CORONA DEL MAR, CA – Presidential elections aren’t known for cooperating with commercial real estate fluctuations. The current wave of uncertainty, however, has this ballot feeling particularly ill timed. So how do the major candidates’ policy proposals fit in for commercial real estate investors? They’re already having an impact as we are seeing many investors pulling the trigger on acquisitions and dispositions now to get in front of what may come, depending on who they think will be elected to office, says Eric Wohl, EVP at Hanley Investment Group.
“Every presidential election creates new uncertainty about the direction of the economy,” said Wohl. “The goal is to have a clear picture on how each presidential nominee, if elected, will impact the commercial real estate industry. While some policy details may be vague or change, all we can do is to interpret the provided information at this time to the best of our ability.”
So, with that in mind, what are the candidates’ policies on capital gains and tax reform? “Hillary Clinton is proposing a sharp increase in the capital-gains tax rate for the highest earners for investments held for less than six years, according to reports,” said Wohl. “Under the current law, gains from assets held for more than a year often qualify as long-term capital gains, which are taxed at a top rate of 20%. Under Clinton’s proposal, for individuals in the top bracket, the tax would start at 39.6% for investments that taxpayers maintained for two years or less, then gradually decrease after that, back to the 20% rate only for assets held for more than six years. Taxpayers outside the top bracket, which starts at $466,951 for married filers, would see no change.”
According to Donald Trump’s website, Trump wants to dramatically streamline the tax process and cut the top marginal income tax rate from 39.6% to 33%. “Trump also advocates lowering the tax rate on business income from 35% to 15% and has advocated that the rate applies to all sorts of businesses, including partnerships and sole proprietorships. Some analysts say that this will provide the loop hole to turn what is now taxed as individual income into ’pass-through‘ business income at that low 15% rate,” Wohl said.
Regarding long-term capital gains, Trump would cap taxes on capital gains at a top marginal rate of 20%, Wohl reports. Trump also proposes to eliminate the net investment income surtax. Given the reduction in rates here, Trump, on his website, says, “many of the current exemptions and deductions will become unnecessary or redundant,” so that “those within the 20% bracket will keep more than half of their current deductions and those within the 25% bracket will keep fewer deductions.”
Clinton would charge a minimum 30% tax on incomes over a million dollars, and she’d raise the total tax rate to 43.6% for those making over $5 million, according to reports. “Additionally, she would limit the value of tax deductions, and require longer holding periods to get the low long-term capital gains tax rate plus other rulings that would make the tax code less favorable to the affluent,” said Wohl.
Trump had tweeted in February, “It is so important to audit The Federal Reserve” – a reference to an “Audit the Fed” Senate bill that the central bank fiercely opposes, Wohl comments. “He has said the Fed played a role in stoking asset bubbles and predicted a ’very massive recession.’ Last year, before the Fed raised rates in December, Trump accused the central bank of keeping interest rates low at the bidding of President Barack Obama, something the White House has denied.”
It doesn’t appear that Clinton has weighed in on whether or not the Federal Reserve should raise its key interest rate, Wohl notes. “However, in May, Clinton came out in favor of reforming the Federal Reserve including reducing the number of bankers in key central bank positions. Clinton called for the Fed to increase the racial and gender diversity of its leadership, and ban private bankers from the boards of the 12 regional Fed banks. In a statement she said: ‘The Fed needs to be more representative of America as a whole,’ adding that ‘common sense reforms—like getting bankers off the boards of regional Federal Reserve banks—are long overdue.’”
Wohl adds, “Although the Federal Reserve officials have talked about the imminent increase in the federal funds rate, some believe that is extremely unlikely the Fed will raise the target rate right before the presidential election and what they do next will be dependent on who sits in the Oval Office. In the meantime, as the
November election approaches, hopefully we will get a clearer view on the candidates proposed policies impacting commercial real estate investors, and which candidate will be our new Commander in Chief.”
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SACRAMENTO—Sacramento-based L5 Real Estate Investments is a privately held investment firm focused on value-add income-producing multifamily properties. Michael Flaherty, founder and managing partner of L5 Investments, recently shared his insights into identifying apartment investments, due diligence process and what the future holds for multifamily.
GlobeSt.com: What does L5 Investments look for in evaluating assets?
Michael Flaherty: Primarily we are looking at assets in areas that show strong growth in rents and jobs. I think our appetite is a little unique because we acquire hybrid opportunities that offer both attractive yield and value-add driven IRR. This combination is not always easy to find. I like to say that we are in the “needle and the haystack” business. We are typically buying stabilized, class-B properties that can provide immediate income, but also offer an opportunistic element for adding long-term value.
GlobeSt.com: You focus on apartment investments in strategic locations. How do you identify these?
Flaherty: We certainly track rent growth, but primarily job growth and favorable employment trends. At the moment, we are also very attracted to supply-constrained submarkets with limited future multifamily developments in the pipeline. With that said, we have recently acquired assets in Richmond, VA, Seattle, San Francisco, Kansas City, MO, and Reno, NV that meet that criteria. We take a lot of pride in our due diligence process and as a result we are very selective when it comes to the microeconomics of any given market. This would include how we would rate and qualify an asset’s accessibility, walkability, mass transit alternatives, and the strength of nearby retailers and employment centers.
GlobeSt.com: Once you have identified a potential asset, what is your due diligence process?
Flaherty: I fondly call our team the “due diligence freaks.” Superior due diligence is what makes us experts at what we do. We actually enjoy our investors’ inquiries when it comes to reviewing and even challenging the pros and cons of any given deal. Our goal is to dig deep enough to find that “golden nugget” that others could not. That makes our opportunities successful. As a result, our due diligence process gives us a lot of credibility with clients and the industry as a whole.
Even before we identify a property, we engage an economist/demographer annually to ensure that we remain focused on US markets that meet our criteria. All market analysis begins with on-site meetings with economic development departments at the city, county, and regional levels to really understand the commitment and plans for the area. We want to understand path of progress, job announcements, new construction supply, historical occupancy, wage growth, population trends, rent/buy ratios etc. Ideally, our properties are convenient to employment centers, attractive retail options and public transit. However, in the end, it always comes down to buying “right,” implementation of our repositioning strategies, and our understanding of applicable sales and rent comps.
Another part of the due diligence process we are particular about is understanding the competition. Like any business, it all comes down to beating the competition. We want our assets to be competitive immediately and even more so once our renovations are complete and enhanced operations underway. This focus on competition will serve us well in the short term but more importantly in any given future downturn in the cycle.
GlobeSt.com: How do you see the national multifamily market doing in 12 to 18 months? Will there be a downturn soon?
Flaherty: I think 12 to 18 months down the road, multifamily will remain stable with the most rental demand continuing to be from millennials and baby boomers. Interest rates are expected to stay flat which will create more stability. On the other hand, cap rate movement or stagnation can alter submarket to submarket.
As long-term multifamily investors, we tend to underwrite more on the conservative side to protect ourselves from future rate risk and supply issues. We do expect a pending dip in the cycle but don’t see that coming in the near future. Continued market uncertainty is expected to keep interest rates low and apartment demand steady. We typically add significant value to our assets during the first two years of ownership and hold for up to seven year periods to enable us to perform better than most in the next downturn.
Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What’s driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.
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L5 Real Estate Investments, LLC is a privately held investment firm focused on stable, income producing multi-family opportunities in emerging U.S. markets.