Altus Insight November, 2017

The Altus Insight
Market news, commentary and relevant topics for today’s alternative asset investor

Date: November 30, 2017
FR: Forrest Jinks
RE: So…I have been asked…

I hope everyone had a happy Thanksgiving. It is my favorite holiday each year. I have much to be thankful for, as does everyone reading this article.

So…I have been asked…

What do you think about the tax plan going through Congress? Frankly, at this point in the process I try not to think about it at all. A couple years ago there was a tax proposal that would have done away with the interest deduction as a business expense. This would have had a pretty substantial impact on the way companies operate, and especially on real estate investing. We (Altus) spent a considerable amount of time and stress trying to understand the impact to our business. The tax plan ended up going nowhere. And I learned my lesson. There is a lot of noise and rhetoric around most new bills/laws but few of them actually go into effect. We have plenty to do each work day without spending time worrying about what may (or may not) be. Once the tax bill gets passed through both the House and the Senate we will dig into it deeper and see what the impact, if any, will be. That being said, I do have three high level thoughts:

1. I have no issue with a reduction or elimination of primary residence interest deduction. I don’t believe that home owners should get a tax benefit over and above renters. I know, I know, the Association of Realtors will have my head, but all the noise they make is fully in self-interest and frankly, is a little silly. How many people do you know that decided to buy a home instead of renting because of the interest deduction?

2. I also have no issue with the elimination of the state tax deduction from federal taxes. I say this despite living in a state with ridiculously high taxes. Why should the rest of the country subsidize California’s (and New Jersey, New York, etc..) poor spending habits? Additionally, the extra pain felt by residents in high tax states will lead to increased analysis of moving to lower taxed states. This should increase awareness around the competition between states, which I think is a good thing. Increased competition nearly always leads to better performance.

3. The current tax plan, almost regardless of any tweaks that will be made, comes up way short compared to the true tax overhaul that is needed. The US, like many Western countries, has serious fiscal issues. The current tax plan doesn’t help, and could negatively impact, those same issues. We need to blow up and rebuild the tax system to eliminate special interest benefits, increase international competitiveness, and (hopefully) make baby steps in dealing with the debt and deficit. Such an overhaul will not happen until things are considerably worse, or until we have a leader with considerable courage.
What are your thoughts on the economy? As readers know, I have been pessimistic about economic prospects for the past 16 - 24 months. The current economic expansion is the third longest US expansion on record, and since economies go through cycles, we know that at some point we will have another recession. However, small business confidence readings have continued to climb over the past 9 – 12 months. Small businesses employ a large percentage of the US workforce, so confident small business owners are something to watch (note: consumer confidence is also measuring high). Absent a large geopolitical shock, this may mean the economy has some expansion life left. The Fed, with its desire to raise interest rates, certainly hopes so. Don’t get me wrong, many of the hard statistical measurements are still flashing red, but which is stronger - current statistical measurements or consumer/business sentiment? Time will tell. 

Can you provide more explanation as to why you feel natural disasters don’t provide true economic benefit? Gross domestic product is a measure of activity, not wealth. As a teenager, I always took the Friday night shift as a grocery store bagger. My theory was, not only was I making money from working, I was also not spending the money I would be spending if I spent that Friday evening with my friends. My economic situation therefore improved. A natural disaster has the opposite effect, by increasing short-term spending but at the expense of true productivity and growth. If I may, let me give you my own personal example, to illustrate:  I now know from experience how much time dealing with a loss of property can be (in our case, due to the fire). It is a huge time commitment and daily disruption; and we haven’t even started rebuilding yet. This is despite the fact I have considerable experience in the field, meaning I should, in theory, be more efficient than others without any experience. The time required to deal with the loss has to come from somewhere. Does the extra time required come from family? Maybe some, but with three small children also dealing with the upheaval, I need to make sure they are getting the attention they need. Does the extra time come from reduced sleep? That was definitely the case for the first several weeks after the fires, but isn’t sustainable. Where else does the time come from? In my case, it largely comes out of reduced time and focus on growing the Altus business. So, I am spending a huge amount of time to simply replace the utility of what I already previously had, at the expense of creating economic benefit through business activity. I lose, because I am not creating as much economic benefit for myself, but the economy also loses, because I am not creating the same level of economic benefit within the economy. Now take that concept and multiply it across the thousands and thousands of people that were affected by the hurricanes and fires over the past few months. Yes, there will be some massive economic winners through the rebuild process. And yes, it should cause GDP as the measurement of activity to see a bump, but trading wealth for activity is not a good long-term strategy.

Where is the investment opportunity due to the recent fires? As could be expected, there has been considerable conversation around this topic. Thus far, I can only answer that I don’t know. There is considerable opportunity for the needed service providers (contractors, claims adjusters, etc.) but unless there is opportunity to invest directly into one of those people/companies that doesn’t equate to investment opportunity. There will be opportunity to buy buildable lots, but if they are being purchased with the intent to build and resell, it isn’t so much an investment opportunity as it is quasi-speculation. The possibility of buying buildable lots and land banking them certainly exists, and could be considered investment, but to do so an investor needs to have considerable patience and understand there could be no profit for quite some time.

How is Altus doing with the dealing the fallout from the fires? While none of our portfolio properties or existing investments were affected, the fires have caused more disruption than I would have originally anticipated. The most immediate impact was our accounting manager deciding she wanted to spend her time directly helping people impacted by the fires. We applaud and support her in this, but her departure has left us with a hole on our team in the short-term. Positions such as this take time to fill in normal times, and the disruption to everyone’s lives in the area of our office has slowed down the process further. The fallout is threefold: First, we haven’t been able to supply financial information in as timely as a manner as we like.  Second, we have had extra cost of bringing in an outside company to help us through the transition.  And lastly, our team has had to spend time dealing with the transition, that it otherwise would have spent on other business activities.

The other fallout of the fires is as mentioned above. My time has been fragmented and reduced, as I am forced to spend hours dealing with issues that are not of benefit to the company. Naturally, that impacts Altus’s growth.

On the flip side, I feel like our team has grown closer than ever, and our teamwork has improved as we go through this experience. Long-term, this benefit will likely more than outweigh the short-term headwinds.

How are you and your family doing? We are doing very well and feel extremely blessed. One, we are all safe.  Two, the outpouring of support has been amazing and reminded us that we have great friends, family, and work associates. Three, we have been reminded of the good in humanity. It is easy to get pulled down by the negativity in the news, on social media, etc., but an experience such as this really brings out the best in people. Four, if we step back and take a broader view of the situation, we see how lucky we really are. Going back to depths of the real estate crash in 2008, I was renting a basement bedroom without a kitchen, wasn’t married, and was waaaay insolvent. If you told me then that in only 9 years I would have a wonderful wife, three beautiful and healthy children, a successful business with great team members and investors, and have the opportunity to build a dream house, I would have said sign me up. That is where we are today. We are the lucky ones.

The November article I wrote a couple years ago sums up the way I am currently feeling nicely (Click here), with one addition. In rereading the article, I realized I didn’t mention my family. My parents and siblings are wonderful, and I am glad to be part of the family I am. Just one more, huge, blessing.


Happy investing,

Forrest Jinks
Altus Equity Group, LP
off: 707/932-5887
fax: 707/544-2972
www.altusequity.com