Allan Sloan’s Washington Post commentary yesterday, “Time to Close the Carried-Interest Loophole,” would very likely have struck a tender nerve among our National Multi Housing Council (NMHC) friends and a multifamily community intent on keeping capital flow and investment opportunity in clear focus as demand picks up.
The Washington, D.C.–based advocates have had their hands full lately, amid a struggle that for all the world makes its seem like Capitol Hill’s denizens live in a comic book cosmos populated exclusively by heroes and villains, never mind who is which. The Sloan piece, we get it, demonizes “loopholes” and a cadre of evil business barons who use them to maintain their place just out of reach of the lnternal Revenue Service and its code.
Tax reform, Sloan intimates, should result in a formula that makes the very rich pay their fairer share of the burden of running government. Prior to a sweeping tax reform measure, tax laws should be “tweaked” to remove one of the ways super-visible, super-rich hedge fund and private equity fund managers navigate the system pain-free.
Carried interest means general partners’ take in a deal gets taxed at a capital gains 15 percent level, rather than as part of income, which would be 35 percent. In the multifamily community, a great deal of participants—as much as 45 percent of multifamily investment partnerships—currently benefit, according to NMHC estimates, and a healthy dollop of performance draws motivation from the policy as it works now.
However, Capitol Hill seems only to work in broad brushes these days, so everybody who’s in on this loophole gets targeted as a public enemy. In a comic book cosmos, the heroes take down the villains and make them pay.
In today’s real world, a fragile economic recovery has begun to make noise as if it may have the gumption to stick out the final throes of adversity. We’re with the folks who believe that Animal Spirits, a collective psychology-driven behavior among both consumers and businesses investing in their business, will play an absolutely critical role in sustaining a baby-steps progress out of a long, cold darkness.
Sloan’s theory is that plugging the carried-interest loophole for general partners of investment groups—a very common business model for multifamily enterprises and developments—will wind up exerting little direct influence on their motivation to be in, and re-invest in, the business.
That theory is certainly arguable, and a fragile early-recovery instance is, we think, not the moment to test it. The fledgling, unsure-of-itself rebound may have a tolerance for just so much “uncertainty risk,” and could endure just a smidge of “event risk,” but an abundance of both would more than likely squelch the little evidence of momentum the economy and residential investment have going right now.
“Do no harm” means something quite different from “take no action.” Do no harm means see beyond the Z-z-z-z-a-a-a-h-p-o-w-i-e!!!! one fancies would avenge all the evil-doing, chicanery, and blatant disdain for what is right, fair, and just. Do no harm, in this politically divisive environment, is actually strong policy and leadership.
The NMHC treads a delicate line in advocating for the interests of both big-time financial real estate investment enterprises and much smaller, more localized organizations whose business models and tax structures are drawn from identical designs as the vaunted Wall Street fund managers who are the villains of the comic book cosmos.
Sometimes, not always, but sometimes, a taxpayer and general partner in an LLC that owns a multifamily community are one and the same individual. A comic book cosmos doesn’t account for such an instance, which is one of the reasons Main Street takes such umbrage with both Constitution Avenue and Wall Street.