Quote:
Originally Posted by LeftCoaster
I do have access to several years of a real estate company's books, I work in the industry, and like I said in my post, most of what you said is correct, I just disagreed with some of what you said. I dont know why you didn’t bother to ask what I disagreed with.
First off, I'm sure you know that REITs are no longer tax avoidance schemes, and even when they were, it is not the fault of the board for adopting a IT structure, but of the government for making it such an attractive alternative to incorporation. Second, I dont think Godfrey being on the board of RioCan does not make him the boss, he is a board member and nothing more. The inherent conflict of interest you attempt to create is not very likely, as the much more likely story is simplly shoddy journalism and sensationalist titles. Drivers of RE prices are much much more deep seeded than confidence in the industry, and Godfrey knows this, making some price influencing media conspiracy theory just not very likely in my opinion.
Second, I would hesitate to call the Mainland Chinese investors amateur. Though they may not be corporate or institutional investors, most mainlanders with money are well educated and of the business class, and would likely therefore be somewhat sophisticated, at least sophisticated enough to hire an advisor or consultant when making an international investment, especially in real estate.
I do agree that the banks and RE industry have a very close relationship and a vested interest in keeping prices rising, and like I said, I took this away from your post and disregarded the rest.
With regards to your latest post, I have some serious issues with your logic. Double declining depreciation does not allow for heavier reinvestment. First off double declining depreciation wipes assets off ones book sooner rather than later, making it difficult to secure debt financing as there are less opportunities for asset backed collateralized loans not to mention the damage it does to a firm's financial metrics. As well the benefits of DD depreciation do not show up in a company's ability to capitalize projects, as CAPEX is a pre-tax expense and therefore a product of free cash flows and not after tax NI, which is what is benefitted by DD depreciation. I am not even aware of many firms double declining their land assets, in fact im not even sure that would comply with GAAP, but I'm not an accountant so I don't spend too much time looking at various firm's depreciation methodologies. The DD depreciation method does not allow for a firm to invest more in CAPEX, but merely allows it to report a lower taxable income without affecting its cashflows... very handy for sure, but not a contributor to the raise in re prices.
Lower taxes on capital gains on the other hand certainly could be argued to have had an effect, but this is a very divisive issue and there are pros and cons to lowering capital gains taxes... and that is a very long and protracted debate that I dont know anyone here wants to sit through, and frankly belongs in its own thread if anyone cares to talk about it.
Finally, tax shields certainly allow a firm access to more capital, both from making a shift to higher leverage attractive, and freeing up more capital from a firms tax bill, but that is an issue that affects the entire economy, not just the RE industry, and has more positive effects than negative. Don't really know why taxes would be paid on income tax expenses anyway... they are expenses afterall.
Ease of access to capital was, and still is, the prime casue of the rise in RE prices. There are so many causes and symptoms of that it could, and has, literally filled volumes of books. If you would like to discuss that one further please create a thread entitled "The financial crisis of 2007 and how we haven't actually fixed a thing" and I would be more than happy to chat about it on end. I keep in contact with a lot of my profs from b-school and we have had quite a few chats about it lately. It's an incredibly interesting and complex web of mistakes and misguided policies that just can't be summed up in one post here.
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you've written so much. yet i had ONE quibble. i'll address that, then go on.
i argued that accelerated depreciation schemes were a contributing factor to the asset price bubble. many properties are owned for only a few years. declining depreciation schemes result in higher yields for short term owners. a generation ago, a building was depreciated using the straight line method. plotted on a graph, with the x axis being time and the y axis being depreciation expense, it would go down in a straight line. with declining value depreciation, the depreciation expense would be asymptotic. because of
accelerated depreciation, the (paper) expense would be much higher in the first few years of ownership. a higher paper depreciation would not detract from actual revenue, but it would lead to a lower tax burden. for the first years of any real estate investment, accelerated depreciation results in more after-tax profit.
EVERY school of economics argues that higher yields will result in more investment. classical economists like smith/mill/ricardo/marx state that lowered tax burdens/higher yields on real estate investments will result in further investment and hence higher values and even more unearned income. the chicago/austrian school boys state that the lowered tax burden and higher yields will result in higher prices and wealth creation. arguing against the initial tax-friendly aspects of accelerated depreciation is akin to arguing against gravity.
REITs have ALWAYS been tax avoidance schemes. their rules have been changed, but they still have a higher expected return than other investment schemes. i didn't BLAME the real estate people for the investment trust industry, i just said it contributed to some fat profits and inflated values.
mind you, much of the government's tax laws ARE in fact influenced by the FIRE industry. all those profits concentrated into a few connected and politically organized industries could lead to some nice campaign contributions. but then with your logic, you could argue that the interest expense deduction and low, low capital gains taxes on real estate speculation aren't influenced by vested interests. maybe workers are lobbying for low capital gains taxes? maybe those mainland chinse are lobbying for them? or maybe we can use a little logic and see that the already politically organized and powerful want the tax laws to their liking?
you can continue goosestepping with the other gullible fools and follow the newspaper in casting blame on one particular ethnic group, and ignore the inherent advantages of the real estate industry. it's so easy to blame it on the out-group, while ignoring the systemic advantages of commercial real estate industry. *hint hint* the ability to deduct interest expense on real estate investment.
go ahead and doubt my logic. unless you're an apologist for the FIRE industry friendly tax laws, and thus seek to deflect blame for the asset price bubble onto some third party, you're just not making any coherent point. you thoroughly mangled depreciation expense, yet you're accusing someone else of faulty logic?
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