OVERVIEW: OPPORTUNITY ZONES JANUARY 9, 2019 · To qualify as an Opportunity Zone Business: Partnership interest or stock acquired in exchange for cash after 12/31/2017 and the business

WWW.ARCAPITAL.COM

A R K A N S A S C O M M U N I T Y & E C O N O M I C D E V E L O P M E N T A L L I A N C E

O V E R V I E W : O P P O R T U N I T Y Z O N E S

J A N U A R Y 9 , 2 0 1 9

Overview: Arkansas Capital Corporation

ARKANSAS CAPITAL CORPORATION 2

ACC: It All Began Over BBQ

3ARKANSAS CAPITAL CORPORATION

Innovative Entity: Private Non Profit Founded in 1957, Not a governmental entity but has a public purpose, working to create and sustain long-term economic development opportunities and helping communities thrive.

Key Founders: Winthrop Rockefeller, John Tyson, Harvey Couch Jr, Charles Murphy, Horace Cabe, John Ed Chambers, Raymond Rebsamen, JA Riggs Jr, William Darby and Robert Young Jr.

Key Partners: Small Business Administration, Department of Treasury CDFI Fund, Department of Agriculture Private Banking Syndicate.

Impact: +$1.5 Billion in capital deployed since 1957 and nearly 10,000 students received entrepreneurship education since 2001. Partners with more than 100 community banks in Arkansas and is ranked consistently as one of the largest SBA and USDA lenders in Arkansas.


Overview:Opportunity Zone Tax Benefit


Challenge •52 million Americans, or 1 in 6, live in distressed communities

•Since 2000 - 450,000 net new businesses created in prosperous zip codes and 80,000 net business closures from distressed zip codes. Business growth is a key to job growth.

•Opportunity Zones encourage capital investment in a concentrated set of distressed tracts to encourage new or expanding business activity.


Opportunity Zone Tax Benefit•Signed into federal law with no appropriations cap as part of the TaxCuts and Jobs Act of 2017.

•Investors currently hold +$2.3 trillion in unrealized capital gains. JointCommittee on Taxation estimates the tax benefit will cost $1.6 billionbetween 2018-2027.

•Encourages long-term equity investments into targeted low-income communities through Opportunity Funds, incentives are tied to the longevity of the investment.


Sends IRS Form 8996 to the Department of Treasury

Investor with Capital Gain elects to invest into OZ Fund,

OZ Fund makes equity investment into eligible project


Qualified Opportunity Zone Property Qualified Opportunity Zone Stock or Qualified Opportunity Zone Partnership Interest

Opportunity Zone Tax Benefit

Don't Forget About Securities Law

Opportunity Fund InvestorsAny individual, corporation, or trust, whether foreign or domestic,

Can defer an unlimited amount of capital gain from the sale or exchange of any property (stock, business assets, personal assets, or any other property) to an unrelated party. Note No direct tracing of the funds which allows for borrowing towards basis.

by investing part or all of the proceeds from such sale or exchange in a ‘‘qualified opportunity fund,’’ during the 180-day period beginning on the date of the sale or exchange.

Only capital gains realized in sales or exchanges on or before December 31, 2026, can be deferred under this program.


What are Opportunity Funds?Any corporation or partnership organized for the purpose of investing in qualified opportunity zone property.

Opportunity Fund self certifies by completing IRS form 8996 and attaching that form to the taxpayer’s federal income tax return for the taxable year.

Fund must invest at least 90% of its assets into eligible Opportunity Zone property. Financial penalties on the unqualified amount for not passing the 90% test.


Qualified Opportunity Fund –Assets TestMust hold at least 90% of assets in QOZP, determined by the average

of the percentage of QOZP held on:

The last day of the first six month period of the fund’s taxable

year, and

The last day of the fund’s taxable year

JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC

June 30th December 31st


90% Testing Key PointsForm 8996 starts the clock for testing.

Funds get a maximum of 6 months to invest but may not be 6 months if say fund was formed in December it would have 1 month.

If the project invested in has asset values reported on their financial statements those values are the ones to be used, if they do not have values then cost accounting is to be used in measuring tangible assets, If values used are projects financial statements that means fair market value is used, (Sample Issues: depreciation, asset impairment, how to measure assets for first six month test if financials prepared annually)

Cash held at the project level may qualify under working capital safe harbor if the project has a written plan that identifies the financial property in the OZ, written schedule consistent with ordinary business operations of the business and the business substantially complies with the schedule and uses the money within a 31 month period.

HEARTLAND RENIASSANCE FUND AN AFFILIATE OF ARKANSAS CAPITAL CORPORATION 12

Opportunity Fund Key Dates 12/31/2019 investment deadline for seven year hold period benefit

13/31/2021 investment deadline for five year hold period benefit

1/1/2027 capital gains need to be recognized

12/31/2028 Opportunity Zone designations expire

1/1/2048 Investment assets need to be disposed of prior to


What Are Opportunity Zones?Arkansas has 85 certified Opportunity Zone Tracts effective until December 31, 2028.

Does not guarantee investment into any designated areas. Funds and investors make their own investment decisions based on the merits of each investment opportunity.

Nationally 11% of all tracts are qualified tracts (9,700 tracts qualified)

Department of Treasury - CDFI Fund has a national mapping tool online https://www.cdfifund.gov/pages/opportunity-zones.aspx


https://www.cdfifund.gov/pages/opportunity-zones.aspx

Arkansas Opportunity Zones


Opportunity Zone PropertyTangible property used in a trade or business if such property

(i) was acquired by purchase from unrelated party after December 31, 2017,

(ii) the original use of such property in the QO Zone commences with the QO Fund or the QO Fund substantially improves the property, QOZBP will be treated as substantially improved by a QO Fund only if during the 30 month period beginning after the date of acquisition, the additions to the basis of such property exceed the adjusted basis of such property at the beginning of the 30 month period.

(iii) substantially all of the use of such property was in a QO Zone during substantially all of the QO Fund’s holding period for the property.


Opportunity Zone BusinessTo qualify as an Opportunity Zone Business:◦ Partnership interest or stock acquired in exchange for cash after 12/31/2017 and

the business was qualified OZ business when the fund acquired equity or interest.◦ substantially all of the tangible assets of the business must be used in an

Opportunity Zone (70% threshold), there is a tangible property safe harbor. ◦ for intangible property no limit stated but intangibles must be used in the active

conduct of a business in the Opportunity Zone. ◦ at least 50% of the gross income earned by the business must be from the active

conduct of a business in the Opportunity Zone.◦ business can hold only a limited amount of cash or other investment assets (5%)

plus reasonable working capital with the working capital safe harbor. IRS guidance does allow for a 31 month safe harbor for cash at the project level in an indirect investment model as long as there is a written plan and the project substantially adheres to the written plan.

◦ No sin businesses under an indirect fund model.


Ineligible Opportunity Zone BusinessesA Qualified Opportunity Zone Business cannot engage in any of the following “sin” businesses: any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, any store the principal business of which is the sale of alcoholic beverages

for consumption off premises.

Note: third party legal professionals have mixed opinions on medial marijuana related facilities would be included in this definition.


Opportunity Zone Benefits Benefits at the federal level include: • tax deferral, • partial “forgiveness” of capital gains, (5 year 10% adjustment / 7 year 15%

adjustment)• possible tax free investment appreciation for qualified investments ( 10

years)


Partial Forgiveness and Forgiveness of Additional Gains

SALE

INVESTMENT

Basis increased by 10% of the deferred gain

Up to 90% taxed

HELD FOR 5 YEARS

Basis increased by 5% of the deferred gain

Up to 85% taxed

HELD FOR 7 YEARS

Basis is equal to Fair Market

Value

Forgiveness of gains on

appreciation of investment

Requires an election

HELD FOR 10 YEARS

2018 2019 2020 2021 2023 2024 2025 2026 2027 20282022


2018 2019 2020 2021 2022 2023

Jan. 2, 2018Taxpayer enters into a sale that generates $1.5M of capital gain

June 30, 2018(Within 180 days), Taxpayer contributes entire $1.5M of capital gain to a Qualified Opportunity Fund

• Taxpayer is deemed to have a $0 basis in its QOF investment

• QOF Invests the $1.5M in Qualified Opportunity Zone Property

Sample Investment


2023 2024 2025 2026 2027 2028

June 30, 2023(After 5 years), Taxpayer’s basis in investment in QOF increases from $0 to $150k

June 30, 2025(After 7 years), Taxpayer’s basis in investment in QOF increases from $150k to $225k

Dec. 31, 2026$1.275M of the $1.5M of deferred capital gains are taxed and the basis in QOF investment increases to $1.5M.

June 30, 2028(after 10 years) , Taxpayer sells its investment for $3.0MM. Basis in the investment is deemed to be FMV. The effect is no tax on appreciation in investment.

Sample Investment


Opportunity Zone – 7 Year Hold


Initial Investment $1 million

Sold for $2.5 million

Capital Gain $1.5 million

Capital Gain TaxCap Gain Gains Rate Tax Due$1.5 million * 23.8% = $357K

Post Tax Cash $2.143M

Invest in Opportunity Zone Fund

Hold Period of 7 Years

Basis Adjustment (15%)Cap Gain Basis Adj Basis Adjust$1.5 million * 15% = $225,000

Cap Gain Basis Adj Cap Gain Basis $1.5 million - $225,000 = $1,275,000

Capital Gain TaxCap Gain Gains Rate Tax Due$1.275 million * 23.8% = $303,450

Post Tax Cash $2.196,550

Pay Capital Gains Now

Tax Savings $53,550

Tax Deferral

6.00% 6.00% 6.00% 6.00%

8.08% 7.95% 7.71%9.08%

0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%

10.00%

5 Year 7 Year 12/31/2026 10 Year

Standard After Tax IRR Total IRR

23.8% Tax Rate 5 Year 7 Year 12/31/2026 10 YearStandard After Tax IRR 6.00% 6.00% 6.00% 6.00%Incremental OZ Benefit 2.08% 1.95% 1.71% 3.08%OZ Investment IRR 8.08% 7.95% 7.71% 9.08%Percentage Increase 35% 32% 29% 51%

Opportunity Zone Incremental Benefit


Yield enhancementsFurther yield enhancements may be realized when using Opportunity Zones in combination with other programs such as New Market Tax Credits, Low Income Housing Credits, Historic Tax Credits, Energy related Credits.

Maybe combined with state programs but need guidance from the programs on a case by case based upon the merits of the projects. Examples would include the 33 1/3% investment tax credit and the state capital gains deferral for certain equity investments.


$6,880,000 Loan- $780,000 Credit Pricing Delta-$200,000 CDE Fees= $5,900,000 OZ Deferral

Twinned NMTC Sample


NMTC / QOZF Investor

Investment Fund (Single Member LLC) Third Party Lender

Sub-CDEQualified Opportunity

Zone Fund

QALICB / QOZB

CDE(Managing Member)

NMTC Equity$3,120,000

Loan$6,880,000

$.80 NMTC 100% Interest

QEI$10,000,000

OZ Deferral $5,900,000 OZ Deferral Amount

2% Upfront Fee$200,000

Equity QLICI$9,800,000

6.16% 7 Year After Tax IRR15.94% Increase to IRR from OZ22.10% Total IRR

6.43% 10 Year After Tax IRR19.46% Increase to IRR from OZ25.89% Total IRR

IRR Return Delta

Sample Guidance IssuesState Level

•Capital gains treatment, ex: Arkansas law doesn’t mirror federal law

•Thoughts from your states State Securities Department,

Federal Level

•Several items pending clarification around operating businesses.

•Some items around land development: raw land, triple net leases, residential rental housing

•Second round of IRS guidance to address these points thought to be out Jan 2019 but government shutdown may impact the timing for release of guidance


State Tax ImplicationsOpportunity Zone benefits increase if states conform to the Federal Law

Some states piggy-back off of the current Federal Law but could decouple from OZs ◦ Hawaii decided to decouple◦ North Carolina released a draft bill that would decouple

Some states do not conform to Federal Law but could add OZs at the state level ◦ Colorado is considering a bill to add the OZ benefit at the state level

Some states do not have a state income tax (e.g. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming).

State Tax Implications of an single OZ transaction may include multiple states◦ State where original gain was realized◦ State (s) where the opportunity fund has nexus

Some states are tying other State incentives to opportunity zones◦ Missouri proposed increased cap for state historic credits for properties in OZs


Overview:New Market Tax Credits


NMTC Program Overview

United States Department of Treasury administers the NMTC Program through the Community Development Finance Institutions Fund (CDFI).

Goal is to bring capital to communities that have traditionally had inadequate access to capital.

Allocates $3.5 billion in annual allocation authority to Community Development Entities, awardees have the ability to utilize a 39% federal tax credit to attract pools of capital into projects. CDFI NMTC allocation is not an award cash and credits are assigned to the CDE to allocate the benefit.


Department of Treasury: Community Development Finance Institutions Fund

NMTC AllocationNMTC Application

QALICB (Borrower)

Tax Driven Investors

Return Driven InvestorsCRA Eligible Activity

Community Development

Entity (Lender)

QLICI (Loan)Professional

Service Providers


Arkansas NMTC Tracts


Sample NMTC Transactions


NMTC Ineligible BusinessesExcluded Businesses:◦ Leasing of unimproved real estate or residential rental property where more

than 80% of the gross rental income is from renting dwelling units. ◦ Any trade or business consisting predominantly of the development or

holding of intangibles for sale or license.◦ Any trade or business consisting of the operation of golf courses, country

clubs, massage parlors, race tracks, hot tubs, sun tan facilities, gambling facilities or any stores where the principal place of business is the sale of alcoholic beverages for consumption off premise

◦ Farming Business◦ Governmentally owned facility


General Fee Ranges Estimates (Variable) Third party closing costs (estimates): $250,000 - $350,000

• Per Attorney: $50,000- $150,000 with 3-4 attorneys typical due to legal opinions• Accounting model: $15,000 - $40,000 (transaction specific) and commonly done by either Reznick or

Novogradac• Misc fees: $5,000 – $30,000 (transaction specific)• Economic Impact Study • Traditional Title & Insurance work

Annual fund audits $15,000 per year x 7 years of compliance

CDE fees (industry estimates) :◦ Front end 2% -9% of QEI◦ Ongoing Compliance 75 -100 basis points annually◦ Back End 2% of QEI – 100 % of tax equity


Credit Detail on Sample TransactionInvestors

CDE

Closing Costs

Available Project Subsidy20.15% of Nominal Credit

4% of Nominal Credit

9% of Nominal Credit

5.85% of Nominal Credit

Note: Not HRF Fee Schedule

= 39% Nominal Credit

Financial Returns at 85% pricing

Recapture Risk with Indemnifications to IRR

Normal Business Operating Risk

Legal Opinions Risk

Note: Will be lower % the larger the deal as these costs are largely fixed


TimingDec 2018 – projects will have their summary project materials ready to seek allocation pending Treasury Departments announcement.

Jan – March 2019 – Treasury Department will announce the 2017 NMTC allocation of $3.5 billion. Based on historical averages this will result in +/- 82 groups each receiving around $42.6 million in allocation.

+/- week of announcement summary project materials sent to CDE’s

+/- 2-4 weeks from announcement CDE’s will be selecting projects to support with allocations and performing due diligence

+/- 4-8 weeks from announcement CDE’s will start reserving allocation and trying to begin kick off closing calls

+/- 8-10 weeks from announcement metropolitan allocation will become difficult to find and projects will start becoming back up projects

+/- 12-18 weeks from announcement projects will begin financial closing and start work on deploying funds. Often non metro credits begin to become hard to find as well

– Govt Shutdown?


ACC Team Linda Abrams Tonya BrownMarie Bruno Christa ClarkRush Deacon Shannon GarciaJason Gober Sandra HairstonBert King Leslie LaneGrace Morrissey Richard PhelpsKathleen Purcell Shelby SturdivantSam Walls Becka Webb


LESL IE LAN E O R SAM WALLS

AR KAN SAS C APITAL C O R PO R ATIO N

PH O N E: 501 .374 .9247

EMAIL : LLAN E@ AR C APITAL .C O M / C S3WALLS@ AR C APITAL .CO M

WWW.ARCAPITAL.COM

CONTACT

mailto:[email protected]

mailto:[email protected]

OVERVIEW: OPPORTUNITY ZONES JANUARY 9, 2019 · To qualify as an Opportunity Zone Business: Partnership interest or stock acquired in exchange for cash after 12/31/2017 and the business

Documents