Stephen Ross and Government Subsidies
Last weekend I was showing a friend
the Ross School’s building and saw the painting of Stephen Ross on the main
floor. A small plaque gave information
about the painter and the subject. I
learned that Mr. Ross founded Related Companies, a real-estate investment
company that began in 1972 with financing and developing government assisted housing. The billionaire real-estate developer who
gave $100 million to the University of Michigan’s Business School got his start
using government subsidies. I did some
research and thought I would share a few things I found interesting.
Although Related Companies has
expanded into areas that include fund management, hospitality, distressed
property acquisition, and “the fitness and lifestyle arena”, it is still very
much involved in “affordable housing”:
Affordable
housing laid the foundation of Related Companies and we continue to place a
high priority on developing, acquiring and preserving housing for this sector.
In fact, over 60% of the 40,000 residential apartment homes under our
management are part of one or more affordable housing programs, and an
additional 20% of these homes provide workforce housing.
To
date, Related has developed or acquired over 23,000 affordable housing units
with a total value of approximately $3.5 billion. Currently, we have over 7,000
units under development or under contract throughout the country with a value
in excess of $1.5 billion. [1]
What is affordable housing? HUD’s definition is housing costs that do not
exceed 30 percent of annual income.[2] When Related Companies refers to affordable
housing, it means housing development that has been subsidized by the
government in order to provide housing that is affordable to lower income
residents. Those subsidies come in
various forms, including favorable financing for the developers, or housing
vouchers for the residents (commonly known as “Section 8” vouchers).
Not all housing in a development
needs to be “affordable” in order for the development to qualify for
subsidies. For example, there is a obtain
tax exempt financing through a program known at “80/20”. Under 80/20 programs, when at least 20% of
the rental units are set aside for low-income residents (those with incomes at
50% or less of the local Area Median Income or AMI), Low Income Housing Tax
Credits are made available to the developer.
These credits can be syndicated or used to offset tax payments. (LIHTCs are also called Section 42 credits
because of the applicable section of the Internal Revenue Code.)
The 80/20
program is a good deal for the low income residents who are able to get on the
list, but it is an even better deal for developers. In a 2011 article about 80/20 financing in The New York Times, the reporter wrote: “without the incentives it affords, it would
be all but impossible to build new large-scale rental buildings.” [3] Related says on its website that it “is one
of the nation’s largest developers of 80/20 rental housing in New York City.”
LIHTCs are not inexpensive. The Office of Tax Analysis of the U.S.
Department of the Treasury estimates a ten-year revenue loss of $61 billion for
the period of 2008-2017 resulting from these credits.[4]
Why do I
find it interesting that Ross started his business with government
subsidies? I don’t object to government
encouraging desired behavior through tax incentives. In fact, I think that our tax policy should be
based in part on using incentives. I
find it interesting because of Ross’s politics. In 2012 Ross donated $100,000 to the
pro-Romney super PAC Restore Our Future.
He also donated $20,800 to the Republican National Committee, $5,000 to
Free and Strong America PAC, and $2,500 to Governor Romney’s campaign.[5]
After his
loss in the presidential campaign, Governor Romney remarked on a conference
call with donors that President Obama had won by “giving targeted groups a big
gift.” According to Governor Romney, these
“gifts” included free contraceptives for college women and free health care for
Hispanics. How would he characterize $61
billion in low income housing tax credits?
Gifts for developers? Or is
something not a “gift” when the recipient can be labeled a “job creator”?
[1] The
Related Companies website, “Affordable Housing”, accessed January 6, 2013, http://www.related.com/ourcompany/businesses/9/Affordable-Housing/.
[2] HUD.gov,
“Affordable Housing”, accessed January 13, 2013, http://portal.hud.gov/hudportal/HUD?src=/program_offices/comm_planning/affordablehousing
[3] Santora,
Marc, “Across the Hall, Diversity of Incomes”, New York Times, published September 2, 2011, accessed January 13,
2013.
[4] The
President’s Economic Recovery Advisory Board, The Report on Tax Reform
Options: Simplification, Compliance, and
Corporate Taxation, August 2010, p.77.
[5] Fin’s
Ross giving big to Romney, October 2, 2012, CBS Miami, accessed January 13,
2013 http://miami.cbslocal.com/2012/10/02/fins-ross-giving-big-to-romney/
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