The Future Is a Dense Fog
Everyone now wonders where do we go from here. Probably nowhere good. Start with taxes going up. That is your taxes if you are reading this. Assume for sure taxes are increasing on capital gains and there will be major limits on how deductions are calculated. We don’t know yet what this will look like or the detail, but you can be sure real estate transactions will be negatively affected. By how much is completely unclear. Returns will have to be reconsidered, tax impacts might now matter for investors. The problem is it will be a very long time before the real tax reform is undertaken and then we have no idea what that might be. It seems highly likely that a major rewrite of the whole tax code will happen over the next two years since 100% of everyone agrees the current code is ridiculous and unfair. Just remember, the Democrats think unfair means you. It may or may not also go after carried interest taxes since that was a major issue in the campaigns. If that goes, and I doubt it will, then the way funds invest may change. The real issue now is you can’t do any tax planning at all. Whatever you assume now for three years from now is wrong. Whatever deal structure you use now will not look as good in three years most likely. We simply don’t have any idea so get tax advice on how to make deals flexible with the best of what is known today. Keep an ability to modify the structure so when the tax law changes you are not locked in concrete if modification is needed.
The EPA extremists are now going to be let loose. I had dealings with Lisa Jackson when she ran New Jersey DEP. She is impossible to have a sensible discussion with. She made New Jersey DEP almost impossible to work with even when the solutions were apparent and seemingly good for the state. Now she is being given a free hand and she has been sitting on a pile of new regulations on all sorts of topics that will make development harder and more costly. Many of these will also cost the economy a lot of money. Coal being a primary target, will mean the eventual closing of all coal fired power plants. That likely means power costs will rise despite cheap gas. The utilities have to bear the cost of conversion. You will pay more.
Then we get to little things that mean a lot. For example, hotels were forced to install pool lifts. These cost all in about $20,000. For smaller hotels this is a cost they did not need, plus they are unattractive and take space by the pool. There are all sorts of other agencies now weighing in with health code rules, labor rules and other regulations. The second term will make the first term regulation look easy. Remember you are the big bad greedy developers, bankers, private equity monsters who need to be controlled and whose earnings need to be redistributed.
Dodd Frank is far from implemented. Well over half the rules are yet to come. Banks have already had their earnings potential limited by the debit card rules, mortgage fines, trading limits, and a myriad of other regulations, with many more to come. Local and regional banks are being made to bear costs that are burdensome. Giant fines and lawsuits continue to pile up and more to come. And now Cordray and the CSFB is being turned loose and that will be a real nightmare. Net result of all of this is banks willingness to lend aggressively, or at all is being severely reduced. While it needed to be a lot less than in the bubble, it is headed to more constraint and that means development loans will remain harder to get for a long time. One might argue that is good as it reduces available space and so supply is limited, meaning higher rents. Yes, but too great restrictions on lending means a slower economy overall, and that is never good. The needed balance between the wild days and over regulation is needed but is not going to happen under this administration.
There is nothing being proposed by Obama which is growth oriented for the economy. It is more of the same. It is very unclear we will get real deficit reduction over the next four years. There may be a Simpson Bowles deal, but one does not get a sense that will happen when listening to Reid, Patty Murray, and Obama. Entitlement reform is a dirty word to many Democrats. It is not a hopeful picture. While in the short run it means more ultra low rates from the Fed, we are just setting the country up for a terrible problem in three or four years when QE has to be unwound, inflation starts to really ramp up from all the central bank stimulus around the world, and we have high taxes and heavy regulation that will take years to unwind.
Then we get to the real capper of Obamacare. Companies in the restaurant, hotel and similar businesses will move staff to part time to escape. Less personal income for millions of low end workers. Lawsuits by the Feds to claim that is not fair or whatever. There will be a shortage of doctors which will get worse over the years. The cost of insuring your staff will rise even faster if you use private carriers. 50% of all doctors are now salaried employees and that will rise materially. This raises real issues for medical office. Reimbursements to hospitals and doctors is going down materially. Medical care will be more expensive for people reading this and for private employers. Quality of care will decline unless you pay for concierge services. The impact of Obamacare is yet to be seen but so far it looks bad and getting worse.
Overall the election was about how to take more from you and give it to everyone else. It was not about economy policy as it should have been. That got lost in the personal attacks on Romney. Obama has clearly stated over the years he believes in transfer of wealth. That means from you to them. Real estate developers have never been liked by most of the rest of the world. People making money on carried interests and promotes has been a target for the Democrats. As though you did not really earn it. With all the other really bad things going on in the world, especially with Iran and continued terrorism, we are in for a long troubling four years, and less money in the pockets of those who take risk, and invest. The greatest generation sacrificed a lot to make this country what it is, but now the greatest generation is dying off and the change that is unfolding of the- you owe me generation is taking control, is accelerating. That is bad for the country and will be limiting on our business, and our ability to build wealth in the way it has always been done –working hard and smart and taking risk. This is not a time to take big risk, and not a time for high leverage. It is a time to assume long term holds and total uncertainty on the economy, tax laws and world events. You can do whatever projection spreadsheet you want, but just know the likelihood of it being accurate is not high.
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