The Original Tax “Shelter”
Every year, “true crime” fans look forward to the IRS Criminal Investigation Unit’s annual report detailing their New York City is the indisputable hub of American capitalism. Its glittering streets are home to the worlds of finance, advertising, fashion, publishing, and even organized crime. The island of Manhattan is home to some of the richest people on the planet, and they own some of its priciest real estate in the world.
You would think all those rich people living in all those expensive apartments would keep the tax collectors satisfied. But in fact, the oceans of money sloshing ashore are managing to bypass some of the most obvious tax tollbooths.
A generation ago, New York’s bold-faced names dreamed of living in what Tom Wolfe called the “Good Buildings” — a triangle of 42 limestone coops centered on Manhattan’s Upper East Side. Today, plenty of plutocrats have more than enough cash to afford those buildings. But what if their blood isn’t blue enough for the famously snooty boards of directors? Well, if you’re an internationally ambitious Russian car dealer, a Super Bowl-winning quarterback with a penchant for underinflated balls, or the son of a deposed African dictator, you turn your gaze south and west to “Billionaire’s Row,” a stretch of super-tall, super-expensive condominiums mostly lying along 57th Street.
In January, a mystery buyer made real estate history when he bought a shiny new apartment in a shiny new building for $100,471,452. And 77 cents. (Not a typo.) Sure, he gets 11,000 square feet overlooking Central Park from the 89th and 90th floors. There’s even room service from the Michelin-starred chef at the Park Hyatt hotel occupying the building’s first 25 floors. But it’s not like the place is special or anything. Just down the street, the developers of 111 57th Street are asking the same $100 million for their top units. And right around the corner, the developers of 520 Park Avenue are asking $130 million for their three-story penthouse. (Can you imagine how unbearably proletarian it must feel to live 1,000 feet above the street on the 84th floor, but know there’s someone even richer living right upstairs?)
Why are the tax collectors so unhappy? It mainly comes down to a dense provision of New York State law. It’s called Section 421-a, and it slashes property taxes for new construction by up to 95% for up to 25 years, if developers agree to also build homes for low-income tenants. (Of course, that doesn’t mean the “poorsies” get to overlook Central Park with the billionaires — the developers of the record-breaking condo underwrote 66 units way out in the Bronx.) So, just how much can that break be worth? In the case of that $100 million sale, it’s $360,000 per year, with Section 421-a costing over $1 billion in annual tax overall.
Why would New York pass such a boondoggle in the first place? The goal is to lure rich residents to “make it rain” in local stores and restaurants. But it turns out the average billionaire owns 10 residences — and if you’ve got 10 places to live, how much time do you spend at any one of them? Foreign buyers, especially, are using their New York City pads as glass-and-concrete Swiss bank accounts rather than homes. One study found that 30% of all apartments bounded by 49th Street, Park Avenue, 70th Street, and Fifth Avenue are vacant at least 10 months out of the year. Oh, well. At least if it all hits the fan back home, owners will have part of their fortune safely beyond the new regime’s reach.
Lawmakers have naturally reacted with plans to make up the taxes they’re leaving on the table. Some have proposed eliminating Section 421-a entirely; others call for nonresident taxes on empty apartments. Unfortunately, the heads of New York’s State Assembly and Senate are both under indictment right now, which has pretty much ground the legislature to a halt. In fact, part of the case against Senate leader Dean Skelos involves accusations that he voted to give 421-a breaks to a developer who employed his son. It looks like we shouldn’t expect the law to change anytime soon.
The new breed of high-end Manhattan condo buyers may not be seeking the same “shelter” that you or I get from our homes. But who can blame them for looking at the tax laws and planning to pay less? That part is the same. And at our firm, planning isn’t something we just do on April 15. It’s a year-round commitment to exploring every way we can to help you save.
In The Headlines
USAA: An Old Bank that Grows by Learning New Tricks
In 1922, 25 Army officers met in San Antonio and agreed to insure one another’s vehicles because nobody else would. Since its founding, the company has been transformed into a group of diversified financial services companies with subsidiaries offering banking, investing, and insurance to people and families that serve, or served, in the United States military. At the end of 2014, it had 10.7 million members.
Today the company, United Services Automobile Association, or USAA, is also one of the largest banks in the country by assets, as well as one of the top mortgage brokers and auto insurers. That is all the more remarkable since just a small fraction of the population is allowed to sign up. The bank is open only to military members and their families, and it serves them with what Celent analyst Dan Latimore calls a “laser focus.”
The company was one of the pioneers of direct marketing and most of its business is conducted over the Internet or telephone using employees instead of agents. It was in reaching service members stationed abroad that led USAA to be among the first to offer real mobile banking services. And its member-owned model (it paid $1.6 billion in dividends to members last year) and devotion to its client base insulated it from the temptations that ruined many other financial services companies. The result: Since it loosened membership in 2009 to include anyone who had honorably served, membership has shot up 45%.
With only one full-service brick-and-mortar branch, USAA was an early leader in mobile banking, but it didn’t stop there. In the past five years alone, the company has filed 493 patents. It offers facial and voice-recognition logins, customer-service video chat, and mobile insurance-claim filing. In the works: a drone program, developed with the Federal Aviation Administration, that will allow USAA to assess damages after major catastrophic events, like last summer’s Colorado wildfires.
Serving service members is “baked into the core of who they are,” says Forrester analyst Megan Burns. That means sending some employees to mock boot camps, more mobile options, and exploring unusual products by popular demand, like ride-sharing insurance for former military members turned Uber drivers.
USAA is a regular on Fortune’s Best Companies to Work For ranking (No. 33), as well as the magazine’s Most Admired Companies list (No. 28). “We know that the member experience can’t be any better than our employee experience is internally,” says COO Carl Liebert. To wit, the company offers stress-relieving rooms, more than 20 hours a year in leadership training, and a gold-plated benefits plan. Plus, it is hiring 1,600 work-from-home employees, making staff as mobile as members.
Private Investors Aim to Become the New Bank for Small Businesses
Investor Leon Black, like many of his peers, has urged caution given high market valuations. But the Apollo Global Management CEO said his $163 billion firm is rapidly expanding one of its business lines: lending money. “Credit in general is a huge, huge opportunity today,” Black said recently at the Milken Institute Global Conference in Los Angeles, noting the diminished role of banks in providing loans. Black’s Apollo is one of many investors to see the opportunity.
A new paper from the Alternative Investment Management Association (AIMA), a London-based hedge fund lobbyist, estimates that private debt funds—including hedge and private equity funds, among others—now manage about $440 billion globally, with $64 billion of new capital allocated to the sector last year alone.
The surge in activity from private lenders, according to the AIMA, is a boon for smaller companies. “Many small and medium sized businesses would miss out on growth opportunities or fail altogether if it were not for the absolutely vital support of hedge funds and other alternative asset managers,” AIMA CEO Jack Inglis said in a statement.
Hedge funds and others in this space usually provide loans of between $25 million and $100 million, often for periods of one to three years, according to AIMA’s survey. About 65% of companies taking the loans typically have earnings before interest, tax, depreciation and amortization of between $5 million and $75 million.
The report notes that the companies lent to are typically too small to raise capital through the public bond market and banks have been more reluctant to lend to them because of stricter standards following the 2008 financial crisis.
The most popular sectors for lending are consumer goods and services, healthcare, industrial, and real estate, according to AIMA’s survey of private fund managers. Examples of recent loans from U.S. firms given by AIMA include private equity shop KKR & Co giving an approximate $12 million loan to help grow a Scottish wind farm; a $26 million loan from hedge fund firm Pine River Capital to an American aircraft parts dealer for purchasing a target company; and Avenue Capital, another hedge fund manager, lending money to investment firm H.I.G. Europe to help it buy consumer loan broker Freedom Finance Nordic.
Another benefit of the private lending, according to AIMA, is systemic: instead of a few big banks, there are lots of funds to share the risk, and the funds use relatively little borrowed money to leverage their bets.
Citations
1. http://for.tn/19yV9i2 – Fortune
2. http://cnb.cx/1JtQaeQ – CNBC
The Good News Is . . .
• Total nonfarm payroll employment increased by 223,000 in April according to the U.S. Bureau of Labor Statistics. Job gains occurred in professional and business services, health care, and construction. In April, the employment rate was 5.4% and the number of unemployed persons was 8.5 million. Over the year, the unemployment rate and the number of unemployed persons were down by 0.8% and 1.1 million, respectively.
• Walt Disney Co., a global entertainment company, reported earnings of $1.23 per share, an increase of 10.8% over year-ago earnings of $1.11. The firm’s earnings topped the consensus estimate of analysts by $0.13. The company reported revenues of $12.5 billion, an increase of 7.0%. Management attributed the company’s results to the worldwide success of its key brands, such as Marvel’s Avengers: Age of Ultron.
• Document and data storage services company, Iron Mountain Inc. announced that the company would be acquiring Georgia-based data protection services provider, Recall Holdings Ltd., for a hefty $2.2 billion in a part cash, part equity deal. Once the acquisition is finalized, shareholders of Recall Holdings will have the option to receive 0.1722 Iron Mountain shares or $8.50 cash for every share they own.
Citations
1. http://1.usa.gov/IOsIPK – Bureau of Labor Statistics
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1KVKKu5 – Walt Disney Co.
4. http://bit.ly/1KyQedy – FinancialBuzz.com
Planning Tips
Tips for Managing Your Credit Cards
According to new Gallup research, more Americans are relying less on their credit cards. In fact, credit card ownership is at an all-time low, with 64% of those surveyed paying off their balances in full each month, the highest percentage Gallup has recorded. Below are some tips to help you use credit even more cleverly, especially since there is power in wielding plastic as long as you do it the right way.
Ask for a lower interest rate – First, the good news: Two out of three credit card holders who ask for a lower interest rate have their request honored. A bank will not lower your interest unless you ask, so consider calling if you have had an account for a long time and show a good payment history. Now the uncertain part: Sometimes, a bank may consider this new deal as a request for new credit, which activates a new credit check that can take a toll on your credit score. Make an anonymous inquiry to your credit card company first to find out their policy on altering interest rates. If they do it with ease, then it is time to bank on the savings.
Consider a limit increase – Do you find that your balance is moving too close to your credit limit — even if you pay it off in full each month? Many use their credit card for just about everything to earn rewards. However, you may be hurting your credit score. Request a higher credit limit to protect your credit rating. By boosting the gap between your balance and your credit limit, your credit utilization (the amount of credit you are using versus the credit available) will stay lower as you reap reward points. Use this strategy when you have the hard cash to pay off those bills monthly. You need to be a disciplined credit card user to pull this off.
Move your due date – You do not need to settle for the payment due date your credit card company gave you. Make payments foolproof by calling your creditor to change the date to one that works best for your paycheck cycle. It can be as easy as a toll-free call to your creditor—and the request is almost always approved.
Pay mid-cycle – Even when you move your payment due date, it is often better to pay credit card bills mid-cycle (if you are carrying over a balance) than at your due date. The balances that appear on your credit reports are usually based on your balance at the end of your billing cycle, not after you have made your payment and paid it off. One strategy is to go online to make a payment early—a few days before the end of the billing cycle—so that the balance that gets reported to the credit bureaus is lower. When you are seeking to pay down a debt or boost your credit rating, this plan can help.
Leverage the grace period – Thanks to the consumer protections of the CARD Act of 2009, credit card users who do not carry balances month-to-month and have signed up with a credit card that offers a “grace period,” have at least 21 days from the time of purchase to pay off the charge in full without accruing interest. Note that grace periods do not include balance transfers or cash advances.
Citations
1. http://bit.ly/P8rO3H – Bankrate.com
2. http://1.usa.gov/1cFKioL – Federal Reserve
3. http://ti.me/1H0UJzN – Money
4. http://abt.cm/1KyQnxv – About.com
5. http://bit.ly/1CSITQy – MoneyCrashers.com
