The Incredible Shrinking World Of Publicly-Traded REITs – August 2022 Round-Up

The US Labor Department has proposed a new rule that could favor ideological goals over investors’ best interests; plus, the world of publicly-traded REITs continues to shrink.

Listen in as AltsDb co-founder Andy Hagans discusses these stories and more with Michael Johnston, VP of Business Development at AltsDb, in the August 2022 Round-up.

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Episode Highlights

  • Recent stats on housing affordability (hint: it’s not a pretty picture).
  • Why the world of publicly-traded REITs is shrinking so quickly, and the related fallout for investors.
  • A new ESG proposal from the US Labor Department, and why it’s receiving strong pushback.
  • The latest update on Build Back Better, and how the most recent legislative proposal would affect the alts industry.

Today’s Guests: Andy Hagans & Michael Johnston, AltsDb

About The Alternative Investment Podcast

The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss tax-advantaged investment strategies to help you grow your wealth.

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Show Transcript

Andy Hagans: Welcome to the Alternative Investment podcast I am your host Andy Hagans bringing you the August alternative investment news Roundup.

We’re going to be talking about tax increases more IRS agents potential changes to how non traded rates are treated by state regulators and a whole lot more, and with me, I have Michael Johnston, the VP of business development at AltsDb and OpportunityDb. Michael how you doing today.

Michael Johnston: I’m doing great Andy I feel like we just did this and I blinked and we’re back here again, so the months are flying by right now.

Andy Hagans: Yes, summer just goes too fast, I mean it yeah as you get older, they say that time speeds up, but I think summers seem to go especially fast, and you know I thought we were going to get through without any tax increases it looks like that may not be the case, we will get to that later in the show.

we’re going to start the first link from this no housing has not been this unaffordable in 15 years.

shouldn’t be any surprise right because we’ve had this one two punch of an incredible rise and housing prices, followed by.

Now we have an increase in interest rates in mortgage rates and you know, Michael I you’d expect that, with the economy slowing down and with mortgage rates going up.

That housing prices would adjust downward, but I think we’re in that sort of awkward lag period where home sellers are still kind of hanging on and crossing their fingers and they haven’t quite face the reality that you know 2021 may have been the near term peak.

and housing prices and their house may not be worth what it was.

But let’s let’s get to some of these facts in the article, so the national index dropped to 102.5 and may the lowest that has been since July 2006 when stood at 100.5.

Also, close to July 1990 when it came in at 100.2 Now this is interesting nar formulates the index based on median existing home prices.

median family incomes and average mortgage rates and index above 100 means that a family with the median income had more than the income required to afford a median price.

home so higher index means more affordability, on average, for more buyers but Michael I kind of laughed when I read about this formula because 100 means affordable and it sounds like this index basically never drops below one.

Your that nar.

If you’re the nar I guess you never want to admit that you know housing is basically totally unaffordable, but when you’re even getting close to that point, I guess, when the nar is even getting close to admitting that that means that things are pretty rocky right.

Michael Johnston: yeah I think you need to recalibrate that scale a little bit I mean it’s all relative right so and here’s some some real numbers that will help to put this in perspective so.

A couple years ago the median home price was $320,000 So if you were taking if you’re putting 20% down and barring the rest you’d have a mortgage of about 256,000.

And now the median home price has gone up to 440 $440,000 so if you’re doing that same 20% down let’s just say that you are and a lot of people put down less.

Your bar in about $350,000 and then a couple years ago interest rates for 3% and now they’re 5.3% so kind of mechanically how this works out and i’m simplifying here, you know, a couple years ago with lower prices and lower mortgage rate your monthly payment was in my example $1,079.

And then it’s gone up prices have gone up rates have gone up you’re paying now $1,995 almost $2,000 so almost doubling so those don’t sound like crazy numbers going from 5% excuse me, going from 3% to 5.3%.

and prices going up the median price going up from 322 for 40 by just mechanically how it works it’s doubling what you’re paying on a monthly basis, again, and this simplified example.

So I mean that’s that’s meaningful and you know, regardless of whether or not it’s at 100 or three stars or four squares or however you want to score this right, the dollar amount is going up here.

Andy Hagans: yeah and it’s interesting because we keep hearing you know it’s a political talking point but it, but I mean it’s also shows up.

In the unemployment stats that we have a very strong job market right, and I think that’s that’s true on a surface level when you look at unemployment stats the unemployment rate is very low.

But underneath that number one there’s all kinds of ways that the unemployment rate is not necessarily the best metric to track.

But also, if you look at wage growth in real terms, it has not kept pace with inflation.

But Michael has, as you pointed out, inflation specifically and housing has far outpaced the CPI or you know blended basket.

Type inflation rate and even that official inflation rate has outpaced nominal wages so real wages are not only negative compared to inflation, but if you compare real with real wage growth.

Compared to the growth in housing prices over the past three years, I mean talk about an extreme swing or an extreme spread right workers may be looking at.

12% 13% real wage growth if that over over the past 24 to 36 months compared to an almost doubling in the nominal price of their you know monthly payment or straight home, I mean that’s crazy.

Michael Johnston: yeah and and that’s not happening in a vacuum either right it’s not like everything else is being held steady, in addition to the potential cost of your monthly mortgage payment Dublin.

gas prices have doubled, they pulled back a little bit recently, but I think you know from from a year or two ago they’ve still doubled.

A lot of grocery prices have have doubled so it’s not like this is an isolated pain point that can easily be absorbed to your point wages aren’t rising as much as some of these these other factors.

And and you’re kind of getting hit you’re getting hit from all sides here, and I think what that means Andy is you know a lot of people won’t be buying houses.

And it kind of ripples you know it ripples throughout the throughout the economy and it’s you know it’s interesting to just kind of look at at how some of these numbers line up here.

The other thing that kind of jumped out to me is that the average see the average first time homebuyer is 33 it’s kind of been where it’s been for a while it’s picked up a little bit.

So that means someone born in 1989, and that means someone who is graduating from college and in 2010 when unemployment was basically 10% nine and a half percent somewhere somewhere in there.

So so that’s been a pretty you know pretty challenging.

timeline they’re coming out of college for a lot of those folks when unemployment was was really, really high in the wake of the great recession and now when they reach their their home buying age.

they’re priced out of the market so it’ll be interesting to see how that kind of impacts investor psychology for a large chunk of Americans.

Andy Hagans: yeah absolutely you know we just one more comment obviously sales volume transaction volume in residential homes it’s fallen off a cliff in the past few months.

And I know, there was some talk earlier this year about reforming the 1031 exchange program and I was talking with Jimmy atkinson about this and.

He made the point you know the the 1031 exchange really kind of greases greases the wheels of so much of the real estate market right if you imagine if section 1031 exchange.

went away, how many fewer real estate transactions, they would be so now think about if they made any sort of change or limitation.

On section 1031 exchanges at this point in the market, where volume has already fallen off a cliff even how much worse, it could be and thankfully we’ve received news in the latest.

form latest variation of bill back better which may pass the Senate and ultimately be signed into law.

doesn’t look like there is any limitation or any new restrictions placed on the 1031 exchange program but we’ll get to that update in just a minute i’m going to bring up our next link here.

On the Wall Street Journal opinion page so now we’re shifting gears to policy a little bit of politics, a little bit of legislation now, and you know, Michael I don’t want to hold stevie to be a political show, but obviously the you know the politics of of taxes and regulating.

You know, regulating publicly traded securities and private securities.

It is really affects all of these markets and all of these products, quite a bit, so I think we’re going to be covering a lot of policy and politics and today’s show so just a fair warning for everyone, so this.

This op ED was about a Labor department rule that is going to push fiduciaries to flake to favor SG considerations.

Above you know the the shareholders best interest potentially.

And so my goal, I want to dive into this and you know it’s it’s a little bit of a touchy subject you know different players have different.

feelings about SG and you know the term can even mean different things to different people but, but I really think that.

You know this could potentially be a sea change because last year, the US Labor department, they propose a regulation.

That would tell retirement fund managers to consider SG factors such as climate change and quote collateral benefits, other than investment returns and quote when investing employees money so that doesn’t sound.

Like a fiduciary duty to me that sounds a little bit more like an ideological goal, that is trumping the fiduciary duty for these fund managers, where, am I going wrong, Michael.

Michael Johnston: No you’re not going wrong, I mean it’s those two things are contradictory, you know just read it read this read this text here.

collateral benefits, other than investment returns and you’re asking a fiduciary to do that, like that’s just that’s a contradiction.

fiduciaries have a responsibility to their clients to make investment decisions with basically one goal, which is to maximize the investment return for their.

For their clients and typically That means they can’t pick these expensive historically what it’s matt and a lot of context What it means is they can’t pick these.

investment products that have really high expense ratios of these products that pay them the most they can’t consider that they have to think about what is best for their client.

But it’s the same concept here that they need to consider kind of one thing only what is best for their clients what’s going to maximize their clients return risk adjusted return.

So, asking them to take into account these these other things, I think, is the article points out, potentially opens up the door for some lawsuits it creates some confusion yeah it creates some confusion in my mind Andy about what what they should be doing and what their obligations are.

You know the fiduciary standard is kind of beautiful and its simplicity and it seems to me to be muddying the waters quite a bit.

Andy Hagans: yeah and I don’t even understand all of the legal issues at play because you know from the article here retirement and pension fund managers are fiduciaries they are legally required to make every investment decision with that one purpose.

maximizing the retirees financial interest, so the uniform prudent investor Act, which is a model law that has been adopted by 44 states.

makes clear that quote no form of so called social investing is lawful if the investment activity entails sacrificing the interest of beneficiaries.

in favor of the interest supposedly benefited by pursuing the particular social cause so it sounds to me.

like this proposed regulation from the US Labor department may via violate State law that’s already been adopted by 44 states and.

You know, again, this may be a field that’s full of landmines, but i’m just going to wait into this field, you know.

Supposedly benefiting particular social causes I recently wrote my own op ED at all CB and you know SG I think this whole.

idea of yes G and how its operating in the corporate world in the asset management world it’s on the one hand.

it’s a very big deal right more and more you hear the term you see people taking it seriously, but I also see a huge segment of professionals.

and investors who are beginning to tune it out, who are beginning to openly market or laugh at it, because it has been so politicized because it has been.

Honestly it’s you know in some in some contexts appears to be taken over by idealogues so it, you know in my op ED I talked about the fact that.

tesla was removed from the s&p is SG index right and, of course.

The s&p had some sort of justification for why tesla would be removed, but it’s a really bad look for the world’s most successful manufacturer of electric vehicles to be removed for it, I mean it seems like they would otherwise be the poster child of SG but.

You know, according to the index criteria, you know, there are other quote social factors at play, and once we’re once we’re going there, this is becoming so subjective it’s becoming so.

Political it’s becoming so you know it’s at the whim of whatever the flavor of the day is whatever is fashionable.

Politically, in the corporate world is not immune to that and asset managers are not immune to that, and so I I think when things like this happen when s&p kicks out tesla out of there.

s&p index, you know it makes so many investors so many financial advisors so many people in the industry just roll their eyes at the entire concept of gst so now for the Labor department to say.

Actually managers are required to use the SG as as the driving factor in their investment selection.

To me that’s crazy it because so many investors aren’t even on board with this at all, like you know they don’t agree.

With the sd criteria that you know, even if you even if you say, of course I want better environmental protections the devils in the details and then there’s a lot of disagreement on how we achieve those.

Michael Johnston: yeah and I think the key word that you use there was.

subjective right like this is not as you don’t put something on a scale and you get an.

Yesterday you know how it’s not as simple as measuring something and it’s not black and white it’s it’s very subjective and I think I think.

I don’t think there’s any debate about that I don’t think that’s a controversial statement that ESP scores, and I say scores, because there are lots of different methodologies.

Are subjective and and I think you know to kind of why that sets off alarm bells for me is because it’s a quick hop skip and a jump from these.

subjective methodologies to corruption, where you’re you’re paying someone you’re bribing someone or otherwise influencing them to.

kind of twist the methodology or to give this company and more favorable score because if changing your score impacts.

How dollars flow to you, then, absolutely people are going to game that they’re going to greenwash it as a term that we’re kind of hearing more and more as companies figure out how to game, the system and get the investment dollars to flow to them so.

I mean it sets off alarm bells for me, and you know i’m not going to make any apologies for being a big fan of capitalism.

But whenever investment dollars are flowing to something other than the best idea, and then the best executioner’s.

that’s that’s off alarm bells for me, and I know there’s folks out there, and yes capitalism is not perfect, but.

Over the long haul it’s been pretty good at lifting people out of poverty and extending life expectancy and literacy rates and all of these these really great things as well as quality of life.

So i’m on my soapbox a little bit here I think we’re we’re kind of aligned here but yeah this sets off some alarm bells for me when you’re coercing people essentially.

Andy Hagans: yeah well that’s the key key word to me is coercion, because you know, like you, i’m a big fan of capitalism, but.

i’m also frankly in favor of PSG in the sense that I think an individual investor should be investing in a way that they’re comfortable with.

You know if I don’t want to invest in a cigarette company I don’t need to invest in a cigarette company if i’m not comfortable that if someone else is not comfortable investing.

In an arms manufacturing company they don’t need to invest on that I think what what bothers us is the idea that there would be a central authority that can decide these things, and you know use that coercion.

You know, to sort of stack the deck in favor of desired social goals.

Michael Johnston: yeah and and he said at the top, like a you know I don’t want to be political here, and I think that’s The point is that this shouldn’t be political.

And we’re you know beating up on the current administration, because they’re the one pushing this but.

Investing shouldn’t be political it shouldn’t you know come come in and out of favor.

Based on you know who’s been elected, it should be the money should flow to what the what the best ideas are.

And and i’ll point out that you know tesla’s worth $900 billion and people spend I think $17 billion a year at whole foods, and you know the list goes on and on.

People vote with their wallets even when they’re you know no one’s been been forced to shop at whole foods, no one’s been forced to buy an electric car.

But, but people do it because they’re they’re great products and and there’s a they’re delivering things that that the market wants, and I think in my mind that’s the way it should be.

Andy Hagans: yeah there’s no need to stack the deck that’s exactly right.

Michael Johnston: that’s right.

Andy Hagans: And speaking of voting with our wallets i’m going to bring up the next link from biz know the headline here know ipos reads going private the shrinking world of publicly traded.

Real Estate and you know, Michael, this is an interesting article and we’ll get into some of the details here, but I had Michael EPA scope.

principal at origin investments on the show recently and I mentioned that you know typically publicly traded rates, in my view, were overvalued, and he pushed back.

and basically said Andy not right now they’re not you know they’re trading at a significant discount and you’re going to find some great values and publicly traded reads.

And you know reading this article reinforces Michael EPA scopes point of view 100% because a lot of these publicly traded rates are trading at huge discounts right now, and so they’re really.

there’s not a lot of incentive to be publicly traded right when you are going to be trading, let me dig these up.

In here because it actually the article went into the discount by sector.

What do you think about this trend, though, Michael have more of these non traded, excuse me more of these publicly traded reads being bought out by non traded reads.

Michael Johnston: yeah I think well it’s certainly I think lens lens some support to michael’s push back, I guess, and I think what he was saying, if I can just just talk through and make sure.

I understand here is that what’s driving this trend is well a couple things one there’s no new ipo so there’s no new supply or no new REACH coming out onto the market, and at the same time.

Existing rates are buying up smaller reach typically so there’s you know, fewer ticker symbols out there publicly traded reach out there.

And I think what Michael was saying, is of course they’re buying other reach because they’re at attractive prices right now they’re they’re trading at.

A little bit of a discount and they’re they’re great deals, so why wouldn’t they put their cash to work and kind of acquiring what they think are good long term assets at a discounted price.

And I see here that you’ve you know you’ve pulled up some of the some of the discounts here across the sectors and there’s a pretty big range here and gosh that number for office kind of jumps out at us doesn’t that.

Andy Hagans: Well, you know it’s so so here’s what’s interesting I took took me a while to find it, this is a very in depth.

Article with a lot of detail so and, by the way, will will link to all of these articles in our show notes and this one in particular.

I think is worth reading, but the article points out the s&p 500 is down near the 20% on the year right, and if you think about private equity real estate funds.

Private real estate fund managers are not claiming that their you know their assets are down 20% on the year right like certainly they wouldn’t be claiming that at all, so this is a case where the publicly traded project products and the publicly traded assets.

I guess artificially look worse or maybe the transparency of the market, there is is helping that you know those private funds right now.

But private real estate is not gone down 20% this year, and you know the article cites a report from merit and real capital analytics data.

That estimates the markets discounts to now have this is 8.3% in the industrial read sector 10% in the data Center sector 14 and a half percent for self storage.

25.7% for multifamily that one surprised me 29.6% for hotels 32.7% for retail and 45 and a half percent for office, to be honest, Michael hotels retail and office that didn’t surprise me much when we see an economic downturn, you know what to expect those sectors to be pretty swingy.

But multifamily trading at a 25.7% discount to now.

That seems crazy to me, I mean it almost makes you want to launch a private fund that that does nothing but buys out publicly traded reads right and it seems like that would be pretty good business plan, if you agree, if you believe these you know discounts to nav.

Michael Johnston: yeah and I think you know I had the same reaction Andy and I think you and I.

Another one of our properties opportunity db focuses on the opportunities own space and we see a lot a lot lot lot of multifamily projects and opportunities on funds.

And, particularly in the southeast and Southwest United States right now but man that market, I mean it seems like every every oC fund, we see there’s a lot that are exclusively multifamily.

there’s almost all of them have have some multifamily piece in there, I shouldn’t say almost all of them, but a good chunk of them have at least some allocation to multifamily.

And it seems like as the economic uncertainty has grown that’s been an attractive asset class because families way more stable than hospitality or office, particularly of last few years.

So I, I agree with you Andy.

Andy Hagans: yeah, and I mean, as you pointed out, traditionally it’s been a relatively you know the stable guess number of publicly traded reads because.

Some publicly traded REACH would get bought out would go private but there would also be ipos and the number of ipos is just slow to a trickle and and why, would you take a republic if it’s going to you know immediately trade at this discount to now have.

You know so on that note.

Michael Johnston: And we should point out there Andy that that’s not exclusive to reach right now, I mean the I the ipo market is is I wouldn’t want to say frozen but it’s pretty pretty icy right now I think there’ll be a couple there’s a few more high profile ipos coming down the pipe this year.

But that’s kind of industry wide is you know it’s not a great environment for it with with interest rates going up and there’s been a lot of economic uncertainty and you know we’ve had a couple.

A couple pretty great years here where ipos have.

Companies younger companies have taken advantage of the favorable environment and done their ipo so they’ve been kind of front loaded over the last few years, so.

that’s not necessarily exclusive just to reach that’s kind of plan out across the market where there’s not a lot of ipos here but you’re right, combined with the the acquisition activity, it leads to a pretty significant decline in the number of ticker symbols out there.

Andy Hagans: Well, let me push back on that a little you I mean you’re right that ipo activity has slowed quite a bit.

But according to the article so there’s been zero ipos for reads in 2022 the last time that’s happened was 2001.

Even during the financial crisis of 2008 2009 there were to read ipos to 2008 and there were 11.

In 2009 verses five take private deals through the first half of this year, so I mean, I agree that hack to activity is very low.

But, but even given that it seems like this is an outlier and it, you know it’s especially I guess scary.

You know, given the the trend bringing me to our next article from investment news headline here alerts group.

All groups opposed state regulators reach reform okay so we’re going to talk about proposed revisions to read policies from the North American securities administration.

administrators association boy that’s a mouthful the North American securities administrators association, but so so many of these rates and.

You know, are going private and of course there’s been just incredible growth in the non traded read space in the last few years, which we’ve talked about on all stevie.

You know, in several past podcast episodes so this space that you know the non traded read spaces heated up so much, but now we’re hearing about some proposed regulations.

You know that are you know, are making a lot of people sort of wake up and say, well, wait a minute.

So let me just read this you know verbatim from the article so early this month, the North American securities administrators association released proposed revisions to read policies and began a 30 day public comment period.

That ends on August 11 it’s the first effort to update state level read rules since 2007 the reforms include number one raising the broker standard of conduct related to non traded read sales to incorporate regulation best interest.

Number two increasing the net income and net worth thresholds for investors who purchase non traded reads.

Number three and posing a purchase limit on non traded rates and other illiquid direct participation programs, that does not exceed 10% of an investor’s liquid network.

And number four prohibiting non traded read issuers from using gross offering proceeds to fund distributions, and so this this comment period is is ending pretty soon here, Michael let’s see we’re recording this on August 1.

So, but by the time you listen or watch this podcast episode the comment period will be closing in less than a week.

And you know the IPA just to get to the spoiler here the IPA the trade association that represents the Alternative Investment space.

They are opposing this for sure they’re urging people to take action and i’m also i’m having a representative from IPA.

On the show in a couple of days so actually a cup just a couple of days after this episode will air that episode will air all before this comment.

period closes so you know anyone listening who opposes this you know, I urge you to number one listen to this follow up episode that i’m doing with representative from the IPA.

And number two you know, to make your thoughts heard, while this comment period is still open, but this is a big deal Michael because.

With with fewer and fewer publicly traded reefs more and more of the Read space is going to be these you know non traded illiquid reads, and you know these are pretty significant revisions to read policies.

Michael Johnston: yeah so Andy I think i’m i’m really looking forward to hearing that that episode that I know is coming up with with IPA and kind of diving in here and understanding.

kind of all the ins and outs here and what exactly this would impact so i’ll kind of leave that to the experts, I think there’s.

You know there’s some things in here that seem less offensive than than others to me the idea that we’re going to have kind of a uniform policy across all the States instead of funds, having to navigate I think there’s 20 different states right now have.

Different you know minimums net worth minimums etc salary minimums annual income minimums I think that you know, having simplifying that is helpful, but you know.

i’ll leave it to the experts to really dive into the weeds here and i’m looking forward to that podcast if I could kind of zoom out here and look at this from a very, very high level here and kind of get philosophical.

You know i’m not afraid to admit i’m a little bit biased here, I think that that asset managers and fund managers when they do their job right.

They help people retire they help people pay for their kids college they help people leave their state to charity like these, really, really great things when when they do their job right.

And whenever I see you know a lot of regulation coming down the pipeline, my concern is always we’re going to scare off the best and brightest they’re going to be so overwhelmed with the regulations.

And they’re going to be so afraid that they won’t be able to do their job, despite their best intense without you know screwing up somewhere and going.

break crossing the line on some rule that was well intentioned, but that they you know they didn’t know about.

And they’re going to throw up their hands and say you know screw it I don’t want to take these risks i’m going to go, you know, do something else and and that.

The asset management industry will be worse off for it and that kind of trickles down to those folks I mentioned, who want to retire and send their kids to college and donate their state to charity so.

i’m getting a little a little cheesy and philosophical here Andy but you know that’s kind of that’s kind of my high level thoughts here.

Andy Hagans: What I absolutely agree, and I mean, for instance, this 10% concentration limit on non traded read investments, you know, so we have state level securities Commissioners.

who are trying to micromanage individual investor portfolios and you know, are they doing this in other sectors with other type of investments, is there a 10% concentration limit on.

You know technology etfs.

For emerging markets index funds because you know tech etfs or emerging markets index funds are likely going to have higher volatility than most non traded reads you know, so this.

is really.

You know, you know and, of course, you know the publicly traded funds or you know exchange traded funds or publicly traded stocks are going to have more transparency.

But that doesn’t mean that the risk is lower, so if these if these you know concentration limits are meant to lower investor risk they seem.

very specific and not uniformly applied to all other sorts of rappers and asset classes and frankly random I mean why 10%, why not 20%, why not 22%, why not 12%.

This just seems like sort of silly at least some of it at least some of these proposed revisions seemed like silly you know over regulation micromanaging.

Maybe some of them are more practical so again, you know we’re going to have a representative from IPA on the show we’re going to dig through those details.

So please stay tuned for that I think that’s going to be a great show.

Michael Johnston: it’s very handy whenever you add complexity, you know there’s a downside to complexity I kind of just went through it and it makes makes people’s jobs harder makes compliance costs higher which that you know who all my pays for that it’s the investor.

Andy Hagans: So when your audio is not the Ohio securities Commission.

But she doesn’t she can propose this rule.

and say that 10% is a great threshold, but she never actually has to you know deal with the randomness and arbitrariness of that number or the complexity.

Michael Johnston: yep.

Arbitrary is a good word.

yeah subjective and arbitrary those have been that the two.

words that you’ve used today that have jumped out at me.

Andy Hagans: You know and said sorry to be the bearer of bad news in the adult industry.

But, but now, maybe here would be some good news so speaking of policy and good ideas and bad ideas it looks like we may actually get a build back better bill and a slimmed down version of it that Senator Joe Manchin has agreed to.

sort of contradicting some of his prior statements, but I guess that’s besides the point.

And I think for alternatives, you know it’s maybe it’s a mixed bag right because.

The plan is going to close the quote unquote carried interest loophole as well as establish a minimum corporate tax rate.

And you know we can get into those details, but one thing that I point out right off the BAT is closing this carried interest lupul doesn’t actually raise that many dollars and cents for the Federal Government.

Michael Johnston: yeah that that’s right Andy I think it’s 14 billion is that the number that I think it’s going to raise.

And I think I did the math I think that that funds, the government for less than a day I think it’s like 18 hours based on on what we spent last year, so.

So so yeah it’s not that much money, and you know look, this has been a controversial topic I think it’s article said.

Every President since since I think, was the first Bush or excuse me, since since George W Bush, the second Bush has tried to close this loophole and it.

Has has failed, so it looks like it’s going to get done, although you know I wouldn’t be surprised if given the difficulties closing this in the past, if it doesn’t so.

yeah I know there’s some some strong feelings on this, I think you know there’s one side that says this is earned income, it should be taxed as earned income.

You know I think there’s another side that you can say, well, private equity, they yes, we like to portray them as being These evil folks on Wall Street, who are.

Who are you know doing these horrible things, but the reality is they invest in a lot of small businesses.

and small and midsize businesses and that capital is crucial and now if you’re if you’re taxing them at a higher rate that means they’re going to have less money to pump into pumped into small businesses and to help entrepreneurs grow and launch their companies.

So there’s you know there’s a few different a few different sides to this certainly has been an issue that a lot of people are pretty passionate about it seems to have a decent amount of support, but there’s a there’s a downside to it as well.

Andy Hagans: yeah you know I, I think, Joe mansion is politically astute.

And so the two tax increases that are in this proposed bill, I mean, I do think that taxing carried interest at ordinary rates is politically popular and I think having a minimum corporate income tax rate, I mean don’t we already have that, by the way, but but anyway in theory that should be popular.

I don’t know about you know hiring whatever it was 70 or 80,000 new irs agents I don’t know that that’s going to be so popular but, but I think these to propose tax increases.

are relatively popular However I don’t know that we’ve heard from kiersten cinema yet if she will greenlight this.

In you know one one thorn I guess in the side of chuck schumer right now.

Is the fact that you know it’s it’s not universally agreed to that this proposed bill doesn’t contain any other tax increases on the middle class, because there was an analysis by the Joint Committee on taxation.

which found that 49.7% of the tax would hit us manufacturers and the argument and the way that this is scored by the jct and I won’t put you to sleep.

With all of the details, but the the assumption is is that when you tax corporations, when you hit them with the higher corporate tax rate.

Some of that will be reflected in lower profits and lower returns to investors, but some of that will also be passed through in the form of lower real wages.

To workers going forward, and so you know that tax increase actually does end up hitting working class middle class upper middle class, basically, you know the folks earning less than 400,000 a year, this does end up according to jct.

The jct taking a bite out of their paycheck you know, like attacks, so I don’t know you know this has been making the rounds it’s obviously reported by the Wall Street Journal also has been the subject of a couple of different op eds.

So we’ll see how kierston cinema Senator from Arizona reacts to this.

You know we’ll see if it politically will fly but but Michael i’m going to frame the whole thing overall as good news, you know me i’m a.

sunny side up glass half full kind of guy and, as I said earlier in the show they were talking about limiting 1031 exchanges and all sorts about you know wasn’t there a wealth tax.

LIEN propose I mean there were all sorts of.

policy proposals that were on workable impractical that could have totally tanked the real estate market and at least those appear to be off the table so i’d say overall.

Whether this passes or not.

You know, certainly, it could be a lot worse from that tax policy perspective.

Michael Johnston: yeah and I think I think what we learned there Andy as you’re not in favor excited about the 86,000 new irs agents are.

poking around your books.

Andy Hagans: Well, I hope, they’re lazy agents, you know no, I mean the thing is is you know they’re gonna work hard right they’re going to find work to do, and some of that probably will find new revenue right, but you know as we’ve seen in the past, you know people inside the irs can be politically motivated can have an ideological agenda.

So no I don’t necessarily want an irs that has a whole bunch of new agents that are looking for work to do and i’m squeaky clean on my taxes.

right but, but I would look forward to an audit.

Michael Johnston: It would be a huge distraction from from business at hand right So hopefully they think everyone’s in favor people will be in favor of it as long as they’re not the ones getting audited right, this is a.

This is is nimbyism at its best go go a long as you’re you know dealing with those folks in the next town over who I can’t stand and audit away, but if you show up at my door i’m going to have different feelings about it.

Andy Hagans: Great audit audit the the folks earning the carried interest and audit all the corporations to make sure that they’re paying their new minimum tax right that’s probably the political thinking in practice.

will have to find out, and you know I think that’s a good note to end on and that’s a reminder to our listeners and viewers, that all of the links that we discussed in today’s episode will be included in our show notes at.

comm slash podcast and, by the way, if you have a moment and you’d like to review the show on apple podcast give us that five star review that helps us tremendously to spread the word.

about the show, and we will be back soon with another episode Michael thanks so much for joining me today.

Michael Johnston: Thanks Andy always fun.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.