Real Estate Underwriting Needs To Change
The only word to describe what is happening in Washington with the fiscal negotiations is disgusting. We had Simpson Bowles which Obama appointed and most objective observers think is the best way to get to a true deficit reduction. Then we had Rivlin Domenici, The Gang of Six and last year the almost agreement between Boehner and Obama. Now we seem to be in a stupid war of the Democrats thinking they got some sort of mandate to raise taxes on most of you reading this and to then spend more. The audacity to suggest that he have sole dictatorial right to raise the debt ceiling is the height of arrogance. The last time I read the constitution it is the House that controls such things. We have a giant spending problem, and while revenues must go up, that is a drop in the ocean of a tidal wave of debt that will wreck the country. After listening to the Sunday morning talk shows it is clear that the Democrats think raising rates on a few successful people is all they need to do. Revenue is revenue, whether from capping or eliminating deductions or raising rates –a dollar of cash inflow is a dollar of cash inflow. It is not a religious edit that rates have to go back to 39.5%. Obama won but he only got the votes of 26% of all eligible voters and only 36% of all registered voters. That is not a mandate. The Republicans retained total control of the House and it is the House that passes revenue laws. To say it is not fair that guys like me pay 70% of all income taxes and 47% pay zero, and we are not paying enough is just pandering, but it sure sounded good to people paying little or nothing.
It is all about entitlement spending which is going to drown the nation and disrupt the capital markets for all of us who depend on smoothly functioning capital markets to succeed in our chosen business. The real debt is $86 trillion and growing rapidly. Given that the world is highly likely to be on a slow growth mode for the next several years, it is absurd to think we can just grow our way out of this mess. That is impossible.
It is absurd that when I got two surgeries on my knees I paid nothing at all. Medicare paid all of it, and they paid the surgeon, who is one of the best knee surgeons in the country, and the Hospital For Special Surgery, almost nothing. They can’t keep cutting payments to doctors and hospitals and expect them to continue to serve Medicare and Medicaid patients. In New York now, it is very hard to find a top quality doctor who will take Medicare. It is what will happen across the country and it is the middle class and poor who will suffer. People like me can pay for concierge medical care so it will not matter to me. In the end, the Democratic and SEIU union position that even the wealthy have to get the same benefits as the poor is stupid. On the one hand they say we need to pay more taxes, but then say it is unfair and wrong that we pay more for medical care. We already pay 70% of all the taxes and 47% pay zero. I don’t know anyone of my peer group who would object to pay a co pay on Medicare, or who would object to a small increase in premium. I also believe that most objective people will not disagree that spending over $1 million to keep an old, desperately ill and dying person alive for an extra few months in a state of barely conscious is a good use of spare resources that would be far better spent on helping kids with cancer or bad diseases that might be cured if the money were available for more research.
We need the games to stop. The election did not give Obama and the Democrats a big win that was any mandate to continue the country into a spending oblivion. The Republicans need to discard whoever Norquist is. Nobody elected him to set policy. The danger is that instead of solving a giant problem, Washington is still in the mode of children acting out instead of adults sitting in a room and solving massive problems. Both sides need to get off TV and start to act like adults behind closed doors. You can say whatever you wish about Regan-O’Neil, or how Lyndon Johnson operated, of Clinton-Gingrich, but they all knew how to get done what needed to get done for the good of the country. The more there is posturing on TV the harder it is to back down and compromise. The Dems seem to think and say so, it is only all about raising taxes on the main payers of tax, and the Republicans seem to say it is all about not raising rates even a little. If any of these people worked in any of our companies we would fire them for stupidity.
It is hard to know what the result will be, but most likely there will be a deal, and it will not be satisfactory to the markets. It will be one that does not really solve anything now. The result will be more damage to the economy and the capital markets, lower growth, continued high unemployment and more need to assume your investments will take longer to harvest and will yield a lower return that they should do. Capital gains will rise for sure-they already go up by 3.8% under Obamacare. There is highly likely some added cap gains coming on top of that. Carried interest will be on the table but what happens with that is not at all clear- most likely it will not change. In short, all those tax breaks we enjoy as real estate owners, are going to change either directly or due to caps on deductions and/or increases in cap gains. You need to recalibrate your underwriting in major ways to assume slower value increases and less net cash to you after taxes, and it will not be insignificant.
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