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Leveraging Opportunity Zones to Support Regional Economic Development

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During the 2019 NADO Annual Training Conference (October 19 - 22 in Reno, NV), Scott Dadson shared information creating investable communities and how to take advantage of the Opportunity Zone Program.

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Leveraging Opportunity Zones to Support Regional Economic Development

  1. 1. Creating Investable Communities & Opportunity Zones: Local and State Readiness
  2. 2. A Not So Fun fact: “State and local government” is by far the largest economic sector that has never recovered from the 2008 economic crash -- down 71,000 employees since January 2009. That means innovation capital is harder to find. State and Local Fiscal Stress… Sources: BLS, Milken Institute Analysis
  3. 3. 3 Source: Congressional Budget Office, using data from the Office of Management and Budget and the Bureau of the Census. Public Spending on Transportation and Water Infrastructure, by Level of Government, 1956 to 2017
  4. 4. 4Source: Milken Institute Analysis The Context live in economically distressed communities. Between 2000 and 2015, more than half of these communities experienced a decline in both jobs and businesses. three-quarters of net job growth occurred in a narrow selection of metropolitan areas, resulting in inequalities across the country. comes from small businesses, for whom the most important variable for success is access to capital. 52.3M AMERICANS FROM 2010 TO 2016 67% OF JOB GROWTH
  5. 5. 5Copyright 2019 • Opportunity Zones is a new tax incentive-driven initiative -- NOT a program – designed to encourage eligible investors to invest in 8700 US census tracts. • Investor rules have been written –but continue to evolve - and OZ funds are now forming and OZ deals are happening across the country. $63 billion of potential QOF capacity has been announced to date. • Jury is out: OZs could either move billions in new impact investment annually into distressed communities driving job, wealth creation and economic resilience for local residents or promote unwanted investment, gentrification and displacement. Communities have a role to play! • Public sector success using the OZ tool will demand new skill sets for public officials, early engagement and creative partnerships with investors, citizens and key local constituencies. OZ Toplines for the Day
  6. 6. 6 1 Milken Institute does not provide investment advice and any information contained in this document is for informational purposes only and does not constitute financial, accounting, or legal advice. 2 IRS Revenue Guidelines are required for clarification and have yet to be released 3 For a more detailed explanation of Opportunity Zones and Qualified Opportunity Funds, please visit: irs.gov and cdfifund.gov. 4 Kosmont Companies proprietary graphic • Opportunity Funds may provide potential Federal tax incentives to investors (1,2,3) • A temporary capital gains tax deferral for all newly realized capital gains reinvested in an Opportunity Fund, lasting until the investment is sold or December 31, 2026, whichever is sooner • A 10 % basis adjustment on the original capital gains, which can result in tax reductions if the Opportunity Fund investment is held for 5+ years; plus an additional 5 % adjustment if the investment is held for 7+ years • If an investor holds the Opportunity Fund investment for 10+ years, the investor also may permanently avoid capital gains taxes on any proceeds from the Opportunity Fund investment itself How do the Tax Benefits Work? Timeline of tax benefits (4) Realized capital gain 2018 2019 2020 2023 2026 2027 2028 2022 2021 2024 2025 Investment Made into Opportunity Fund Basis increased by 10% on original gain Deferred Fed Tax on original gain due by 12/31/26 Basis increased by 5% on original gain Basis is adjusted to equal Fair Market Value. No tax on Opportunity Fund appreciation
  7. 7. 7Copyright 2019 What Investors Are Looking For… • Investment certainty • Permit delays, regulations, no headline risk. • Acceptable rate of return • That rate depends on the type of investor and the type of deal. An EXIT. • Investors want to know how they get their money back, and when. A PARADIGM CHANGE IN ECONOMIC DEVELOPMENT? “We used to look for communities offering us a tax break. With OZs, we don’t need that. What we need a community that has the infrastructure, community partnerships and talent base in place, or a plan to get that done in the next few years. —Investor
  8. 8. 8 Key Industries 1. Agriculture 2. Aviation/Aerospace 3. Energy/Alternative Energy 4. Entrepreneurship 5. Film/Arts & Entertainment 6. Health Services 7. Hospitality & Tourism 8. Information Technology 9. Manufacturing 10.Science & Technology What is the path forward to launching this “tool kit” in a way that aligns with the timing requirements of the Federal incentives? 3.
  9. 9. 9Copyright 2019 The OZ Acceleration Curve: innovation at scale to attract impact capital and catalyze stronger public sector economic development systems Local Economy Development OZ ReadinessWork to catalyze project innovation Planning & Preparation Project & Pipeline Development Project Acceleration Pre-deal incentives in place to advance high impact transactions Scale up public sector innovation andbreakthrough community partnerships to attract impact capital • OZ Expert (Deal Jockey) Hired • Reporting Framework Established • Framework for High Impact Transactions • Predevelopment Funding Available from State/Philanthropy • Carrots and Sticks for Smart Permitting of Issues Preferred Projects • Community Finance Ecosystem Engaged • Designated Point Person • Deep Community Engagement • Know Your Zones/Zoning/2030 Economy • Promotional Prospectus Done • Inventory of Assets/Current Spending • Gauge Your Capital Access and Entrepreneurship Gaps • OZ-Ready Project Portfolio • Workforce Innovation • Regional-Scale Partnerships • Deal “Warehousing” To Bundle Smaller Projects and Engage Institutional Capital • New Community Finance and Capital Access Structures
  10. 10. 10 Phase 1 Preparation & Planning: Key Takeaways • Put An Integrator on Point, not just your housing person • Don’t go it alone: Need for Community Quarterbacks and Engaging Philanthropy • At Minimum: Check Your Zoning & Codes • Build Out A Prospectus Planning & Preparation OZ ReadinessWork to catalyze project innovation • Designated Point Person • Deep Community Engagement • Know Your Zones/Zoning/2030 Economy • Promotional Prospectus Done • Inventory of Assets/Current Spending
  11. 11. 11 Phase 2 Project Acceleration: Key Takeaways • Hire A Deal Jockey/Screener • Predevelopment/Development Funding: The Critical Move • Investors don’t want to be first money • Address Permitting Issues and Delays • Remember the timelines Project Acceleration Pre-deal incentives in place to advance high impact transactions • Project Finance Expert (Deal Jockey) Hired • Predevelopment Funding Available from State/Philanthropy • Permitting/Regulatory/Reporting Issues Addressed • Preferred Project Incentives Created
  12. 12. 12 Phase 3 Project & Pipeline Development: Emerging Pathways • Regional Partnerships • Cracking the code on public-private investment in infrastructure • Deal warehousing Project & Pipeline Development Scale up public sector innovation andbreakthrough community partnerships to attract impact capital • OZ-Ready Project Portfolio • Long Term Asset Management/Procurement Reforms • Regional-Scale Partnerships/Workforce Innovation • Deal “Warehousing” To Bundle Smaller Projects and Engage Institutional Capital
  13. 13. 13 • Easing local regulatory barriers • Develop incentives to attract and build OZ projects • Ensure project pipeline is fully fledged out • Key Players: US Department of Treasury, HUD, State Governors, State Governments, Local Governments, Government • Providing complimentary debt financing in Opportunity Zones • Key Players: JP Morgan Chase, Wells Fargo, Citi, Bank of America, Morgan Stanley, Credit Suisse, Goldman Sachs Banks • Investing equity capital through received capital gains • Developers investing in low income areas, with the benefit of a tax incentive • Key Players: High Net Worth investors, Family Offices, Developers, Corporates, Industry Private Capital • Enable community engagement to stabilize and sustain struggling neighborhoods • Address community specific needs by supporting efforts at the local level • Partner with public and private entities • Seed initiatives that encourage and leverage private capital investment • Key Players: Milken Institute, Economic Innovation Group, Cal FWD, LISC, Enterprise Community Partners, Kresge Foundation, Rockefeller Foundation, Governance Project, Accelerator for America, EJF Philanthropies, Parker Foundation Non-Profits/ Philanthropy The Opportunity Zone Players
  14. 14. 14Source: Katz, B. (2019). How philanthropies leverage opportunity zones. Knight Foundation. 1. Convene Stakeholders – coordinating efforts within government and across key institutions and sectors 2. Map Assets – supporting design and marketing of OZ Investment Prospectuses to enable effective communication of city/county/state competitive advantages, trigger local partnerships, and identify sound projects prepared for receive capital 3. Build Markets – supporting collection of market data, the conduct of market research, and the provision of patient capital 4. Empower Local Residents – helping residents in/near OZs express preferences, obtain skills, start businesses (improving quality of life) 5. Build Institutions – enhancing capacity of existing public/private/civic organizations, and creating or supporting new institutions/intermediaries that can help cities design, finance, and deliver transformative investments and initiatives 6. Encouraging Innovation – using mechanisms (e.g., challenge grants) to source path breaking ideas around urban stakeholders or push key players to coalesce around coordinated neighborhood investment strategies 7. Sharing information – speeding the process by which innovative strategies, practices, and instruments are captured, codified, and communicated. Role of Philanthropies
  15. 15. 15Source: Novogradac Opportunity Zones Resource Center. State Conformity At present, 46 of 50 states have adopted some form of full or partial tax conformity. Nonconforming states: • California • Mississippi • North Carolina • Massachusetts
  16. 16. Economic Development in Opportunity Zones (infrastructure, housing, jobs, education, health) 16 Opportunity Zones as an Economic Development Tool Public Private Infrastructure, housing, jobs, education, health Housing, commercial, retail Project Pipeline & Deal Flow Community finance, tax credits QOF, CRA, Social Impact Funds Debt, Equity Capital Toolbox Barriers State/Local Regulatory State Taxes Coordination Time
  17. 17. 17 Source: Lincoln Institute of Land Policy. The Land Value Capture Toolbox
  18. 18. 18 Source: Lincoln Institute of Land Policy. The Land Value Capture Toolbox
  19. 19. 19 MI State Approach Framework
  20. 20. 20Source: Novogradac Opportunity Zones Resource Center; Kentucky Red Tape Reduction Initiative. Connecticut • Bill 6552 - An Act Concerning Exemptions from Certain Historic Preservation Requirements • Would allow fewer hurdles to redevelopment of historic properties in OZs in small towns. Would exempt (a) distressed municipalities that have been unable to alter a historic building for five years or more, and (b) individuals who wish to alter a historic building located in an opportunity zone from compliance with the provisions of chapter 97a of general statutes California • SB 25 - California Environmental Quality Act: Projects funded by qualified opportunity zone funds or other public funds • Would streamline environmental review and approval for OZ developments. Establishes expedited judicial review procedures under the California Environmental Quality Act (CEQA) for projects financed in whole or in part by a “qualified opportunity fund” or other specified means and meeting other specified conditions, requiring the courts to resolve lawsuits within 270 days, to the extent feasible. Kentucky • Red Tape Reduction Initiative • Initiative identifies costly, ineffective, or outdated regulations and conducts a thorough review • As of June 2019, of over 4,700+ of KY’s administrative regulations, 628 have been repealed, 693 amended, with 27% of all regulations having been repealed/amended Puerto Rico • S 1147 - Puerto Rico Economic Development Opportunity Zones Development Act of 2018 • Promotes incentives and favorable regulatory environment for OZ projects (e.g., tax credits, tax exemptions, credit priority system, expedited permitting and more) Place-Based OZ Incentives: Streamlining Regulations
  21. 21. 21Source: Novogradac Opportunity Zones Resource Center. Nebraska • LB 87 - Provide funding in opportunity zones designated pursuant to federal law • Legislation that gives OZ developments priority for funds from the state Affordable Housing Trust Fund, as well as the state Site and Building Development Fund, Job Training Cash Fund and Business Innovation Act • Would also make OZ preferred locations for state’s Enterprise Zone Act Maryland • HB 1141 – Qualified Maryland Housing Tax Credit • Would enable the creation of a state affordable housing tax credit effective in 2020 • Would also create a “Qualified Maryland Housing Tax Credit” for properties that qualify for the federal low-income housing tax credit (LIHTC) and are in areas designated as “community revitalization areas,” which include OZs. The bill sets an annual statewide cap of $10 million and no requirement that the development also receive federal LIHTCs California • AB 791 - Income taxes: credits: low-income housing: qualified opportunity zone • Provides a $100 million credit to maintain affordable housing units located in OZs and creates a new Low-Income Housing Tax Credit (LIHTC) set aside to encourage the additional creation of low-income housing units in OZs Place-Based OZ Incentives: Supporting Housing Priorities
  22. 22. 22Source: Novogradac Opportunity Zones Resource Center. Maryland • SB 581 –Economic, Housing, and Community Development Tax Credits – Opportunity Zone Incentives • Establishes the Opportunity Zone Enhancement Program, to be administered by the Department of Commerce • Qualifying businesses investing in projects located in an opportunity zone may qualify for enhanced incentives under the following ​existing MD tax credit programs (1) job creation; (2) One Maryland; (3) enterprise zone; (4) biotechnology investment incentive; (5) cybersecurity investment incentive; and (6) More Jobs for Marylanders Rhode Island • SB 668 – Rhode Island Opportunity Zone Tax Credit and Tax Exemption Act • Legislation to create a 20% tax credit for investments of at least $250,000 in qualified OZ business property in the state • H 5808 – Relating to taxation • Would create a 10% tax credit for OZ investments in Pawtucket and Central Falls, with the QOF required to make a minimum investment of $250,000 to receive the credit Place-Based OZ Incentives: Tax-based Incentives for Business Formation and Job Creation
  23. 23. 23Source: Novogradac Opportunity Zones Resource Center. Ohio • SB 8 – Authorize tax credit for investment • Would amend and enact sections of the Revised Code to authorize tax credits including job creation, job retention, historic preservation and other tax credits for investments in designated Opportunity Zones. Proposed 10% state tax credit for OZs, using existing tax credit availability.SB 8 – Authorize tax credit for investment • HB 727 - Grant income tax credit if invest in an opportunity zone • Authorizes a nonrefundable income tax credit for certain investments (at least $250,000) in an Ohio opportunity zone West Virginia • HB 113 – Personal Income Tax • Would create a decreasing modification for personal income tax and corporation net income tax for income derived from businesses activity in state QOZs Texas • HB 2397 – Tax refunds for business in economic opportunity zone • Franchise tax credit and sales-and-use tax refund for certain businesses that invest in OZs. A 25% credit would be granted for expenses to remodel, rehabilitate, or build a structure in an OZ, or to purchase equipment or machinery for a building in an OZ. This legislation would also allow a one-time 25% credit (or $50,000 credit, whichever is less) for qualifying businesses for expenses involving materials, labor and equipment for structures in OZs Place-Based OZ Incentives: Tax-based Incentives for Business Formation and Job Creation
  24. 24. 24Source: Novogradac Opportunity Zones Resource Center. Texas • HB 1000 – Rural and opportunity funds • To create 25% tax credit for rural OZ investment that would apply to the state insurance tax, since TX has no state income tax. QOFs would be required to have invested at least $100 million in nonpublic companies in OZs or rural cities/counties and there would be a $35 million annual cap • SB 826 – Texas Rural and Opportunity Zones Act • Would create a 25% tax credit against the state insurance tax for credit-eligible capital contributions to a state- approved rural opportunity fund that in turn makes an investment that meets certain job-creation and job-retention standards in a targeted rural area Kentucky • HB 203 – Kentucky Rural Jobs Act • Would provide tax credits for investments in rural counties and federal opportunity zones across Kentucky, with an annual cap of $35 million; State-approved growth funds would require a minimum of $100 million to be invested in targeted areas during first two years, with remaining funds invested over rest of program’s life • Legislation requires 75% of investments to go to small businesses in counties with populations of 50,000 or less Place-Based OZ Incentives: Tax-based Incentives Targeting Rural Areas
  25. 25. 25Source: Novogradac Opportunity Zones Resource Center. Oklahoma • OS 62-690.18 – Priority Enterprise Zones • Department of Commerce will use priority enterprise zones to attract capital to OZs. That allows investors to layer in other incentives with an OZ investment, such as doubling the state investment tax credit, tax increment financing, low interest loans from banks participating in the state program and more Louisiana • HB 585 – Louisiana Act No.251 • Would add buildings in OZs to a list of properties allowed to participate in the state’s restoration tax abatement program, which allows property owners to pay property taxes for five years based on the value of the property for the year before it was improved Vermont • H 442 - Act relating to downtown and village center tax credits in an opportunity zone • Would allow OZ properties to apply for the state Downtown and Village Center Tax Credit twice as often as other projects (annual, rather than biannual, basis). That credit covers 10 percent to 50 percent of eligible rehabilitation expenses Place-Based OZ Incentives: Pairing Existing Incentives
  26. 26. 26Source: Novogradac Opportunity Zones Resource Center; Arizona Commerce Authority. Washington, D.C. • D.C. Law 13-166 – Supermarket Tax Exemption Act of 2000 • Waived certain taxes and fees to supermarkets that locate in specific neighborhoods (Priority Development Areas), encouraging investment in areas lacking access to groceries and fresh food • Benefits (10-year) include real property tax exemption, business license fee exemption, personal property tax exemption, and sales and use tax exemption on building materials necessary for construction Arizona - AZ Commerce Authority Programs • Quality Jobs Tax Credit • Provides up to $9,000 of income or premium tax credits over a three-year period for each net new job to the state and concurrent qualifying capital expenditures • Qualified Facility Tax Credit • Provides refundable income tax credits up to $20,000 per qualifying net-new job to eligible manufacturing companies that invest in one or more qualifying facilities • Job Training Grant • Reimburse a portion of qualifying costs associated with hiring and training of net new employees Place-Based OZ Incentives: Pairing Existing Incentives
  27. 27. 27Copyright 2019 Some Final Questions To Ask: • Should your city or state create its own OZ or parallel pre-development fund to accelerate implementation? • Should state and local partners drive “adjacency strategies” to better link long- term community economic demand to start-up service company investments? • Should your city or state wisely partner with major institutional investors (education, hospitals, military, pension funds) • Should you act and think regionally based on long-term economic demands and shared best practices? • Should you weigh in on a federal OZ fix-it-bill? (to include CDFIs, extend deadline, add back reporting, add wrap around support, disaster zones)
  28. 28. Matt Horton Associate Director, Center for Regional Economics and California Center (310) 570-4617 mhorton@milkeninstitute.org www.milkeninstitute.org

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