Polsinelli Opportunity Zones Dealmaker Forum

Polsinelli Opportunity Zones Dealmaker Forum

January 9, 2019

Opportunity Zones Basics Panel Members

2

Moderator Korb W. Maxwell, Polsinelli, Opportunity Zones

Speaker S. Patrick O’Bryan

Polsinelli, Tax

Speaker Brian A. Bullard

Polsinelli, Fund Creation

Speaker Genniveve D. Ramsey Polsinelli, Real Estate

3 Tax Incentive Benefits

Deferral of Capital Gain

Partial Exclusion of Deferred Gain

Exclusion of Additional Gains

Time value of money – Deferral of capital gain lasts until the earlier of:

• Date the investment is sold or exchanged; or

• December 31, 2026

Gain recognition in 2026 (or at earlier disposition)

• Lesser of (i) amount of deferred gain or (ii) current FMV

• Less: the taxpayer’s basis in the fund

10-15% Up to 8 years of deferral

Amount excluded: • 10% if held for 5 years

before 2026 or earlier disposition

• 15% if held for 7 years before 2026 or earlier disposition

If Qualified Opportunity Zone Fund (QOF) interest has been held for 10 years, additional gain realized on disposition of OZ Fund interest (above the amount recognized in 2026) is tax free

100%

3

5-7 years 10+ years

Key Terms

Qualified Opportunity Zone

Business Property

Qualified Opportunity Zone

Business

Qualified Opportunity Fund

Tangible property purchased in 2018 or later from an unrelated party, the property is used within an opportunity zone, and the QOF/QOZB either has the original use or has substantially improved the property.

An entity classified as a corporation or partnership that is owned by a QOF that, among other things, operates the qualifying business.

QOF

QOZB

QOZB Property

An entity classified as a corporation or partnership in which the investors reinvest their capital gains realized in the 180 days prior to the investment.

4

Qualified Opportunity Zone QOZ An economically distressed census tract designated as a QOZ by the U.S. Treasury.

Basics of Qualified Opportunity Fund (QOF)

Fund must be domestic corporation or partnership (cannot be a disregarded entity) No limit on the # of QOFs that can be created QOZB Property must be purchased by Fund in 2018 or later for cash.

QOF

Example

Fund must hold at least 90% of assets in QOZB Property Can hold qualified property directly, but generally more favorable for Fund to own a QOZB, which is a lower-tier partnership or corporation

Capital gain realized by flow-through entity (partnership or S corp), owners have additional 180 day window beginning on last day of entity’s taxable year

180 days from date of capital gain event to reinvest into a QOF

Timing Testing Types Assets

Twice per year

$10 million sale • $10m sale results in $3M gain, only $3M gain needs to be invested to obtain full QOZ benefits • For flow-through entity gain, if calendar year partnership sells a capital asset on May 1, 2018, the partnership

and the partners have until Oct 28, 2018 to invest. Partners have additional window between Jan 1 and Jun 2019 to invest in QOF

No tracing of funds, money used to fund QOF I does not have to be the same money generated in the sale.

Unlike a 1031 like-kind exchange, a flow-through entity making the sale does not have to be the entity that reinvests the capital gain proceeds (partners can go their own way).

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Standard Deal Structure

Sponsor Fund Investors - Non managing

members -

JV Partner Can be another fund or fresh

equity

QOF I, LLC [DE- LLC]

- managing member -

QOZB, LLC [DE – LLC]

Potential Fees to Affiliated Sponsor: • Development Fee: [__]% of total project cost. • Acquisition Fee: [__]% of Property Purchase Price. • Property Management Fee: Mkt. terms. • Asset Management Fee: [__]% of collected gross

revenue. • Finance Fee: [__]% of aggregate indebtedness.

Potential Lender

QOZB Property

QOZ $$ QOZ $$

6

You can form your own Fund (sample structure)

Your QOF, LLC [DE- LLC]

- managing member -

Your QOZB, LLC

Your C or S Corp

Potential Fees to Affiliated Sponsor: • Development Fee: [__]% of total project cost. • Acquisition Fee: [__]% of Property Purchase Price. • Property Management Fee: Mkt. terms. • Asset Management Fee: [__]% of collected gross

revenue. • Finance Fee: [__]% of aggregate indebtedness.

Potential Lender

QOZB Property

1% 99%

You

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Capital Gain $$

At least 50 percent of its gross income must be derived from the active conduct of a trade or business [in an Opportunity Zone]

A substantial portion of its intangible property must be used in the active conduct of its business in an Opportunity Zone

70% Tangible Property Test

Intangible Test

Substantially all (70%) of its tangible property (whether owned or leased) is QOZB Property

8

Qualified Opportunity Zone Business (QOZB) Tests

Gross Income Test

No more than 5 percent of the average unadjusted basis of its assets may consist of “non-qualified financial property” (NQFP) 5% NQFP Test

No Sin Business Cannot be a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility, or any store the principal business is the sale of alcoholic beverages for consumption off-premises

QOZB Property Tests

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20% Related Party Standard

Original Use: The “original use” in the QOZ commences with the QOZB

OR

Substantial Improvement: The QOZB substantially improves the property

New Property Test

Qualifying Asset Test

It is acquired by purchase from an unrelated party (using a 20% related party standard) after December 31, 2017

During substantially all of the holding period for such property, substantially all of the use of such property is in an QOZ.

Substantially All Test

New Property and Bad Assets

• Requirement is that QOZB Property must be acquired by QOF/QOZB by purchase from an unrelated party in 2018.

• For property that is currently owned and doesn’t meet these requirements, the conservative approach is to sell property to a QOF/QOZB in which the current owners own 20% or less of QOF/QOZB (including capital and promotes).

• What if more than 20% ownership is desired? The existing property would be a “bad asset”, but the structure can work if the total “bad assets” of a QOZB consist of 30% or less of the total asset mix.

Likely to work for building new building (which would likely be a “good asset”). Rehabilitating existing “bad asset” buildings will likely retain bad asset characterization.

Some technical application issues that we think will be favorably resolved, such as how to value an under construction new building (current value vs. expected completion value) on the first testing date for purposes of the 70% test.

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How Could “Bad” Land Work - Build New Building on Existing Land

• An entity controlled by you acquired the land prior to 2018. One option would be to demolish the existing building (if not already vacant) and construct a new building on the land.

• Because the land was acquired from an entity related to the QOF, the land will be a “bad asset” in the hands of the QOZB.

• The QOZB will construct a new building and will have the “original use” of the new building. Thus, the building is expected to be a “good asset”.

• So long as the building is at least 70% of the value of the QOZB assets, the QOZB should qualify.

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You Land Investors

Land

Prior to 2018

QOF, LLC

QOZB, LLC QOZB purchases land

QOF Investors You

QOZB Property

QOZB builds new building

Current

More than 20%

More than 20%

How Could “Bad” Land Work - Improve Existing Building on Existing Land

• An entity controlled by you acquired the building and land prior to 2018. If the preference is to substantially improve the existing building, then to qualify would require that the QOF not be “related” (with a 20% standard) to the existing owner of the property.

• Goal of this structure would be to capture some of the upside now by selling a QOZ eligible property to other investors, while maintaining a sizable stake in the upside of the project (following substantial improvement) going forward.

12

You Building + Land Investors

Building + Land

More than 20%

Prior to 2018

QOF, LLC

QOZB, LLC QOZB purchases building + land

QOF Investors You

QOZB Property

QOZB substantially improves the existing building

Current

20% or less

Land is ignored for purposes of determining substantial improvement. Under a revenue ruling released at the same time as the regulations, the IRS concludes that where there is a purchase of land and an existing building, only the amount allocated to the existing building must be “doubled”

Property is treated as “substantially improved” if, during any 30-month period beginning after the acquisition of the property, additions to basis of the property exceed an amount equal to the adjusted basis of the property at the beginning of such period.

Original Use

Substantial Improvement Test

The “original use” in the QOZ commences with the QOZB.

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Original Use “OR” Substantial Improvement

or

Fund and Family Office Panel Members

14

Moderator Brian A. Bullard, Polsinelli

Speaker Ruben Alonso

AltCap

Speaker Ryan Anderson

Platform Ventures

Speaker Tim Dunn JE Dunn

Speaker Dave Pavlik

Decennial Group

15

INVESTOR PRESENTATION

DRAFT v2

[Formatting to be updated throughout]

Opportunity Zones Dealmaker

Forum January 9, 2019

Confidential | Not for Redistribution

16

Capital Stack

Agnostic

Middle Market

Focus

Non-Gateway

Markets

1. Mariner Real Estate Management, LLC (“MREM”) changed its name to Platform Investments, LLC as of June 22, 2017. Investment advisory services are provided by Platform Investments, LLC , a wholly

owned subsidiary of Platform Ventures, LLC. Platform Investments, LLC is an SEC registered investment adviser. Registration of an investment adviser does not imply any level of skill or training. To the

extent information in this presentation speaks to date of operations and/or services provided prior to June 22, 2017, the references are to dates of operations and/or services provided by MREM.

2. As of Q3 2018 and includes affiliates that are not registered with the SEC as a Registered Investment Adviser. This does not represent Regulatory Assets Under Management as defined by the SEC.

$1.3b $747m Current Assets

Under

Management2

Equity Deployed

since 20092

Platform Ventures is a real estate investment and advisory company.1

We invest in real estate assets, real estate operating companies, and real estate

technologies.

$15-

$75m

37

States Average Deal

Size

With Assets Purchased2

17

Platform’s Proprietary Technology

• RealtyClub opens the door to registered investment

advisors (RIAs) and their clients to invest in Platform-

approved offerings

• Platform has over 200 advisors and over 1,000 RIA

clients registered on RealtyClub

• The platform streamlines the investment process and

integrates with back-end systems for efficient and

transparent client reporting

• Direct data feeds through Fidelity, Charles

Schwab, TD Ameritrade, and ORION

• The platform also offers insights on real estate tax

strategies and offers one-on-one consulting services

18

Platform’s Opportunity Zone Focus

• Joint ventures with strong local operating partners that can execute the business plan and that have pre-defined projects

• Platform’s Opportunity Zone Funds likely will be centered around “one deal” and will not be commingled with other investments

• Target investment asset classes may include multifamily, student housing, mixed-use development, and office

• Target fund-level Net IRR to investors over 11-year hold: ~10% • Focus on current cash flow (5-6% current distributions) and appropriate leverage

levels

• Platform has identified several potential Opportunity Zone deals

19

Disclosure

This presentation contains confidential, proprietary information, and may not be distributed in whole or in part. It is

intended for informational purposes only and does not constitute legal, tax, or accounting advice or any other advice of

any kind. This presentation does not constitute an offer to sell or a solicitation of an offer to buy any security and may not

be relied upon in connection with the purchase or sale of any security. If any offer of securities is made, it shall be made

pursuant to a formal offering that would contain material information not contained in this presentation and that will

supersede, amend and supplement this information in its entirety.

Investment opportunities are intended for sophisticated investors only as they are speculative and involve a high degree

of risk, which each investor must carefully consider. There can be no assurance that any investment objective will be

achieved. An investor could lose all or a substantial amount of his, her or its investment. Past performance does not

guarantee future results.

Any views expressed herein are for commentary purposes only and do not take into account any individual personal,

financial, or tax considerations. There is no guarantee that the views and opinions expressed herein will come to pass.

This material represents an assessment of the market environment at a specific point in time, is subject to change

without notice, and should not be relied upon by the reader as research or investment advice.

Actual events are difficult to predict, are beyond our control and may differ from those assumed. There can be no

assurance that forward-looking statements will materialize. All forward-looking statements included are based on

information available on the date hereof, and we assume no duty to update any forward-looking statement. No

representation or warranty of any kind, express or implied, is made as to the accuracy or completeness of the estimates,

projections and other information contained in this presentation, and nothing contained in this presentation shall be relied

upon as a promise or representation whether as to the past or future performance.

Net fund-level returns are calculated net of all fees and expenses (e.g., management fees, administration fees, etc.) and

carried interest. With regard to all projected performance numbers included herein, actual returns will vary from the

estimates and/or projections and variations may be significant.

20

4220 Shawnee Mission Pkwy, Suite 200 B

Fairway, KS 66205

www.platformv.com

(913) 229-9650 | [email protected]

AltCap

• Kansas City metro serving certified CDFI • 5X NMTC allocattee ($213M since 2008)

High performing NMTC investment portfolio in LIC (~$150M in 2018)

— Real estate — Operating businesses

• $8M in small business/micro loans in LIC since 2015 (<.3% default rate)

• Family of Opportunity Funds planned starting in early 2019 Metro focused Double bottom line investment strategy Uniquely positioned to offer complete investment platform

JE Dunn

Rio Nuevo 12-story mixed use project in Arizona • Office Space: 150,000 SF • Retail Space: 30,000 SF • Parking Stalls: 350

$70 million total project size Located within Opportunity Zone

Decennial Group

WHY INVEST WITH DECENNIAL?

Decennial Group’s investment strategy for Opportunity Fund I will include investing more than $500 million of equity into large-scale multiple-asset community redevelopments, standalone investments across asset types, and synchronized renewable energy investments.

EXPERIENCE The best QOZ investments will take specialized experience across numerous disciplines. Decennial Group is a developer-led fund with more than 100 years of combined experience, much of that in the same communities now designated as QOZ. EXECUTION Our leadership team has committed more than $1 billion of capital to real estate investments in numerous asset types and across the nation, with a blended IRR of 28% and MIC of more than 2. ENHANCED MODEL We have implemented numerous strategic and tactical initiatives at the fund and deal level to maximize return for our investors without increasing risk, including additional tranches of low cost capital, accretive to fund equity. ENERGY (RENEWABLE & SUSTAINABLE) Decennial Group will employ a synchronized energy investment strategy that will benefit the real estate investments by increasing NOI, enhancing tax structure, creating social impact value and adding marketing benefits. EXCLUSIVITY (DEAL FLOW & PARTNERS) Our team has forged numerous partnership across the nation that are delivering exclusive, proprietary and off market investment opportunities that will only be available to the Decennial Group.

Decennial Group

Overview of Qualifications

Collectively, the Decennial team has over 100 years of real estate development experience and has committed more than $1 billion of capital to real estate investments across the US. Many of those years and much of that capital focused on areas that would qualify as Qualified Opportunity Zones today. The team’s diverse skill set brings a wide range of tools to the investment process, ensuring that each investment opportunity is thoroughly vetted by our many different perspectives. Across the team our members have: • DEVELOPED over $3 billion of real estate projects across the US • INVESTED over $1 billion of capital across the US, consistently realizing above market

return • MANAGED a $2.8 billion portfolio with more than 550 assets and 2500 tenants • OPERATED over 45 million square feet of commercial real estate across the US • BROKERED and sold more than $2 billion in real estate across the US In addition, our leadership team has: • Advised on some of the largest and most complex public purpose asset financings in the

US. • Innovated new investment structures in the real estate and renewable energy sectors.

Fund and Family Office Panel Discussion

Developer Panel Members

29

Moderator Marcus G. Abbott, Polsinelli

Speaker Hunter Harris

LANE4 Property Group

Speaker Mark Pomerenke

NorthPoint Development

Speaker John McGurk

Milhaus

Speaker Jason Swords

Sunflower Development Group

NorthPoint Development

R E C E N T P R O J E C T S

39RAINBOW

NORTHWOOD COMMUNITY LIBRARY

HOME2 SUITES


WHERE ARE WE?

OUR OFFICES MILHAUS PROJECTS

CURRENT OPERATIONS

1

Indianapolis Milwaukee

Corporate Headquarters

460 Virginia Avenue

Indianapolis, IN 46203

(317) 226-9500

Pittsburgh

Indianapolis

Cincinnati

2 Kansas City

Kansas City 2800 McGee Trafficway

Kansas City, MO 64108

(816) 564-3768 Memphis

Oklahoma City

3

Pittsburgh 125 39th Street

Pittsburgh, PA 15201

(412) 478-3378

Tampa / St. Pete

4 Bonita Springs

Tampa 1919 E. 6th Avenue

Tampa, FL 33605

(813) 361-8492

Milhaus

Milhaus Kansas City Projects

GALLERIE 2705 McGee Trafficway • Residential: 361 Apartments • Commercial: 7,100 SF • Capital Providers: Stepstone Real Estate • Lender: BMO

GALLERIE II 27TH & McGee Trafficway • Residential: 57 Apartments • Capital Providers: Stepstone Real Estate • Lender: First Merchants Bank

Milhaus Kansas City Projects

MARCATO 2697 Troost Avenue • Residential: 186 Apartments • Commercial: 10,000 SF • Capital Providers: Wolverton Capital

Partners • Lender: First Merchants Bank

ARTISTRY KC 19TH & Oak Street • Residential: 341 Apartments • Commercial: 11,500 SF • Capital Providers: Crossharbor • Lender: UMB & First Midwest

We transform historic spaces into modern destinations. Sunflower Development Group is an accomplished real estate developer

committed to preserving our communities’ history while planning for their future. Where others see blight or neglect, we see opportunity to

improve lives and create community.

Real Estate Development • Historic Renovation +

Adaptive Reuse • Hotel Development • Residential Development • Urban Infill • Commercial Development

Tax Credit Consulting • Historic Tax Credits • Low Income Housing Tax

Credits • New Market Tax Credits

Real Estate Consulting • Owners Representation • Hotel Development

Consulting

Sunflower Development Group

American Electric Lofts

302 N. 3rd Street St. Joseph, MO

• 137 Market Rate Apartment Units

• 12,000 SF Retail

• 7 Stories Above Grade & Walkout Below Grade

• 1.22 Acres

• 140 Parking Stalls

• $39.75mm Total Development Cost

• $12.95mm State & Federal Tax Credits

• $8mm Equity Raise

• Ideal Ten Year Hold

• Excellent Rent Growth Potential Over Hold

Developer Panel Discussion

Thank you

Please visit us at opportunityzones.polsinelli.com for more information on how to get connected to

our network and resource library

Polsinelli PC, Polsinelli LLP in California | polsinelli.com

Polsinelli PC provides this material for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship.

Polsinelli is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements.

© 2018 Polsinelli® is a registered trademark of Polsinelli PC. In California, Polsinelli LLP.

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Polsinelli Opportunity Zones Dealmaker Forum

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