Opportunity Zones: Aligning Public and Private Capital
At the end of 2017, a potential $6.1 trillion in unrealized capital gains was available for reinvestment.
Throughout the U.S., unrealized capital gains have significant tax implications with enormous potential. Unrealized capital gains occur when the value of an asset has gone up on paper, but has not yet been sold for a profit. Taxes are triggered once the asset has been sold.
Investors can offset or defer these taxes in a few ways, including one new strategy: investing in opportunity zones.
Today’s infographic from Bedford Funds explains what opportunity zone funds are, their core benefits, and their potential impact across the country.
What is an Opportunity Zone?
Opportunity zones are U.S. Census tracts whose citizens experience economic distress.
Originating in the 2017 Tax Cuts and Jobs Act, they offer the potential to connect long-term capital with low-income communities across the country to drive return and impact.
How are opportunity zones chosen? The initial base is low-income census tracts, which have:
- Poverty rates of at least 20%; or
- Median family incomes lower than 80% of the surrounding area
The state’s governor or chief executive then nominates up to 25% of these areas as opportunity zones. Nationwide, a total of 8,700 opportunity zones exist, and 7.9 million of the areas’ residents live in poverty.
Overall, 35 million people live in these opportunity zones. There are a number of disparities between opportunity zones and notional averages across key variables:
|Poverty Rate||Median Family Income||Education*|
*Adult with Bachelor’s degree or higher
It’s evident these cities could benefit from increased investment.
What is an Opportunity Zone Fund?
An opportunity zone fund (OZF) is an investment vehicle that provides tax benefits for private capital to help revitalize economically distressed communities. Both operating businesses and real estate are eligible for investment.
Many investor types may take advantage of opportunity zone funds:
- Corporations– Also includes partnerships
- Accredited investors– Defined as high net worth individuals, brokers, and trusts
- Nonresident foreign investors– Only on capital gains earned in the U.S.
- Retail investors– Through funds that have lower minimums, though options are more limited
In addition to their wide eligibility, OZFs have a number of potential benefits.
Tax breaks on capital gains can be organized into three tiers:
- Initial Tax Deferral– Once the previously-earned capital gains are channeled into a qualifying OZF, federal tax is deferred until December 31, 2026 or the date the investment is sold— whichever comes sooner
- Step-Up In Basis– 10% of the original capital gains will be excluded from federal taxes if an investment is held for five years
- Capital Gains Tax Exclusion– Federal tax on capital gains earned within the OZF is 100% eliminated if an investment is held for 10 years
All things being equal, OZFs realize after-tax outcomes that are over 40% higher than a standard portfolio investment. For example, the potential after-tax value of a $100 investment after a 10-year holding period would be as follows.
|Initial Investment||Net after-tax value|
|Standard portfolio investment||$76.20 ($100- 23.8% capital gains tax)||$132.36|
*Note: assumes long-term federal capital gains tax rate of 23.8%, no state income tax, and annual appreciation of 7% for both the OZF and alternative investment.
While it takes a few years to realize these tax benefits, OZFs have long-term horizons to encourage sustained investment with a lasting impact. The result is the potential for sustainable and equitable wealth creation.
Although real estate investments have captured significant attention, recent regulation has clarified that operating businesses are also eligible OZF investments.
By investing in businesses, OZFs can have a direct impact on economic growth and job creation.
Ultimately, OZFs have the potential to catalyze collective impact through their scalable operating company and real estate investments. Working directly with community leaders, OZFs can help drive long-term rejuvenation from within, versus gentrification from outside forces.
Opportunity zone funds are projected to raise $44 billion in capital designed specifically to invest in this future growth.
Ranking Asset Classes by Historical Returns (1985-2020)
What are the best-performing investments in 2020, and how do previous years compare? This graphic shows historical returns by asset class.
Historical Returns by Asset Class (1985-2020)
Mirror, mirror, on the wall, is there one asset class to rule them all?
From stocks to bonds to alternatives, investors can choose from a wide variety of investment types. The choices can be overwhelming—leaving people to wonder if there’s one investment that consistently outperforms, or if there’s a predictable pattern of performance.
This graphic, which is inspired by and uses data from The Measure of a Plan, shows historical returns by asset class for the last 36 years.
Asset Class Returns by Year
This analysis includes assets of various types, geographies, and risk levels. It uses real total returns, meaning that they account for inflation and the reinvestment of dividends.
Here’s how the data breaks down, this time organized by asset class rather than year:
|U.S. Large Cap Stocks||U.S. Small Cap Stocks||Int'l Dev Stocks||Emerging Stocks||All U.S. Bonds||High-Yield U.S. Bonds||Int'l Bonds||Cash (T-Bill)||REIT||Gold|
*Data for 2020 is as of October 31
The top-performing asset class so far in 2020 is gold, with a return more than four times that of second-place U.S. bonds. On the other hand, real estate investment trusts (REITs) have been the worst-performing investments. Needless to say, economic shutdowns due to COVID-19 have had a devastating effect on commercial real estate.
Over time, the order is fairly random with asset classes moving up and down the ranks. For example, emerging market stocks plummeted to last place amid the global financial crisis in 2008, only to rise to the top the following year. International bonds were near the bottom of the barrel in 2017, but rose to the top during the 2018 market selloff.
There are also large swings in the returns investors can expect in any given year. While the best-performing asset class returned just 1% in 2018, it returned a whopping 71.5% in 2009.
Variation Within Asset Classes
Within individual asset classes, the range in returns can also be quite large. Here’s the minimum, maximum, and average returns for each asset class. We’ve also shown each investment’s standard deviation, which is a measure of volatility or risk.
Although emerging market stocks have seen the highest average return, they have also seen the highest standard deviation. On the flip side, T-bills have seen returns lower than inflation since 2009, but have come with the lowest risk.
Investors should factor in risk when they are looking at the return potential of an asset class.
Variety is the Spice of Portfolios
Upon reviewing the historical returns by asset class, there’s no particular investment that has consistently outperformed. Rankings have changed over time depending on a number of economic variables.
However, having a variety of asset classes can ensure you are best positioned to take advantage of tailwinds in any particular year. For instance, bonds have a low correlation with stocks and can cushion against losses during market downturns.
If your mirror could talk, it would tell you there’s no one asset class to rule them all—but a mix of asset classes may be your best chance at success.
How to Avoid Common Mistakes With Mining Stocks (Part 4: Project Quality)
Mining is a technical field that manages complex factors from geology to engineering. These details can make or break a project.
Mining is a technical field and requires a comprehension of many complex factors.
This includes everything from the characteristics of an orebody to the actual extraction method envisioned and used—and the devil is often found in these technical details.
Part 4: Evaluating Technical Risks and Project Quality
We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.
Here is a basic introduction to some technical and project quality characteristics to consider when looking at your next mining investment.
View the three other parts of this series so far:
- Mistakes made when choosing a team
- Mistakes made with the business plan
- Mistakes with project jurisdiction
Part 4: Technical Risks and Project Quality
So what must investors evaluate when it comes to technical risks and project quality?
Let’s take a look at four different factors.
1. Grade: Reliable Hen Vs. Golden Goose
Once mining starts, studies have to be adapted to reality. A mine needs to have the flexibility and robustness to adjust pre-mine plans to the reality of execution.
A “Golden Goose” will just blunder ahead and result in failure after failure due to lack of flexibility and hoping it will one day produce a golden egg.
Many mining projects can come into operation quickly based on complex and detailed studies of a mineral deposit. However, it requires actual mining to prove these studies.
Some mining projects fail to achieve nameplate tonnes and grade once production begins. However, a team response to varying grades and conditions can still make a mine into a profitable mine or a “Reliable Hen.”
2. Money: Piggy Bank vs. Money Pit
The degree of insight into a mineral deposit and the appropriate density of data to support the understanding is what leads to a piggy bank or money pit.
Making a project decision on poor understanding of the geology and limited information leads to the money pit of just making things work.
Just like compound interest, success across many technical aspects increases revenue exponentially, but it can easily go the other way if not enough data is used to make a decision to put a project into production.
3. Environment: Responsible vs. Reckless
Not all projects are situated in an ideal landscape for mining. There are environmental and social factors to consider. A mining company that takes into account these facts has a higher chance of going into production.
Mineral deposits do not occur in convenient locations and require the disruption of the natural environment. Understanding how a mining project will impact its surroundings goes a long way to see whether the project is viable.
4. Team: Orchestra vs. One-Man Band
Mining is a complex and technical industry that relies on many skilled professionals with clear leadership, not just one person doing all the work.
Geologists, accountants, laborers, engineers, and investor relations officers are just some of the roles that a CEO or management team needs to deliver a profitable mine. A good leader will be the conductor of the varying technical teams allowing each to play their best at the right time.
Mining 101: Mining Valuation and Methods
In order to further consider a mining project’s quality, it is important to understand how the company is valued and how it plans to mine a mineral resource.
There are two ways to look at the value of a mining project:
- The Discounted Cash Flow method estimates the present value of the cash that will come from a mining project over its life.
- In-situ Resource Value is a metric that values all the metal in the ground to give an estimate of the dollar value of those resources.
The location of the ore deposit and the quantity of its grade will determine what mining method a company will choose to extract the valuable ore.
- Open-pit mining removes valuable ore that is relatively near the surface of the Earth’s crust using power trucks and shovels to move large volumes of rock. Typically, it is a lower cost mining method, meaning lower grades of ore are economic to mine.
- Underground mining occurs when the ore body is too deep to mine profitably by open-pit. In other words, the quality of the orebody is high enough to cover the costs of complex engineering underneath the Earth’s crust.
When Technicals and Quality Align
This is a brief overview of where to begin a technical look at a mining project, but typically helps to form some questions for the average investor to consider.
Everything from the characteristics of an orebody to the actual extraction method will determine whether a project can deliver a healthy return to the investor.
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