Quarterly Newsletter – 3rd Quarter 2017

Dear Friends
of TwinRock,

We’re likely looking at months of political posturing and theater before we know what Trump’s proposed tax plan will look like, when – and if – it becomes law.  Nevertheless, here are some of our immediate takeaways on the tax plan promises as it stands now, along with a few thoughts on how these will help our investors and our business.

Trump’s Tax Plan Promises:

  • #1 – Reduce The Corporate Tax Rate:
    Reducing the corporate tax rate from the current 35% to 20% will allow businesses to keep and reinvest more of what they earn.
  • #2 No Corporate Bond Interest Deductions:
    This is good for both public and private equity investors, because if companies are no longer able to deduct the interest on debt financing that they issue, they will be encouraged to issue additional stock to raise capital.  Private investment capital will also seek out new opportunities, such as real estate partnerships and REITs.
  • #3 Reduce Pass-Through Tax Rates:
    The plan is to lower this rate to 25%, and will benefit not only entities such as real estate partnerships and equity fund operators, but also small mom-and-pop business owners as well.
  • #4 Top Tax Rate Decrease:
    For a married couple making over $1 million per year, this represents a tax savings of $24,000 annually, freeing up additional money for investment.
  • #5 No State & Local Tax Deductions:
    This is one thing that we don’t like about Trump’s tax plan, because it hurts people in states with high taxes rates such as California.  According to the Tax Foundation, Californians currently deduct $101 billion in state and local taxes from their federal returns, with New Yorkers coming in second-place at $68 billion.
  • #6 No Alternative Minimum Tax:
    Sometimes known as the stealth tax, simply because many people aren’t aware of it.  Created in the 1960s, the AMT rate has never been adjusted for inflation.  Nearly 33% of people making between $200,000 and $500,000 end up paying the alternative minimum tax.
  • #7 No Estate Tax:
    Also known as the ‘death tax’, which currently applies to inherited assets of $5.49 million and above.  Eliminating this will be a boon to family office investing.
Good For Business

Now, here’s why we think Trump’s tax plan will be good for business in the U.S., and for commercial real estate investment.  At first glance this is the most business- and investment-friendly set of proposed tax changes since Ronald Reagan was president.  According to a recent article from the Brookings Institution, there is broad recognition among both Republicans and Democrats in Congress that:

  • The current tax system is too complex and unfair
  • The current system leaves corporations at a competitive disadvantage, driving them to invest overseas
  • That the over $2.5 trillion held abroad should be brought back to the U.S. and used for job-creating investments
  • The current tax code favors debt over equity, by allowing corporate interest deductions
The last two points are good for our investors, our business, and for commercial real estate investment.  First, a tax code revision that eliminates corporate deductions for interest expense will in turn boost the demand for equity investment not just in corporations, but also private real estate group investments and REITs.  Then, even if just a small portion of the $2.5 trillion held overseas finds its way back into the U.S., those funds will have a positive impact on the capital available for new real estate investment and development.
If the U.S. Government was pro-real estate development even before President Trump took office, now that we have a commercial real estate guy in the White House it’s easy to see how business can only keep getting better.  Granted, passage of Trump’s Tax Plan is far from certain.  What we end up with after everything is said and done could be watered down and will ultimately dictate the economy’s direction.

Very truly yours,

Alexander Philips

Chief Executive and Investment Officer

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