Ep #584 – Understanding the infrastructure package and how it affects Multifamily Real Estate

Paulina Likos is an investing reporter with U.S. News and World Report and has worked at Fannie Mae as a credit risk analyst. We had a great discussion about the proposed infrastructure and its impact on us as investors.

Here’s some of the topics we covered:

  • Trillions vs Billions
  • Improving and building new infrastructures
  • Climate crisis
  • Clean Energy
  • Made In America Tax Plan
  • Global Minimum Tax Rate
  • 10301 Exchange
  • Implications on investors
  • Who will benefit the most

Full Transcript Below:

Rod: Welcome to another edition of how to build the “Lifetime Cashflow through Real Estate Investing”. I’m Rod Khleif and I’m thrilled that you’re here and I know you’re going to get tremendous value from the young lady we’re interviewing today. Her name is Paulina Likos and she’s an investigative reporter with US News and World Report. And her coverage area is the stock market, real estate investing, among lots of other things. And before that, she had a degree in political science. So, we’re going to have kind of a wide-ranging conversation about what’s happening in the market today. Paulina, welcome to the show.

Paulina: Rod, thanks so much for having me.

Rod: Yeah. So, could you expand on your background a little bit? I didn’t do it justice. Tell us a little bit more about who you are.

Paulina: Yeah, absolutely. So, I’m an investing reporter with U.S. News and World Report. And as you mentioned, out of college, I started working at Fannie Mae. And for those of you who might not be familiar with the company, they’re chartered by the US Congress and they provide mortgage financing in the US. So, I was in the single-family side as a credit risk analyst. And during my time there, I worked with lenders to support their business, to originate quality mortgage loans that fit Fannie Mae’s requirements. And I worked with lenders of different sizes in different regions, and I really enjoyed tracking and assessing the lenders performance and really everything that goes along with that. But I was really questioning how things work. So, for those of you who might be new to the mortgage industry, even if you are even a few years in, it can be a complex industry to understand because there’s so many moving parts. There’s a bunch of participants. So, I was questioning not only the dynamics of the mortgage industry but more so how the economy works and really what makes the world go round. So fast forward to today. I’m in journalism, so I’ve always had a strong passion for journalism. And so, it was a natural progression for me as an investing journalist. I like to take the macro view of things. To see what’s happening in the world and then distill it down to the topic at hand. So, you know where we were and where we got to here. So, I think that’s what I was missing in my job before. So, I write articles on a variety of topics, particularly real estate investing, but also portfolio management, emerging markets and investing trends. More broadly in the context of what’s happening in the markets today. And–you know, these articles are for retail investors who are looking to get a breakdown of the complex investing topics that we see in the markets and in the news, ultimately to further educate investors to make sound investing decisions.

Rod: Love it. And I called you investigative reporter groups. I’m so used to that term. I didn’t even think I missed the investing report so you focus on investments, which is awesome. Most of my listeners know what Fannie Mae is I think because that’s–you know, they provide– they and Freddie Mac weak non-recourse lending for our marketplace, which is fantastic. But I know that you’ve studied this new infrastructure package, and I would love to get your take, if you could outline, what you know about 2.3 trillion dollars. If you guys want to see something interesting, go online and see what a billion dollars looks like compared to a trillion dollars. So, you have some idea of just how massive that amount is. Could you outline that infrastructure package and what it entails?

Paulina: Yeah. Absolutely, so this is the largest investment in the US we’ve seen since World War II. And what the administration is putting forth is this plan. Their case is to– you know, America needs to remain competitive in the 21st century. Right? And by investing in these physical infrastructures, we’re driving the future and improving our competitiveness, particularly against China. So, this initial rollout, as you said, 2.3 trillion-dollar infrastructure plan and it would cost the debate is how much it would cost. There’s still negotiation being negotiations being had. But this cost would be spread throughout eight years and it focuses on improving the quality of existing infrastructures, but also the building out of new infrastructures like roads, bridges, transportation, and more importantly I would say the electric grid. And the president’s hope is to make these investments. In order to create quality jobs, but also to create opportunities for businesses that could help with the design, with the construction and the manufacturing of these infrastructures. One of the central initiatives of the plan is to tackle the climate crisis. And this is a theme that I think we’ll stick throughout parts of the conversation today. There is a strong focus on building out clean energy for communities. There is disagreement on the amount of money being spent and what actually constitutes infrastructure. The definition of what infrastructure is. So, negotiations are going on in Washington right now about both of those fronts. So that’s kind of what the plan is generally and what it entails and what the status is and where it stands right now.

Rod: Okay. Well, as we talked before, we started recording, I have strong feelings about all this, because in my view, somebody’s got to pay for it. Based on what you know, you’re reporting and you’re interviewing. What have you found be the sentiment in the real estate market about that particular infrastructure then? I know we’ve had there are other bailouts and things like that, that happened in Trumph’s administration still happening now in Biden administration. But this particular infrastructure plan, what you hear from my confederates?

Paulina: That’s a great question. And I spoke to several sources when I was writing this article and one of them told me that they’re having a series of roundtable discussions in a variety of different sectors, like the technology sector, the automotive sector, manufacturing sector. And they did that in order to get a broad input from their clients. To get their views on the sentiment around about the plan. And ultimately, they’re actually optimistic. They’re excited about the plan there. He said there could be a, quote and quote, “Transformation in the real estate segment” because when you think about the retrofitting of commercial buildings and building out of these clean energy infrastructures, that presents a huge opportunity for real estate investors, but not only limited to real estate investors, also to the construction industry and companies coming out with goals of being environmentally sustainable and energy efficient. So clean energy here is very important. And Biden’s plan specifically targets climate change and clean energy investments. So, I would say that it’s a very exciting time for this sector. We’re also seeing a shift, experts say, in how electricity is being produced. So, we’re moving away from fossil fuels to more environmentally friendly power plants like wind and solar and so forth. Technology is also changing. It’s changing very fast. And over the next few years, I think we’ll start to see some changes in how our power is being generated and and transmitted. So, this shift towards clean and electric energy sources say are going to be in high demand. So, there’s a lot of work being done in this space that will be had across the country and companies that will be working on these new technologies and companies that are working towards sustainability initiatives will experience growth. Now, there’s also the manufacturing part of it. So large scale manufacturers will be working on clean energy sources as well. So, you’re going to have these different industries and sectors that need to work together. We might see experts say the build out of private-public relationships. And the government will need to come in and align their goals in order to make this happen. Now that’s easier said than done, but you know, that needs to happen in order for the goals to be achieved.

Rod: I was going to interrupt because I love Ronald Raegan’s lying about the you know, be afraid when the government says they’ll handle something for you, something I’m paraphrasing obviously but, you know, how are we going to pay for this? How will this you know, what are the concerns that you’re hearing from real estate industry? I don’t know you can talk about it maybe the interview? Maybe you could speak to the types of people that you have been interviewed in the real estate sector and how they feel about how the plan will be funded.

Paulina: Yes. So, there is a huge concern about how this package is going to be financed. The administration came out with the this Made in America tax plan. And this proposal is a tax provision that will essentially help fund the infrastructure plan we’ve been talking about. So, this plan, the Made in America Jobs–in America tax plan would raise over 2,000,000,000,000$ within 15 years to pay for the American jobs plan. And just a clarification, America jobs plan and infrastructure plan are one and the same. So, some of the details that this other tax plan would include and we’ve heard some of it on the news are raising the corporate tax rate from 21 to 28%. Some are saying that could be around 25%. Setting a global minimum tax rate for US companies. And that actually has been said this week. It came out. It’s been said to 15%. Also, a big one is eliminating incentives for US companies to locate investments overseas. So those are some of the things that the administration put forth that on a corporate level people are concerned about. But on the individual level, president– the president’s proposal to increase taxes on individuals who are earning over 400,000$ through either increased taxational or increase marginal tax rates or some sort of modification to capital gains taxation. Anything that has to do with limiting these benefits is something that people are concerned about. So, these are major concerns coming out of the market.

Rod: Huge concern for me. I actually believe personally that and the 1031 exchange dialog is going to create the next contraction we’ll see. I really believe that could very well be the catalyst on– for the next contraction in the real estate market. So, it’s a big concern for me. You know, how do you– you know, what are you hearing from others about their concerns as it relates to real estate investors, specifically their concerns as it relates to the potential tax changes that the administration talking?

Paulina: Yeah. So, people in the industry are saying that, of course, you know this better than anyone Rod, it’s important to consider what implications of the tax treatments are for real estate investors. So many real estate investors feel that the 1031 exchanges could be targeted for some sort of modification. And you know, just a definition, I’m sure your listeners know this but 1031 exchange allows you to defer paying capital gains tax when you sell and buy a like property. So, experts are telling me that when you start modifying the tax treatment that we were talking we just talked about, as well as the 1031 tax exchange, investors may have second thoughts about investing real estate investors. But yeah, because this also includes developers that finance these deals. Because if you think about it, when you start a real estate projects, any sort of real estate investment, you have considerable risk. How are you going to offset that risk? Well, you have these tax benefits that are help that help mitigate these risks. So real estate investors, they maybe wondering, you know, okay, some of these policies, are they going to dampen my benefits? If you lose these benefits a lot of investors in the commercial real estate sector, they’re going to maybe think about participating less or maybe think about not participating at all. So, you know, ultimately, my sources say that you– when you roll out this spending plan which is such big capital spending, you have to have correct tax laws in place so people, real estate participants can benefit or else it’s going to be a challenge.

Rod: It’s not. It’s challenges is underestimating is too soft of a word. I think it’s going to be fantastic personally and you know, because if you’re– you know, in my world, we buy and sell, you know, larger commercial real estate projects. And if that capital gains goes up like they’re proposing and then someone cannot do 1031 exchange. Which is why– which is what keeps the movement in the market place. Yeah. I think it’s gonna the tap is literally going to turn off. I mean, why would someone sell? I mean there’d be no point of selling at that point. And sometimes that’s a real, you know, a question mark. Should we sell or should we just refinance or you know, pull our money out to refinance or hold onto this asset? But if we’re going to take a big tax hit and we can’t roll that tax hit, why would we ever sell? Which is to me is I mean, to me it’s kind of obvious that it’s going to massively impact my business, you know, this multi-family in real estate business. I’m praying it doesn’t go through, frankly. So that’s my opinion guys. Just opinion. That’s all it is. But–

Paulina: I did have a little bit of insight on that point that you just mentioned about selling. So, during my interview, one of the sources said that he’s seeing more groups of private investors with institutional money talking about selling their assets. So that’s something that people are considering there and actually working on because they don’t know how this tax treatment is going to play out. So, they’re going to be– Yeah.

Rod: If that’s what you’re saying in advance of this tax?

Paulina: Correct.

Rod: Right. I just want to be clear. They’re talking about selling right now so that they’re out before it happens. So yeah, okay I’m sorry. I just want to be–

Paulina: Yeah. No and then just to conclude that there could be a potential increase in these potential sellers. That’s all I want to say on your point earlier.

Rod: Well, that could be point to look like it’s coming down the pipe. I think would be a lot of frantic selling at that point for sure. Yeah. It’s very sobering to me. And you know, I think we’re due for another contraction anyway. Real Estates goes through cycles I’ve gone through several of them already, of course the 08′ crash kicked my butt. But they’re–you know like anything that goes through cycles and we’re due for one. And I actually believe this could be the catalyst. But you know, on the negative– that’s the negative side, what are some of the areas in the market you think might benefit from this plan. What are your thoughts on that?

Paulina: Yeah. So, companies as I was discussing earlier, you know, this green initiative is a huge part of the plan. So, companies that are green experts say, are going to benefit the most because this is a central theme of the policy. So, we are seeing this ESG environmental social governance investing manifest across the country. Climate change is a movement. People really care about this. So, companies that are at the forefront of this are going to do well. And you know, any of the large homebuilders, their stocks that are looking into these projects will do well. Also, REITs, real estate investment trusts that are involved in these areas are set to benefit as well. So having investments from this size will create opportunities also for bidding opportunities from general contractors to subcontractors across different areas and different trades. So, companies that have an appetite for these infrastructure plays and that can handle these infrastructure projects are going to find opportunities. Now for individual investors who are looking for this approach, they need to look at geographies’ experts say where money is being infused in these areas, where there’s going to be growth in these areas in either commercial or residential real estate. So, someone who recognizes that early on, they say okay, this money is going to be affecting this community. I need to invest here. And you know,

I’m sorry. You’re talking about tax funding money? it’s looking in an area where that area may be receiving some of those 2.3 trillion dollars. Is that what you mean?

Paulina: Precisely, yes.

Rod: Gotcha. Okay, so that be an opportunity in that regard. Yeah, I think you know, I’m struggling, you know, I mean– it’s sure it’d be great for contractors. Which would be great for companies that are doing the green thing. And there will be opportunities, you know, certainly the opportunity zones and places where this funding may show up. But I think as a whole, it’s frightening to me that this is my opinion because I really think you could slammed the door on, you know, what we’ve been seeing as far as market, you know, buying and selling of these assets. You know, it’s been– maybe that’s the idea is to slow that down. Who knows but– yeah, I am concerned about it. We’ll see how it all shakes out.

Paulina: And many people echo your concerns. So, I agree with you.

Rod: Even the politics out of it. This is strictly I’m a capitalist. I’m a business person, no doubt. I’m also a philanthropist. I’m not just, like, totally greedy money guy. But I see– I just– I feel like this could really negatively impact commercial real estate in general. And I just remember that I’m 61 years old, so I’ve been through some of this stuff before. And I remember, when the government got involved and slowed things down in the past. And so, who knows, I guess it just remain to see what it ends up looking like. And unfortunately, I don’t think they have much to stop them. Honestly from pretty much enacting whatever they want at this point. So that’s even more sober to me. But we’ll see what happens. You know, I hope it’s not as bad as I expect. I can tell you; I’m getting in cash because you know, in crisis comes opportunity and slows down like that. I think it May in 2008– 2009. I was hiding under rock because I lost 50,000,000$. I hope it won’t happen this time. If it happens again, I’ll be ready. You know, I know people that just exponentially increase their wealth, you know, through that contraction, so but– you know, is there a question that you wish I would have asked you? I know I’ve been– I’ve thrown my opinion out here. Which probably isn’t fair, but I can sit here and not say anything. Is there a question you wish I have asked you? or you want to have any kind of final comments about what I’ve said or what we’ve discussed here in general.

Paulina: Yeah. So, this plan is still in negotiation. So, there’s still more developments to be had. I think that from what I’m hearing in the industry and from what I’m gathering in general from real estate reporting. It’s important to understand where the industry is going and see what trends to look forward to this year. And I think that will be helpful for the real estate investor to find opportunities in different areas and just to pay attention not only to what’s happening in the markets, but also what’s gonna be happening with these potential tax implications, because that is– that I feel like that might be a determining factor for real estate investors when they’re pursuing opportunities. But, yeah, it’s a big plan and there are some big projects, so I will keep my eye on it.

Rod: Now, if anything further develops that you’ve got your ear to reach back out to my community back on this. This is really helpful. Now, one last question. Do you feel like any, you know, there’s certainly many sectors in their business? There’s multifamilies office, there’s this retail, self-storage, mobile home parks? Do you feel like any sectors might come out better than others? Does anything come to mind if I ask that question?

Paulina: That’s a good question, and while I’m not an expert in the space, I would say that any sort of infrastructure, let’s say commercial multifamily, any sort of real estate that supports technology, I think they that area will bode well because technology is such a positive disrupter. I mean, we’ve seen just throughout this past year during the pandemic that has been the support for us to continue our day to day lives. To continue working, to continue ordering things online and really pushing our life forward. So, I think that investments that are supported around technology and 5G and anything related to that will do well. Of course, different areas of real estate come with their own risks, as everyone knows. But– and everyone has to do their own due diligence. And of course, nothing I’m saying is investment advice, just some observations. But yeah, I think technology and as we’ve been saying, clean energy are two sectors that will be poised to perform well.

Rod: Sure. Well. And guys, let me just say this. Those listening listen. I am fine right now. We’re putting a 269 unit under contract probably Monday. But that said, you know, I’m very conservative right now. Cause I do feel we’re poised to have contraction doesn’t mean stop buying. This means you just have your eyes open and not that not to be fearful about it. Just to be ready for that happens and you know, will come up with other ways that mitigate things hopefully other strategies come out as legislation goes through as written. So again, do not poke your head in the sand and think that it’s all over. It’s not. But it is good to be aware. Keep your eye on it. And Paulina, I really appreciate you coming on the show. If you have further insights, please reach back out to my team. It’s been very valuable and I’ll try to be less opinionated next time you go on because it’s hard for me. But it’s a treat to meet you. And I really appreciate you coming and sharing.

Paulina: Thank you so much Rod. It’s been a pleasure.