Gill Capital Partners August 2018 Market Commentary
What are we talking about at Gill Capital Partners?
Our Investment Committee meets regularly to review portfolio allocations, macro-economic events and our investment managers. Our monthly market commentary has a slightly different feel this month, as we will present an overview of a new community development program that has drawn quite a lot of interest (Opportunity Zones). Before we review Opportunity Zones, however, here are a couple of very brief updates on intriguing market headlines and happenings:
Bitcoin’s Fall From Grace – Last December, our monthly commentary outlined the speculative bubble that had formed in crypto-currencies, which had driven the price of Bitcoin up nearly 1,500% in 2017. Since that time, the price of Bitcoin has fallen roughly 68% in eight months. Crypto-currencies have been plagued with security, regulatory, and liquidity issues that have removed much of the luster. Blockchain technology (which is the technology behind Bitcoin) is formative and will likely play an important role in the future, but for now, crypto-currencies look like many past historical speculative bubbles and, in our opinion, likely have further to fall.
Trade Wars – We discussed trade wars last month, and not much has changed since then. Our position on the matter remains the same, which is that this is the Trump Administration’s negotiating style. It appears that there has been at least a tentative resolution with some of our European trade partners, and the negotiations with China continue, as both sides dig in their heels and ratchet up threats. We continue to watch this closely and will provide updates as we gain further insights.
We have had inquiries from our clients wanting to learn more about Opportunity Zones, and members of our Investment Committee were pleased to be able to attend an educational event recently where we gained valuable insight. Below is a brief overview of Opportunity Zones, along with potential benefits and current issues.
What are Opportunity Zones? Opportunity Zones are a new community development program established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investment in low-income urban and rural communities across the country. Opportunity Zones are specific areas in each state that have been identified by state and federal governmental officials which are targeted for economic development, both through new construction and rehabilitation of existing real estate. The Opportunity Zone program provides a tax incentive for investors to re-invest unrealized capital gains (from all asset types) into Opportunity Funds that are dedicated to investing into designated Opportunity Zones, and generally run by expert real estate managers.
Why would one invest in Opportunity Funds? The benefits of investing in Opportunity Funds are potentially compelling for those with significant unrealized capital gains that are looking for a way to diversify and/or minimize taxes. Opportunity Funds provide the following benefits for investors:
· Allow investors to defer federal taxes on capital gains associated with the Opportunity Fund investment until December 31, 2026.
· Allow up to a 15% step-up in cost basis on the asset that was sold and rolled into an Opportunity Fund.
· Provide a permanent tax exclusion on any new capital gains which may result from the Opportunity Fund investment, if held for at least 10 years.
· Offer potential for positive community impact based upon the type and location of Opportunity Funds.
Our View - While Opportunity Funds are a captivating concept for certain investors, they are not without risk, and still require further regulatory clarity before being ready for investors. Investing in the identified zones carries a high level of risk as these areas are selected not for their return potential, but for the desire for them to attract investment capital. Therefore, if not managed carefully by strong management teams, the capital gains investors are looking to protect could turn into losses. Strong management is paramount, and it is particularly important to find managers that have experience in community impact investing and redevelopment. Secondly, there are very significant aspects of the new law that remain unclear, specifically those relating to investment and rehabilitation of existing real estate, and what the requirements are for rehabilitation capital. Experienced national real estate developers and investors are currently working with the U.S. Treasury Department to clarify various aspects of the new law, and until it is clarified it would be unwise to make any investments into the space. If you have further questions, or simply wish to learn more about Opportunity Zones, please do not hesitate to ask.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.