Opportunity Zones and the Local Government Role

2/7/2020

OZ - County Attys [email protected] 1

Opportunity Zones and the Local Government Role

Tyler Mulligan

Professor of Public Law & Government

County Attorney Conference

February 7, 2020

Agenda• Basics of Opportunity Zones

– How they work

– What it means for investors

– What it means for counties

• Strategic approaches– General marketing not enough

– “Investment ready” projects needed

• Examine county “toolbox” in Opportunity Zones

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NC Opportunity Zones

• NC Opportunity Zones: 252 • US Opportunity Zones: 8,700 (12% of US census tracts)

Counties with the most OZsMecklenburg 17Wake 13Guilford 12Forsyth 11Cumberland 9Gaston 9Robeson 7Durham 7Rowan 5Pitt 5Edgecombe 5Buncombe 5

Benefits for investors (& counties?)

Investor Benefits County Benefits?

• Possible increased demand for development in OZs

• No funding for infrastructure

• No funding for county-owned facilities

• No funding for county services

• No funding for affordable housing

Immediate capital gains tax deferral

5-year hold for capital gains tax

reduction

10-year hold for capital gains tax

exemption

No goals or regulatory

requirements!

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$(200,000) 5 yr hold $(180,000) $(170,000) $(320,000) $(500,000)

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

OZ Investment Example

Capital Gains Tax Tar Heel Inc. Stock Gains Tar Heel Real Estate Dev. (OZ Investment)

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How the OZ incentive works (for investors)

Sal

e of

Tar

Hee

l Inc

Sto

ck

Cap

ital G

ains

Tax

Due

Sal

e of

OZ

Ass

et $1.6 Mil

Capital Gain

Assumptions:

20% capital

gains tax

10% OZ asset

appreciation

(annual)

X

Tax Free

Observers say that the incentive favors real estate investments

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Why “Investment Ready” is important

• OZ timing– Max benefits if invest by

2019, not much lost if invest by 2021

– Short period to invest cap gains in OZ

• Investor has 180 days to invest in “Opportunity Fund”

• “Opportunity Fund” must hold OZ property for semi-annual 90% test

• OZ designation is not a strategy: Need “investment ready” projects for investors

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General marketing: See any projects ready for investment w/in 180 days?

Authority for General Marketing

• G.S. 158-7.1(a). “Each county and city … is authorized to make appropriations for economic development purposes. Those appropriations must be determined by the governing body … to increase the population, taxable property, agricultural industries, employment, industrial output, or business prospects of the city or county.”

• G.S. 158-7.2: “In the event funds appropriated for the purposes of this Article are turned over to any agency or organization other than the county or city for expenditure, no such expenditure shall be made until the county or city has approved the same, and all such expenditures shall be accounted for by the agency or organization at the end of the fiscal year.”

• Dennis v. City of Raleigh, 253 N.C. 400, 405 (1960) (expenditure for “advertising to promote the public interest and general welfare of the City” serves a public purpose)

but general marketing isn’t enough to attract OZ investment

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Compare to “investment ready” project available at same time

Months of analysis by the School’s DFI. Current status: - MOU signed with market rate developer and affordable housing developer- Tax exempt bond and 4% LIHTC package submitted- Ready to receive OZ investment

Lawful county activities to attract private investment to OZs

(in addition to general marketing)

Organized into a logical framework

(or toolbox)

Toolbox framework explained in more detail in “Development Finance Toolbox” course (and CLE credit).

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Local Government P3 Toolbox

Abate Taxes & Fees

(don’t collect)

Finance and construct

public-ownedfacilities to

support private development

Property Assemblage & Conveyance

Loans/Guarantee(Risk-Adjusted Interest Rate)

Subsidy

Market ParticipantAll Private All Public

Prop Tax Exemptions Common in Other States, Very Limited in NC• “Only the General Assembly

shall … classify property for taxation [and] only on a State-wide basis…”

• “[E]very classification shall be made by general law uniformly applicable in every county, city and town, and other unit of local government.”

• G.S. 105-380: No rebates• Examples of statewide tax

exemptions useful in OZs?

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• Chris McLaughlin blog post: Property Tax Exemptions and Community Economic Development– Charitable exemption (100)

– Historic landmark exclusion (50)

– Brownfield exclusion (90-75-50-30-10)

– Low-income housing appraisal

Tax Exemptions and Exclusions

Fee Waivers

Water and sewer service to be provided by local government at half the usual rate in Opportunity Zones.

Permissible?

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Fee Waivers

• Utilities/ enterprise funds must treat similarly situated customers the same

• Non-utility fees: Reasonable fees to offset cost of administration. Homebuilders Association of Charlotte v. City of Charlotte, 336 N.C. 37 (1994).


Abate Taxes & Fees

(don’t collect)






Subsidy


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What are some examples of public-owned facilities that

support private development?

What are some ways to finance those public-owned facilities?

Supportive public-owned facilities

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Abate Taxes & Fees

(don’t collect)






Equity


Local Govt as Market Participant: Development Powers

• Your governing board wishes to revitalize some structures in (distressed) Opportunity Zones.

• What development powers would the board need (aside from power to tax and power to enter intocontracts)

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Local Govt as Land Bank

•

Powers Depend on PurposeInterstate

Competition

Real Estate

Development

Affordable

Housing for LI

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Powers Depend on PurposeReal Estate

Development• Powers are limited depending on

purpose• Examples:

– Economic development: must hold hearing before acquiring property

– MSD – no power to sell property– In URA, eminent domain only for

blighted parcels

• Constitution prohibits gifts and generally requires “necessity” for assistance to private sector– Maready v. Winston-Salem (1996)– Martin v. N.C. Hous. Corp. (1970)

Multiple Statutes for Development

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Legal concepts in outline

• General marketing of community

• Tax abatement • Fee discounts or waivers• Property acquisition• Construction of public

facilities • Property conveyance• Loans• Equity (partial ownership of

private business)• Give away property or

ownership interest?

National rule

N.C. Constitution

N.C. case law

N.C. statutes


Abate Taxes & Fees

(don’t collect)






Equity


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Property Acquisit. & Assemblage: Value to developer?

Market rate over commercial

Affordable only development

Affordable only development

Convey to developer• Can always use

competitive bidding– High bid = FMV

– No buyer restrictions unless blighted urban redevelopment area

• Private sale (choose buyer) for public purpose– Economic development

– Low-income housing

– Historic preservation

– P3 for public facility

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Public Purpose Required by NC Constitution• “No person … is entitled to …

privileges from the community but in consideration of public services” (no gifts)

• The power of taxation shall be exercised … for public purposes only….”

• “[A] public corporation may contract with and appropriate money to any person, association, or corporation for … public purposes only.”

NO GIFTS

Property Conveyance and“Fair Market Value”

Economic Development “conveyance may not be less than fair market value”

Urban Redevelopment Area

conveyance to charity “shall not be less than the fair market value”

Redevelopment “conveyance shall not be less than the appraised value”

Brumley v. Baxter, 251 N.C. 691, 700 (1945)

Deed invalidated when below FMV conveyance to charitable entity wasnot conditioned on perpetual public use

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Zombie Conveyances• Brumley v. Baxter (1945)

– Conveyed to charity for public purpose– Failed to include reverter back to municipality– Invalidated

• Bagwell v. Town of Brevard (1966)– Inadequate notice– Invalidated

• Barnes v. Nash County (2012) – Economic development acquisition– No public hearing in advance– Challenged by taxpayer– County cured procedural defect– Too late! Company went elsewhere….

• Wells v. City of Wilmington (2015)– Sale to hotel developer at fair market value (FMV)– City adjusted appraisal downward to reflect

conditions that appraiser failed to consider– City’s adjustment was more accurate FMV—upheld

Statutory Authority for Loans• G.S. 160A-503(19): “programs of

assistance and financing, including the making of loans, … in a redevelopment area.”

• G.S. 153A-376: programs “principally for the benefit of low and moderate incomepersons … including … loans, the subsidization of interest payments on loans, and the guaranty of loans….”

• G.S. 157-3(12): “Housing project” shall include “loans, interest supplements and other programs of financial assistance to public or private developers of housing for persons of low income….”

• G.S. 158-7.1(a): broad authority to make appropriations for economic development purposes, to include making “loans for the rehabilitation of commercial or noncommercial historic structures.”

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Practice Tips: Subordinated Loan Program

• Keep bank in the deal!• Form loan committee and/or engage

experts to underwrite loan• Security/collateral: 2nd position lien• Risk-adjusted interest rate

– Loan with lien in 2nd position charges higher interest rate than 1st position loan

– Other terms can be flexible, though risk-taking (longer loan term, interest only) should result in higher interest rate

• Loan forgiveness is unconstitutional in real estate deals—cannot be “necessary”

Equity (partial ownership of private business or property)National rule Generally impermissible

N.C. case law “it is not the function of government to engage in private business”Mitchell v. North Carolina Ind. Dev. Fin. Auth., 273 N.C. 137, 156 (1968)

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Can you give your ownership/ equity away?

Not “necessary” for developers -hotels, office, retail, residential

Real Estate

Development• Cannot be “necessary” (to quote the N.C. Supreme Court). If one developer is interested based on local market conditions, then another can be found to take its place.

• Most developments are financed based on local market conditions and therefore cannot be “lost to other states” (to quote the N.C. Supreme Court).

• The School’s Development Finance Initiative (DFI) attracts interest from multiple developers frequently.

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Statutes cannot be interpreted to mean that gifts may be given

Real Estate

Development• Canon of constitutional avoidance: “a statute . . . should be construed so as to avoid serious doubt as to its constitutionality.”

• Full knowledge of prior law. Legislature assumed to have full knowledge of prior and existing laws—all read together

• No surplusage. Allowing gifts would create end-runs and render irrelevant statutes related to lawful tax exemptions, expenditures, and property conveyances described earlier.

Opportunity Zones: your questions?

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All the Lawful Tools in the Toolbox

All Private• Historic Landmark (there

is no tax exemption for OZ property)

All Public• Park and Greenway• Parking• InfrastructureMarket Participant• FMV Conveyance:

Historic, P3• Seller Financing

https://www.sog.unc.edu/dfi/broughton

HIGH-END RESIDENTIAL/HISTORIC COMMERCIAL

Need help? Pros or Grad StudentsGraduate Student Teams (submit projects online)

2/7/2020


Questions and Comments

Tyler Mulligan

UNC School of Government

CB#3330, Knapp-Sanders Bldg.

Chapel Hill, NC 27599-3330

919-962-0987

[email protected]

Documents

Opportunity Zones and the Local Government Role