Industry Rx for economy

Real Estate Weekly, Dec 4, 1991 by Lois Weiss

INDUSTRY RX FOR ECONOMY

With the holiday season upon us, real estate executives were eager to share their ideas on making the New Year brighter and better. With no end to the fall in values or the credit crunch in sight, these are their prescriptions for bringing our economy back to life.

Reduce Interest Rates Further

Mortimer Zuckerman, chairman of Boston Properties, said he believes lowered interest rates will help the economy. "Disaster would be to increase the deficit," he said. "They must sharply reduce money rates. Then, if the economy turns around they can move them up again -- but they can't do it if they do a tax cut which would increase the deficit."

The last thing we need, Zuckerman said, is to increase the deficit which would keep interest rates up.

Interest rates, Zuckerman believes must be lowered even more than they are now. "They have room to go," he said, "and must go even further." He suggested that the discount rate should go down from 4 percent to 3.5 percent and the federal funds rate down to 3.5 percent as well.

Zuckerman said he also understands why the banks are not lending. "They are trying to preserve capital and not put it at risk," he said.

Should things not change, Zuckerman warned, "Watch out for political panic." What's that? REW asked. "I don't know yet," he admitted. "It hasn't happened yet."

Recapitalize Banks

Francis Greenburger, CEO of Time Equities, said, on a national level, the government should create a system to recapitalize banks using existing banks or a special real estate bank. These banks could lend money in the form of cooperative banking, similar, Greenburger said, to the way the national agricultural bank works.

"If you borrow money, you buy 5 percent in stock which becomes the capital," he said. "We have a problem because banks can't lend and have a capital shortage. I suggest a recapitalization through the banks where the banks would be encouraged to lend money to real estate but the developers would contribute enough capital to finance their loan. The feds were trying to establish a 6 percent loan ratio. So, if this bank lent you $1 million you would buy stock of $60,000. Now the law discourages you because if developers were to do it they would say it was |self dealing'."

The major constraint on banks today, Greenburger said, is that they cannot attract capital to fulfill the government's requirements for capital. So the developers cannot even finance or save good projects, Greenburger noted, because the banks are calling their loans. The government should pass a bill allowing banks to capitalize loans out of the equity of the properties, Greenburger suggested.

"It would be a way of encouraging lending to real estate people while at the same time encouraging loans and providing a way to recapitalize banks," he said.

Meanwhile, he noted, nobody is selling and nobody is buying and the values of buildings and co-ops have already fallen below their mortgages. "The market is just stagnant," he said.

Greenburger had other suggestions to reform both property taxes and the legal system. "Clearly we need legal reform so that our legal systems are less costly so that transactions are less legally intensive and are done in a less expensive way," he said.

He said tax reform is needed whereby the tax burden is shared in a way that ensures the commercial sector is not overloaded. "Right now we have a system where the residential taxes are low and commercial taxes are high," Greenburger noted. Taxes are less, he said, in Englewood, New Jersey, so businesses move there. "Our tax system has to be similar to the areas we compete with. Otherwise people are going to buy what's cheap here and not what's expensive." Single family houses are assessed at |ridiculous amounts,' and yet, he said, taxes on office space are equal to the rent--which is equal to the price of rent in other markets. It's absurd."

Sell Tax Liens

Stephen Anfang, president of the Anfang Group, believes the city should be selling its real estate tax liens to generate cash and keep taxes lower. Anfang has already founded Collect, an organization of real estate businessmen and attorneys, to influence the city to adopt this strategy. "The city's problem is cash flow," Anfang explained. "This would be a better way to expedite collections."

Tax liens would be sold at auction after a period of six months, he said. The winning bid would be the one offering the lowest amount of interest that the owner would have to pay on the taxes due. "It's been very successful in other jurisdictions," Anfang noted, including Chicago.

Anfang said real estate taxes could be stabilized if those monies were collected which otherwise would go uncollected. With approximately $400,000 in delinquencies owed to the city, Anfang said, the benefits would accrue immediately. He expects banks to begin a cottage industry of lending money to those buying liens. Anfang is also putting together a fund that would make these investments as well. He said the lien holders, which he calls "tax certificate owners," get the tax rate down to zero. He also favors shorter deprecation schedules and incentives for investments to build housing. The construction industry needs to get back to work, he said.