In late October, the CEO of Harvard’s endowment, the largest of any university in the world at $40.9 billion, stated he was not pleased with the fund’s 6.5% returns in fiscal 2019. CEO N.P. Narvekar identified illiquid holdings as one of the drivers for the disappointing results. The Harvard fund is not unique in wanting to obtain liquidity for seemingly illiquid asset classes. While illiquid investments are a core component to many of these long-term investment portfolios, they can often remove the ability to make dynamic decisions when the investments are not performing as anticipated.

Over the past few years, we’ve identified this issue as a pain point for many large institutions looking to invest in illiquid alternatives. In the case of Harvard, when there is a change in its investment strategy, they are forced to undergo a slow and protracted restructuring period in order to reallocate capital to different investment opportunities while still beholden to established performance estimates during this period. As endowments and other institutions are looking to adjust portfolios to address shifts in investment priorities or growing uncertainty of economic conditions, they chafe against illiquidity more and more.

However, through the digitization of these funds or investments on the blockchain, investors are granted greater control over their portfolio performance because they can more simply transfer ownership to interested parties. Provided the necessary demand is available, investors and institutions can access liquidity through a network of prospective sellers and buyers in order to enable performance-driven decision-making.

At RealBlocks, we’re seeing major demand for investment in the alternatives markets. A recent Preqin study states that the market size in 2017 was $8.8 trillion, and is anticipated to grow to $14 trillion by 2023. With immense growth in the alternatives market, we expect the demand for investor liquidity to also increase due to the reasons outlined above. Through our solution, we hope to help lead the transformation in developing a more open and accessible market for alternative investments.

To learn more about what we’re doing at RealBlocks, visit our website at www.RealBlocks.com!

How Liquidity Can Enable Performance-Driven Decision-Making was originally published in RealBlocks Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Did you know that private market AUM grew to almost 10% the size of the global public markets in 2018? That represents more than 100% growth in private markets in the past decade, a market most people don’t even know exists! That’s part of the reason we decided to form RealBlocks — a way for people across the world to gain access to private markets. One of the questions I am frequently asked is if it’s such a large market, why aren’t there more platforms online offering access to it, and why can’t things like the blockchain accelerate access? I’ve had the benefit of struggling with this question myself for almost two years now, and want to share the three big factors I’ve seen holding back significant digital presence of private markets.

Natural Transition to New

When we look back in 50 years and talk about the greatest challenges of blockchain adoption into the finance ecosystem, I think it’ll probably be summarized as ‘everyone became so obsessed with the idea of decentralized self-ownership, no one ever stopped to ask if people really wanted the risk and burden of it’. Did you know almost no one actually owns the stock they buy? This has actually been that way since the 1960s when the financial markets were crippled trying to update paper certificate to prove ownership and moved to a system that centralized stock certificates, making it easier to update records.

Could something like the blockchain change this and provide a more efficient ecosystem? Possibly, but why would anyone step away from a system that has more or less worked for the past 60 years and instead go with technology created in the past decade? And not only that, but the new proposed system is diametrically opposed to how the current system operates (self vs. custodial ownership). So does this mean anyone trying to build applications on innovative new things like blockchain for traditional, mature markets is doomed?

Not at all! But my point is to stress that radical innovation needs to be coupled with gradual steps to an end state. Even if a certain innovation radically improves someone’s life, adoption is still going to be gradual if it doesn’t fit into a person’s existing understanding of how their world works. If you give people an option between a risky new thing or an old proven thing, every risk-averse person is likely to go with the latter. Since we exist in a risk-averse industry, our focus is on how to make a gradual transition into innovation. For example, it may seem silly and even defeating for a blockchain firm to use a transfer agent ledger as the official record while still writing to the blockchain, but being able to show that new technology works the same as the old technology is an invaluable strategy to adoption. Removing fear from new technology is a must-do in mature markets to have any form of success.

Nascent Ecosystem

Usually when an entrepreneur thinks about starting a business and building a product, they try and find out what is the bare minimum you can do to launch and get feedback. The problem with the minimum viable product (MVP) approach is that it strives for ‘barely enough’, while mature regulated markets have many expectations to even be usable. So what does it take to build a system like this in the world of alternatives? Some bare minimums include:

• A broker-dealer partnership to legally be able to host and sell an offering at all in the United States
• Escrow services to hold money while an offering is live and ongoing
• Custodial services to hold client funds after the offering closes, because no one in the traditional world holds assets in their own names (see street name)
• KYC/AML/Investor Accreditation so you can legally qualify investors for an offering
• The ability to buy using traditional currency, because almost no traditional firms are going to buy anything in the near future using mainstream cryptocurrency
• A Transfer Agent / ledger service to account for who owns the shares
• Money to pay for all the documents and legal analysis to make sure it does not violate any private market regulations in every country you plan to offer securities in

The list can go on, and shows private offerings expectations go far beyond simple KYC/AML procedures. Building an alternatives platform isn’t simply making a webpage with some commerce features; it’s enabling an entire ecosystem of events to run through your system. Many companies have started to tackle pieces of the puzzle, but without a heavily vertically integrated platform, it’s easy to see how much work is left for a potential client to figure out.

Compelling Differentiation

One of the biggest roadblocks beyond catching up to minimal acceptable products is that there are almost no compelling differentiators practically available. This includes both things not created yet, and things that are created but don’t have the necessary prerequisites for adoption. Especially in the blockchain area, there are so many things to play catch-up on that it almost predicates some level of completion before useful differentiating products are embraced. Take the Uniswap project, for example, which is building around the idea of automated market makers. The idea of liquidity pools could greatly decrease the illiquidity discount on private securities, but it is predicated on properly vetted and issued securities, vetting of parties involved, regulatory checks, etc.

This isn’t something that has to stay this way though, and most people don’t expect it to. A 2018 study from Fidelity indicated that 73% of the institutional respondents felt that significant change would occur in the financial industry by 2025, with 75% of the respondents believing non-financial services firms will be involved in the disruption.

Conclusion

As daunting as it may seem, it’s really a very exciting time to see an old industry adopt new legs to stand on. Over the next few years I expect we’ll see particular focus on more fully vertically integrated systems, faster and easier management of issuances and shareholders, and more efficient secondary markets that comply with sophisticated international regulations.

This has the potential to drive price efficiency in a historically illiquid market and access to markets all over the world, bringing a whole new generation of sophisticated investors into a digitally-compliant global market. We are still very much in the discovery phase of finding out how to best evolve the alternatives market, but disruption in the industry seems to be a matter of “when”, not “if”.

Thanks for reading, and be sure to stay up to date with the latest RealBlocks news by signing up for our newsletter!

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The Challenges Bringing Private Markets Online was originally published in RealBlocks Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

RealBlocks is an Ethereum-powered digital trading platform for alternative asset classes. We make fund administration a breeze and facilitate liquidity through our secondary trading system. (We’re hiring for a Senior Front-End Engineer role!)

At RealBlocks, we use Laravel + TDD to help us write and refactor code quickly while maintaining quality. Last week the full suite took nearly 11 minutes to run on local, so we started looking at ways to improve our performance while maximizing efficiency and resources.

• Refactor the tests to avoid database/network?
• Use a (faster) in-memory SQLite database?
• Something else?

Refactor the tests to avoid database/network?

Oh no! Your tests aren’t isolated?!

Allowing tests to touch the database and network are considered bad practices for a few reasons.

• Tests run slower.
• Tests can fail for external reasons (e.g. third party API failure).
• It doesn’t discourage writing tightly-coupled code.

As a startup, our top priority is rapid iteration on our product. By writing non-isolated tests that touch the network, we can write new features faster, without having to write lots of mocks and stubs.

The trade-off for faster development in this case is slower test execution time and incurring technical debt on non-isolated tests that will require refactoring in the future.

We’re still a startup and only have ~ 300 test cases, so slower individual tests are fine (for now) as long we can run the full test suite in a few minutes. The problem is our suite is taking 11 minutes already!

In the most pure sense, the correct solution is to refactor the tests. But what if we don’t want to spend a two-week sprint (right now) refactoring tests for features that may not even make it to production? Can we delay this decision?

Let’s come back to this as a last option. We’re looking for a quick win to bring us down to ~ 5 mins execution time TODAY.

Use a (faster) in-memory SQLite database?

SQLite is fantastic lightweight database that is popular for testing since you can run it in-memory resulting in faster tear-downs and migrations. You’ll find Adam Wathan, Jeffrey Way, and others use it online in the context of Laravel TDD — it’s pretty damn fast.

One of the cons of SQLite, however, is that it doesn’t support all types of database migrations, so you’ll have to make sure that all your migration files are compatible with Sqlite. For example, if your migrations attempt to drop foreign keys, SQLite does not support this. There are workarounds, but we’d need to reword our migration syntax.

We didn’t plan on supporting SQLite when we got started, so to get SQLite running we’d need to rewrite a lot of our migrations. This also feels like quite a bit of work and may have future considerations — will we always need to be SQLite compatible? Let’s keep digging and see if we can find a better solution.

What if we could run the tests in parallel?

Paratest is a fantastic package that will run our test suite in parallel! After following the instructions in the readme, we can specify how many parallel runners you want to use with the -p option.

vendor/bin/paratest -p8

Aaanndd… most of the tests fail. Why would parallel running cause our (green) tests to fail?

Parallel database migrations = bad

The first villain in this story is Laravel’s DatabaseMigrations trait. If you’re writing tests that touch the database with Laravel, odds are you’re using this utility to make sure your database is migrated before each test suite, giving you a fresh database to test against. This was super convenient before, but now that we’re running our tests in parallel, this utility causes tests to clash when handling the database.

While one test is migrating, another is tearing down, another is trying to seed data, and yet another is trying to insert data. Not good.

It’s almost like trying to run multiple experiments simultaneously using the same petri dish. One scientist is adding bacteria for their experiment while another is trying to measure their own results. It’s clear that this would no longer be a fair test. See cute dogs for further illustration.

Solution? Simply replace the DatabaseMigrations trait with the DatabaseTransactions trait. Instead of migrating and tearing down the database with each test, we will only migrate ONCE at the start of the test run. Each test will record the transactions it performs on the database, and then roll back those changes when it’s done executing. Neat!

Let’s run the tests again.

Better, but some tests are still broken…

Instant results! When run in parallel, our test suite now takes around 3 minutes instead of 11; that’s a huge boost for very little work on our part.

But we still have a few failing tests… Let’s take a look at the assertions and try to figure out why they work in sequence but not in parallel.

/** @test */

function admin_can_view_transactions()

{

   $response = $this->actingAs($admin)->get('/api/transactions');
   
   $response->assertStatus(200)

      ->assertJson([

         'data' => [[

            'id' => $transaction->id,

            'asset_id' => $transaction->asset_id,

            'quantity' => $transaction->quantity,

            'price' => $transaction->price

         ]]

   ]);

}

The issue here is that assertJson() is expecting a data array in the response, where the FIRST element in the data array is the transaction object described in the test. If we run this test on its own with a fresh database, it passes.

Since we’re running our tests in parallel, it’s possible for other tests to write to the same database that we’re checking against. There’s really no guarantee that our object will be the first element in the response.

Luckily, we can fix this by changing our assertion to something that’s guaranteed to be true.

$response->assertJsonFragment([

   'id' => $transaction->id,

   'asset_id' => $transaction->asset_id,

   'quantity' => $transaction->quantity,

   'price' => $transaction->price

]);

Now, even if there are other records in the database, our test should be able to find the transaction that we’ve specified in the json response.

Another assertion that created problems in parallel is assertJsonCount() .

/** @test */

function admin_can_filter_transactions_by_status()

{

   $pending = $this->createTransaction(['status' => 'pending']);
   $closed  = $this->createTransaction(['status' => 'closed']);

   $response = $this->actingAs($admin)
      ->get('/api/transactions?status=pending);

   $response->assertJsonCount(1, 'data');

}

When running parallel tests, the checks against json element counts fail because other elements have been inserted while the test was running.

Instead, we can refactor this using assertJsonMissing().

$response->assertJsonMissing([

   'id' => $transaction->id,

   'asset_id' => $transaction->asset_id,

   'quantity' => $transaction->quantity,

   'price' => $transaction->price,

   ‘status’ => ‘closed’

]);

After refactoring our tests to use DatabaseTransaction and guaranteed assertions that would hold up in a dynamic environment, our test suite is finally getting green while running in parallel.

Conclusion

Parallel testing is an awesome concept that exists in many testing frameworks and can provide a huge performance boost for developers doing TDD. Our team saw 3X returns from parallel testing using Paratest with very little time invested for performance optimization.

How does your team do TDD? Tell us about your favorite testing tips and tricks in the comments!

Parallel testing for Laravel: How we cut test suite execution time to 1/3 in one day was originally published in RealBlocks Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

NEW YORK, June 3, 2019 — RealBlocks, a blockchain-powered technology platform that democratizes access to alternative investments, announces that Scott Brooks has joined the organization as its new Head of Distribution. Mr. Brooks joins RealBlocks with 30 years of investment management experience leading distribution teams across both retail intermediary and institutional channels.

As Head of Distribution, Mr. Brooks is responsible for developing RealBlocks’ relationships with alternative investment funds and their distribution channels. The RealBlocks platform aims to solve the problem of illiquidity in alternative investments. Investors on the platform are able to access a secondary marketplace that enables peer-to-peer trading in order to unlock liquidity. Additionally, the platform allows for distributors to gain access to previously inaccessible investment products.

“We’re thrilled to welcome Scott to the RealBlocks team,” said RealBlocks CEO Perrin Quarshie. “He brings a wealth of knowledge and experience that we believe will be paramount in achieving our goal of increasing access and providing liquidity for investors and institutions in the alternative investment market.”

While working at some of the leading asset managers in the US including: Capview Partners, SEI Investments, DWS/RREEF Real Estate, JPMorgan, AMG Funds and OppenheimerFunds, Mr. Brooks has focused on the defined contribution, sub-advisory, OCIO, and HNW markets and is a recognized thought leader in these markets. He has been responsible for raising over $35 billion in new assets for the firms he has worked for.

Additionally, Mr. Brooks served as the first co-President of the Defined Contribution Real Estate Council (DCREC) and was one of the group’s founding members as well as founding the Pension Real Estate Association (PREA) Defined Contribution Affinity Group and serving as its first co-chairman. Mr. Brooks is also an active member of the Defined Contribution Institutional Investment Association (DCIIA), where he has co-authored two white papers on the use of alternative investments in DC plans as well as leading the production of their recent white paper on white-label and multi-manager funds.

“RealBlocks has brought together an extremely talented team bringing the best of academia, investment banking and technology to solve the long standing issues of administration, access to offshore capital and liquidity for both the sponsors of alternative investment products and investment advisors and their clients,” said Brooks. “In particular, the issue of liquidity in alternative investments has been a persistent challenge for many investors across the institutional, defined contribution and retail/high net worth segments of asset management, to which RealBlocks provides an industry leading solution. I look forward to guiding the firm in enabling our partner firms to accelerate the growth of their businesses.”

About RealBlocks

RealBlocks is a blockchain-powered technology platform that democratizes access to alternative investments through a proprietary 30-second web-based subscription process. Fund sponsors are able to 1) sell shares to both domestic and international investors, 2) accept digital and fiat currency, and 3) enable peer-to-peer secondary trading via a bulletin board. For more information, please visit www.realblocks.com or follow us on Twitter @RealBlocks.

Contact

Matt Jago
RealBlocks
matt.jago@realblocks.com

Scott Brooks Named Head of Distribution at RealBlocks was originally published in RealBlocks Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Today we are excited to announce a partnership between RealBlocks and AZTEC, a zero-knowledge privacy protocol, that will enable private, permissioned, and compliant private offerings on a public blockchain. We firmly believe that privacy is an essential pillar for mainstream adoption of blockchain technology by traditional firms, and we are ecstatic to be partnering with a leader in the space.

The Importance of Privacy in Public Blockchains

Previously, public blockchains have been criticized over their lack of privacy, but the RealBlocks solution will allow for privacy while still benefiting from the inherent network effects of building on a public ecosystem. Using our peer-to-peer bulletin board, users will be able to trade amongst themselves in a completely anonymous manner. Publicly verifiable smart contracts will ensure that regulations, such as the 2,000 investor limit, are maintained. You can think of this as a new-age ‘black box model’ — all the happenings inside the system are private, but the actual workings of the system are publicly verifiable. Having this kind of technology is critical for trustless, compliant, international markets to exist.

Imagine for a second a world where High-Frequency Traders couldn’t magnify sell-offs simply because a certain amount of stock was sold, or any kind of change caused by non-material company events! This arguably makes the value of the underlying more honest. Front-running (buying or selling for one’s own account based on advance knowledge of client orders for a security) is also stymied by our solution since the AZTEC protocol masks the trading amounts to anyone not directly involved in the exchange — it could be a transaction for $1 or $1 billion and no one would be the wiser.

This is especially important in the institutional trading world which normally relies on dark pools to make sure large orders aren’t exposed before completed. Funds on either side can be confirmed trustlessly without signaling anything to the general network, so the RealBlocks system will help by making sure buyers and sellers can only post honest intents (ie. a potential buyer can’t post an offer to buy $1 million in shares unless they have $1 million ready in their wallet). We plan to also extend this concept in the future to the idea of ‘permissioned liquidity’ which would allow a user to send an intent across different exchanges through partnerships with RealBlocks. This will ultimately lead to more efficient counterparty discovery and reduced information leakage for all involved.

Industry transformation is just as much about timing as the actual tech, and for finance this is why Zero Knowledge Proofs (ZKPs) are so important. Being able to trustlessly confirm using math that I have something (20 shares of X) without revealing that info to the world is the ultimate gift that ZKPs grant us, and AZTEC is the team we feel best poised to make this consumable at an international level.

Download our full white paper here.

Stay up to date on what we’re doing and sign up for our newsletter here!

RealBlocks Partners with Aztec Protocol to Evolve Private Markets was originally published in RealBlocks Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

In the nascent space of security tokens (or is it digital securities now..?), there has been much confusion surrounding the proper nomenclature to use. Terms like “tokenize” and “digitize” are often used interchangeably with no clear rhyme or reason as to why one term is taking precedence over another.

Much of the confusion and lack of set rules stems from the fact that the industry is still putting out feelers to see which terms resonate best with their audiences. For the crypto-literate crowd, “security token” makes perfect sense. If you’re tokenizing an asset, it’s only logical that the output is a security token. But for those less familiar with the space, words like “token” and “coin” immediately tie back to complex concepts associated with cryptocurrencies and the prices of bitcoin or “How-The-Hell-Is-This-Legal Coin”.

As a quick primer, a digital security (or security token; who knows, right?) represents ownership in a tradable asset that is recorded on the blockchain. Venture capital funds, currencies, gold, art, and real estate are all examples of types of assets that can be “tokenized”. Much of the benefit derived from tokenization stems from the programmable ownership of assets, which creates a more efficient way to trade and achieve liquidity (think the efficiency levels between communicating via snail mail vs email). Additionally, tokenization enables fractionalized ownership which helps to decrease barriers to entry for investors, thereby creating opportunities for many more participants in the investment market.

RealBlocks team… which terms should I use? I’m begging you.

There’s a lack of consistency when it comes to the terminology in this space; we’ve seen instances of “security token” and “digitization” used in the same sentence as “tokenizing digital securities.” Quite frankly, it can be incredibly confusing for people who operate in the space, let alone for those attempting to educate themselves on the subject. So instead of talking about the “digital blockchain tokenization of securitizational tokens”, the industry can greatly benefit from consistent nomenclature that is easy to understand.

So how are we at RealBlocks treating this matter at hand…

Tokenization is the digital representation of assets recorded on the blockchain. To us, this is the best term to properly describe the process, largely due to the fact that the alternatives don’t accurately describe the process. There’s potentially an argument to be made for a term like “digitization”, but 1) it’s cumbersome and clunky (who wants to listen to a TED talk that’s largely comprised of the speaker fumbling over the pronunciation of the topic at hand?) and 2) we feel that the word “digitization” can be attributed to multiple other processes and could cause confusion (scanning images/documents, digital video conversion, etc.).

The process of tokenization, however, allows for the issuance of digital securities. After many meetings with individuals in the financial services industry, we found that the best way to describe what we do was to state that we can issue digital securities that, in our case, represent ownership in real estate funds or offerings. The term “token” often led to much confusion about what we were providing, or what our business model was. “Is that like bitcoin?” or “So when are you doing an ICO?” are just some of the questions that we’ve fielded in the past. Digital securities, however, resonated far better with our audience due to the familiarity factor associated with securities.

Read our White Paper for more information.

Why does this even matter?

Throughout history, the adoption of ideas and movements can be tied directly to the diction being used. Delivering a palatable or understandable term may be the difference in something gaining traction, or falling to the wayside. It’s why Apple touts its “Liquid Retina Display” instead of its “High Pixel Density Display”; it’s why in the early 2000s, the term “death tax” was used as a substitute for “estate tax” by the GOP because “who wouldn’t be opposed to a ‘tax on death’?” And perhaps even more ominous, it’s why starfish aren’t called star-echinoderms (though Big Starfish certainly doesn’t want you reading that).

Joking aside, the use of particular terminology is key in getting one’s message across. In the case of digital security vs. security token, much of our decision to side with digital security stems from the pre-existing knowledge base of our intended audience. As with any new technology or system, there is a layer of education that needs to be had. It’s up to us as educators, in this instance, to make that learning process as simple and intuitive as possible. An immense hurdle for many to clear is the ability to make a hard-line distinction between security tokens and other cryptocurrencies. It’s also a hurdle that is largely unnecessary. The simplicity of digital security comes from the fact that the general audience already knows what a security is, and they already understand the idea of something being digital. Why bog them down with additional complexities? Ultimately, we as an organization feel that using digital security instead of security token is the best path forward in helping to properly communicate the use case of tokenization and blockchain, while also being something that is easy to understand for those just entering the space.

War of the Words: Digital Security vs. Security Token was originally published in RealBlocks Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

However, despite the existence of 8,700 total Opportunity Zones spanning 12% of all census tracts in the United States, there has been surprisingly little analysis to identify ‘ideal’ areas to invest in. Many articles published to date consist of top 10 lists recommending the major metropolitan areas in the US anyone could probably guess, which seems a disservice to the massive amount of areas elected as qualified Opportunity Zones.

My analysis sought to develop a rank system for all Opportunity Zones based on 5 economic indicators, and see if there were areas of above-average growth not commonly discussed. I believe the results showed that there are many Opportunity Zones across the US that ranked highly across all 5 indicators, many of those actually not being located on the coasts.

In aggregate, we found that areas in the Northeast and Southern regions in the US had the best performing overall areas, while pockets in the Midwest and Western areas showed significantly better performance vs. other similarly grouped areas. We also found that Unemployment and Median Value of Owner-Occupied Homes were the biggest differentiators in our dataset, with ranking deviations almost double of the other 3 indicators examined.

Method to the Madness

From the start I applied a more analytical approach to examining the Opportunity Zones and determine if there were potentially highly desirable investment areas that had flown under the radar. To start, I elected to pull 5-year (2011–2016) estimates from 5 datasets found via the US Census Bureau:

1. Total Population
2. % of Unemployment for the population 16 and over
3. Median Value of Owner-Occupied Homes
4. Median Contract Rent
5. Median Household Income (HHI) in the past 12 months

For this analysis the importance of each dataset was unweighted, meaning that all 5 rankings per census tract matter equally in the final ‘rank’ for each Opportunity Zone. Weighting the attributes and/or adjusting those included may result in profoundly different outcomes. Based on the attributes examined, there are indeed many opportunity zones showing favorable trends across these attributes, which can exist across the entire United States.

The Results

After pulling the data I assigned a rank to every Opportunity Zone per attribute, 8,700 being the ‘best’, 1 being the ‘worst’. Once each Opportunity Zone had ranks for all 5 attributes I averaged all 5 ranks into a ‘Total Average Rank’ for each Opportunity Zone:

After doing this for all the Opportunity Zones, I wanted to see how it would look on a map. Since census tracts are really small geographically, I aggregated the results up to US counties, which reduced the dataset to a seemingly more reasonable 2,000 or so points. The result:

Looking at this visualization we can see……well, nothing. There is too much going on to yield meaningful insights from this map. Looking at this also made me question the lack of regionality taken into account — the ‘best’ census tracts are likely influenced by economic trends in neighboring regions over the 5 year timeframe.

Based on this I created code to automatically group together census tracts in similar areas. K-means clustering is a great method to achieve just this and after reading Carl Anderson’s post on weighted K-means analysis, I adapted it to my use case. My goal was to use each Opportunity Zone’s ‘Total Average Rank’ in order to influence where the center of each cluster would be drawn on the map.

To explain using Carl’s example, if there are 4 points on a map and one has a much higher ‘Total Average Rank’ than the others, the new point created will lean toward the highest ranked point:

The last thing I needed to do was figure out how many ‘clusters’ I wanted to create. Determining the ‘correct’ number of clusters is still largely an art more than a science, relying on the person’s knowledge of the problem and qualitative insights to determine an ideal amount. I settled on 25 — it provided the best tradeoff of visual digestibility while also evenly segmenting the US into areas large enough to generate macro-level regional insights. Here’s a final output overlayed with a Voronoi visualization to better ‘show’ how the regions were divided up:

So we are now left with a map telling us 2 things:

1. How the 8700 Opportunity Zones were divided up into 25 regions
2. The center points in each region weighted towards concentrations of highly ranked Opportunity Zones

To provide more context, here are the final breakdowns of how each clustered scored overall and each dataset analyzed, higher ranks being ‘best’:

There were many interesting insights from the analysis, summarized as follows:

• At the highest level, the Northeast and Southern regions (as defined by the US Census) had the best performing overall areas (4,683 average), with the Midwest and West area ranks averaging around 4,216
• Despite lower regional averages, the Midwest and West claim the top 3 best ranked clusters on the map (10/4/5), with average ranks almost twice as high as the lowest performing cluster areas (15/18)
• The most significant attribute affecting rankings appears to be unemployment rate — Unemployment rates in Clusters 5 & 10 were 8.56% and 6.65%,respectively, almost half the average for all 25 clusters (13.70%)
• Average 5 year population increases were also the highest in Clusters 4 & 5 (0.46% and 0.58%) vs. the average 0.16% growth across all clusters
• Cluster 4 also had the highest median value of owner-occupied homes at 1.10%, which is more impressive given that 13 clusters all had negative values for appreciation, the lowest being Cluster 18 (-2.22%)
• Median HHI was fastest growing in Cluster 10 at 1.02%, easily topping the next best cluster (cluster 9 in the south at 0.58%) and almost 4x the average for all clusters (0.26%)
• Median contracted rent saw the highest increases in Cluster 4 (1.53%), closely followed by Clusters 8/10/9/11 (all between 1.32–1.22%).
• Overlaying the findings with other datasets like major US cities provides perspective as to the degree in which major metropolitan cities influence the ‘center’ of each region. For example, Cluster 6’s center falls almost directly on top of Phoenix despite large surrounding areas eligible for Opportunity Zones.

Looking at aggregate state stats we can also glean different strategies for how states chose to designate Opportunity Zones. For example, the chart below shows the count of Opportunity Zones in each state (Y-axis) along with the ‘Total Average Rank’ of each (X-axis). Half of the Opportunity Zones were held within 8 states (CA/NY/TX/FL/IL/OH/PA/MI), and these Zones tended to be highly concentrated around major cities within these states. Midwestern states in the US tended to elect much fewer Opportunity Zones, although the area of the Zones tended to span much larger areas vs. their coastal counterparts. The Southeast area tended to elect a high amount of areas across their states in both urban and non-urban areas.

States like NY also had a surprisingly large concentration of high-rated Zones, seen by the skew in the graph above. Overall, ND and WY contained the highest rated zones of any state, with states like IL and NV having the lowest ranked concentration.

… More Data and Maps?!

As a final note, this article was intentionally brief on the technical steps taken to generate the final dataset. Steps such as managing missing data in the datasets (imputation), creating ranks, cluster aggregation, etc., were not discussed but were major components in arriving to the final analysis. If there is enough interest I would be happy to dive into the mechanics in a future post. In the meantime, I have included an interactive ARCGIS map below for you to further explore the clusters along with other dataset layers to provide a jumping point for further analysis!

INTERACTIVE ARCGIS MAP WITH VORONOI AND LAYERS
http://arcg.is/1zu14z

What I Discovered About Opportunity Zones From Analyzing Half a Million Data Points was originally published in RealBlocks Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

This was originally published on 11/6/18 on RealBlocks.com.

Introduction to Opportunity Zones

Originally conceptualized by the Economic Innovation Group (EIG) in 2015 and established by Congress in the Tax Cuts and Jobs Act of 2017, the opportunity zone program was created to stimulate economic growth in designated low-income communities in return for capital gains tax breaks. Opportunity zones are designated low-income census tracts with a poverty rate of 20% or a median family income of up to 80% of the area median. There are 8,762 opportunity zones spanning all fifty states and five U.S. territories (American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the Virgin Islands).

The goal of the program is to improve the economic conditions of low-income communities by incentivizing long-term private capital investment. There is $6.1 trillion of individual ($3.8 trillion) and corporate ($2.3 trillion) unrealized capital gains that can be deployed into opportunity funds. Spreading wealth to grow these local economies will surely have a positive impact on many of the 35 million people who call these communities home.

How to invest in Opportunity Zones

By deploying capital gains earned from the sale/exchange of any asset (real estate, art, bitcoin, etc.) into a Qualified Opportunity Fund (QOF), investors are able to defer, and potentially reduce, capital gains taxes. An additional tax benefit to be aware of is the ability to exclude all taxes on capital gains earned on interest in the opportunity fund if held for 10 years. Investments in Qualified Opportunity Zones (QOZ) are done so through a QOF, which must invest at least 90% of assets into QOZ. Any eligible taxpayers such as individuals, C corps (RICs & REITs), S corps, partnerships, trusts, and estates are able to create or invest in qualified opportunity funds. Below is a visual to help further understand.

Tax Incentives

The opportunity zone program was designed with three favorable tax incentives for investors to encourage participation. The tax incentives offered by the Opportunity Zone Program include:

Immediate deferral

• Taxes on initial capital gains of appreciated assets can be deferred if invested into a QOF within 180 days.

Future reduction

• 10% reduction of the deferred gain if the investments are held in a QOF for longer than 5 years
• 15% reduction of the deferred gain if the investments in a QOF are held longer than 7 years

Future exclusion

• No taxes on new capital gained if the investment is held in the QOF for 10 years or more.

Example:

Year 1, 2019: Capital gain deferred into opp fund: $100
Year 5, 2024: Tax liability on $100 capital gain is decreased by 10% to $90
Year 7, 2026: Tax liability on $100 capital gain is decreased an additional 5% to $85
- Pay capital gains tax of x% on $85 vs $100
- Continue holding $100 interest in opp fund
Year 10, 2029: Original investment of $100 has appreciated to $150. By holding interest for 10 years, you earn the right to pay no capital gains tax on $50 earned.

What is a Qualified Opportunity Fund (QOF)?

A QOF is an investment vehicle (corporate or partnership entity) established for the purpose of investing in Qualified Opportunity Zone Property (QOZP). QOZP consists of stock, partnership interests, and business property and excludes sin businesses (liquor stores, strip clubs, casinos, massage parlors, racetracks, golf courses, etc). If you were seeking to create your own qualified opportunity fund, you would fill out Form 8996 and self-certify. A QOF must invest at least 90% of its assets in QOZP. For each month it fails to meet the 90% requirement, the fund must pay a penalty.

List of Opportunity Funds

Recap

The Opportunity Zone Program is designed to stimulate economic development and employment creation in low-income communities by incentivizing long-term private capital investment. With an estimated $6 trillion in unrealized capital gains, there is astounding potential for distressed communities across the country to benefit. This program will enable investors to put their capital to work and accelerate economic growth in distressed communities across the country, while also taking advantage of tax incentives.

Takeaways

• Opportunity Zones Program — The program incentivizes investors to unlock private capital and facilitate economic growth in distressed areas. Received bipartisan support and established by Congress in the Tax Cuts and Jobs Act of 2017.
• Qualified Opportunity Zone (QOZ) — economically distressed community designated by the state, certified by Secretary of US Treasury and IRS.
• Qualified Opportunity Fund (QOF) — an investment vehicle (corporate or partnership entity) established for the purpose of investing in Qualified Opportunity Zone Property (QOZP).
• Qualified Opportunity Zone Property (QOZP) — stock, partnership interests, and business property. Excludes sin businesses such as liquor stores, strip clubs, casinos, massage parlors, racetracks, golf courses.
• Tax incentives — established in Tax Cuts and Jobs Act of 2017
• Immediate deferral of capital gains until 12/31/26
• Future reduction in gains if the investment is held for 5 years (10%) and 7 years (15%)
• Future exclusion of gains earned on interest in opportunity fund if held for 10 years.

What you should know about Opportunity Zones was originally published in RealBlocks Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.