Panelists at Odds Over Impact of Pending Tax Revisions on Real Estate
Tax reform will be bad for real estate, it will be neutral and it may even be helpful in weeding out the people who never belonged in real estate in the first place.
These were among the opinions expressed at a midyear real estate economic forecast sponsored by the Building Industry Assn. of Southern California. Daylong sessions were held June 27 in Los Angeles and last Monday in Anaheim.
Michael S. Carliner, staff vice president for housing policy at the National Assn. of Home Builders, predicted a heavy impact on housing construction if the current tax reform measure is adopted.
The measure, now being considered by a House-Senate conference committee, will have a particularly strong impact on rental housing, halving production of apartments and reducing the value of existing property, he said.
Large Rent Increases
“Over time, it would result in large rent increases--in the 25% to 30% range--if developers are to obtain the return on their investments they now receive,” Carliner said. “These large rent increases would place substantial burdens on the low- and moderate-income households that constitute the bulk of the renter population.”
Carliner added that whatever gains renters receive from the reduction in tax rates would be offset by rent increases.
John Konwiser, an Orange County-based apartment developer catering to the family market, said that one salutary effect of tax reform will be to weed out the bad people in the field.
He stressed the need for quality property management, saying that of the 60 to 80 apartment units vacated each month--out of the 1,700 his firm owns--virtually all are rented the same month.
‘Kick in the Pants
He said that his firm, the Konwiser Co., plans to build no new units this year, mainly because there are no major development areas that are affordable to an apartment builder seeking close-in areas that are convenient to both Los Angeles and Orange counties.
Paul D. Koehler of Laventhol & Horwath, an accounting firm that specializes in real estate, said that tax reform will give the real estate industry a “kick in the pants” that it doesn’t need. He added that real estate is a resilient industry that will adjust to the realities of a bill that he expects will be adopted in September.
“Real estate syndication, a $13-billion industry in 1985, isn’t dead and won’t be wiped out by tax reform,” Koehler said. “Builders will concentrate on the real rate of return, rather than the after-tax return.”
He believes that commercial property values will drop slightly and rents will have to increase--in areas that aren’t overbuilt.
Will Reward Savings
Anthony M. Frank, chairman and chief executive officer of First Nationwide Savings, San Francisco, admitted that he probably was in the minority of panelists present in favoring the tax reform bill, but said that the measure will result in a change for the better for the nation.
For the first time, tax laws will make a start on rewarding savers rather than punishing them, he said.
Previous tax laws have rewarded borrowers and punished savers by making interest payments deductible, he added. Americans will save more, won’t borrow as much and will pay off their debts quicker if the measure is adopted, he concluded.
Frank believes that apartments will sell on a cash-flow basis rather than as a tax shelter, a “sea change” that many of those attending the session probably aren’t ready to accept.
Money Available
Leonard Weil, president of Mitsui Manufacturers Bank, a major source of construction lending, disagreed with Frank’s assessment of the effects of tax reform legislation, saying that the savings rate of Americans--in the 4% range--has to rise because it can’t sink any lower.
Weil said that the short-term outlook for real estate is favorable, with plenty of money available and stable or even lower interest rates at least through the end of 1986.
Developer Elizabeth G. Williams, president of the Williams Co., Palm Desert, believes that tax reform or no tax reform, the market for retirement housing will be strong for decades to come and is as yet a virtually untapped market.
The older population has been growing at a faster rate than any other age group, now numbering 35 million people 60 and older and is expected to reach 80 million in the first decade of the next century, she said, citing its future impact on housing.
Pays Cash for Homes
Williams got her building industry start working for Ross Cortese of Leisure World, a pioneer in the retirement housing field.
“Our target market, the relatively affluent older buyer, generally pays cash for their houses, demands quality and security and doesn’t want geographic isolation,” she said.
Jack Shine, president of First Financial Group, Encino and current president of the Building Industry Assn. of Southern California, said that the outlook for single-family sales in Southern California is strong through the end of the year, hampered only by product supply. California will probably see production in the 300,000-unit range, well above the 250,000 sold last year.
The bad news is that inflation is beginning to increase, it is becoming more and more difficult to build houses thanks to the permit backlog in municipal building departments and that the cost of lumber and concrete is increasing 15% to 20%.
“Tax reform will benefit single-family builders because the interest rate deduction for first and second homes will remain intact,” Shine said.
Attorney Advises Home Sales in ’86
Owners of real property thinking about selling this year or next year should make every effort to conclude the transaction this year because tax reform legislation may exclude capital gains treatment for profits on real estate, according to attorney Douglas R. Ring.
A Los Angeles attorney specializing in governmental relations and real estate, Ring told the American Industrial Real Estate Assn. that the Senate version of the tax reform bill, if enacted, will “virtually drive syndicators and tax-oriented buyers out of the marketplace because of very tough new tax shelter limitations.”
On a more positive note, Ring and his partner, Kent Mouton, noted that after price deflation has occurred, there will be windfalls for owner-users buying property and investors coming into the market with substantial cash to put into transactions. Ring is a partner in the firm of Howard, Ring & Chizever.
