June 13, 1973
Discussions with three large Boston real estate developers about the Treasury proposals to limit artificial accounting losses indicated that only subsidized housing built by limited dividend corporations would be severely hurt. Developers of apartments for the private market and of commercial construction felt that while profits would be reduced, worthwhile investment projects would still be built and only marginal projects would be affected.
The Massachusetts Housing Finance Agency channels funds into the subsidized housing market to limited dividend corporations. Between 95-100 percent of the equity capital put up in these corporations is attracted by the tax shelter feature. The Director of the agency said, "We're in the business of selling tax shelter." Without the tax shelter provision, the limited dividend corporation would not attract private capital and the low income housing market would disappear. Developers are only interested in this kind of construction if they can sell off their losses at the front end and end up with no investment or even a negative investment of their own capital.
In the private market for apartments, developers felt that the tax shelters were one of the factors increasing profits, but that its removal would not really hurt large firms. As one developer put it, "The Treasury proposals are like higher lumber prices; they're another factor affecting a firm's income stream, but they only affect the marginal situation." The Treasury proposals may, therefore, partially slow down some construction activity, but it's not going to kill the apartment market.
In some cases, this developer felt that removal of the tax shelter provision will help the housing market because it has been an added ingredient distorting the economic picture and has led to overbuilding. He cited overbuilding in Southern California, Florida and Texas where there are wealthy
tax-conscious populations which have put their money into projects which were not economically viable investments just because they provided tax shelters. These projects are built for sale, not investment.
While large real estate developers will be able to continue operating, it was felt that many small builders are not dependent on outside capital attracted by the tax shelter provisions. For large builders, the tax shelter has been a windfall, but for many small builders it is crucial. Developers also felt that the Treasury proposals would accelerate condominium construction.
A large developer of commercial construction reported that the Treasury proposals should not have a dramatic effect on that market because there is more capital available for investment in good industrial and commercial leases than there are good projects. Since there aren't small developers in the commercial market, the effects will again be less than on apartment construction. This developer summarized his company's position by saying, "We'll survive, but it won't be as much fun."
Both of the academic correspondents available this month, Professor Eckstein and Dr. Shapiro, felt the prospects are good that economic growth will taper off without becoming negative. Neither was pessimistic about the long-run outlook for inflation.
Shapiro felt that internal sources of funds would be sufficient to finance the most likely prospective levels of nonfinancial corporate investment. Thus, he felt short rates, and later long-term rates, will come down. This would preclude a significant squeeze on housing and consumer credit. Shapiro recommended a 7 to 8 percent rate of growth in RPDs for the current policy period.
Eckstein again expressed concern about a credit crunch. Past crunches, he suggested, have been "stumbled into, not planned." He noted that the indicators of a crunch—short rates close to long rates, and no growth in unborrowed reserves—are present in the current situation. In order to prevent the Federal funds rate from stabilizing as high as 8.5 percent, additional reserves must be made available over the next two months. Unless borrowings are to rise to unprecedented heights, therefore, nonborrowed reserves must be expanded. Eckstein grants that current policy must tread "the narrow path between not worsening the prospects for a decline in 1974 and not contributing to the current commodity price explosion."