Tax Free Cryptocurrency Mining

Tax Free Cryptocurrency Mining

NSDQ Mining provides capital gains tax free cryptocurrency mining. We provide our vertically integrated solution by taking advantage of the Opportunity Zone provisions included in the December 2017 Tax Cuts and Jobs Act.

Our data center is located on site at a power plant in St. Louis Missouri. Ashley Energy is our strategic partner and brings deep experience and a wide breadth of relationships as we establish and grow our business.

NSDQ Mining Executive Summary

NSDQ Mining is an operating company, first and foremost. We are neither  a hedge fund nor currency fund nor a pure financial trading company. As the business grows, NSDQ will own and operate multiple data centers at strategically important locations. We will own mining hardware, data center hardware, software assets and strategic power supply contracts. The balance sheet will also hold the results of our operating business - the mined coins. Functionally, this is no different than a company exploring for oil, natural gas, a gold mine or a diamond mine.

Value Proposition

  • Capital Gains Tax Free
  • Data Center on Site at Power Plant
  • 35 MW Available. Scaleable to 200+ MW.
  • Economic Development via Opportunity Zone

 

Capital Gains Tax Benefit

The Opportunity Zone provisions included in the December 2017 Tax Cuts and Jobs Act provide compelling tax benefits. Our initial facility is located in an Opportunity Zone in St. Louis. As a result, our investors benefit from the Opportunity Zone tax benefits.

The Economic Innovation Group summarizes Opportunity Zone tax benefits:

“The Opportunity Zones program offers three tax benefits for investing in low-income communities through a Qualified  Opportunity Fundi:

  1. A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026.

  2. A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.

  3. A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.”

 

Example

A US taxpayer holds 150 BTC ( ~$1 million @ 1 BTC = $6700) purchased more than one year ago. The cost basis of the position is $100,000. If sold, $900,000 would be subject to long term capital gains of 15% or 20%. Uncle Sam gets a check for either $135,000 or $180,000. That’s a bummer.

Alternatively, one could liquidate their BTC and use the proceeds to make an Opportunity Zone investment via a Qualified  Opportunity Fund. The Qualified Opportunity Fund investment provides the investor with temporary deferral, step-up in basis and permanent exclusion as discussed above. In a perfect world the the Opportunity Zone investment would allow the investor to maintain exposure to cryptocurrency assets. That is exactly what NSDQ Mining provides investors.


Blockchain and Cryptocurrency Powered Economic Development

 

It’s simple. Data centers need skilled, technical staff. Typically both land and power are inexpensive within the low income census tracts that define Opportunity Zones. NSDQ Mining creates jobs and positive economic development in the very places where it is most needed. Given our unique needs and mission, it is truly a win, win situation.

 

Definition of a Qualified Opportunity Fund

The Qualified Opportunity Fund has a bit of a different context than a traditional fund. The IRS provides guidance on Opportunity Zones and Qualified Opportunity Funds here. Below is an excerpt of the IRS FAQ:

“Q. What is a Qualified Opportunity Fund

A. Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment for funding the Opportunity Fund.

Q. How does a taxpayer become certified as a Qualified Opportunity Fund?

A. To become a Qualified  Opportunity Fund, an eligible taxpayer self certifies.  (Thus, no approval or action by the IRS is required.) To self-certify, a taxpayer merely completes a form (which will be released in the summer of 2018) and attaches that form to the taxpayer’s federal income tax return for the taxable year.  (The return must be filed timely, taking extensions into account.)

Q. Who created Opportunity Zones?

A. Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017.

Q. What is the purpose of Opportunity Zones?

A. Opportunity Zones are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities.”

 

IRS and Treasury Opportunity Zone Sites:

 

Additional Opportunity Zone Resources:

Cryptocurrency Mining Colocation Within a Power Plant

Cryptocurrency Mining Success = Real Estate Fundamentals. Location, location, location.

The old adage holds true in cryptocurrency mining as it does with all real estate asset classes. Fundamentally mining Bitcoin, Ethereum and other cryptocurrencies is a high density data center real estate play.

Ask yourself, what is the theoretically perfect cryptocurrency mining location…….?

 

The answer is a power plant in a politically stable country.

  • Hyper-Reliable
  • No Transmission Risk
  • Immediate Access to Scale
  • Maximize Profit
  • Physical Security

The problem is that one can’t get access to a power plant and install a data center….until now.

 

Welcome to NSDQ Mining

NSDQ Mining provides mining colocation services inside an operating power plant in St. Louis, MO USA. NSDQ is a joint venture between Ashley Energy and Bright Light Commercial Real Estate. NSDQ Mining offers immediate access to 30 MW of mining capacity. We can accommodate over 17,000 S9’s creating more than 200 Petahash.


If your mining business seeks immediate access to institutional scale, please contact us here or connect via LinkedIn.

 

VOL 2: CRE TECHNOLOGY, TITLE INSURANCE AND THE FUTURE OF LAND RECORDS

Part 2 in the Series

This is the second part of a three part series on title insurance, the possibility of blockchain technology being used for land records and what effect that would have on title insurance. This part discusses the business of title insurance in order to answer the question why it is expensive. This is a very timely topic. As we put this article together we had no idea Bitcoin Magazine was going to drop the following article today:

Democratizing Real Estate Investing with Blockchain Technology
Bitcoin Magazine, March 31, 2017

The article discusses REIDAO's efforts to apply blockchain technology to real estate investing. The potential implications are massive and complex. While their efforts are currently focussed in Asia, the model will be interesting to watch from the U.S. perspective. Conceptually this type of blockchain application could provide for fractionalization of real estate asset ownership, totally dis-intermediate traditional title insurance and alter the real estate taxation mechanism. All before breakfast, so to speak.

 

Let's have a look at the current pricing structure and economics of real estate title insurance.

According to this article, the ratio on pay out of claims for title insurance is about 7%, so for every $100 of title premium collected, $7 is paid in claims. Fidelity National Title, the largest title insurance underwriter, reported in its 10-K for 2016 (p.41) loss provision rates (the statutory accounting estimate for what claims will prove to be expressed as a ratio of title insurance premiums received) of 6.2% and 5.7% for 2014 and 2015, respectively, and, after adjustment, 3.3%(!) for 2016. As noted last week, title insurance works by risk elimination (and a 7% claims payout demonstrates the effectiveness of this strategy) through title searches, which is typically covered by a fee separate from premium, so why must the premium be so high?

It’s not perfectly clear, other than to say that premium is often split with third parties. Continuing to pick on Fidelity, its 10-K (p.48) reported $2.6 billion in title insurance premiums from its third party agents, to whom Fidelity was able to pay $2 billion, or nearly 80% of total insurance premiums for agent-issued policies (to be fair to Fidelity, First American also pays nearly 80% of agent-generated policy premiums to the agents - First American's 10-K (see p.38)). Fidelity also goes directly to market, and generated $2.1 billion in premiums and another $2.1 billion in “escrow, title-related and other revenue,” from its direct activities. Fidelity doesn’t clearly break out its expense associated with its direct operation even though premiums are broken out between agency and direct. Fidelity need only keep the ratio below the agency commission (almost 80%) for its direct operations to perform better than its agency business. If that is so, why would Fidelity bother with agents?

It’s instructive that, while property buyers are the beneficiaries of title insurance policies, the industry does not see its insureds as their customers. Pointing again to Fidelity’s 10-K (p.7), its sales personnel target other real estate related service providers, including real estate brokers, financial institutions, independent escrow companies, developers and mortgage brokers. Of course, entertainment is part of any sales budget, including title insurance. But sharing can be more direct.

To understand this, consider the federal anti-kickback statute in the Real Estate Settlement Procedures Act (RESPA), making payment of referral fees for business related to real estate services illegal. While RESPA’s restriction is limited to residential properties, it does sanction affiliated business arrangements (joint ventures, or JVs) between different parties to a real estate transaction. A title insurer can therefore establish a JV with, for instance, a real estate or mortgage broker, where the JV acts as a title insurance agent. The JV partner uses its influence to direct title insurance business to the JV.

Generally, as long as the property buyer is not required to use the JV and the JV does actual work, the JV won’t run afoul of RESPA’s anti-kickback provision, and the JV partners share in the profits of the JV. In other words, it’s a way to share the action with business influencers. And since RESPA is limited to residential property, there is no similar federal restraint on commercial business (though one should be wary of state laws, as this article points out). In other words, title insurers need to share their revenue with others to generate that revenue, and given the low claims ratio to premiums, title insurers apparently have the revenue to share.

Title insurance is an expensive proposition. An owner buys a policy to protect the lender’s loan, and then a policy to protect the owner’s investment. As explained in part 1, title insurance is about risk elimination, work which is separately paid for than the premium for title insurance. As noted above, payouts average about 7% (and Fidelity is closer to half of that). Is there any reason to hope that title insurance could be eliminated, or at least priced more reasonably?

At Bright Light, we believe in transparency. The easiest way for us to provide that is to have an undivided loyalty to sponsors. Bright Light works for sponsors, and doesn’t seek to leverage those relationships in ways that are not beneficial to its clients, so we do not have any interest in sponsors using a particular service provider other than the ability of that provider to best serve our clients.

 

ACCESS | TRANSPARENCY | EXECUTION
It's what we do.

 

Why Does Financial Technology Matter?

The Customer

As it pertains to financial technology infrastructure, the landscape in commercial real estate is changing rapidly. This is evidenced by so many observable events of disruption where tasks using legacy systems are replaced with state of the art technology.

Last week I had the pleasure of visiting with industry leaders and chatting about a wide variety of topics. Joe Salesky (CEO, CRMNext) was in town from San Francisco. Chris Atkinson (CEO), Justin Helmig (COO) and Leigh Haydon (VP Sales) from Investor Management Services carved out time from their busy schedules to discuss financial technology and its impact on commercial real estate. While we are all solving different problems in CRE, we share the vision and passionate commitment to make a difference for our customers via commercial real estate fintech.

 

“The winds of change are blowing wild and free.”
Make You Feel My Love, Bob Dylan

 

The Process of Change and a Better Tomorrow

In his moving 1997 David Letterman Show performance Billy Joel sings of change and a better tomorrow with Make You feel My Love.

The status quo of old manual systems, redundant work flows and single points of failure (think of a complex excel workbook that a CRE sponsor uses to compare commercial real estate loan alternatives and/or calculate limited partner distributions) has epic amounts of inertia. Bank legacy systems have even more inertia.

So, what is a legacy system? It is an old method or application that is out of date or in need of replacement. Unfortunately, a legacy system may continue to be used for a variety of reasons. It may simply be that the system still provides for the users' needs. In addition, the decision to keep an old system may be influenced by immediate economic drivers , internal corporate politics, an “if it isn't broken, don't fix it” mentality reasons other than what is best for The Customer.

Companies often lean into current budgetary constraints which fail to address the need of replacement of a legacy system. However, companies don’t consider the increasing support costs and do not take into consideration the enormous loss of productivity or business continuity.

 

“The winds of change are blowing wild and free.”

 

As the alternative, CRE financial technology is now finally making inroads. FinTech companies range from startups to established financial and technology companies. The FinTech solutions compete to replace or enhance the incumbent solutions. There are a wide variety of compelling alternatives that provide simple solutions to complex problems in CRM, investor management, capital raising and optimal debt financing.

 

It's all about the customer. Stay Focused!

At Bright Light, we are excited about the myriad of financial applications that are now available. With these, we can reduce traditional costs of operations while increasing efficiency and accuracy. All this provides The Customer with a better experience and a superior solution.

 

ACCESS | TRANSPARENCY | EXECUTION

It's what we do.

3 Most Critical CRE Loan Refinancing Considerations

Prepayment Flexibility

Would you pay an 18% prepayment penalty...$1.75 million prepayment penalty on a $10 million commercial real estate loan? HELL NO!!!

Neither would I.

But, if your loan has a Yield Maintenance prepayment structure that would be your obligation if you sold the property 12 months after loan closing ($10 mm loan, 5.00%, 25 yr amortization, 2.50% 10 yr U.S. Treasury). I used Chatham Financial's Yield Maintenance Calculator

Brutal. Heavy prepayment structures equal a call option on your real estate equity capital and your limited partners' capital. Unless you will absolutely buy and hold the property to loan maturity, use lenders that offer no prepayment penalty or step-down prepayment.

 

Is Your Loan Refinanceable?

In the current market environment Debt Service Coverage Ratio (DSCR) limits available loan proceeds. Loan-to-Value (LTV) rarely constrains loan size. We discuss this dynamic in more detail here

Lenders "adjust" vacancy rates and expenses to market. Some lenders then deduct reserves prior to calculating DSCR (NOI - Reserves = Net Cash Flow). Net Cash Flow can be 15%+ less than NOI. Ouch!

Do you know what loan amount your NOI will support? Do you know which lenders DO NOT hold back reserves? Use this tool for the former and contact us for the latter. 

Required DSCR and reserves directly impact our next topic...

 

Cash Return On Equity

Challenge: in 5 seconds or less identify the loan option that provides the highest Cash ROE @ 70% LTV.

  1. 4.25% on a 25 year amortization 
  2. 4.65% on a 30 year amortization

Unless you have extraordinary mental math game, the answer can be figured out in your head. Many steps and the math is complex. Though a constant is the answer, it's not always intuitive (hint - low rate doesn't always win).

The fact of the matter is that borrowers do not have effective tools that allow them to compare different loan options. Bright Light developed a solution to this problem that our clients find extremely useful.

 

Simple and Effective

Prepayment Structure. Refinanceablility. Cash ROE. Keep these three essential factors in mind as your consider CRE loan options for your next refinancing (or acquisition).

 

 

ACCESS | TRANSPARENCY | EXECUTION
It's what we do.

Warren Buffett - Low Fees and Transparency Win

A Simple Question

Low fees and transparency are critical to Warren Buffett, Charlie Munger and Jack Bogle.
Should they be important to you?

 

Low Fees in Commercial Real Estate Loans Matter

Low fees and transparency - two central themes in Warren Buffet's 2016 Annual Letter to Berkshire Hathaway shareholders. Minimizing fees and creating transparency in commercial real estate are critical given the asset's inherent leverage. CRE fees measured as a percentage of the equity are 2x - 4x greater than they appear relative to the total value of the property.

 

Warren Buffet, the Impact of Fees and "The Bet"

Mr. Buffet describes "The Bet" on page 21 of this year's Annual Letter to shareholders. Simply put, The Bet pits actively managed funds with high fees against a passively managed, low fee Vanguard S&P 500 index fund over a period of 10 years. Spoiler alert: one must be bold to bet against Mr. Buffett. The 10 year window closes this December.

Jack Bogle founded Vanguard. Vanguard evangelizes low fees and transparency in financial services. Mr. Buffett pays respect to Jack Bogle: 

Page 24:
"If a statue is ever erected to honor the person who has done the most for American investors, the hands- down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.

In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me."

 

Transparency is Critical

Mr. Buffett discusses transparency in a brilliant, non-fiction storyline beginning on page 16. The storyline points out that industry standards (and in this case GAAP) encourage behavior utterly contrary to common sense. Warren Buffett and Charlie Munger refuse to yield to such behavior. It's a good read. Check it out.

 

Application to Commercial Real Estate Loans

CRE market participants frequently dismiss high fees, antiquated technology and opaque processes. 

"Don't worry the Seller pays the fees."
"It's only 2%."
"Yeah, the Lender is paying me too. Sorry I forgot to mention that. Don't worry, I'm working for you. You're my client!"

The Borrower is the source of funds for all fees paid in a commercial real estate acquisition or refinance. Period. God Bless. Amen.

Let's take a quick look at the math of a traditional mortgage banking fee. Traditional mortgage banker's frequently receive far more than 1.00% per loan. Over the life of the loan the total fee can be 150 bps - 200+ bps.

I can hear you now ... "Preposterous! I've never paid a 200 bp mortgage banking fee in my life." Maybe, maybe not. Simply sum production incentives and/or servicing fees received from lenders. These fees are on top of the stated fee in your mortage banking engagement letter.  

Back to the math...

Cash Return On Equity = (NOI - Loan Pmt - Fees) / ((1 - LTV%) * Price)

The loan payment on a 6.25% cap rate acquisition financed with a 4.75% (25 yr amortization) loan consumes anywhere from 70% - 90% of NOI @ 65% LTV - 80% LTV. This is before fees.

 

4.87% Cash ROE. Not So Great.

Consider a $10 million deal on an industrial asset in a nice market purchased with the above parameters (6.25% cap rate with 4.75% financing) at 70% LTV with a 5 year maturity. Cash ROE comes in at 4.87%.

The financing creates a loan constant of 6.84%. Thus, the loan payment consumes 77% of NOI. Equity investors receive a rather modest 4.87% Cash ROE.

In dollar terms, there is $146,000 in cashflow available...before the $105,000 mortgage banking fee (1.00% upfront and 10 bps per annum servicing fee). THAT'S 72% OF YEAR 1 CASH FLOW. 72%!

The standard industry practice is to obfuscate this fact by financing the fee into the loan balance. The practical result is that high fees, no matter who charges them, result in commercial real estate sponsors selling a call option on the initial price appreciation of a project.

Fees and transparency matter, particularly in an asset that is leveraged 2x - 4x capital.

 

ACCESS | TRANSPARENCY | EXECUTION
It's what we do.

Low Cap Rates and Maximum CRE Loan Amounts - LTV Doesn't Matter Anymore

"Rate and proceeds"...the commercial real estate industry standard for summarizing a loan in two words. In reality, CRE borrowers use "proceeds" as shorthand for loan-to-value (LTV) * Property Value. For decades, LTV has been the go-to term for comparing alternative loan proceeds.

That just doesn't work anymore.

 

The Reality of Commercial Real Estate Loan Sizing

Commercial real estate lenders CAP the loan amount at the lower of:

LTV Guideline
Debt-Service-Coverage Ratio (DSCR) Guideline
The current low cap rate environment creates a double whammy working against CRE sponsors. Lower cap rates drive up prices. This means more loan dollars for a given LTV. Larger loan amounts require more net operating income (NOI) dollars to cover debt service payments. It's a vicious cycle...

The vast majority of loans BrightLight arranges are constrained by DSCR and not by LTV. For those of us that can't do differential equations in our head, estimating loan proceeds based on DSCR is laborious and time consuming. And then you must compare the "DSCR Loan Amount" to the "LTV Loan Amount."

 

A Simple Solution

 

BrightLight developed a great tool to solve this problem faced by our customers. The CRE Loan Payment Calculator provides both the annual loan payment AND the minimum required NOI to support the loan amount. We provide annual loan payments and minimum required NOI for 30 year, 25 year and 20 year amortization terms at the click of a button.

 

ACCESS | TRANSPARENCY | EXECUTION

It's what we do.