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

2. https://www. polleverywhere

3. https://www. polleverywhere

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

5. 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

6. 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

7. Commonwealth of Pennsylvania Initiatives
opportunities/qualified-opportunity-zones/

8. City Involvement City of Philadelphia is working to promote the OZs

9. 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 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. Highlights of Regulations
Operating Businesses
Investor Issues
Fund Operations
Real Estate

20. Future Proposed Regulations
Interim gains at fund level
Reporting requirements

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

22. Leslie Smallwood-Lewis

23. 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

24. Golaski Labs – Neighborhood Impacts
Creating 35 high-tech rental units including 26 market rate units and % 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

25. 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.

26. Before…
Driving growth to every corner of Philadelphia

27. Driving growth to every corner of Philadelphia

28. After…
Driving growth to every corner of Philadelphia

29. Driving growth to every corner of Philadelphia

30. Driving growth to every corner of Philadelphia

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

32. 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

33. 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

34. 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