ECONOMIC DEVELOPMENT IN OPPORTUNITY ZONES 06/26/2019 ECONOMIC DEVELOPMENT IN OPPORTUNITY ZONES

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COMMUNITY INVESTMENT FUNDAMENTALS OF OPPORTUNITY ZONES AND THE EFFECT OF THE REGULATIONS Marcy Newman Hart

Introduction The Qualified Opportunity Zone Program was established under The Tax Cuts and Jobs Act, signed into law December 2017 Program has its roots in prior incentives for Empowerment Zones and New Markets Tax Credits Only Bi-Partisan legislation (sponsored by Cory Booker and Tim Scott) in The Tax Cuts and Jobs Act

Introduction Codified in IRC Sections 1400Z-1 and 1400Z-2 First set of guidance released October 19, 2018 Second set of guidance released April 17, 2019 Additional guidance is expected by year end Promoting investment in “designated census tracts” Designations have been made in all 50 states- more than 8,700 tracts in all Heralded as a program with potential to become one of the most impactful federal incentives ever enacted to encourage capital growth

Commonwealth of Pennsylvania Initiatives https://dced.pa.gov/programs-funding/federal-funding- opportunities/qualified-opportunity-zones/

City Involvement City of Philadelphia is working to promote the OZs https://www.philadelphiadelivers.com/opportunity-zones

Fundamental Tax Benefits Deferral- Sale or 2026 5 years- 10% elimination of roll-over gain 7 years-15% elimination of roll-over gain Deferral Election: IRS Form 8949. Election is filed in the year the Taxpayer would have recognized the capital gain (absent an election) Gain retains the character that exists on initial date of deferral. Gain taxed at capital gain rates when recognized (not rate in effect when deferred) Gain Elimination- 10 Year Hold

Fundamental Tax Benefits Who gets the benefits: A taxpayer that rolls over long term or short term capital gains within 180 days of realization of gain into a Qualified Opportunity Fund (“QOF”) Taxpayer includes individuals, corporations, partnerships, other pass-through entities The taxpayer MUST acquire the interest in the QOF by making a capital contribution to the QOF

Guidance The Act provided an initial framework Since enactment, practitioners and industry participants were for the most part sidelined from utilizing the program due to certain ambiguities and open issues QOF certification, timing of investment, what types of “gain” qualify, “original use”, substantial improvement test- to name a few Industry had been looking for guidance to address these issues and in October and April Treasury and IRS issued proposed regulations

Guidance The Proposed Regulations are proposed to be effective date of publication in the Federal Register as final Generally taxpayers may rely on the provisions of the Proposed Regulations

Qualified Opportunity Funds OZ Fund Certification A QOF is self-certified by attaching Form 8966 with the first tax year of the QOF and then filed each year thereafter To be a QOF must meet three tests on an ongoing basis: Organizational Test Purpose Test Asset Test

QOF Tests Organization Test: To be a QOF, an entity must be organized as a corporation, or partnership, or LLC treated as a partnership for tax purposes A pre-existing entity can self-certify and establish an initial date as a QOF Purpose: Must be formed for the purpose of investing in QOZ Property (Form 8996 will require a description of QOZ business or businesses) Asset Test: 90% Test

QOZ Property Stock or Partnership Interest Business Property Acquired after Dec 31, 2017 From an “unrelated party” (no more than 20% common ownership) Original Use in OZ or QOF “substantially improves”- double basis in any 30 month period Substantially “all” QOZ Property must be located in OZ

Structure Direct Investment- in QOF (QOF owns QOF Business) Investment in QOF that invests in 3rd entity (OZ Business or Property Subsidiary) (QOF owns subsidiary partnership or corporation that conduct QOZ Business) Subsidiary-70% of its tangible property qualifies as QOZBP: Acquired from unrelated party Original Use or Substantial improvement Substantially all property located within the OZ 50% of gross income is derived from active trade or conduct Substantial amount of intangible property is used in active conduct or busine Less that 5% NQFP NOT a “sin” business Typically working capital was excluded- now per Regs allowed so long as plan provided to IRS

Examples of Qualifying Subsidiary Businesses Affordable and market rate housing Mixed use developments Retail-grocery stores Research facilities Sports facilities Hotels Restaurants Health clinics Office buildings Manufacturing

Examples of Businesses that DO NOT QUALIFY Banks Branch of existing business (fails 50% test) Any business if large portion of business is liquor sales

Highlights of Regulations Operating Businesses Investor Issues Fund Operations Real Estate

Future Proposed Regulations Interim gains at fund level Reporting requirements

FOR QUESTIONS ABOUT OPPORTUNITY ZONES PLEASE CONTACT: Marcy Newman Hart MNHart@foxrothschild.com

Leslie Smallwood-Lewis

Golaski Labs Acquisition and rehabilitation of a 25,844 SF former manufacturing facility on 0.79 acres of land at 4537 Wayne Avenue Development includes 40,000 SF mixed-use complex with 35 high-tech residential rental units occupying 21,000 SF 4 Commercial tenants occupying 19,000 SF including restaurant, offices and a world-class multi-cultural innovative and collaborative co-working entrepreneurial network

Golaski Labs – Neighborhood Impacts Creating 35 high-tech rental units including 26 market rate units and 9 80% AMI affordable rental units with resident social space and fitness center Retaining 15 and creating 35 high quality FTE positions with 99% of new positions paying Living Wage Transit-oriented facility located 2 blocks from Wayne Junction, the SEPTA Bus Depot and Commuter Rail station

Project Details – Commercial Tenants LaKay Restaurant – 2,500 SF restaurant featuring open kitchen studio/restaurant and community garden operated by famed “Top Chef”, Chef Sylva Senat. P4 Impact Hub – multi-cultural co-working space to serve as an incubator and training facility for start-ups, early stage and established businesses. Innovation Center- a joint venture between The Business Center and Eastern Minority Supplier Development Council to operate a light manufacturing makers' space Roof Meadow Studio and Roof Meadow Services, Inc. – new headquarters for landscape architecture and civil engineering design firm specializing in green roofs.

Before… Driving growth to every corner of Philadelphia

Driving growth to every corner of Philadelphia

After… Driving growth to every corner of Philadelphia

Driving growth to every corner of Philadelphia

Driving growth to every corner of Philadelphia

Financing Structure - NMTC & Opportunity Fund Investment Driving growth to every corner of Philadelphia

Sources and Uses Sources: New Market Tax Credits & US Bank Grant   New Market Tax Credits & US Bank Grant $2,308,200 Golaski Family's Capital Investment $300,000 OZ Investment $397,000 Small Change Investment $575,000 Sponsor's Capital Investment $27,496 Bank Loan $3,957,885 TOTAL $7,565,581 Uses: Land Costs $425,000 Soft Costs $918,584 Financing Costs $1,060,537 Hard Costs $4,911,460 Tenant Fitout $250,000

OZ Lessons Learned OZ Investors still expect a market rate return The OZ designation has increased the investor pool in marginalized neighborhoods OZ investment does not “play nice in the sandbox” with NMTCs The use of Convertible Notes

Panel Discussion Anne Fadullon, Director of Planning and Development, City of Philadelphia Marcy N. Hart Fox Rothschild, LLP Lawrence McComie PIDC Leslie Smallwood-Lewis Mosaic Development Partners Shalimar Thomas North Broad Renaissance

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