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CapZone Impact InvestmentsOpportunity zone solutions
June 2019
• Uses Separately Managed Accounts (SMAs) to match investor requirements with specific opportunities (returns, sectors, ESG+R impact investments, co-investment opportunities)
• Creates Sponsor Special Purpose Vehicles (SPVs) to invest programmatically in Opportunity Zone projects and businesses
• Invests in Proprietary Data & Analytics platform to source & assess deals, ensure compliance, & monitor investments
• Formed as a Qualified Opportunity Fund to generate significant capital gains with superior tax benefits
• Structures scalable investments for investors with embedded capital gains, a$6.1 trillion addressable market
• Invests in key sectors with significant returns: data & analytics, housing & real estate, infrastructure, manufacturing and other job-creating businesses
• Investing in low income communitiesnationally in order to benefit people
• Deploying capital with a social impact that can be measured
• Building resilience for sustainability and future growth
• Building long-term partnerships withcities, towns, rural communities andvarious stakeholders
• Sharing insights and metrics broadly throughout the Opportunity Zone ecosystem
Unique Model That… Connects Profits to Purpose… For Social Impact at Scale…
CapZone Impact Investments LLC is an investment management company founded in May 2018 and established as aQualified Opportunity Fund to capitalize on the capital gains benefits of the national Opportunity Zones programcreated by the Tax Cuts and Jobs Act of 2017.
CapZone connects profits to purpose by bringing together financial, intellectual and human capital to benefit lowincome communities and generate market rate returns through ESG + Resilient investments at scale.
CAPZONE IMPACT INVESTMENTS LLC
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The 2017 Tax Cuts & Jobs Act Created 8,764 Opportunity Zones
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WHAT ARE OPPORTUNITY ZONES?
8,764 Opportunity Zones
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• 8,764 Census Tracts in Low Income Communities, including 1400 universities and 200 military bases (represents 1/8th ofU.S.)
• Selected by Governors in all 50 states, Washington, D.C. and fiveU.S. Territories
• Certified by the IRS as eligible through December 2026 for private capital investments with attractive capital gains treatment
• Geographic boundaries are set andtax benefit will survive subsequentUS Census definitions until 2047
Estimated $6.1 trillion embedded capital gains
HAWAII
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U.S. VIRGIN ISLANDS
PUERTO RICO
GUAM
ALASKA
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Investor Eligibility
Taxpayers who sell appreciated property to non-related parties for CASH, and reinvest gain within 180 days in aQualified Opportunity Fund (“QOF”) that makes investments in opportunity zones, will receive the following taxbenefits (with no dollar limit)
Deferral of Taxable Gain
• Through December 2026
Reduction of Taxable Gain
• 10% to 15% if held for 5 to 7 years
Permanent Exclusion of New Gain
• Investment in QOF held for 10 years
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ELIGIBILITY AND BENEFITS
A temporary deferral of inclusion in taxable income for federal capital gains reinvested into an QOF. The deferred gain must be recognized on the earlier of the date on which the QOF is disposed of or December 31, 2026.
A step-up in basis for capital gains reinvested in QOF. The basis is increased by 10% if the investment in the QOF is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original deferred gain from taxation.
A permanent exclusion from taxable income of capital gains from the sale of the investment in the QOF if the investment is held for at least 10 years.
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Must be certified by the IRS to invest in Qualified Opportunity Zones (QOZ), through self-certification
Must invest 90% of assets in QOZ, either indirectly-held property or equity interests incorporations or partnerships, in each case,acquired after 2017
Tested for compliance every six months
For Qualified OZ Businesses:
• Substantially all (70%) of its tangible property (owned/leased) is in a QOF
• 50% of total gross income is derived from active conduct of its business in QOZ
Private Equity Style Partnerships or REITs
• A national or sector fund that invests in real estate or provides capital to operating businesses located in Opportunity Zones
• Local fund that provides the equity for targeted municipal or regional development
Local Fund
Single Investor Funds
• Fund that serves specific investor in single or few projects
QOF Requirements Examples of QOFs
WHAT ARE QUALIFIED OPPORTUNITY FUNDS (QOFs)?
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EXAMPLES OF QOF FORMATION AND FUNDING STRATEGY7
2019 2020 20212018
Investor Triggered Gain November/December:Sale of existing investment for cash (produces capital gains)
Investor Investment in Qualified Opportunity Fund May/June: (within 180 days)
Investor Investment in QOZB By December:
QOZB Working CapitalFor 31 Months
June 28: Deadline for QOF funded with 2018 K-1 capital gains (180 Days after end of partnership taxable year)
2022
Investors with 2018 K-1 gains May/June:Establishment of QOF investment vehicle,
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$300,000
$350,000
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Investments in Opportunity Zones and OZ BusinessesFar Outpace Traditional Investments
Example:• $100MM Capital
Gains• 20% CG Tax• $30MM in property
improvements
• QOZB Investment of$20
Traditional InvestmentCG
TaxDue
MM $250,000
$200,000
$100MMCapital Gains Triggered
$150,000
$100,000
$20MM QOZB $50,000Investment
$30MM in Improvements
QOFDeferral PeriodEnds
(85% of Deferred CG Tax)
Asset Sale Netof CG Tax
Asset SaleWithno CG TaxDue
Exit at 10Years with No CGTax
Due
~7x Return Tax-Free
24%Improvement In returns
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IRS REGS: GREAT OPPORTUNITY FOR BUSINESSES 9
April 2019 IRS Regulations Update:
Clarifies that Opportunity Zone incentives go beyond Real Estate
New business startups – incubators, accelerators, venture capital and growth capital Corporate finance tool for tax-efficient off-balance sheet financings, mergers, acquisitions and restructurings Relocation of existing businesses and/or operations into Opportunity Zones
Provides wide range of business opportunities
Operational businesses related to real estate strategies Manufacturing, distribution, service businesses Infrastructure – energy/water, renewables, data centers, broadband, rail/transportation facilities Technology, education, food, agricultural, entertainment, hospitality, sports Excludes certain “sin” businesses (country clubs, liquor stores, racetracks etc.) & financial firms
Enhances existing subsidies/tax credits
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OZ equity enhances traditional capital stacks which include typical debt financing OZ incentives overlay but do not replace existing tax code State & local incentives remain available Many states are conforming state capital gains taxes to federal OZ rules and in some cases providing extra incentives
OPPORTUNITY ZONE REGULATIONSBasic Requirements to Become a Qualified Opportunity Zone Business (QOZB)
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Substantially all (70%) of Tangible Property must be QOZ Business Property (“QOZBP”) acquired after December 31, 2017
– Original Use property defined as depreciable for 1st time in QOZ (with exemption for property unused or vacant for 5 years)– Substantial Improvement Test of Non-Original Use Property – 100% improvement (excluding land value) required on asset by
asset basis within 30 months– Market-rate leased property now allowed - No substantial improvement requirement of leased property required unless
related party– Inventory (including in transit) allowed as QOZBP– Real property straddling QOZ may qualify– Relocation of existing business into QOZ may qualify
Substantial portion (40%) of Intangible Property must be used in active conduct of business
At least 50% Gross Income Requirement is from active trade or business (Section 162) in QOZ– Safe Harbor tests based on hours, compensation, headquarters of employees/contractors defined allowing sales to
customers outside of QOZ– Merely entering into triple net lease does not qualify as “active”
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OPPORTUNITY ZONE REGULATIONSKey Considerations for QOZBs
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Limit of 5% of QOZB assets in non-qualified financial property− Safe Harbor for reasonable working capital over 31 months with written plan if invested in cash/equivalents with extensions for government
caused delays− Multiple overlapping or sequential Working Capital applications are possible
Interim sales of QOZBs by QOF is allowed within the 10-year holding period− QOF Investor benefits preserved if reinvested with 12 months− However any taxable gains on QOZB will be owed at time of sale
Inclusion “taxable” and Exclusion “non-taxable” events defined including for conversions, reorganizations and ownership changes− Cash-out refinancings may be non-taxable if they do not exceed investor’s basis− Special Rules for Consolidated Groups− Tax-free merger or consolidation of partnerships (under 708) generally non-taxable− Tax-free merger or consolidation of corporations (under 381) generally non-taxable− Death of QOF owner non-taxable but gift of QOF interests taxable
Anti-Abuse Rule Guidance will be based on facts and circumstances
Reporting and Impact Requirement expected to be increased over time
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LEGAL DISCLAIMERNotice to Potential Opportunity Zone Stakeholders
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TERMS AND CONDITIONSCapZone Impact Investments LLC and its members, officers, directors, owners, employees, agents, and representatives, (collectively “CapZone”) providethis Memorandum (the “Memorandum”) for informational purposes only. Use of the Memorandum and the information contained herein are subjectto these terms of use and all applicable laws.
NO INVESTMENT ADVICEThe Memorandum is for informational purposes only. You should not construe any such information or other material as legal, tax, investment,financial, or other advice. Nothing contained herein constitutes a solicitation, recommendation, endorsement, or offer by CapZone or any third partyservice provider to buy or sell any securities or other financial instruments. CapZone does not make any representation or warranty whatsoeverregarding the accuracy or completeness of the information provided herein. A prospective investor in an Opportunity Zone must make its ownindependent investigations, projections, and conclusions regarding any investment in an Opportunity Zone without reliance on this or any otherconfidential information, written or verbal, from CapZone.
All information in this Memorandum is of a general nature and does not address the circumstances of any particular individual or entity. Nothing in theMemorandum constitutes professional and/or financial advice, nor does any information herein constitute a comprehensive or complete statement ofthe matters discussed or the law relating thereto. CapZone is not a fiduciary by virtue of any person’s use of or access to this Memorandum. You aloneassume the sole responsibility of evaluating the merits and risks associated with the use of any information contained herein before making anydecisions based on such information. In exchange for using the Memorandum, you agree not to hold CapZone, its affiliates or any third party serviceprovider liable for any possible claim for damages arising from any decision you make based on information made available to you herein.
For more information on Opportunity Zones Please visit our website:
www.CapZoneImpactInvestments.com
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