Opportunity Zones

A Registered Investment Advisory Firm

Opportunity Zones Patricia Healy, CFA Senior Vice President of Research & Portfolio Manager Patricia.Healy@cumber.com

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Municipal Bonds Credit Quality • Strength of the service area economy – Population growth, income levels, employment levels, diversification of tax payers and employers

• Debt Burden – Debt, Pension and other post employment benefits (OPEB) healthcare

• Financial operations – Balanced budgeting, conservative assumptions, level of fund balance (rainy day fund) diversification of revenue sources, dependence on other entities (state or federal), capital planning, rate raising flexibility

• Management •

Timely budgets, strong fund balance, reasonable increases with public awareness

• New Issues Getting more focus – Cybersecurity – Preparedness for Climate Change ©

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Opportunity Zones • • • • •

Bipartisan effort to encourage investment in underserved communities Finally passed in 2017 as part of TCJA 8700 opportunity zones designated – mostly low income census tracts Real estate related for housing and retail development Investors defer capital gains taxation by investing in Opportunity Funds – 5 years reduce original gain by 10% and if held for 7 years reduce by another 5% so not only is tax on gain deferred the amount of gain invested is reduced for tax purposes – If held for 10 years any gain on the investment in the fund is exempt

• Risks – A long time to have money tied up – Subject to changes in tax rate law – Real estate is a risky asset class

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Opportunity Funds • Opportunity Funds are being established seemingly every day – OpportunityDB.com as of March 20, 2019 counted 87 funds totaling $26.3 billion – Money needs to be in fund by end of year to get maximum tax break and projects need to be determined

• Rules – Intent to reduce paperwork to give developers room to be creative – though some worry that could be abused or desired outcomes such as lower cost housing and job opportunities would not be measured – Not finalized

• Only 1/3 of Opportunity Zones are deemed by Funds to be investable

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Impact Investors • Impact investors are looking for outcomes and documentation that those outcomes are continuing • Looking for more than affordable housing and retail development – they want to see jobs, education and opportunities for existing residents • The Hub of Opportunity is such a place that has multiple outcomes • Kresge Foundation committed $22 million to back Arctaris and Community Capital Management to anchor their opportunity funds. The funds agreed to a level of transparency, accountability and disclosure that is not currently required – Prevent displacement, prohibit nonproductive investments such as selfstorage form community advisory boards

• The Foundation will provide risk mitigation and first loss protection to improve the risk return profile of the funds making them more attractive to investors - and if they are interested in their investment having impact ©

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Municipal Efforts • National Development Council – Encourages municipalities to identify projects and offer other incentives New Markets Tax Credit, state and local funds to encourage investment

• City of Erie, PA and Louisville KY have prospectuses on their economic development websites to aid investors • Local Initiatives Support Corp.

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Final Thoughts • Opportunity Zones that are in or adjacent to already developed areas will likely get the bulk of investment and may have been investable in any case.

• The growth of impact investing and the support of foundations and government programs may help the opportunity zones have their intended outcomes of improving underserved and low income areas • The zones may incrementally improve the credit quality of a municipality through diversification, increasing income and employment and reduction in social service spending. Depending on the size of development and contribution could eventually lead to ratings improvement.

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Disclosure All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed. Past performance is no guarantee of future results. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk.

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