With an election less than one week away, most citizens remain in the dark about the important policy positions of each candidate. Yes, hundreds of millions of dollars have been spent flooding the airwaves about the elections and the candidates, but most of these advertisements remain focused on the reasons NOT to vote for a candidate. Instead, many tough questions remain unanswered about the policy positions and the candidate’s beliefs. As was painfully noted in the first presidential debate, moderated by Chris Wallace in Cleveland Ohio, there was not a clear policy position that was either stated, implied or could be heard, by the audience. The second debate offered some information, yet the American citizens need details so that they can vote intelligently.
Both mainstream political parties have their position papers and party platforms on their respective websites. But even then, candidates are notorious for talking out of both sides of their mouths, and even though you may see a policy statement in writing, it is often turned on its head when the candidate starts to articulate their personal views. With so many 24-7 news outlets, and countless citizen journalists spewing rhetoric on the internet, what can you truly believe? The adage of “after all, it was on the internet” cannot and should not be sacrosanct. But what are the short-term and long-term consequences of this upcoming election? In an effort to save the time, agony and having your eyes glaze over, the following is an objective look at what policy positions each candidate brings to the election, and more importantly, examines possibilities of various outcomes.
First and foremost, the financial markets have, long ago, analyzed, polled, and considered the effects of different election outcomes, and the consequences each might mean for the future of economic policy. So, this paper is NOT a blueprint on how to get rich in the market, as the market speculators have a monopoly on that technique. Rather, it is a high-level analysis of ECON 101 based on simple economic and geopolitical theory.
In short, a Trump or Biden win, when paired with a divided Congress, would yield little in the way of major economic policy changes, perhaps other than a slimmed down COVID-relief bill. Under this scenario, a President Trump/Biden might have to focus their efforts on making policy changes in areas where the executive branch has significant unilateral power, such as trade policy, foreign policy and appointing cabinet members, judges and regulators. Therefore, unless either party can dominate both the executive and legislative branch, neither party will screw up the economy due the institutional checks and balances!
The current political pollsters do not have a scientific crystal ball, but many political pundits DO NOT think that any one political party will sweep the House, Senate as well as the White House. However, if it were to occur, it is wise to anticipate that a “Democratic sweep” would facilitate the most far-reaching and significant changes to fiscal policy. This scenario, if it played out, could create an opening for the end of the filibuster in the Senate, and could lead to higher taxes on the wealthy and corporations, as well as major new spending initiatives on public health, infrastructure and a slew of other areas. It is also wise to believe that a Democratic sweep is also a scenario in which a significant (>$3 trillion) COVID-relief bill would have the highest probability of becoming law in an attempt to prop-up economic and financial market conditions. Betting markets are increasingly pricing in an additional fiscal stimulus, although it will probably not come before the end of 2020, and the odds of it coming at some point in the next couple of quarters are on the rise.
A Look at Policy
It is important to keep this backdrop of political, economic and market opinion in mind while looking at each candidate’s policy. It helps to give a more holistic look at the election, showing that the presidency alone cannot change the fiscal dynamics of the country. Nevertheless, the following is a snapshot at some of the key issues in this election and where the candidates line up.
A Candidate’s ideas and views on economic policy are of paramount importance in any election cycle. However, the policy position is even more important given the Coronavirus pandemic induced recession.
The first thing that either of these candidates must deal with, after their induction, would be their plan to reopen the economy. President Trump has spent the last few months pushing and campaigning for an aggressive and full economic reopening. He wants the states to open as soon as possible to help accelerate the recovery process. Under a Trump administration a push for opening would be highly likely, along with a predictable and continuing spike in Covid-19 cases. Former Vice President Biden, on the other hand, has a much more cautious plan for reopening of the economy. Lockdowns would most likely continue for a couple extra months under a Biden presidency. Mr. Biden has often said that he will follow the science and would put the health and safety of the American people over economic recovery. Under a Biden administration, lockdowns and a slow opening would be highly likely.
Since the COVID-19 outbreak, President Trump has signed legislation to flush the economy with trillions of dollars in onetime aid to businesses, individuals, and local governments. He has also supported further stimulus measures, including payroll tax cuts. Former Vice President Biden has proposed trillions in spending to create new jobs in clean energy, manufacturing, caregiving, and in programs to ease racial economic inequality. Mr. Biden wants to offer states more support in paying for unemployment benefits and says that households, as well as local governments, need more support to get through the shutdown.
Taxes have been a point of serious disagreement between these two candidates throughout all of the election. President Trump’s 2017 tax cuts have served as his shining achievement. He has proclaimed those “supply-side theory” cuts as an example of his approach to stimulating economic growth. Trump’s tax platform for this election has been one based on the cutting of taxes, such as payroll. The Trump campaign has said that cutting payroll taxes puts more money in people’s pockets, and therefore stimulate the economy by boosting “net paychecks” of most working Americans. A Biden tax plan seems to be the antithesis of this policy. The former Vice President has openly criticized the same tax plan that the President boasts. Biden has said that the 2017 tax cuts are responsible for the growing a wealth gap in America and generally apply only to the wealthy, and do not do enough for middle class America. Biden’s plan would be a partial reversal of these tax cuts, with a raise in the marginal tax rate on the highest income earners back to 39.6%, from 37%.
The Trump campaign is attacking the policy of raising taxes while the economy struggles to recover. He has also said that a raising of the minimum wage would stifle small business recovery. Biden, on the other hand, supports raising the national minimum wage to $15 an hour from $7.25, and expanding some tax credits for lower-income workers, as his economic advisors feel that it will promote the “rising tide lifts all boats” theory.
Trade is most certainly an important issue in this election. A trade war with China, a controversial North American Trade Agreement, and other topics have become hot button issues in recent years. In a return to a core issue of his 2016 presidential campaign, Trump is telling voters he wants to boost domestic manufacturing. He says America’s difficulties in procuring medical supplies internationally during the pandemic are a national security reason to encourage U.S. companies to avoid offshoring. Trump has not shied away from instituting tariffs on other countries and has clearly entered a trade war with China. Biden has proposed his own made-in-America manufacturing plan in July. He pledged to spend $700 billion on American-made products and industrial research, which he said would give at least 5 million more people a paycheck during a job-killing pandemic. Biden criticizes Trump’s tariff war with China as “bad for US consumers and farmers.”
Investment, research and innovation in green technology has become increasingly important during this election as the climate and new technology has become ever more prevalent. The president’s green investment has been very conservative and been one based on deregulation. He has not introduced any major plans or subsidies. He Advocates more spending on infrastructure such as U.S. roads, bridges, and airports., and he also has sung his praises for electric cars. But, with all of his singing, has not yet introduced any policy or other initiatives to boost the industry. This is a stark contrast when compared to Mr. Biden’s green investment plan. There was confusion over whether he was in support of the “Green New Deal,” which has support from many in the Democrat side of the isle. While a majority of Biden’s plan, which is said to cost $2 trillion over the next 4 years, looks very similar to the Green New Deal, universal jobs and free healthcare are absent from the former Vice President’s plan. Nevertheless, the investment and incentives associated with green technology are a centerpiece for Mr. Biden.
Big tech will most certainly see scrutiny during the next couple of years. Both sides of the political spectrum, while they might have different reasons, have a bone to pick with the major social media companies, such as Facebook, Twitter, Google and YouTube. It has become clear to many that there is something wrong with the way that social media platforms are being handled. From censorship, the cancel culture, false narratives of the citizen journalist to the lack of decency contained in the Telecommunications Decency Act, these platforms have turned against the American people.
In a second term, Mr. Trump and his appointees likely would maintain, and possibly accelerate, the broad-scale regulatory scrutiny of technology companies that marked his first term. That effort has included allegations of anticonservative bias online, antitrust investigations of internet giants such as Alphabet Inc.’s Google and Facebook Inc., and actions against Chinese-owned apps such as TikTok and WeChat. Mr. Biden, the Democratic nominee, has also been critical of Big Tech’s market power. He and running mate Sen. Kamala Harris say they would support stricter antitrust oversight and online privacy rules. But the Biden camp has emphasized forcing social-media companies to better police their sites against false information, instead of unilaterally taking government action.
Sadly, the idea of a hands-off approach, when it comes to social media, is no longer a viable option. With these platforms being so important to the framework of American society, both sides have agreed that they cannot be treated the same as other private sector companies.
If you do not currently care about the issue of big tech, you should. It is extremely important to the promotion of our First Amendment Rights. Whether you are left, center or right leaning in your political views, this is an extremely important issue that can affect our democracy and our protected freedoms.
While immigration was the ever-present topic of discussion in the 2016 election, it seems like it will be an issue that will continue to be present during the next 4 years. The topic of immigration has seen less screen or talk time in the last few years, but it is still an important economic and social issue. The President’s previous campaign and policies were heavily based on immigration, while his challenger, Mr. Biden continues to be critical of these policies.
While his dealing with the pandemic, overall, have been more relaxed, the President has taken a stern stance on immigration throughout the events due to Covid-19. Mr. Trump dramatically curtailed immigration and travel into the United States during the coronavirus pandemic, arguing the steps were needed for health reasons and to protect jobs for U.S. workers. The former Vice President, in contrast, has been very critical of Trump’s Covid-19 immigration policy. Mr. Biden is against the cutting of new immigrant numbers and those seeking green cards and asylum. In fact, the former Vice President has said that he would put a pause on deportations for the first 100 days of his presidency.
The President has been adamant throughout his presidency that he would like to end the DACA program. Mr. Trump has seen very little support from the Supreme Court on this issue and lost a fight on the issue in 2017. Mr. Biden, however, opposes Trump’s actions and calls it “a cruel decision to terminate the DACA program.” Mr. Biden has stated that he would make Dreamers eligible for federal student aid for college, and would back legislation that provides for an amnesty path to citizenship for all of the estimated 11 million immigrants living in the country illegally, including those who did not arrive as children.
In the past few years, the ever-increasing debt levels and cost of student loans have become a major talking point. The amount of student debt in the country has exceeded $1.6 trillion and effects tens of millions of Americans. Although every American knows that the debt is an issue, however, President Trump and Joe Biden disagree on how much of the $1.6 trillion in federal student debt owed by 43 million Americans should be forgiven, and equally, how to finance college going forward through a public option.
The Republican Trump administration has sought to limit opportunities for Americans to have their debt forgiven. Education Secretary Betsy DeVos has said that the government must address borrowers’ needs while guarding against taxpayer waste. But the administration has improved access to data showing how much students can expect to pay in tuition and how much they are likely to earn after graduation, treating higher education as a marketplace driven by consumer choice. Students and their families would continue to pay the growing cost of a college education, though low-income students have been given more flexibility on the use of so-called Pell Grants. Mr. Biden, the Democratic challenger, proposes having the government forgive hundreds of billions of dollars in student debt owed by poor and middle-income households. He says that would help to reduce income and wealth inequality. Mr. Biden also says that students from low and moderate-income households should not have to pay for a public college education.
When it comes to health care, there is one … and only one … major fight taking place. It is over the Affordable Care Act, a plan introduced by former President Obama. Judging from the number of political ads that have the ACA, pre-existing conditions, single-payor options, etc. as the primary talking point, it is clear that this is an issue that moves the needle from a voter’s perspective.
President Trump has been openly critical of the ACA and has made it his mission to end it. He has given some limited information on his own plan, and has succeeded in lowering drug prices, yet he has not yet released a comprehensive, replacement plan. Biden, on the other hand, has made it one of his main priorities to protect the ACA plan which was created under his term of vice president.
So, what does all of this mean for the future of our economy?
For those of us who have watched the hit Broadway Musical Alexander Hamilton, the creators not only wanted to entertain the audience, but also to educate the masses. Remember the scene when both Jefferson and Hamilton tried to convince President Washington that their political views represented the greater public opinion? What began as a personal dispute over a centralized and decentralized government and federal banking system, evolved into the formation of primitive political parties. Both Jefferson’s and Hamilton’s political views represented public opinion. Jeffersonians shared the belief in a strict interpretation of the Constitution, while Hamiltonians accepted a broad interpretation. And thus, the two-party political system was created.
It is this two-party system which has lived through two hundred years …. which has survived wars … has survived famine, depression, and pandemics … has survived civil unrest and political strife … and it will prevail for the next two hundred years.
The framers of our constitution and the early creators of our republic wanted to make sure that no one single party … one president … one legislative or judicial branch … could dramatically alter our economy, social fabric, and overall direction of America. In short, they built in enough “political frustration” to ensure that we could stay moving in one general direction, and not be entirely subject to the far right or far left, and their political agendas.
So, the differences, similarities, number of tweets, attack ads, debate interruptions, and political rhetoric of both President Trump and former Vice President Biden, should not dramatically effect the near term for the US economy, as this “political frustration” will take months, if not years, for the policy pendulum to swing in one direction or another. Therefore, the 2020 election will be largely symbolic and more of an election that will call for Democrat reform, or a continuation of Republican policies, as nothing will change quickly in Washington.
Now it is up to you
The ability to vote is something that many Americans take for granted. As an American citizen, you must be engaged, have your voice be heard and make an impact on the direction of American policy. Your vote does matter as it is your statement as to the direction you choose for America. It is integral to the American democratic system and it is your civic duty. So, with an election that has already witnessed a historical turn out, you should become educated and go vote.
Talking you off the cliff
If you have watched any news channel, seen any talk show, or just looked at Twitter or Instagram, you probably have heard something along the lines of “this being the most important election in the history of the free world!” From the left, you here that Trump will bring COVID death to hundreds of thousands more people. From the right, you here that Biden will bring us to civil war and unrest and take away your rights under the 2nd Amendment.
But rest assured, none of that will happen. Every presidential election is important, but for the American people, this election is no more important that the last. People fear the worst in most circumstances. It is natural for humans to “pile on” and reach conclusions that “the world is going to end,” rather than not much will change.
As stated before, unless a unified government is established with all branches of government under one political party, not much ever happens. There is a reason why presidents do not accomplish everything on their agenda in their presidential term. It is called checks and balances … and bureaucracy. While most often the speed of government and lack of effectiveness is seen as a bad thing, this process was created to keep quick, unilateral and radical changes from occurring.
Sure, some of the policies outlined in this article will get enacted during the next presidential term. But even if they do, it will not occur on the first day. In fact, it will probably not occur within the first two years.
Therefore, if you are on the edge of the cliff due to the attack adds, the negativity and the spin … take a step back. Everything is going to be fine. The effects of this election, whether you approve or disapprove, will not materially change your life. The economy will stay relatively stable … you and your loved ones will stay alive … and the world will continue to spin in the same manner it has for thousands of years. Again, everything is going to be fine and our democracy will prevail!
Are you looking for gold, friend? Well, come to Texas and look around. A new gold rush is occurring deep in the heart of Texas. Whether it is the “new gold” in oil shale reserves, new technologies, Bitcoin, or many other industrial advancements, or simply the search for a lower cost of living, no state income tax, less regulations, tort reform and reasonable property values, there is gold in them there hills. And this modern-day Gold Rush is causing most real estate investors to smile from ear to ear and generate very attractive investment returns.
With a population of 29.9 million, the population density in Texas is 108 people for every square mile, which puts the state at the mid-range for density rankings. Median household income for Texans is $57,000, which is also a mid-range value according to national data from the U.S. Census Bureau. So, if Texas is in the mid-range on these benchmarks, then why does everyone want to come to the Lone Star State?
The Texas economy is valued at $1.6 trillion, which places it at a close second to California. Annual job growth was measured at 2.2 percent as of 2017, spurred, in part, by lower business costs and less regulations. The state has earned the following accolades from Forbes Magazine:
- Ranks first in the nation for favorable economic climate due to solid growth in employment and gross state product over the last five years
- Considered among the top states for business startups
- Ranks second in the list of Best States for Business
- Ranks second in the list of Best Growth Prospects
- Ranks third in the list of Best States for Business Costs
- Ranks ninth for availability of qualified labor
- Ranks 21st for Best Regulatory Environments for Business
A Great Migration
Texas, as we all know, is big. After all … “everything is bigger in Texas.” But in terms of population, Texas is only getting bigger. The state has the second highest population at 29.9 million people, as of 2020, and has a high growth rate to match. Texas is growing at a rate of 1,000 people per day and has many of the fastest growing cities in the nation. In fact, five of the top 10 fastest growing large cities in the United States are in Texas: San Antonio, Dallas, Fort Worth, Frisco, and Austin. When you expand the survey, this Texas growth trend continues, as out of the 15 fastest growing American cities, by percentage, Texas houses 7, including New Braunfels, Frisco, McKinney, Georgetown, Rowlett, Midland and Round Rock.
What does this mean? As George Strait put it … it means that “Texas is the place I’d really love to be.” It is the land of opportunities. It is “wide open for business.” And many people are flocking to Texas in search of new careers, greater value in real estate and lower cost of living. And it bears repeating …. No state income tax! When you follow the money, the prudent people … and their money … are all flocking to Texas.
Relatively speaking, the job market in Texas is strong, and its only getting better. Since many corporate headquarters are relocating to the Lone Star State, it means that there is a tremendous demand for qualified workers in many fields. On top of that, residential housing costs are relatively low. Whether you are in the C-suite, or hold a middle market job, when you look at the house that you get for the relative dollar in terms of salary, many areas in Texas offer a great value for growing families.
Along with the low housing cost, Texas has a reputation for low taxes. The state has no state income tax, and according to the fiscally conservative policy makers in Austin, they never will. In fact, a state income tax is against the Texas state constitution. Some say that the state’s revenues must therefore be generated by larger than average property taxes. But, in reality, these property taxes are about half of what you would pay in a city like Chicago. As the state is known for its libertarianism, taxes are a sort of “state sin.”
Alternatively, a state like California has no problem taxing people, especially small business owners, to death. For those businesses that are still alive, they are looking for greener pastures. Greener pastures that all exist in the great state of Texas, This, along with other factors, encouraged 86,164 California residents to move to Texas in 2018 alone, which is the largest crowd, by far, from one state to another. This trend continues in 2019 and throughout 2020. People from states like California, Illinois and New York are moving to Texas by the tens of thousands each year, in search of a better life, and better economic prosperity, than anywhere else in the country.
A Booming Economy
Contrary to popular belief, Texas is more than just cowboys, ranching, rodeos and oil. Texas is the energy capital of the world, has the largest medical center in the world, and is home to Space City Houston, which is the space exploration capital of the world. Texas makes up 9% of the United States economy. But if you look at Texas as its own country, it would have the tenth largest economy in the world, beating out countries such as Canada and South Korea.
As we all know, everything is bigger … and more economically diverse … in Texas. One of those “bigger things” is the Texan manufacturing industry. Back in 2017, total manufacturing output from the Lone Star State was $226.16 billion, or about 10 percent of total U.S. manufacturing goods, according to the Federal Reserve Bank of Dallas. The industry supports more than 1,241,379 jobs in Texas, or about 10.2 percent of its workforce. The average annual compensation for manufacturing was $82,544, which is one of the highest in the nation, and helps boost the state’s gross domestic product. Finally, at a time when global manufacturing expansion is slowing, this sector in Texas continues to grow at a healthy pace.
Texas is also the king of American exports. In 2018, Texas exported a record $315.9 billion of “Made-in-America” goods to the world. Texas is the largest state exporter of goods. While their exports are led by crude oil, Texas has a diverse number of exports ranging from technology to rocket parts.
Texas citizens also see the fastest income growth of any state in the union. Due to the fact that it is one of only four states without a corporate income tax, Texas residents enjoy the fastest personal income growth of any state. People in Texas not only get to keep more out of their income, but they get more money faster too. The data shows that Texas has the largest increase in personal income of any state, at 7.5 percent. In comparison, a state like California has an income growth of 4.8 percent.
Furthermore, the Texas real estate market is strong. The housing economy remains rock-solid despite the shock and awe of the pandemic. A long period of record-low mortgage rates has opened the floodgates for a refinancing boom that is likely to last for several years. In addition, after a momentary COVID-19-induced blip, home buying demand has picked up, driven by low rates and enthusiastic millennial and investor buyers. Spurred by strong demand and record-low mortgage rates, expect to see more home building in 2021 and beyond, which should help support a healthy housing market for years to come.
Texas Real Estate Investment
Texas is also gold mine for Real Estate investment. The housing market has performed exceptionally well since the post-recession years. Home sales in the state have grown, and will continue to do so, at a good rate for years to come. While the market did see a small decline at the beginning of the pandemic, like almost every industry, it was hit much less severely than other states, and for the most part has already rebounded.
Population growth drives interest and profitability of real estate investing ventures. The housing sector and multifamily development will continue to be under pressure due to high demand for residential units as this population grows.
Let’s take a look at some of the best markets in Texas.
Dallas– Dallas has seen substantial population growth in recent years. It has become one of the wealthiest cities in the country and its real estate markets has become a strip mine for earnings. Dallas will continue to be one of the bright spots for real estate activity in the state and nationwide. The National Association of Realtors predicts strong residential sales, especially in the mid-price to luxury-price range. The North Dallas cities of Frisco, Allen, Richardson, Carrollton and McKinney are among the nation’s hottest small-to-midsize housing markets and are constantly mined for tracts of land for multifamily development opportunities. These markets have generated, and continue to promise, a higher yield on real estate investments. Many of the jobs in this area are in the high-compensation sectors of technology, consultancy and finance.
Houston– The Houston real estate market is becoming one of the favorite destinations for those looking for a beautiful and spacious home, or to generally invest in residential assets. This city is one of the golden examples of a booming housing market. Houston has everything: the people, cultural diversity, business climate, world renowned energy, medicine, health care, space exploration and manufacturing. So, if you are an investor looking to invest, Houston is a great place to shop. The Houston market offers plenty of investment choices, amazing value for properties, and it is simply a good time to invest in Houston.
Austin– The capital of Texas is another strong choice for investment. The Austin economy continues to be based on technology, health care and higher education. Austin has made its way to the top of many “best of the best” lists, including the best city for job growth. In 2019, Austin experienced an unemployment rate of 2.7% which is lower than the state average of 4.0%. Millennials, born 1981-1996, have the highest percentage of relocating to Austin. With a large segment of the millennial population preferring to rent, this represents a favorable condition for investor capital. A growing population means housing and multifamily demand. Austin is among the fastest-growing metro areas in the U.S., and the population is expected to continue its exponential growth throughout 2035. During the last decade, the Austin MSA has grown by an average of 55,500 people per year and is just another one of the strong pillars that supports the powerful Texas market.
San Antonio– Also on our list is, of course, San Antonio. The San Antonio real estate market continues to remain strong, healthy and vibrant. An important measure of a healthy real estate market is “underwater mortgages.” If you are unfamiliar with this term, it refers to a situation where a homeowner’s mortgage balance exceeds the property value of the home itself. This, sadly, happens all too often in the United States, but San Antonio has one of the lowest rates in the country, at 9.08%. Surprisingly, San Antonio also has the lowest down payment percentage out of any city in the nation. With an average down payment of 13%, buyers do not need to have a huge savings account to buy a home. In fact, most buyers are spending less than 10% on a down payment in the famous Riverwalk City. San Antonio not only has a job growth rate and median income trending upwards, but it is also located to nearby Austin, Texas and has the benefit of offering more affordable housing for commuters to the Capitol city. Additionally, San Antonio is home to Lackland Airforce Base which employs over 25,000 people and continues to be a steady driver of the local economy.
This, along with a fast selling market, makes San Antonio another one of the great choices in Texas.
By no means is this a comprehensive list. Yet it should be viewed as more of a glimpse into the Texas submarkets. The markets listed are some of the best in the country, if not the world, but there is a plethora of other Texas markets to be discovered.
Like everything else in the world, Texas was hit by the corona virus. Texas may not be immune to a pandemic, but they are not far from it. First, to be clear, Covid-19 hit Texas hard, and in some ways, caused damage that will take substantial time to heal. But, in other ways, the Texan resilience, whether it be from Hurricane Harvey, which was the worst storm in the history of Houston, or the pandemic, Texans work together, rebuild and bounce back on their feet faster than anywhere else in the world.
The overall Texas real estate market experienced a noticeable dip at the beginning of the pandemic. As anyone would expect, a national shut down paired with an unknown pandemic, are not the best ingredients to promote a thriving economy. People were scared and locked inside. Throughout the country, recovery has been slow, and in some places, has not yet even begun as lock-downs continue. Texas, on the other hand, was one of the first states to begin to open. At first, many “nay-sayers” saw it as a bad move, as a spike in positive cases ensued. But soon, the spike flattened, positivity rates declined, and the state began to recover. Almost immediately, jobs returned, houses began to sell, and people began to rally together to help struggling businesses. The residential housing market is doing better than ever and has a trajectory to move in a positive direction for years to come.
The Land of Gold
Texas is a new land of opportunity. Life is good in Texas … and its only getting better. Thriving business, massive migration of capital and human resources, and a booming real estate market are strengthening the state’s foundation. Texas is the place to live, work, play …. and invest. The “city of gold” has been a dream and a quest of explorers throughout history. From the early European explorers, to Indiana Jones, people have searched the new world and beyond, for this golden city. It just so happens that we have finally found it, and when you get there, you will be greeted with a friendly “Howdy!”
Over the years, cities, states and the federal government have created incentive programs that were designed to stimulate investment in disadvantaged, or economically challenged areas. Some incentive programs were structured as tax credits, some were low interest rate loans, while others were direct cash incentives or grants. Regardless of the structure, the ultimate goal was to help stimulate direct investment to create jobs, stimulate the economy and enhance the overall quality of life for an area. One of the most recent and successful programs designed to accomplish this stimulus goal in the Opportunity Zone.
The Opportunity Zone legislation was championed by U.S. Senator Tim Scott (R-SC), and strongly supported by President Trump. And, according to Senator Scott, there is no time like the present to accelerate and grow these Opportunity Zones. “As we work to recover from the economic effects of COVID-19, we cannot allow the patterns that emerged following the 2008 financial crisis to occur again,” Scott said. “The Opportunity Zones initiative has proven to be a powerful tool, and with these necessary adjustments, it will be a leader in helping our most vulnerable communities get back on their feet. Every American deserves the opportunity to succeed, a reality made even more imperative following COVID-19.”
The Creation of the Opportunity Zones
On December 22, 2017, Congress enacted H.R. 1, also known as the “Tax Cuts and Jobs Act” (the “TCJA”). Among many other provisions, the TCJA established a new tax regime for investments in vehicles established for the purpose of acquiring “qualified opportunity zone property.” These vehicles are referred to as “qualified opportunity funds” or “QOFs.” The tax regime is referred to as the “QOF Program.”
In order to qualify as a QOF, an investment fund will need to hold at least 90% of its assets in qualified opportunity zone property in each of its taxable years, determined by calculating the average of the percentage of qualified opportunity zone property held by such investment fund (i) on the last day of the first six-month period of the taxable year of such investment fund, and (ii) on the last day of each taxable year of such investment fund. Qualified opportunity zone property generally includes direct and certain indirect interests in businesses or property located in a population census tract that is (i) a low-income community (or contiguous with a low- income community) located in a state or possession of the United States and (ii) designated as a qualified opportunity zone by the applicable state or possession and approved by the U.S. government.
In addition to the potential tax benefits to investors described below, investing in qualified opportunity zones can benefit these underserved areas, as substantial real estate investment in qualified opportunity zones can assist in creating the infrastructure and economic growth necessary for attracting new business and investments to these areas, thereby, creating a cycle of economic growth.
Qualified Opportunity Zones
Under the provisions of Subchapter Z of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), as enacted by the TCJA, individual U.S. states and possessions have nominated certain census tracts to be designated as opportunity zones (“Opportunity Zones”). Such nominated census tracts have been certified by the Secretary of the Treasury. An Opportunity Zone generally must be a population census tract within a U.S. state or possession that qualifies as a “low income community” as defined under Section 45D(e) of the Code (or, in certain cases, is contiguous to a low-income community). A low-income community is a population census tract with either a poverty rate of no less than 20 percent, or a median family income that does not exceed 80 percent of either the statewide or metropolitan area income, depending on the tract’s location. The number of Opportunity Zones designated in each U.S. state or possession cannot exceed 25 percent of the number of population census tracts in such U.S. state or possession that qualify as low income communities, provided that if a U.S. state or possession has fewer than 100 low income communities, it may designate up to 25 of such low income communities as Opportunity Zones.
As of June 2018, all 50 states, the District of Columbia, and five U.S. possessions had areas designated as qualified opportunity zones; a total population of nearly 35 million Americans live in these approximately 8,700 designated communities.
Qualified Opportunity Fund Program Need
Since the 2008 financial crisis, and excluding the recent effects of COVID-19, the U.S. economy had enjoyed a strong recovery, but the recovery has not been distributed evenly across the United States. Based on data from the 2011-2015 American Community Survey, qualified opportunity zone-eligible census tracts had an average poverty rate of over 32%; the poverty rate for the average U.S. census tract is 17%. During that same timeframe, qualified opportunity zone-eligible census tracts have lost an average of 6% of jobs while the United States on average experienced job growth. The QOF Program was created in order to spur economic investment and development for these historically underserved areas in order to rebalance the uneven post-crisis economic recovery.
Potential Tax Benefits
The QOF Program is intended to provide investors in QOFs four types of potential tax benefits:
(1) Temporary Deferral:
There are two kinds of deferral that occur:
(a) If a taxpayer realizes eligible capital gain from the sale or exchange of any property to or with an unrelated person, the taxpayer, generally, has 180 days from the sale or exchange to elect to defer all or part of the eligible capital gain from the sale or exchange by investing the gain in a QOF. Eligible capital gain does not include (i) certain gains from “section 1256 contracts,” i.e., any regulated futures contracts, foreign currency contracts, non-equity options, dealer equity options, dealer security futures contracts, and (ii) any capital gain from a position that is or has been part of an “offsetting- positions transaction.” The 180-day period for investing eligible capital gains from section 1231 property in a QOF begins on the last day of the taxable year (i.e., after the amount of long-term capital gains from such property can be determined). The amount of the eligible capital gain that has been invested in a QOF by the taxpayer is referred to as the “Deferred Gain Amount.” The taxpayer’s equity interest in a QOF that is attributable to the Deferred Gain Amount and invested in the QOF is referred to as the “QOF investment” and such Capital Gain may be deferred. The taxpayer is required to include the Deferred Gain Amount (subject to certain adjustments described below) in its taxable income on the earlier of (i) the date the taxpayer sells or exchanges QOF investment, with some exceptions (explained below), and (ii) December 31, 2026 (the applicable date, the “Inclusion Date”).
(b) Because of the deferral of the Deferred Gain Amount, the taxpayer also gets to defer payment of the 3.8% net investment income tax that applies to certain high earners until the Inclusion Date – as stated above.
(2) Step-up in Basis:
The initial tax basis of the QOF investment will be zero.
If the taxpayer holds the QOF investment for at least five years and the Inclusion Date has not yet occurred by such 5th anniversary, the tax basis of the QOF investment will be increased by an amount that equals 10% of the Deferred Gain Amount.
If the taxpayer holds the QOF investment for an additional two years (or seven years in total) and the Inclusion Date has not yet occurred by such 7th anniversary, the tax basis of the QOF investment will be increased by an additional amount that equals 5% of the Deferred Gain Amount (or 15% in total).
Upon the Inclusion Date, the taxpayer will be required to include as capital gain on its tax return an amount equal to the excess of (i) the lesser of (x) the Deferred Gain Amount or (y) the fair market value of the QOF investment, in each case as of the Inclusion Date, over (ii) the taxpayer’s basis in the QOF investment as of the Inclusion Date; immediately upon this tax event, the tax basis of the taxpayer’s QOF investment will be increased by the amount of gain so included. The deferred gain that is included by the taxpayer on the Inclusion Date will have the same tax character as such gain would have had if it had not been invested in a QOF.
(3) Permanent Exclusion:
If the taxpayer holds the QOF investment for at least 10 years, the taxpayer can make an election whereby the taxpayer’s basis in the QOF investment will be made equal to the fair market value of the QOF investment on the day the QOF investment is sold or exchanged. Generally speaking, this means that no U.S. federal income tax will be owed with respect to appreciation in the value of a QOF investment (i.e., a qualifying equity interest in the QOF) that is held for at least 10 years.
Placement or other similar fees paid by the investor are not expected to be treated as Deferred Gain Amounts invested in the QOF for these purposes.
The following illustrates the benefits that a taxpayer could receive by investing in a QOF if the taxpayer were to (i) sell stock in 2020 for $150,000 in cash, which was originally purchased for $50,000; (ii) contribute $100,000 in cash to a QOF in exchange for an interest in the QOF in 2020 and within 180 days of such sale; and (iii) sell such interest in the QOF for $200,000 in 2030 (after holding the interest for more than 10 years). This example addresses only U.S. federal income tax consequences and does not address state, local or other tax consequences.
THIS SUMMARY IS NECESSARILY GENERAL AND IS QUALIFIED IN ITS ENTIRETY BY THE STATEMENT THAT THIS DOCUMENT SHOULD NOT BE CONSTRUED AS TAX OR OTHER INVESTMENT ADVICE. ANY SUCH ADVICE SHOULD BE RECEIVED BY A LAWYER OR TAX ADVISOR.
With the hopes of COVID-19 restrictions beginning to ease across Texas and nationwide, many real estate developers and real estate investors are looking for opportunities in the hopes of an economic recovery to the devastation caused by the virus, namely opportunities that provide immediate cash flow. The covered land play (“CLP”) redevelopment strategy just might be able to fill that investment need to a T … as long as you have patience.
In real estate development, a CLP comes in various forms, shapes and sizes, but at its core, is when a real estate developer purchases property that is already producing income, yet the developer has a motivation to redevelop the property into something that can generate more operating income, the land can be repurposed into the highest and best use and, in the long term, can convert the property into an alternative use which serves a greater benefit to the community at large.
The Alternative Option – The Growth Strategy
Urban Sprawl has created countless opportunities where many developers acquire a tract of land along the outskirts of town, provided the land was in the anticipated growth corridor of the city. Why not … land was cheap, and the developer had a view that within the next five to ten years, the city or county would develop streets, sewer, water, drainage and other required infrastructure, and the acquired tract of land would soon be enveloped by development, commerce and activity. This development strategy is used quite often in all real estate investment classes … be it single-family lot development, multifamily, retail, office, mixed-use, etc.
However, what happens if there is a downturn in the economy or a slow-down in the real estate market? The real estate developer quickly morphs into a land speculator, hoping and praying that a “greater fool” will come along and purchase the land for a profit before they run out of money. Numerous real estate cycles witnessed over the past 40-years can illustrate that this identical situation plays out more times than you would care to guess. The cost of carry for raw land is extremely expensive. Between taxes, insurance, interest, maintenance, cost of capital, engineering, architectural design, land planning, city entitlements, etc., pretty soon the developer runs out of money … or at least investor fatigue sets in … and the developer and investors are overheard saying … “forget the cheese, just let me out of the trap!” So, they sell the land at a discount to live another day and to fight another battle.
The Alternative Option – The Covered Land Play Strategy
Now, take for example, the same developer is looking to develop the exact same mixed-use development. But instead of acquiring cheap, raw land and sitting on it in anticipation of the coming growth, they pay a little more and acquire an existing mobile home park on the outskirts of town. Not a sexy investment, yet the revenues from the month-to-month or quarter-to-quarter tenants, is sufficient to pay the property taxes, debt service, etc. until they are ready to start their mixed-use development efforts. This is a very simple example of a CLP. However, what if there was an in-fill site, near or adjacent to the central business district (CBD), as opposed to the outskirts of town. Does this strategy work there as well? The simple answer is … YES
A lot of planning goes into whether or not a piece of land (with an existing cash flow) is a prudent investment. It does not happen overnight as the developer is truly performing simultaneous due diligence and planning on two separate real estate projects. The first is the existing property analysis, based on the current use. The second is, of course, the long term, highest and best use of the property.
An Existing Case Study
One recent example of the in-fill, CLP is referred to as “Project Catalyst,” which is located near the CBD of Austin, Texas. Due east of Austin, between the CBD and Bergstrom Airport, is a stretch of road called East Riverside Drive. During the building boom of the early 1980s, many multifamily developers over-built student housing on both sides of Riverside Drive. It quickly became “the place to be” for the thousands of new students coming to the University of Texas. However, with the advent of the “new and improved” on-campus student housing in the 90’s, and the new Public-Private-Partnership strategy to building new amenities and resort style social life and living environment, new, closer-to-campus developments started to attract students away from East Riverside. So, along came higher vacancies, deferred maintenance, an increase in crime and all of the atrophy that one would expect in a declining and dilapidated area.
However, with all of this new development came a shortage of inexpensive land, and areas close to the CBD for new development. Furthermore, gentrification in near-east Austin (east of I35) has started to occur, and new development has replaced older, run-down single-family homes. Rents, acquisition and operating costs started to skyrocket and sitting here today, the CBD has living and office space costs that rival New York City.
In an effort to benefit from the CLP along East Riverside, the Austin-based development firm of The Presidium Group started to buy up thousands of units of these 1980-vintage multifamily properties. With a systematic approach, purchasing one at a time, they have amassed during the past 10-years over 3,000 multifamily units with an average occupancy of 96%, which aggregates to over 200-acres of contiguous land. As a result of their relatively low investment basis, the highest and best use is no longer student housing, as they now own a footprint that rivals the area of the entire CBD. More importantly, they have time on their side as the properties currently cash flow, and as a CLP, the holding cost of their larger scale, mixed-use development is minimized. This Project Catalyst development, and the overall redevelopment plan, is taking seven million square feet of land in the East Riverside Corridor of Austin, and the developer is proposing to convert it into various purposes. Class A multi-family housing, office spaces, retail, entertainment, arts and culture and hospitality are all part of the overall development plan, while there still will be a large student housing population generating income on the land as the development proceeds.
Benefits to the City
From an economic development standpoint, the city of Austin simply loves the overall strategy. Why not, a private developer is taking a crime ridden, run-down area of the city that contains a high population of homelessness, and creating a new vision which can help drive the economy, increase the quality of life and start producing exponential growth in tax revenues to fund the city’s ever-growing budget.
Now that the vision has been published in local media, others are starting to jump in. The Austin Chamber of Commerce recently was successful at winning the competitive bidding process to secure the relocation of the World Headquarters for the new Oracle Campus. Bringing over 11,000 new, high paying jobs, was a great win for the city of Austin. The location for these new jobs, is along East Riverside. Because of the vision of Presidium, without even starting an investing in its redevelopment plans, the vision has taken hold and the land values have started to grow exponentially.
PPP – The Capital Investment from the Public Sector
The leadership in each major city in America understands the benefits of economic development. If they can grow their tax revenues by adding jobs, attracting new retail sales tax, adding new property tax revenues to their coffers, etc. it enables the city to reduce their property tax rate to the citizens. As this tax rate comes down, and the citizens are able to put more money in their pocket, and as they spend the savings, it creates an exponential impact to drive the local economy. This is Supply-Side Economics at its core.
However, cities understand that economic development is competitive, and they need to fight to secure and incentivize companies, like Oracle, to bring these high paying jobs, new office space, new commerce, etc. to their area. Consequently, the economic development departments are constantly bidding on these packages and providing incentives for their relocation. In other words, if the city is willing to invest $10 million in new roads, sidewalks, greenspace, sewer, water, etc., and it benefits the target company as well as the current citizens, yet it also brings $50 million in new tax revenues, then that is a solid return on investment for the city’s capital.
There are many moving parts throughout the entire incentive process of a CLP, and the purpose of this document is not to go into how a PPP works or the myriad of tools available, but merely an illustration to provide clarity and reference. In Texas, many CLP’s have been executed successfully with the incentives provided by a Tax Increment Reinvestment Zone (“TIRZ”). A TIRZ is a special district that is created by the public sector with hopes of attracting new investment and assessed property values to areas that are in need of redevelopment. In short, as the property owners within the TIRZ boundaries pay their property taxes, a portion of these taxes are redirected by the public sector to be used to fund capital, or pay off bonds, used to help in the overall new development within the TIRZ boundaries. The property owners are paying the same tax as other areas of the city, yet the public sector has agreed to redirect and use such payments for a specific cause.
Being that there are over 200 different TIRZ districts in the state of Texas now, it is apparent that this has become a popular method to spark interest in redeveloping an area. The main goal of a TIRZ, besides simply raising interest in revitalizing the area, is to examine the potential value the land holds. Various members of local government (city, county, etc.) have different TIRZ districts under their jurisdiction, so communication with the local government is beneficial in the execution of one of these types of deals. Many times the local government wants to incentivize investment / redevelopment of certain areas that the city cannot do on its own, which is why TIRZ exists in the first place. Through finding an attractive piece of land within an existing TIRZ, or articulating the need to elected officials and communicating the development plans to the local government in hopes of their buy-in for the creation of a TIRZ, these efforts can be very helpful in causing a good development, to become a great development.
So … What is the Next Step of This Process?
Patience … Patience … Patience!
Simply put, this is a long-term strategy. Executing on the CLP strategy, is not something that you can jump into overnight, as it requires a well-thought-out short-term and long-term strategic plan. Again, the investor needs to perform due diligence on the properties being acquired, as the property owners need to look at the investment as a stand-alone investment. The investor needs to continuously ask the question of “if this is the only asset I am successful in acquiring as part of this strategy, is it a good, stand-alone investment?”
Secondly, this development strategy requires that the developer “walk softly and carry a big stick. As the CLP strategy plays out, the last ting that any developer wants if for the “cat to get out of the bag” too early. Once the acquisition process gets started, the developer must use pseudonyms or unrelated entity names, lawyers, title companies, etc. In other words, keep your mouth shut on the fact that the buyer is slowly aggregating property, and this news will start to leak out and will result in higher purchase prices for the overall development, It truly could be the difference between whether or not the economics of the large scale, mixed use development will work.
Third, the developer must have a better understanding of the goals and objectives of the city, county or other quasi-governmental entities. Ys, the redevelopment plans must be driven by the developer, but it cannot be a developer’s plan, or a mayor’s plan or a city managers’ plan, yet it must be the plan for and by the community citizens. You must have community buy-in, otherwise you will meet up with opposition in some of the most unusual places.
Fourth, you must understand the public sector’s willingness to provide incentives, and determine if there are any Capital Improvement Plans (“CIP”) budgeted over the next 5 to 10-years by your public sector partner. If there is a willingness, and if there are CIP items such as a library, school, park or open space, amphitheater, stadium, convention center, convention center hotel, etc., etc., then this can help with your overall land plan and design. If the public sector intends to floats bonds or allocate resources into one of these public sector projects, then perhaps it can be relocated and serve as a public-funded asset and anchor for the ultimate development.
Finally, you must have patience! Patience to prepare your strategic development plan … Patience to slowly and quietly acquire your multiple properties … Patience to negotiate with the public sector … Patience to diplomatically engage with the community and gain community support for the overall development.