZ.

Substantial Improvement Test Original Use “OR” Substantial Improvement Original Use The “original use” in the QOZ commences with the QOZB. or Substantial Improvement Test Property is treated as “substantially improved” if, during any 30-month period beginning after the acquisition of the property, additions to basis of the property exceed an amount equal to the adjusted basis of the property at the beginning of such period. Presenter: Pat Genni, explain the practical application of this. Can get benefit of OZ by selling to a fund and still controlling 20%. Sell building at Business practice of lower cap rate. Land is ignored for purposes of determining substantial improvement. Under a revenue ruling released at the same time as the regulations, the IRS concludes that where there is a purchase of land and an existing building, only the amount allocated to the existing building must be “doubled”

Standard Deal Structure Fund Investors - Non managing members - Sponsor QOZ $$ QOZ $$ QOF I, LLC [DE- LLC] - managing member - JV Partner Can be another fund or fresh equity Presenter: Brian Potential Fees to Affiliated Sponsor: Development Fee: [__]% of total project cost. Acquisition Fee: [__]% of Property Purchase Price. Property Management Fee: Mkt. terms. Asset Management Fee: [__]% of collected gross revenue. Finance Fee: [__]% of aggregate indebtedness. Potential Lender QOZB, LLC [DE – LLC] QOZB Property 13

OZ Incremental Benefit 23.8% Tax Rate 4 Year 5 Year 7 Year 12/31/2026 10 Year Standard After Tax IRR 6.00% Incremental OZ Benefit 1.44% 2.08% 1.95% 1.71% 3.08% OZ Investment IRR 7.44% 8.08% 7.95% 7.71% 9.08% Percentage Increase 24% 35% 32% 29% 51% 1 - Table Source - Novogradac & Company (www.novoco.com/resource-centers/opportunity-zones-resource-center)

Kansas City Opportunity Zone Mapping

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