Understanding Opportunity Zones · primarily on investment strategies that also may provide tax...
Transcript of Understanding Opportunity Zones · primarily on investment strategies that also may provide tax...
Understanding Opportunity Zones
AUGUST 2020
ABOUT US
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The Strategic Group is a boutique firm that focusesprimarily on investment strategies that also mayprovide tax benefits as a source of returns. We workclosely with affluent investors, family offices, trustedadvisors, corporations, and banks.
FOCUS • Opportunity Zones: Deploys targeted investments in real estate and other private equity opportunities
in designated “Opportunity Zones” that can mitigate the taxation of capital gains while futureappreciation of the investment may be tax free.
• Federal & State Tax Credits: Develops, consults, invests, and brokers transferable federal and state taxcredits such as film, low-income housing, historic rehabilitation, renewable energy, and other programsthat mitigate tax liabilities.
• 1031 Qualified Intermediary: Consults and serves as a qualified intermediary for a 1031 tax-freeexchanges, including strategies resulting from partnerships, lease buy-backs, and other complexexchange structures.
• Investment Management: Manages assets in a focused and disciplined manner with risk managementcontrols, strong underwriting fundamentals, and a thoughtful investment philosophy. Structure andmanage multiple private real estate funds, DSTs, and private equity funds.
• Conservation: Consults with landowners looking to conserve their land to promote “green, sustainable,and socially responsible” land ownership.
FIRM HISTORY
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2007 2012 2014 2015 2017 2018 2019
Strategic 1031 Exchange Advisors launched employing industry leading security and transparency.
Strategic Capital Partners consults on green, sustainable, conservation projects.
Strategic Investment Management launches first fund focused in private real estate investments.
Strategic Investment Management launches its second fund with investments across the Southeast.
Strategic launches two more private funds and brings Mike Fields on as Chief Operating Officer to strengthen the Investment Management of the Firm.
Steve Rothschild joins Strategic to further the Firm’s private real estate expertise and launch Strategic Tax Solutions offerings a multitude of tax credits.
Strategic launches multiple Opportunity Zone Funds helping investors and communities.
Opportunity Zones
WHAT IS THE OPPORTUNITY ZONE PROGRAM?
The 2017 Tax Cuts and Jobs Act provides incentives for private investment in certain communities designated as “Opportunity Zones” to encourage job creation and real estate development
WHAT ARE THE TAX BENEFITS FOR INVESTORS?
There are a number of tax benefits to investors who contribute eligible capital gains into a qualified fund, including the deferral of tax, a basis step-up, and tax free appreciation on the investment
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CAPITAL GAIN EVENT
OPPORTUNITY ZONES OVERVIEW
A Taxpayer has 180 days from the date of gain recognition to deploy funds into a qualified opportunity zone fund. If held through a passthrough entity (and such entity does not make an OZ investment itself) then such recognition date is deemed to be 12/31 of the year in which the sales event occurred.
COVID-19 EXTENSION
In response to COVID-19, taxpayers who sold property for an eligible gain and who would have had 180 days to defer that gain that falls after April 1st
of 2020, now have until December 31, 2020 to invest in a qualified opportunity zone fund.
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TAX DEFERRAL
Temporary deferral of taxable income for capital gains reinvested into an Opportunity Fund. 1
TAXREDUCTION
Reduce your taxable capital gains by 10% for holding the investment for 5 years, and an additional 5% reduction (total 15%) if held for 7 years and invested before December 31, 2019.
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TAX-FREEAPPRECIATION
Hold your investment in an Opportunity Fund for 10 years, and all appreciation since initial investment is TAX FREE.
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OPPORTUNITY ZONES OVERVIEW
POTENTIAL TAX BENEFITS
OPPORTUNITY ZONES OVERVIEW
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2020
2024
2026
2027
2029
Roll over gain into Opportunity Zone Fund and defer paying any taxes until the end of 2026
Original capital gain is reduced by 10%
Original capital gain is reduced by another 5% (15% total reduction if invested by 12/31/2019)
Recognize and pay taxes on the deferred gain with your 2026 tax return filing
Capital gain taxes are eliminated for the investment to grow tax-free in the Opportunity Zone Fund going forward
MILESTONES
TAXPAYER RELATED UPDATES FROM FIRST ROUND OF REGULATIONS
• Opportunity Zones are for capital gains only• All capital gains, long-term or short-term• When recognized, the deferred gain includes the same attributes in the year of
inclusion that it would have had if tax on the gain had not been deferred
• Definition of Eligible taxpayers -The guidance confirms that eligible taxpayers who can defer gain under the OZ statute include:
• Individuals• Corporations (including RICs and REITs)• Partnerships• Common trust funds under Section 584• Qualified settlement funds• Disputed ownership funds• Other entities taxable under Section 1.468B
First Round of Regulations – Key Takeaways
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OPPORTUNITY ZONES OVERVIEW
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TAX BOOST ON INVESTMENT
A long-term OZ investor could see a significant increase in net returns by rolling capital gains into a qualified Opportunity Fund.*
*$1 Million investment assuming a hypothetical 7%, 11%, and 15% annual appreciation, and a hold period of 10 years with an initialinvestment made before 12/31/19, when compared to a traditional portfolio with the same return. The example assumes the current20% long-term capital gains rate, and no state taxes. It also assumes, in year seven, the OZ tax was reduced to 85% of the deferredtax owed at the current 20% long-term capital gains rate. This hypothetical example is not indicative of any Fund’s return, and thereare no assurances that a Fund will meet the example above. Past performance is not indicative of future results. Future returns arenot guaranteed and a loss of principal may occur.
After Tax Net Return to Investors, at $1M Investment*
$0
$1
$2
$3
7% Return 11% Return 15% Return
Afte
r Tax
Net
Ret
urn i
n $Mi
llions
Annual Return Expectations
At an annual growth of 15%, an Opportunity Zone investment would return an additional $997,852 to investors, solely off the tax benefit of the program.
Traditional Investment
Opportunity Zone Investment
$758,894
$1,606,923
$2,787,008
$997,852
$589,694
$299,917$458,977
$1,017,229
$1,789,157
ACCESSING OPPORTUNITY ZONES We have seen three primary types of structures emerge for investors, with each having its own advantages and disadvantages:
Fund Types
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1. SINGLE ASSET 2. MULTI-ASSET BLIND POOL
3. MULTI-ASSET KNOWN INVESTMENT
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SINGLE ASSET FUND
Fund Types
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An Opportunity Zone Fund where investors are allocatingto a single project with initial due diligence completed andcan show projected yields, pro-forma, and developmentplans
ADVANTAGES• Investors can have more control on which projects to invest and
also try to align their own risk/return expectations, asset type,location, etc.
• Investment, and subsequent tax situation with a single allocation, ismore straightforward
DISADVANTAGES• Will the investment be held for at least 10 years? If not, which investors/GP decides what the next
investment will be?• Potential for conflicts of interests• No risk diversification, only one sponsor, asset type, geography• Projects will most likely be open for a short period of time• A single developer may not have the resources to keep the fund in compliance and follow regulatory
hurdles
SINGLE ASSET
MULTI-ASSET, BLIND POOL FUND
Fund Types
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An Opportunity Zone Fund where investors are allocating toa fund which will source multiple OZ project investments inthe fund.
ADVANTAGES• Diversification across multiple different investment asset
types, sponsors, and geography• Capable of a larger fund size, with more investors• Additional resources for better oversight and compliance
DISADVANTAGES• Blind pool – unknown risk with multiple investments• Fund must find suitable investments, and complete improvements within a concentrated window, or
the fund (and investors) will be penalized• Requires multiple exits after 10 years, and some investments may not be stabilized/ready for exit• Multiple investments will stabilize returns but also potentially create less opportunity for ultra-high
returns for the portfolio as a whole• Deployment risk with initial and subsequent investments and redeployment of capital over a
minimum of 10 years
MULTI-ASSET BLIND POOL
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OPPORTUNITY ZONES OVERVIEW
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An Opportunity Zone Fund that makes multiple investments across a wide range of properties
ADVANTAGES• Investors have more return potential than a single
asset fund with a buy-and-hold strategy• Potential for more liquidity through multiple
distributions over the life of the fund• Less risk through diversification across multiple
different investment types, and geography• Additional resources for better compliance and
oversight
DISADVANTAGES• Requires multiple exits from multiple properties in 10 years• Multiple investments can stabilize returns but also potentially create a lower
opportunity for ultra-high returns for the portfolio as a whole.
MULTI-ASSET OPPORTUNITY ZONE FUNDOPPORTUNITY ZONES OVERVIEW
* The diagram above is a hypothetical example, and does not represent the performance of any fund. Past performance is not indicative of future results. Future returns are not guaranteed and a loss of principal may occur. There are no assurances that a multi-asset or single-asset fund will make any distributions.
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$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
$7,000,000Multi-Asset Fund
$4,221,302Single-Asset Fund
Assumes a 3x return on each project, with no yield.
Assumes a 3x return on first project, and a 5% yield on the stabilized asset.
MULTI-ASSET VS SINGLE ASSET FUNDGROWTH OF A $1M INVESTMENT
PHASE 1
PHASE 2
PHASE 3
Yr 3: Multi-Asset Fund makes $2M distribution to investors with sale of first project.
Yr 6: Multi-Asset Fund makes $2M distribution to investors with sale of second project.
OPPORTUNITY ZONES OVERVIEW
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Strategic Rivermont OZ Fund
THE MANAGER
A joint venture between the Strategic Group and Rivermont Capital
THE FUND
A diversified fund investing in small and medium sized downtown districts in the eastern United States that are underperforming market potential
COMPETITIVE ADVANTAGE
Public-Private Partnerships that bring municipalities and private investors together that can drive returns and create a higher probability of success
STRATEGIC RIVERMONT OZ FUND
PHILOSOPHY• Invest across 8-10 public-private partnerships diversified by
geography across the eastern United States and asset type • Focus towards capital preservation and appropriate risk-
adjusted returns, with proper checks-and-balances
FOCUS: DOWNTOWN DISTRICTS • Focus on maximizing risk-adjusted returns by investing in
city centers that are strategically located in or near larger, regional markets
• City centers of secondary and tertiary markets are typically overlooked by institutional investors, often resulting in lower costs to entry and greater upside potential
COMPETITIVE ADVANTAGE: PUBLIC-PRIVATE PARTNERSHIPS • Invest alongside municipalities in development projects that
can ensure project completion and help drive additional returns for investors
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Durham, NC is an emerging city that the principals previously redeveloped through a public-private partnership
“Reimagining historic downtowns in smaller cities that show strong
upside potential ”
Public-Private Partnerships
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Public Return
Private Return Private Investment
Public Investment
PUBLIC-PRIVATE PARTNERSHIP
FINDING MUTUAL INTEREST, AND MUTUAL BENEFIT• The Fund will focus its investments in communities that have designated as “Opportunity Zones” and
where the Manager has strong working relationships with the local governments and opportunities exist• Successful redevelopment projects often require nuanced methods of public participation, and the
Manager believes these relationships help frame the investment strategy around many public interests and determine the types of public support that are feasible for each particular investment
• The timing and layering of the public and private investment will maximize value, and the principles of the Manager have significant experience advising public and private sector actors in how to structure these arrangements so as to maximize the benefits to both
Strategic Rivermont OZ Fund: Third Party Oversight
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UNDERWRITING VALIDATION• As part of the investment process, Cushman &Wakefield will
conduct their own diligence on behalf of the Fund for each project • They will validate all the underwriting and assumptions • They will produce a report to the Investment Committee of their
findings
CONSTRUCTION MANAGEMENT • As part of the project management, CBRE will represent the Fund
and oversee the construction process, and construction draws• This will ensure that the project stays compliant with OZ regulations,
and follows the development schedule
Investment Pipeline
NEW STADIUM DEVELOPMENT
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Fayetteville, NC: Mixed-Use development project is comprised of:
• Publicly owned AAA baseball park & parking deck
• Hotel currently anticipated to be a Hyatt Place
• Class-A Office BuildingIRR: +16.4% (Hotel - projected)Equity Multiple: 3.4x (Hotel - projected)Yield: 10% (Hotel - after stabilization)
Manchester, NH: Tru Hotel with city contributing to a parking deck on the bottom 3 floors.
• Hotel is 6 Stories, 126 Guest Suites• Manchester, 40 minutes outside of Boston, is a
becoming a tech-hub with larger employers moving in
IRR: +16.0% (projected)Equity Multiple: 3.5x (projected) Yield: 8% (after stabilization)
HOTEL + CITY FUNDED PARKING DECK
Investment Pipeline*
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Market Product Est. Cost Equity
Wilson, NC
MultifamilyComm-OfficeYMCAStudent Housing
$100M $40M
Fayetteville, NCResidentialHotel $40M $16M
Huntsville, AL Mixed-Use $50M $20M
Gastonia, NCMixed-UseBaseball Stadium $35M $14M
Danville, VA Mixed-Use $10M $4M
Asheville, NC Affordable $30M $12M
Morganton, NC Hotel $20M $8M
Durham, NC Light Industrial $10M $4M
RIPE DEALS - READY FOR INVESTMENT IN 7-18 MONTHS
*Strategic and Rivermont principals’ relationships have provided access to potential investment opportunities that the Manager can further evaluate. The list included here is provided for illustrative purposes only. The Fund may, but is under no obligation to pursue these opportunities and these potential investment may not be representative of all the types of assets that the Fund anticipates acquiring or developing.
Fund Terms
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FUND STRUCTURE
Investor Qualifications Accredited Investors1
Minimum Investment $500,0002
Contributions Accepted Quarterly thru March 31, 20203
Term 10 years4
FEES Placement Fee 2.00%
Management Fee 1.50% of Deployed Capital5
Preferred Return 6.0%
Performance Allocation Investors will receive return of capital, and a 6% preferred return before incentive fee.5 Thereafter Manager’s Fee: 20% after a 6% return (with a 50%/50% catch-up) 35% after a 12% return
1. Accredited Investors as defined by SEC Rule 501 of Regulation D. For example, an investor who is an individual must have a net worth in excess of $1,000,000, and/or an annual income exceeding$200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income in the current year. 2. The Manager reserves the right to accept CapitalContributions of a lesser amount. 3. The Manager retains the right to extended the offering period by two additional six month periods. 4. The Manager retains the right to extend the life of the Fundthrough three additional one year periods, and, in addition, with the approval of the Investor Advisory Committee, for an additional period of up to two years, in two separate, consecutive one-yearperiods. 5. Please see the Fund’s Private Placement Memorandum for a full description of the fees and expenses associated with investing in the Fund.
THE PRESENTATION CONTAINS HIGHLY CONFIDENTIAL INFORMATION. IN ACCEPTING THE PRESENTATION, EACH RECIPIENT AGREES THAT IT WILL (I) NOTCOPY, REPRODUCE OR DISTRIBUTE THE PRESENTATION, IN WHOLE OR IN PART, TO ANY PERSON OR PARTY (INCLUDING ANY EMPLOYEE OF THE RECIPIENTOTHER THAN AN EMPLOYEE OR OTHER REPRESENTATIVE DIRECTLY INVOLVED IN EVALUATING THE FUND) WITHOUT THE PRIOR WRITTEN CONSENT OF THESTRATEGIC GROUP, AND (II) KEEP PERMANENTLY CONFIDENTIAL ALL INFORMATION NOT ALREADY PUBLIC CONTAINED HEREIN.
This is not an offering to subscribe for units in any fund and is intended for informational purposes only. Admission as a Non-Managing Member in the StrategicRivermont OZ Fund (referred to herein as the “Fund”) is not open to the public. An offering can only be made by delivery of the Confidential Private PlacementMemorandum to “qualified purchaser” or “accredited investors” within the meaning of U.S. securities laws. Copies of the Confidential Offering Memorandummay be obtained by contacting The Strategic Group at 404.963.6657. Investment Partnerships are speculative investments and are not suitable for all investors,nor do they represent a complete investment program. The Fund is NOT registered under the Investment Company Act of 1940, as amended, pursuant tocertain exemptions in such Act.
Key Risk Factors: An investment in the Fund and an indirect investment in the Investments involve a high degree of risk, including the risk that the entireamount invested may be lost. Limited Operating History of the Fund; Lack of Operating History of the Advisor Funds; the Fund’s Dependence on the Managerits principals and the Investment Committee; The Fund may have a limited number and type of investments; The Fund may make Investments that may not beadvantageously disposed of prior to the date that the Fund is scheduled to be dissolved; Reliance on Key Personnel of the Manager; Absence of Liability; Anti-Money Laundering; Conflicts of Interest; There are risks related to blind pool offerings; There is very little governmental guidance exists regarding the QualifiedOpportunity Zone Program, and there can be no assurances the Fund meets the Asset Test and may face penalties for lack of compliance. Investors risk the lossof their entire capital. The foregoing risk factors do not purport to be a complete enumeration or explanation of the risks involved in an investment in the Fund.Prospective Non-Managing Members should read the entire Private Placement Memorandum and the Limited Liability Company Agreement of the Fund andconsult with their own advisers before deciding whether to invest in the Fund.
Please carefully consider the investment objectives, risks, and charges and expenses of the Fund before investing. Please read the Private PlacementMemorandum carefully before investing as it contains important information on the investment objectives, composition, fees, charges and expenses, risks,suitability, and tax obligations associated with investing in the Fund. Copies of the Private Placement Memorandum may be obtained by contacting TheStrategic Group at 404.963.6657. Past performance does not guarantee future results.
All securities are offered via Bridge Capital Associates, Inc., a registered broker dealer and member of the Financial Industry Regulatory Authority (FINRA) andthe Securities Investor Protection Corporation (SIPC). Important disclosures may be found at the followingwebsite: www.bridgecapitalassociates.com/disclosures.htm.
Important Disclosures and Key Risk Factors
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404.963.6657
TheStrategicGroup.com
@TheStrategicGrp
The Strategic Group1180 Peachtree St. NE / Suite 3330 / Atlanta Ga 30309