Economy design
Investment Tools
Investment Tools
Investment tools, such as tax credits, opportunity zones and EB-5 play a major role in local economic development efforts
States have created hundreds of programs with both targeted and broad based functions
Federal government has numerous programs which are proving to be very successful
Response to dwindling federal resources for financing development over the past 15 years
Both federal and state govt. recognize power of credits – hundreds of programs
Programs have emerged based on need for niche financing to help capitalize new business ventures or solidify project financing for real estate projects
Investment Tools: Tax Credits
Taxation 101
Taxable Income –Portion of your income that is subject to taxation
Tax Deduction – Allowances that reduce your taxable income
Tax Rate – Rate with which you are taxed
Tax Liability – Amount you owe after taxable income and deductions have
been factored accordingly with your tax income tax rate
Tax Credit – Amount of relief afford to you to offset your tax liability (dollar
for dollar)
Basics of Tax Credits
Investors receive a state/federal credit on their tax liability for qualified cash
investments in projects/deals
Investors must demonstrate, with written proof, that the resource
commitment has been made and in turn the distributor of the tax credit is
only authorized to issue credit based on actual outlays of these resources
Investor then takes the credit on govt. tax liability. Can be personal, business,
corporate or other liability
In some cases, the credit is transferable to others through sale creating a
secondary financial market
Benefits of Tax Credits
Fill a variety of roles in many types of marketplaces (urban, suburban, etc.)
with targeted assistance (rehab, low-income)
Increase ROI for investors
State and local administration and control
Bring many different players to the table beyond traditional sources
Tax Credit Distinctions
Require considerable oversight and understanding for qualified investments
Require high level of disclosure
Performance based tool so must be proved by investor
Easier financing such as loans, grants, bonds, etc., reduce the interest in credits
Misconceptions – often cited as corporate welfare
General lack of application and understanding across the board – little
marketing, few concrete training options, projects hard to define, lack of
federal oversight
New Markets Tax Credits (NMTCs)
New Markets Tax Credits (NMTCs) are federal, dollar-for-dollar tax credits to
assist in the funding of neighborhood changing/job creating commercial real
estate projects and businesses located in low-income census tracts.
According to the GAO, 88% of NMTC investors would not have considered
investing in a project without the NMTC.
Credit is equal to 39% of total qualified investment.
Very complex, lots of terminology, requires considerable legal and accounting
oversight.
NTMCs – What can be Financed?
Charter schools, health care facilities, timberlands, child care providers,
supermarkets, restaurants, museums, hotels
Performing arts centers, pharmacies, convenience stores, manufacturers,
processors, distributors, trucking companies, printing companies
Waste management, renewable energy projects, sporting goods, office
buildings, shopping centers
Substance abuse treatment facilities, recording studios, movie studios,
parking garages, etc., etc.
NMTCs – About the Credit
NMTCs are offered to investors for Qualified Equity Investments (QEIs) in the CDE
Credit equals 39% of amount of QEIs
Credit claimed over 7 Years:
5% in each of the first three years
6% for each of the final four years
QEI must remain invested in the same CDE for a seven year credit period
(“compliance period”)
NMTCs – Simplified Process (silly)
Step 1: Entities apply to the CDFI Fund for CDE certification (rolling basis).
Step 2: CDEs apply competitively to the CDFI Fund for a NMTC allocation.
Step 3: The CDFI Fund allocates NMTCs to CDEs that are selected.
Step 4: CDEs use allocations to offer NMTCs to investors for cash investments
called a Qualified Equity Investment(“QEI”).
Step 5: CDEs use proceeds to make Qualified Low-Income Community
Investments (“QLICIs”) in QALICB.
NMTCs – Simple Example (demonstrative)
CDE receives a $10 million allocation of NMTCs.
This is only allocation authority!
$10 million of allocation x 39% credit = $3.9 million of federal tax credits to be received by the investor.
Single investor makes a $10 million investment in a CDE and receives $3.9 million in tax credits as such.
Year 1 – 5% = .5 million
Year 2 – 5% = .5 million
Year 3 – 5% = .5 million
Year 4 – 6% = .6 million
Year 5 – 6% = .6 million
Year 6 – 6% = .6 million
Year 7 – 6% = .6 million
7 Years – 39% = $3.9 million
Becoming a CDE?
Entities can apply to become a CDE on a rolling basis but process is costly and
complex
CDEs have access to NMTCs through competitive application rounds each year.
Alternatives – Collaborate with an existing CDE that either has allocation or
expects to apply for future allocation.
Pipeline projects and shop around to find CDE that is right fit and can be a
partner in your efforts
Dozens of national CDEs have allocation that is used throughout the country.
https://www.cdfifund.gov/programs-training/Programs/new-markets-tax-credit/Pages/default.aspx
Historic Preservation Tax Credit
20% income tax credit available for the rehabilitation of historic buildings
Credit claimed over 5 year period (2017 law change)
Credit investment qualifies on income-producing buildings that are
determined through the National Park Service (NPS) to be “certified historic
structures”
State Historic Preservation Offices and the NPS review the rehabilitation work
to ensure that it complies with the Secretary’s Standards for Rehabilitation
HTC - Basics
The IRS defines qualified rehabilitation expenses on which the credit may be taken
Owner-occupied residential properties do not qualify for the federal rehabilitation
tax credit
Each year, NPS approves approximately 1200 projects leveraging $6 billion annually
in private investment
State Tax Credit Programs
Every single state and the District of Columbia have tax credit programs
that address a number of different investment areas including
Machinery and equipment
Low-income area investment
Job creation
Commercial revitalization
Historic rehab
Venture capital investment
Brownfields
Targeting hiring
Relocation – manufacturing
Expansion
Critical industries
Capital improvements
Clean energy
Many more
Strategies for Tax Credit Success
Invest in understanding all available credits at both federal and state level
and prepare fact sheets on available credits
Categorize available credits for real estate property for potential investors,
developers – they often do not know if a site is historic, brownfield or eligible
for NMTCs (or state credits)
Engage your financial community – many banks want deal flow and will buy
and sell credits, get them active in available projects
Consider mirroring credit programs that match state/federal programs
Investment Tools: Opportunity Zones
Innovation: Opportunity Zones
8,700 Opportunity Zones across the United States
Nominated by Governors in early 2018. All Opportunity Zones designated by
the U.S. Department of the Treasury as of June 2018.
Opportunity Zones are low-income census tracts eligible for investment from
Opportunity Funds.
Approximately 35 million people live in Opportunity Zones
56% of those residents are minorities
294 Zones are tribal lands
76% are in metropolitan areas
Source: Economic Innovation Group
Basics of OZs
Opportunity Funds can help tap into the estimated $6 trillion market for
unrealized capital gains.
Two main incentives for investors:
1. Defer taxes owed on federal capital gains taxes by moving them into an
Opportunity Fund. If invested for 5 years, receive a 10% reduction in the tax. If
invested for 7 years or more, receive a 15% reduction in the tax.
2. For investments held for 10 years, any earnings realized by an Opportunity Fund
are not subject to federal capital gains taxes.
The belief is that a successful Opportunity Fund will earn enough over the 10
year period to pay off the original capital gains taxes owed and have enough
remaining to realize the tax free earnings.
Basics of OZs
Opportunity Funds must make equity investments.
Investors can capitalize Opportunity Funds using gains realized within 180
days of a sale.
No limit on size of funds, number of funds, or how many Opportunity Zones
the fund invests in.
Opportunity Funds must invest at least 90% of their assets in qualified
investments located in Opportunity Zones.
Opportunity Funds can make equity investments in qualified businesses or real
estate projects.
Opportunity Fund investors are seeking responsible exit solutions in order to
realize the tax free earnings after the 10 year period.
State & Local OZ Strategies
Understand that not every Opportunity Zone will receive investment without local leadership.
Develop a strategy to identify potential investments and make those opportunities known to investors.
Early research is showing that Opportunity Fund capital will meet about 5-30% of capital needed for a project.
Identify local programs available for debt financing or other incentives now and make those resources known.
Identify projects and local economic development strategies and clearly communicate how investors can engage.
Encourage additional reporting requirements from investors in order to access additional incentives or co-investment.
Investment Tools: EB-5
EB-5 Immigrant Investor Program
Federal program established in 1990 to encourage investment in U.S. business
by immigrant investors
Direct foreign investment tool that encourages wealthy foreign individuals to
invest in U.S. based economic development projects that create jobs
If an immigrant investor creates U.S. jobs by his investment, investor receives
a permanent Green Card
Typically, EB-5 investment is raised and generated through an EB-5 Regional
Center that specialize in this program
1,000 regional centers nationwide with varying footprints and focus areas
How EB-5 Works
Investment = $500,000
Location = Targeted Investment Areas (TIA)
Three keys components:
Must create 10 permanent jobs (direct and/or indirect)
Must pay investor 1% minimum return
Must pay investor back after 5+ years
What can it be used for?
Hotels, office, mixed use
Health care, hospitals, universities
Charter schools, mixed-use housing
Film production, manufacturing
Agriculture, food production
Small business loans, revitalization projects
Etc. etc.
EB-5 Details
Regional center program has emerged as strongest option
Investment is a security and regulated by the SEC
Strict laws and enforcement of immigration elements involved
Typical investor is very wealthy and making investment for their
security and future of children
Program under ongoing threat due to rolling re-authorizations status