March 4, 2021 • 53 mins
David Erard is a partner at Armanino, a top 25 independent accounting and business consulting firm in the US. David has more than 20 years of experience in the accounting industry, with specialties in distressed debt, Real Estate Investment Trust (REIT) tax consulting and compliance, and structuring transactions for private equity firms and other real estate investors. David shares updates on potential tax changes at the federal and state levels and what strategies investors are focused on.
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00:00 The Data Driven Real Estate Podcast Welcomes David Erard, CPA, Armanino
1:34 How distressed debt has changed since 2009
10:57 What are the common concerns real estate investors have in 2021?
15:09 Suggestions for investors facing hardships and nonpaying tenants
17:35 Tax provisions to watch at the federal and state levels
19:38 Big year for foreclosures?
25:16 Are some asset classes facing more distress?
27:30 Will 1031 Exchanges be eliminated
37:53 Are opportunity zones still beneficial?
39:30 Differences between a 1031 exchange and Opportunity zones
46:41 What opportunities should real estate investors focus on in 2021?
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Aaron Norris (00:06):
Welcome back to the Data Driven Real Estate
Podcast, the podcast for realestate professionals dedicated
to driving business using data.
I'm Aaron Norris, along withSean O'Toole with PropertyRadar,
and this is episode 36. On theshow this week, we have David
Erard of Armanino. Armanino isone of the top 25 CPA in
business consulting firms in theUnited States. And David comes
with over 20 years in the CPApractice with some very unique
(00:27):
specialties and things likedistressed debt and working with
REITs. This week, we talkedabout a lot of changes happening
in 2021, under a newadministration, taxes at both
the national and the statelevel, things that small
businesses and real estateinvestors are worried about, and
even down to ten, 1031 exchangesand opportunity zones, you will
not want to miss this week. Weare very excited today to have
(00:48):
David Erard with Armanino.
Welcome to the show.
David Erard (00:53):
Thank you. Nice to be here.
Aaron Norris (00:55):
David, you have a very interesting specialty
we'll, which we'll get to in asecond. But if people aren't
familiar with Armanino, can youtell us a little bit?
David Erard (01:02):
Yeah, Armanino is a full service accounting firm,
we're probably more mostly wellknown up in Northern California
where the firm started and whereheadquartered. But in the last
couple of years, in particular,we started moving into different
markets. So, big presence inSouthern California now as well,
started to move in to Denver,Texas, Idaho, a few other just
(01:28):
opportunities that we reallyliked to get, get involved in
some other cool spots throughoutthe country.
Aaron Norris (01:34):
Okay. And you have worked and spent plenty of time
with the Big Four accounting firs, as they say, and I read you
list of specialties. And it'it's pretty unique. I don't thi
k I've ever seen this speialty attached to a CPA, dis
ressed debt matters, real estte investment trusts, trust tax
consulting, How on earth did youfall into these specialties?
David Erard (01:54):
Well, it worked.
So, I started with one of theBig Four and worked there for
several years. And when I movedto a different firm before
Armanino, continued working witha lot of the same clients. And
as those clients started toevolve their, the way I think
about it in say 2006, 2007,2008, a lot of the big players
(02:17):
because of the distress startedhaving difficulty raising new
funds in kind of the areas thatthey had been focused on in the
past. And so, we started to seewith the least for the couple of
our clients a big shift towarddistressed debt and toward
REITs. And so, we went fromreally not working on any REITs,
(02:37):
say, in maybe 2007-ish, tohaving like our main client base
being REITs and REITs focusedand distressed debt focused
funds. So, it was a function ofwhat, you know, as the clients
evolved and, you know, reactedto the last downturn, we had to
evolve with them and learn aboutREITs and distressed debt and
(02:59):
just kind of learn a whole bunchof nuanced things. You know,
distressed debt by itself isfairly nuanced. When you marry a
distressed debt with a REITs ora Real Estate Investment Trust,
there's a whole lot of otherissues that come along with
that. So, it was really call ita little bit of a baptism by
fire back when we just had to,to keep up with our clients or
(03:21):
keep, hopefully keep in front ofthem to some degree. And we have
to, had, had to go, had toreally dive in and learn those
things. And it was time, it wasquite a challenge. But I've got
to say it's been, It was reallyan invaluable learning
experience and has really servedme and you know, the team of
(03:41):
people I work with very well.
Sean O'Toole (03:46):
Most of your clients on that front are still
going to be larger, you're notdoing, helping the mom and pop
investor for the most part. So,you're working still with more
institutional size clients?
David Erard (04:00):
Let's say as a general proposition, yes, the
clients tend to be larger but asa, with Armanino, we don't
really say have a specificclient size we target and I've
worked with kind of firms thatare just starting and doing
their first deals, also workedwith like individual investors
who might like a piece ofproperty that's subject to a
(04:23):
troubled debt. And so, I'veworked through a few
transactions where that's,that's one means of getting to
the asset that people want. Soyeah, by in and large, I would
say that space tends to beoccupied a lot more by bigger
players than smaller, but I'vecertainly seen the smaller
players go in and we've helpedthem navigate a few of the
little nuances. You got to dealwith.
Aaron Norris (04:45):
California is like New York when it comes to
distressed debt, if you can doit in California, you can do it
anywhere, right?
David Erard (04:53):
Somewhat regulated.
Yeah.
Sean O'Toole (04:54):
You know, so Armanino has, you know, like
Accounting, Tax, Audit, etc.
Where do you fall within thatkind of, you know, purview?
David Erard (05:06):
I'm a, I'm a partner in our tax practice. My
specialty is Income Tax, StateTaxes, Federal Taxes, REITs,
Private Equity, those types ofthings. And I tend to partner
with other partners within thefirm who have the same industry
specialty as I do, we've got areally, our audit practice,
(05:26):
especially we do a lot of workwith this with lending funds.
Our consulting groups on thetechnology side does a lot of
work with private equitystarting to get a lot more
traction with real estate. So,it's really just within the
firm, I'm a Tax partner, but wetry to attack things can have on
an industry basis, instead ofas, I'm going to go in and try
(05:46):
to be a tax guy and only help aclient on a tax thing, rather be
a little bit more holistic. So,hopefully, I can speak well
enough about some of the otherissues that clients will deal
with and know when I've got tobring somebody in. But we've
we've tried to, intentionallyme, Armanino thinks the same
way, as a firm, we're really nottrying to come in and say be
just a really good tax person,or a really good audit person or
(06:10):
a really good consultant, we'retrying to come in and be a
really good partner to ourclients with, with whatever help
they may need with theirbusinesses. And, you know, some,
some, you know, some firms arereally big and sophisticated and
have a lot of infrastructurebehind them. They have people
that deal with things, othersdon't. And so, we're trying to
(06:30):
figure out, we, you know,sometimes our role is to
coordinate with a verysophisticated CFO, who's really
well versed in all of the taxand audit issues. Other times
it's coming in with a firmthat's just getting into a space
and a lot of how do I do thistype of questions.
Sean O'Toole (06:46):
It's great. Aaron didn't know this when he booked
you, but we I've actually beenan Armanino tax client for many
years, so.
David Erard (06:55):
Glad to hear that.
Aaron Norris (06:59):
So, no 'gotcha' questions, no.
Sean O'Toole (07:02):
No, no, that means I can.
David Erard (07:04):
I think, I think it's the opposite. Aaron, I
think it's fair game foranything.
Aaron Norris (07:09):
Okay, great. How does it feel to be a CPA headed
into 2021?
David Erard (07:14):
Oh, probably the same way, it feels to be a lot
of things heading into 2021. Ithink we're, we're all having to
adapt to things that you know,are unique in my lifetime,
certainly, you know, withstarting from, you know, with
Armanino, we're really fortunateto have a really good technology
platform to work from, you know,so we've had some adaptation to
(07:38):
people being outside the officeand having to work remotely. And
we've been forced into that.
Some of our clients, so it seemsa lot more of the adapting has
just been with clients who havetended not to have the best
infrastructure, and they reallylike paper-based systems. And,
you know, how do we getinformation when you're just
talking to somebody who might gointo the office one or two days
(07:58):
a week for a limited window tosign checks, and if they have
time to get us the information,we need to do the tax and audit
work. So, it's a, the adaptationhas been a lot of different
things. And we'll probably delveinto some of those as we talk
through different items on thecast here. But there's just
been, it's a, figuring out thatthe probably the biggest
(08:23):
challenge, quite honestly, isfiguring out, you know, we were
able to get our jobs done day today. So, that hasn't really been
the challenge. More just, youknow, how do we maintain our
culture without people beingtogether? How do we, you know,
how do we go out and meet peoplein the market when you're not
out, able to meet people in themarket. So, you're just kind of
(08:43):
adapting some things to make upfor the lack of in-person
contact. And you know, quitehonestly, the in-person contact
is really one of the more funparts of any job. I think that's
what makes any job worth doing.
It's the clients you work withthe people you work with the
(09:03):
culture of the office, thosewatercooler discussions, so,
it's figuring, a lot of theadapting is just trying to
figure out how to maintain some,you know, make sure people know
that we care, making sure thatyou know, everybody's got
different challenges because ofthe way we're having to do
things in schools being closedto just a lot of it's a we've
(09:24):
tried to be as flexible as wecan be and still meeting the
needs of clients and without,without overwhelming people.
Aaron Norris (09:33):
Real estate is a very paper-heavy industry. So,
that's a challenge if you'reworking with clients that aren't
paperless.
David Erard (09:43):
That is true. It's, it's a little bit the opposite
end. Sometimes, it's SiliconValley, which has a lot of
really new, a lot of slick stuffthat they're really comfortable
with and it's safe for realestate. It tends to be maybe a
little slower to adapt and takeon new things. and new ways that
we are seeing. But one thing I'mreally pleased with is both on
(10:05):
the client-side and internally,I really am proud of the way
everybody has been able to adaptin the way that we have been
able to get through 2020. So,going into 2021, I feel like
we're still holding on a littlebit and trying to get through
the nuance of not doing thingsthe way that we would like to
and being in person. We've got ayear under our belt of working
(10:26):
this way. And it's, it's at thispoint, it feels like we're
closing in on the end of amarathon, we hope things get
back to being the way they wereor you know, whatever new normal
turns out to be of hope we getthere sooner than later. And,
you know, I'm optimistic aboutwhat I see with our people and
our clients. But I'm alsorealistic about theirs, you
(10:46):
know, it's been a hard year. Andwe were just kind of still feel
everybody's got a little bit offatigue, both on the client
side, and then our team site.
Sean O'Toole (10:57):
What are the, what are the big, you know, what are
the most kind of common,especially among your real
estate customers, what are thekind of the common questions and
concerns you're seeing now, thatare kind of unique to this
environment? You know, I'm surePPP and how that works for
especially in the landlords andsome of these other folks and,
(11:18):
you know, tax credits around or,you know, forgiving rent. And,
you know, I don't know, thereare other things along those
lines.
David Erard (11:26):
Yeah, I would say it really depends on the type of
real estate and maybe the marketthat the clients are in, you
know, hospitality has a muchdifferent set of issues than
multifamily. And the PPPprograms and the relief
packages, if you follow whatthose have been geared around is
keeping people employed. And so,from, if you're just say, a
(11:51):
lessor of, you know, residentialor commercial property, you're
not it's not an employee heavytype business. And it's a, it's
a lot of the PPP incentivesreally haven't been call it
overly available to real estate.
And the ones, you know, theindustries that are getting
hammered, really are gettinghammered, you know, the
hospitality. You know, it's,it's very hard to, you know, I
(12:14):
think there's some, hopefully,some sunlight ahead for that
industry. But you know, forthem, it's been one set of
issues. And then for themultifamily, it's been a
different set of issues, youknow, with multifamily, there's,
there's kind of a few thingsthat are affecting them. One
would be because of the waypeople are working remotely now.
(12:36):
The market, a market or alocation that would have been
really attractive two years agomight not be, just for example,
if you had an apartment buildingnear a convenient metro stop
somewhere near a major citywould have been a trophy asset,
right, something that you knewto high demand for it. With the
change in demand for publictransit and people working more
(12:58):
remotely, you might see adifferent set of things that
people are really looking for.
So, instead of like convenience,and access, you might be looking
for a living space that also hasa very convenient workspace, you
might be instead of somewherewith a really nice gym, and
really shared common features,you might be looking for
(13:18):
something people may not be asinterested in having to share
space. And so you know..
Sean O'Toole (13:23):
Yeah... open space.
David Erard (13:25):
Yeah. So, adapting to kind of changes in demand
because this is like this typeof demand change is something
I've never seen yet. There'sgoing to just be some definite
shifts in what kind of realestate people are interested in
using, you know, from a, from anoperating perspective, a lot of
(13:45):
businesses have had peopleworking remotely now for a year
probably questioning what, whattheir real estate needs are
going to be in the future. So,it really depends on what type
of real estate you have, whichmarket you're in what made the
asset attractive before and whatmight make it attractive now.
And so just kind of adaptingthat way is what I see. Again,
(14:08):
with, with my client base, Ireally haven't seen, I've seen a
few cases where they've beenreally keen on the PPP programs
and there's a few clients thathave really benefited from
those. The other, you know,there's been a lot of clients
who haven't. And there's a lotof challenges right now with,
you know, stays on foreclosuresor evictions and things like
(14:31):
that. So, you know, people ifI'm handicapping at high level,
you know, depending on, itreally depends on your facts and
circumstances as to how much ofan impact this had on you. If
you had, as an example, youknow, a low income area and you
had tenants that may not be asconcerned about credit scores
(14:52):
and things like that, you'reprobably going to feel a bigger
impact than somebody that has,you know, a really nice building
with really nice units that havegood working spaces, because
it's just going to be a littlebit of a change in demand. And
there's also going to be alittle bit of a change in tenant
behavior.
Sean O'Toole (15:09):
Right, right. What strategies are you seeing or
suggesting, you know, for thosefolks that are having, you know,
hit and or, you know, have thatloss of income now, maybe you're
at a point where they'restruggling to make their
underlying debt payments, isthere any strategies there
(15:30):
that's helping these folks inhospitality and the hard hit
multifamily?
David Erard (15:33):
I think the one strategy I would always advocate
is just be be open andcommunicative with, with lenders
and other parties, if you haveobligations that you're not able
to meet. I don't think it'sgoing to come as a mystery to
anybody that like, for example,if you're a movie theater, yeah,
(15:54):
I don't think your landlordwould be surprised if you were
to start talking to them prettyregularly about what, what can
we do here. But right, so, andby the same token, I think
landlords have been a little bitconcerned about being approached
by people that didn't need helpunder the notes. So, landlords
are really trying to figure outwho it is that needs help, or
(16:15):
who's just trying to getthemselves, you know, a little
bit of a spiff. So, what one,back to the original point, I
think one thing would be justbe, be open and be in
communication with the peoplethat you have obligations to.
So, that'll give you the bestchance of succeeding and getting
them to cooperate with you. Icertainly wouldn't ignore
(16:37):
notices as painful as I'm surethey are to deal with and
assure, you know, it stinks tonot be able to meet your
obligations. But I think beingopen and realistic about what
you can do, and you're pullingwhatever levers you can pull if
you're, when you're really introuble.
Sean O'Toole (16:56):
Yeah, I think that's great. Great advice. And
it's interesting there, how yousaid how some are just using it
as an excuse to get betterdeals, I know, I have a bit of
commercial. And, you know, theonly real tenant that gave me
problem. So, this was mynational, you know, credit
(17:16):
quality, like the one that thebanks want to see when they go
to loan you money. That was theone that gave me trouble, all
the local ones that the banksdon't want to see, they were all
great, worked really hard,worked well with me. And all the
rest. And of course, thenational credit quality tenant
was the one that was a pain.
David Erard (17:35):
Yeah, it's interesting. And it's because of
that dynamic, I think, you know,there's gonna be a lot of
landlords that are going to beskeptical, as you know, the
first time they're approached.
So, I think if you keep, if youhave a consistent message, and
you stay to that message, andyou're doing everything you can,
and you're being transparent,that's probably the, the best
path, you look for opportunitiesto get relief. I mean, there
(17:57):
were some good tax provisions tobe able to monetize losses that
got put into some of the reliefbills. So, to kind of monitor
what, what options you have.
Sean O'Toole (18:09):
Can you walk us through those real quick?
David Erard (18:12):
Sure...
Sean O'Toole (18:13):
At a high level, not in super detail. But yeah.
David Erard (18:16):
Yeah, at a high level, very high level, one of
the flavor of some of the reliefbills on the tax side, was to
give the ability to get, tomonetize operating losses in a
way that you hadn't been able tobecause of some law changes in
2017. So, you were able to carrylosses back that you wouldn't
(18:38):
have been able to carry backunder the existing rules. They,
they took away some limitationson your ability to use business
losses, to offset other types ofincome and pay less tax. So,
just those types of things. Andagain, I don't want to go too
deep into the weeds on it, butjust they the flavor was they
tried to give a way for peopleto more easily monetize losses.
Sean O'Toole (19:03):
Specifically there, right. So, if you had,
you know, losses in 2020, whereyou were actually negative, you
could go back and apply those toprior years, and then actually
get cash back that you'dpreviously paid in taxes.
David Erard (19:15):
That's right.
Sean O'Toole (19:16):
A good way to sum that up.
David Erard (19:18):
Yeah, you're the perfect scenario would have
been, that you had a lot ofincome coming in to, say 2020
from the prior year or two. Andthen in 2020, you were able to,
you had a loss that you're thenable to carry back and reclaim
some of the tax that you hadpaid.
Sean O'Toole (19:35):
Yeah. Okay, good.
Aaron Norris (19:38):
I know Sean gets asked this question almost every
day, you know, when are theforeclosures coming? You have a
different perspective from thedistressed debt side. What are
you seeing?
David Erard (19:47):
Well, it's, so, surprisingly, it's not gonna
surprise me that we see more ofit. I think it'll trend that
direction. I am actually alittle bit surprised that we
haven't seen more yet. And someof it has to do with stays, like
I mentioned before, there'sit's, I think it's a good thing.
But there, it's, it's hard toevict people and it's hard to
(20:08):
foreclose on property with the,with some of the relief things
that local governments aredoing. So, I think that's, we
may, once those stays arelifted, and once things, you
know, part of it too is thecourts, it's hard to get on
docket right now. And it's hardto get things through a system
that isn't working at fullspeed. So, you know, you may see
(20:30):
more of that, and you may seemore, you know, as a lender, you
might see more of your, youknow, your borrowers getting
into distress and looking forways to exit. And so, with, with
distressed debt, you could lookat it either as kind of on a
single loan basis, how do I dealwith a borrower who's in
distress, or more, what I seemore institutional players doing
(20:52):
is might be looking at aportfolio of debt that, uh, you
know, an institution wants tooffload, figuring out how to
price that, buying it and thenworking it as best you can. And
so the, the opportunities Ithink, are going to be for the,
for the folks who are smartenough to price it right and
find a good, you know,opportunity. There's, there's,
there could be all kinds ofopportunity with distressed debt
(21:15):
for, you know, attractivepurchases. And again, if you
talk to most private equity typefirms, they would tell you that
a lot of their gains are on thebuy side more than the sell
side, you got to buy things atthe right price. So, if you've
got a good system and a good wayof valuing debt, and really
being able to look at collateraland being able to, the deeper
(21:36):
you can dive into the data andthe more you're able to analyze
it effectively, you know, thebetter you can calibrate your
purchase price, say onedifference, I'm seeing, at least
within my own clients now, saybetween now and the last
downturn, the last downturn,there were just a lot of heavy
distress with a lot ofinstitutions really offloading
things that are very, you know,attractive price from a buyer
(21:59):
standpoint. I haven't reallyseen that as much yet. Maybe
it'll get there. I mean, from,from a more global perspective,
I hope it doesn't get there, butyou know, just looking. So,
understanding how to price it.
And then also understanding thenuances, at least from the tax
side, the accounting side,distressed debt has a whole host
of issues that we think a lotabout, and your clients I think
(22:22):
are, there's a little bit of atraining or education on the
types of issues that come alongwith that, because you need to
understand, like how thesethings affect you as the buyer,
if you're going to be effectiveat working the best deal. Yeah,
there's, there's times whenyou're also going to need to
understand really how these sameissues affect your borrowers or
(22:44):
your tenants. So, that you know,what, what would the effect to
them and you know, what theimportant things are going to be
for them to negotiate.
Sean O'Toole (22:55):
Are you seeing transactions at all yet this
round?
David Erard (23:01):
In distressed or just generally?
Sean O'Toole (23:03):
Distressed.
David Erard (23:04):
Starting to see if I've got a few clients that are
launching distressed funds? So,I am seeing some movement that
way, I've got some clients thatnever stops doing distressed
funds. So, they're gonna keepdoing it. But I would say I
haven't been seeing quite asmuch of a lurch in the direction
of distressed as I did last timearound, but it might be a little
(23:25):
too early in the cycle still,and we may get there.
Sean O'Toole (23:27):
I got a lot of calls last March of like, 'Hey,
Sean, we used you last time, andI'm starting $100 million fund
or a $500 million dollar fund,and we're gonna go out and buy',
I'm like, maybe a little early.
And that was a year ago. So,it's still still doesn't feel
like it's really coalesced yet.
(23:48):
I'm not 100% sure. It's not asclear to me that it will, but
we'll it'll be interesting tosee. I mean, you know, you think
you would have seen some like anhospitality or something by now,
but it seems like, you know,banks and everybody's been
pretty patient so far.
David Erard (24:06):
Yeah, surprisingly patient to be honest. There
hasn't been in the last time in2006, '07, '08,'09. Whichever
year you look at. I think therewas a little bit of an
overreaction and a knee-jerk.
And you know, that, that createdits own set of issues, and
actually impressed in a goodway. I really haven't seen that
(24:27):
much this time around. Andmaybe, maybe we learned
something a decade ago or maybe,maybe there's other reasons for
it. But we're not at a point yetwhere I see like distress that
being you know, everybody'sdoing it type of thing.
Sean O'Toole (24:46):
Yeah.
David Erard (24:47):
It's more it's been more targeted by clients who
have had experience with it.
Sean O'Toole (24:51):
Well, certainly the regulatory framework changed
last time around from forcinglenders to get bad assets off
their book as quickly aspossible. To forcing them to
make every accommodationpossible to a borrower, so, that
just that alone tells me it'sgoing to take on the residential
side quite a bit longer. Ofcourse, the rules didn't change
(25:12):
nearly as much on the commercialside.
David Erard (25:15):
Yeah.
Aaron Norris (25:16):
Do you see any specific asset classes that
people are raising money toreally go after? That they're
excited about?
David Erard (25:24):
Yeah, there's some, like I mentioned, some starting
to look to launch distressedfunds. I think others are really
looking at that, there's allkinds of funds that are being
launched. And so, I think itdepends on what the expertise is
of a given client, I can't sayI've seen one, you know, I can't
(25:45):
see I've seen all of my clientsmigrating in the same direction
or looking at the same assetclass. Now, multifamily has been
really strong for the lastdecade, and I see it still being
strong, it's very desirableasset class that I see a lot of,
say, but for 2020, it was apretty quiet year until we got
close to the end, and thenstarted seeing, you know, a lot
(26:06):
of deals closing close to theend of the year. I think that
trend will continue. I think,you know, now that people maybe
have our legs under us, andprobably in a position to make
some decisions, I think you'llstart seeing more activity. And
I don't, you know, guess what,maybe one reason I'm on this
side of the desk and clients areon the other side is maybe I'm
(26:26):
not quite seeing what they'reseeing as far as where the real
opportunities are yet. But Iwould expect that there's going
to be, you know, in theindustries that have been the
hardest hit hospitality, like wetalked about, maybe some of the
commercial buildings,particularly, not so much
industrial, but you know,office, I think you'll, you'll
see some serious, some realtweaks there to what people
(26:50):
like, how the office spaces areconfigured, what is a desire, a
good target asset, you might seedifferent plans, have talked to
some architects and engineersabout, you know, the types of
conversations they're having.
They've been through a yearwhere a lot of it was
repurposing space to put peoplefarther apart, have less people
in the office at the same time,more sanitation, tape stations.
(27:12):
And so, having, I think, youknow, the open plans where you
have 100 people in a room in awar room, that doesn't, that may
be going the way of the Dodo,but you know, who...
Sean O'Toole (27:29):
It already was to some degree, I mean, there's
plenty of studies saying, it'snot a great way to work and
concentrate, it takes ussomething like 15 minutes after
an interruption to get back intothe zone. But, so, yeah, very
interesting. Um, let me shiftgears just a little bit and talk
about, you know, some of thechanges we might see coming. I
(27:52):
think, you know, one that getstalked about a lot is
elimination of the 1031, whichis part of Biden's you know,
proposed tax changes. Did yousee a lot of movement last year
of people saying, Well, I don'tthink that's going to happen,
but it might. So, I'm going tomove some stuff around or people
(28:16):
kind of not too, haven't beentoo worried about what have you
seen any, any action by clientsaround that?
David Erard (28:24):
I've had a number of clients that did 1031
exchanges, but it said, Ithought it was more in the
normal course than it wasspecifically because they were
concerned about losing theopportunity. I think it's
certainly something for peopleto keep an eye on. We, I haven't
really seen anything formal onthat yet other than proposals.
(28:48):
If it starts to get realtraction, then certainly be
aware that may accelerate some1031. So, that may prevent some
1031s from happening. But I'dsay at least from what I've seen
so far, the, the notion that itmay go away hasn't really
changed behavior, but it may bethat is, in part because we've
(29:08):
heard it's been several yearsnow that I've continued to hear
that that's something they'relooking at taking away. And
there might be a little bit of,you know, boy who cried wolf
type of feeling where it's been,yeah, you've told me I'm going
to lose it at some point. If Ilose it, I lose it, but we're
aware of that site. So, I'm notreally seeing a huge reaction to
(29:29):
it. But once pencil meets paperand or I guess the computer
version of that bills arewritten, we may see some change
in behavior and people wantingto accelerate those but to date,
I have not seen the potentialloss of 1031s driving a lot of
people to do them.
Sean O'Toole (29:49):
And what's, what are the chances? I mean, I was
shocked. I was actuallybenefited from one of these but
shocked that sometimes whenthese you know, tax law changes
go into, you know, effect, theycan be retroactive, you know, so
you're doing a 1031 exchangeright now, let's say this gets a
(30:11):
bunch of steam on it by the endof the year, what are the
chances that it's retroactivefor you know, 2021 is that
something you see happen a lot,very often, very rarely?
David Erard (30:23):
Very rarely on the federal side to have a scene
things take retroactive effect.
Usually, there would certainlyexpect some notice of that if
that was the intention. But somestates like California have been
a little bit more, or let's saymaybe a little bit less
considerate about making thingsretroactive. But on the fed
(30:43):
ral side, I would expect if I'mhandicapping it, and this is not
insider baseball, because I dont know. But if I'm han
icapping it, I would, I woud expect any change like tha
to be effective on the date ofnactment or maybe they'll giv
a small window and they'll saymaybe starting in 2022, tha
, that, that's no longer goig to be part of the code. Tha
(31:05):
's what I would expect.
Sean O'Toole (31:09):
That happens, there's a gold rush, I mean,
there'll be a big rush to movestuff around, it'd be really
interesting. So, it's somethingfor our investor customers just
to keep an eye on both for theirown interests. And for all the
activity that might happen if itdoes leave a window.
David Erard (31:25):
Yeah, and I think another thing for investors to
keep their mind on, which iseyes on which is in the same
kind of vein, you know, I'll trynot to be political here. But I
would say it's not hard tooverlook the fact that the
former president was a realestate guy, and that there's a
lot of people that don't havethe most favorable, favorable
(31:47):
opinion about the formerpresident. And so, I think
there's not, there's gonna bemaybe some political wind to do
things that would be detrimentalto real estate. Be in reaction
to that. And it is from an outI'm not certainly a political
analyst or anything, but I thinkwith the prior administration
(32:08):
made a point of kind of undoingand poking the eye of the
administration before them and afew things that they changed.
So, if, if you're, if youbelieve, like I do, that there's
a lot of childish, likemotivation into politics that we
see. It's not hard to imaginethat there's going to be a few
(32:28):
changes coming down, down theroad that are not going to be
favorable for real estate.
Sean O'Toole (32:33):
Yeah, I worry about that a little bit. My
only, like consolation, or, youknow, that I take there is that,
there's an awful lot of powerfuldemocrats that are, you know,
heavily invested in really, youknow, Pelosi's he's husband,
plenty of others that are, thatare very real estate heavy, too.
So, fingers crossed, we're,we're safe. But yeah, you never
(32:57):
know.
David Erard (32:58):
It's just, it's kind of just a question of
whether I know it hurts me, butit hurts you more. So, I like
it, is, that could be theflavor.
Sean O'Toole (33:07):
Ouch. Yeah
Aaron Norris (33:08):
We're trying to follow all the changes. So, the
CFPB is reviewing qualifiedmortgage rules. I'm interested
to hear if a state taxes changesat all. And here at the State of
California, and they're areporter got back to me today
about AB-1199. And excise tax onproperty owners in California
who own more than 10 properties.
So, real estate...
Sean O'Toole (33:30):
Rental income.
Aaron Norris (33:30):
Yeah, rental income. So, they're definitely,
real estate is seen as thatbucket of some money that they
can go after, you know, withrent control things in place,
it's, it could definitely putthe squeeze on some investors,
you have, do you take a lot ofquestions from real estate
investors that are nervous aboutnot just national, but state tax
regulation?
David Erard (33:50):
Oh, for sure. And I don't think that's limited to
real estate. I think there's oneof the reasons I think, you
know, California or New York,some of the states that do imp
se a lot of income taxes and othr taxes. I think there's gon
a be a lot of questions abot whether people want to sta
there and whether busnesses want to stay there. So
(34:12):
ot so much specific to real estte, but just as a, you know, fro
the regulatory environment, tohe tax environment to the des
rability and affordability. Thee's just a lot of reasons why
people are maybe looking at diferent markets as being att
active. I mean, I feel Idao, Utah, Texas, Florida, you kno
(34:33):
, don't mean to limit it to justhose states for any of you
listeners who live elswhere. But there's a lot of sta
es that I think are seeing a lotof new residents because of the
you know, they offer with thoe the people moving out of the
e these certain states, he hasa better opportunity and a bet
er environment to live and runa business.
Aaron Norris (34:52):
But then there, they move there and find out
they're in the same financialsituation. So, maybe you should
expect some things happeningthere as well. I don't know.
Like Las Vegas, right?
Sean O'Toole (35:02):
A lot of the states are in not in great
shape, either, right? I alwayslove how California gets called
a welfare state, but it's one ofthe few states that contributes
more to the federal governmentthan it takes. So, most of the
company, states callingCalifornia a welfare state are
actually welfare states.
Aaron Norris (35:22):
I, is Las Vegas still considering an income tax?
I forgot to look at that beforethe show.
Sean O'Toole (35:27):
Nevada.
Aaron Norris (35:27):
Nevada, yeah.
Sean O'Toole (35:30):
It takes a constitutional amendment
anyways.
Aaron Norris (35:32):
Okay. Yeah.
Doesn't mean that's not gonnahappen in another state, we're
all sort of facing these holesin budgets, as I guess the
point, so.
David Erard (35:40):
Yeah, I agree with you. And I think the thing that
people, that you people mightwant to keep an eye on is just
there are, there's a lot oftrends that are emerging from,
you know, in reaction to thelast year, year and a half.
Yeah, some of it, I think wasunder way a little bit where
people are looking for ways toescape high tax high regulation,
(36:00):
that trend is going to continue.
And other part of it is andmaybe adds on to it, and
snowballs that a little bit iswith people, companies now
discovering that they can dothis with the remote workforce,
you think there's going to beless importance on maybe where
the workforce is located. Andthere's just a little bit of a
different business dynamic aswell, as you know, some other
(36:22):
things that I think willcontribute to growth and some of
these other states.
Aaron Norris (36:27):
Do we think being able to write off state taxes
will come back?
David Erard (36:34):
Yeah. Honestly, if I were trying to add, advise the
Democrats, I would certainly saythat, that's something that wou
d be viewed favorably by mosof their constituents. You kno
, the flip side, I suppose is,if you're advocating the oth
(36:55):
r direction, you'd say, you kno, the rest of the country may
e shouldn't be subsidizing higer tax states for charging hig
er taxes and reducing the fedral taxes of their residents tha
way. But, yeah, honestly, ifwere advising the, the dem
crats on this one, I would sayyou know, that's something you
(37:15):
should really look hard at, becuse it would be viewed very fav
rably by a lot of people thasupport you.
Aaron Norris (37:21):
Okay.
Sean O'Toole (37:22):
Yeah, I think we'll see that one comeback. And
the argument, you know, that ison the other side is a little
bit of a red herring, becausemost of the states that benefit
from SALT are actually the onesthat contribute more to the
federal government than they getin return. So, despite the fee
ing that it's, it conributes less, and I don't kno
(37:43):
how true that actually is.
David Erard (37:45):
Yeah, I think most political arguments are red
herrings. I agree with you.
Aaron Norris (37:53):
What's, uh, I'm just curious, opportunity zones.
Do you have a lot of clientsthat took them very seriously? I
think a lot of Californiainvestors I know, got excited,
they read it. And they're like,oh, California doesn't apply. I
have to pay taxes, now. Did youhave a lot of people dig into
that or shine it on?
David Erard (38:11):
No, I think it was a very popular thing, actually.
And it was, it's one of the fewthings I can remember in the
last decade that's gotten a lotof bite, by, bipartisan support
for it. And it even if you don'thave say, a state benefit, the
Federal benefit might becompelling enough for people to
do it anyway. Because that, theway that program works is you,
(38:33):
you end up deferring the tax onthe gain from say, the first
sale that gives rise to the gainthat you reinvest. The real
benefit of the program is thatwhen you have the second sale,
after you've been in for 10years, you don't pay federal tax
on that gain, as long as you'vemet all the requirements. And
that's a, it's a really, Ithought it was a really clever,
(38:55):
really intriguing program. And Ihave seen quite a bit of
interest both from clients whowant to invest as well as from
clients who want to set up thefunds and bring investors in.
Sean O'Toole (39:08):
Aaron's also done a good job of pointing out that
it doesn't have to be like-kind.
And so you have this ability totransfer, you know, asset
classes and move and that also Ithink, is an underappreciated
piece of that.
Aaron Norris (39:24):
I've had quite a few conversations with Crypto
and Tesla stock owners for somereason, I don't know why.
David Erard (39:30):
Yeah, and if you, one other nuance, if you compare
it to a 1031, is with the 1031you have to reinvest everything.
And the first dollar that youdon't reinvest is taxable kind
of on down. So, 1031 you reallyhave to reinvest everything
where with the opportunity zoneprogram, you only had to
reinvest the gain portion. So,the big, you know, that was a
(39:53):
really big attractive thingbecause it required a lower
investment and I just thought itwas, again, I thought it was a
very clever program.
Sean O'Toole (40:02):
You transfer your gain out, and then, but you can
put the basis back in yourpocket. Interesting. I didn't
even know that one. So, that'sgreat.
Aaron Norris (40:11):
Early on, I was doing some research on it. And I
interviewed some people indowntown Riverside, where I
live, is an opportunity zone.
And it happens to be our Mayor'sinnovation district. So, a lot
of attention, I met witheconomic development people, and
I happen to know a lady in townthat was buying a lot of real
estate. I asked her like, do youknow about this? And she's like,
I have no idea what you'retalking about. And then I talked
to a few businesses, I knewwhere moving into her building,
(40:32):
I'm like, if you're raisingmoney, do you realize that you
could be raising money for yoursmall business, you don't have
to own the real estate, youcould be doing this? They're
like, no idea what you'retalking about. I just don't
think the word ever got out. So,you could have two businesses
being taking advantage ofopportunity zones, and nobody
was paying attention. It's sad.
David Erard (40:50):
Yeah, and it's, it's tough because it was, as
with any program, and I'd saythe same thing of the PPP and
some other things, you know,they're they get so difficult to
administer. And there's so manylike, foot faults and steps that
you have to manage. So, I thinkpart of it, maybe people weren't
familiar with it, the other partof it might be people hear about
(41:12):
it and start to look into it andrealize, wow, this is really
going to be complicated. And so,there's there's probably some a
lot of people that get drivenaway from programs that could
benefit from simply becausethey, they are necessarily so
complicated.
Aaron Norris (41:26):
Some some things I would definitely like to bring
up to ask you because I need areminder. I've had some people
in 1031 exchanges think that Ididn't identify them 45 days,
you know what, I'm just going todo an Opportunity Zone. From
what I understand that is notthe case, you can't switch from
a failed 45-day of 1031 exchangeand flip it to an Opportunity
(41:47):
Zone, you'd have to do thatbefore the 45-days
identification period.
David Erard (41:54):
I'm actually not sure on that one. Because they
think with the opportunity zoneprogram, you actually have, you
know, a window of time after thegain is originally recognized to
reinvest. I'm not sure if youhave a I'll call it a busted
1031, where you go intosomething intending to do it.
And then for whatever reason,you can't, you know, there,
you'd normally have just, it'sjust a taxable transaction
(42:17):
instead of a 1031. Exchange. I'mnot aware of a restriction on
being able to then turn aroundand take that gain and put it
into an Opportunity Zone. It'spossible that, that there is a
limitation I'm not thinkingabout, but I'm not aware of one.
Aaron Norris (42:32):
Because of the hot market, I only want to bring it
up because the Opportunity Zoneyou actually have more time to,
to identify and then also to doyou have to do a fair amount of
improvements. Can you mentionthat? What is it, you have to
improve it by 50%?
David Erard (42:46):
Yeah, I think you have to put in 50, or 50, or
100. And I'm sorry, I don'tremember, but you have to spend
a lot to renovate, or you haveto put a lot of money into the
asset. So, it isn't like you canjust go buy a rental building
and start renting it. So, youactually would you have to go in
and make some substantialimprovements to the building
(43:06):
part of the property, you haveto put money into the business.
So, it isn't just, it isn't justthat you buy something and
you're good, you actually haveto there are some things, there
are some steps you have to takeand drawing a little bit of a
parallel to the rules. REITshave these income and asset
testing requirements that youhave to meet. There's something
(43:28):
similar to that in theOpportunity Zone world where you
have to look at income and assettesting and make sure that
they're complying with theopposite on requirements, so.
Aaron Norris (43:39):
It ends up on your desk, that's a lot of work.
David Erard (43:42):
It does. Some, some of those do and others, you have
clients that invest and we alsorepresent a few firms that are
doing the Opportunity Zonefunds. So, from a testing
standpoint, advising, you'retelling them when they need to
do what, you know, it has been abit of a challenge, because
especially with some of the wellintentioned COVID relief bills,
(44:05):
you know, the periods that youhave to do things kind of shift
a little bit as they give you alittle bit more time to do X or
Y because you know, from, say,March of last year to July of
last year, in particular, theworld was a little bit frozen.
So, yeah, we get involved inhelping people manage through
that process. But it just peopleshould be aware that it is a
process.
Aaron Norris (44:27):
I was fascinated because they launched the
opportunity zones, and theycontinued to legislate around
it. So, they launched it andthey kept on changing the rules.
That's very uncomfortable.
David Erard (44:36):
Oh, it is. But if, if you look at that tax bill
from 2017, it was a verysignificant bill. Yeah, we were
still getting guidance on someof the more complicated
provisions in January of thisyear. So, it's, it's not just
Opportunity Zones. It's all ofit whenever you have a really
robust tax legislation, that theguidance that follows that is
(44:58):
going to be coming out foryears.
Sean O'Toole (45:01):
And then some cases probably and the rest,
even after that.
David Erard (45:05):
Yeah, and probably a little bit early for cases on
anything right now, andespecially with the courts being
working at full steam, I thinkthey just get it like the normal
judicial type of guidance thatyou might get, you're not going
to see in a normal kind ofcadence.
Sean O'Toole (45:21):
Yeah.
Aaron Norris (45:22):
Don't want any clients that become a case,
right? That's not always a goodthing.
David Erard (45:26):
Yeah, unless they win, then you're happy about it.
But you'd rather not fight thebattle if you don't have to.
Sean O'Toole (45:32):
For sure.
Aaron Norris (45:32):
You don't want to be the subject of a private
letter ruling?
David Erard (45:36):
Yeah, not not an unfavorable one, for sure.
Sean O'Toole (45:38):
Yeah.
Aaron Norris (45:40):
Now, Opportunity Zones, have lost some benefits.
If you did an Opportunity Zone,was it by the end of 2019? There
was an opportunity to get, wasit a 15% credit towards the
taxes owed? Is that how thatworked?
David Erard (45:53):
Yeah, so that, what they did was if you just because
of the way the program was laidout, and the timing, if you
invested, I think it was beforethe end of '19 15% of that gain
that you originally recognized,you got a relief. You didn't
have to pay tax on, it getsdropped down to 10%, or 5%. So,
(46:14):
there's a little bit less of aspiff as time went on, which
made it a little bit of abalancing act between do I dare
kind of do this not knowing whatall of the rules are yet, but
knowing I want the full spiff ordo I wait and see, make sure I
really understand the State ofPlay have more defined rules.
And understand that I'm going toget the trade-off is I'm going
to get a little bit less of abenefit.
Aaron Norris (46:36):
You saw people call it contacting you about the
opportunity, though?
David Erard (46:39):
We do.
Aaron Norris (46:41):
Okay. What are other opportunities are real
estate investors bugging youabout these days?
David Erard (46:48):
Oh, I think everybody's keeping a close eye
on, you know, what happens withtax legislation. So, I think the
general feeling is that taxrates are likely to go up and
not down. And understandingwhatever carve outs there are is
going to be important. You know,the carried interest has bee
(47:08):
another one, like something lik1031 exchanges that, you kno
, we've been hearing about forquite a while that people you
know, the, that tax break maybe taken away. And for those of
our listeners that aren't famliar with that term, I've hea
d it called Carried Interest orromote or, you know, Profit Par
icipation, there's a few diferent ways you'll hear it. It
(47:29):
as to do with normally a funsponsor. If their deal is suc
essful, and everybody does, wel, the fund sponsors do bet
er as the deal does better. So,a fund sponsor might get 5% of
he profits if the deal is lik, you know, successful but not
great. And they might get 20%of the profits if the deal is
eally good. And you know, thenumbers vary by deal and by spo
(47:53):
sor, but the idea is that thebetter the deal does, the mor
the sponsor earns, as a caried interest or a promote or pro
it. And so, there's been the noton for a while now that wha
ever they're earning really shold be considered earning and not
something that's, you know, theequivalent of a capital inv
stment. And so, that's of allof the things I guess I'm get
(48:15):
ing the most questions on or heaing the most about, it's pro
ably how likely is it that theactually make those rules eff
ctive. In 2017, had to buid, that they did look at thi
gs of like a three year holing period or less, is being sub
ect to not to capital gains rats, but to ordinary rates for cer
(48:37):
ain situations. Real Estate was't as affected by that as may
e a hedge fund would have beebecause of the type of gai
s you would get on a real estte deal relative to a hedge fun
that selling securities or somthing like that. So, getting a l
t more questions now about whahow likely, is it that rule cha
ges? What should I be ready forDo I need to tweak my agr
(48:59):
ements? How should I be thiking about things? So, I hav
all of the topics that I'm geting, you know, questions on, it'
like, where tax rates goig? What are going to be some car
e outs or, you know, other? Whabenefits do you expect us to
ose? And then at the top of thalist is will, will carried int
rest end up on the chopping blok? And are we going to end up
(49:20):
eing treated as ordinary incme on that, instead of, you kno
, capital or section 1231 gai, which is the way it's wor
ed historically.
Aaron Norris (49:30):
Through offering therapy sessions, like right
after CPA sessions, I see.
David Erard (49:36):
Or just happy hour, I don't know.
Aaron Norris (49:39):
How are you communicating all this? There
could be a lot of changes here.
Do you have a plan on you know,how you're wanting real estate
investors to plug in and sort offigure out what's going on?
David Erard (49:49):
Yeah, if I'm trying not to cry wolf on stuff. So, if
you if you pay attention to thenews every day, your life is
gonna be a lot more morestressful than it is if you pay
attention to time to time, orhave somebody monitoring the
right things for you. So, onething I tell people is maybe
don't pay attention every singleday. But on when, when there's
(50:12):
news of, you know, a proposedbill or something starts to look
a little bit more formal, we'llcertainly be communicating that
with our clients, letting themknow what we're seeing and
hearing. Like I said, thathasn't been a whole lot that I
felt like I had to communicateyet. Other than, you know,
there's a lot of changes thatmight happen when they do and as
(50:34):
these things get more clear,we'll let you know. But I worry
a little bit about, you know,taking a proactive step to
something that you don't needto. And I don't mean for that to
sound bad, it's good to beproactive and not reactive. But
you also maybe don't want to gothrough the expense and brain
damage, you don't want to changeyour business, you don't want to
(50:54):
make a hasty decision, becauseyou're worried about what might
happen. So, I'd say I would tryto tell people to stay the
course, focus on mate runningthe business as well, as you can
run the business, you know, dothe best that you can, if
there's a situation where westart to see something concrete
definitive, then if there's aneed to plan around that we, you
(51:18):
know, we'll do what we can. Butyou know, again, I would try not
to get too focused on possiblechanges and stay focused on
making sure you're doing thebest you can run in your
business.
Aaron Norris (51:30):
Very good.
Anything else we should know,headed into 2021? Before we end.
David Erard (51:36):
Oh, I wish I had something smarter to say. That's
just, I think, the Vegas, again,from a business standpoint, I
think just I worry the mostabout keeping preserving
culture, while we're all workingremotely. And I think, you know,
we've been on survival mode, andwe've been able to stay the
course so far. But you know,from a culture standpoint, from
(51:59):
a people standpoint, the bestadvice I can give is people
really matter. You know, on theclient side, your team really
matters. Relationships reallymatter. And so, we've kind of
had to put some of maybe thenormal relationship management
stuff that we would do on the,on the side, because we can't
be, we haven't been able to bein person. So, I'd say going
(52:22):
into 2021, I would just wanteverybody to be mindful about
how 2020 is affected all of us.
And really be aware thatultimately, everything we do is
centered around people andmaking sure we're doing right,
the right things for people andthe best probably the best
advice I could give.
Aaron Norris (52:39):
Sounds good. If people want to get a hold of
you, where should they be going?
David Erard (52:43):
So, you could find me on the Armanino website,
that's armaninollp.com. Name isDavid Erard. It's a little funny
last name, E-R-A-R-D. Or ifthere's a way I can send you an
email address to put up. Butit's just my first name
(53:04):
david.erard@armaninollp.com, ifanybody wants to reach out, and
my phone number is 949. Hang on.
Sorry, I'll have to look it upactually, cuz I don't call
myself very often. The phonedirect dial would be
949-396-1551.
Sean O'Toole (53:23):
That's good.
Aaron Norris (53:25):
Thanks so much, David, for joining us.
David Erard (53:27):
Thanks a lot.
Aaron Norris (53:29):
Thank you for listening to the Data Driven
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Welcome back to the Data Driven Real Estate
Podcast, the podcast for realestate professionals dedicated
to driving business using data.
I'm Aaron Norris, along withSean O'Toole with PropertyRadar,
and this is episode 36. On theshow this week, we have David
Erard of Armanino. Armanino isone of the top 25 CPA in
business consulting firms in theUnited States. And David comes
with over 20 years in the CPApractice with some very unique
(00:27):
specialties and things likedistressed debt and working with
REITs. This week, we talkedabout a lot of changes happening
in 2021, under a newadministration, taxes at both
the national and the statelevel, things that small
businesses and real estateinvestors are worried about, and
even down to ten, 1031 exchangesand opportunity zones, you will
not want to miss this week. Weare very excited today to have
(00:48):
David Erard with Armanino.
Welcome to the show.
David Erard (00:53):
Thank you. Nice to be here.
Aaron Norris (00:55):
David, you have a very interesting specialty
we'll, which we'll get to in asecond. But if people aren't
familiar with Armanino, can youtell us a little bit?
David Erard (01:02):
Yeah, Armanino is a full service accounting firm,
we're probably more mostly wellknown up in Northern California
where the firm started and whereheadquartered. But in the last
couple of years, in particular,we started moving into different
markets. So, big presence inSouthern California now as well,
started to move in to Denver,Texas, Idaho, a few other just
(01:28):
opportunities that we reallyliked to get, get involved in
some other cool spots throughoutthe country.
Aaron Norris (01:34):
Okay. And you have worked and spent plenty of time
with the Big Four accounting firs, as they say, and I read you
list of specialties. And it'it's pretty unique. I don't thi
k I've ever seen this speialty attached to a CPA, dis
ressed debt matters, real estte investment trusts, trust tax
consulting, How on earth did youfall into these specialties?
David Erard (01:54):
Well, it worked.
So, I started with one of theBig Four and worked there for
several years. And when I movedto a different firm before
Armanino, continued working witha lot of the same clients. And
as those clients started toevolve their, the way I think
about it in say 2006, 2007,2008, a lot of the big players
(02:17):
because of the distress startedhaving difficulty raising new
funds in kind of the areas thatthey had been focused on in the
past. And so, we started to seewith the least for the couple of
our clients a big shift towarddistressed debt and toward
REITs. And so, we went fromreally not working on any REITs,
(02:37):
say, in maybe 2007-ish, tohaving like our main client base
being REITs and REITs focusedand distressed debt focused
funds. So, it was a function ofwhat, you know, as the clients
evolved and, you know, reactedto the last downturn, we had to
evolve with them and learn aboutREITs and distressed debt and
(02:59):
just kind of learn a whole bunchof nuanced things. You know,
distressed debt by itself isfairly nuanced. When you marry a
distressed debt with a REITs ora Real Estate Investment Trust,
there's a whole lot of otherissues that come along with
that. So, it was really call ita little bit of a baptism by
fire back when we just had to,to keep up with our clients or
(03:21):
keep, hopefully keep in front ofthem to some degree. And we have
to, had, had to go, had toreally dive in and learn those
things. And it was time, it wasquite a challenge. But I've got
to say it's been, It was reallyan invaluable learning
experience and has really servedme and you know, the team of
(03:41):
people I work with very well.
Sean O'Toole (03:46):
Most of your clients on that front are still
going to be larger, you're notdoing, helping the mom and pop
investor for the most part. So,you're working still with more
institutional size clients?
David Erard (04:00):
Let's say as a general proposition, yes, the
clients tend to be larger but asa, with Armanino, we don't
really say have a specificclient size we target and I've
worked with kind of firms thatare just starting and doing
their first deals, also workedwith like individual investors
who might like a piece ofproperty that's subject to a
(04:23):
troubled debt. And so, I'veworked through a few
transactions where that's,that's one means of getting to
the asset that people want. Soyeah, by in and large, I would
say that space tends to beoccupied a lot more by bigger
players than smaller, but I'vecertainly seen the smaller
players go in and we've helpedthem navigate a few of the
little nuances. You got to dealwith.
Aaron Norris (04:45):
California is like New York when it comes to
distressed debt, if you can doit in California, you can do it
anywhere, right?
David Erard (04:53):
Somewhat regulated.
Yeah.
Sean O'Toole (04:54):
You know, so Armanino has, you know, like
Accounting, Tax, Audit, etc.
Where do you fall within thatkind of, you know, purview?
David Erard (05:06):
I'm a, I'm a partner in our tax practice. My
specialty is Income Tax, StateTaxes, Federal Taxes, REITs,
Private Equity, those types ofthings. And I tend to partner
with other partners within thefirm who have the same industry
specialty as I do, we've got areally, our audit practice,
(05:26):
especially we do a lot of workwith this with lending funds.
Our consulting groups on thetechnology side does a lot of
work with private equitystarting to get a lot more
traction with real estate. So,it's really just within the
firm, I'm a Tax partner, but wetry to attack things can have on
an industry basis, instead ofas, I'm going to go in and try
(05:46):
to be a tax guy and only help aclient on a tax thing, rather be
a little bit more holistic. So,hopefully, I can speak well
enough about some of the otherissues that clients will deal
with and know when I've got tobring somebody in. But we've
we've tried to, intentionallyme, Armanino thinks the same
way, as a firm, we're really nottrying to come in and say be
just a really good tax person,or a really good audit person or
(06:10):
a really good consultant, we'retrying to come in and be a
really good partner to ourclients with, with whatever help
they may need with theirbusinesses. And, you know, some,
some, you know, some firms arereally big and sophisticated and
have a lot of infrastructurebehind them. They have people
that deal with things, othersdon't. And so, we're trying to
(06:30):
figure out, we, you know,sometimes our role is to
coordinate with a verysophisticated CFO, who's really
well versed in all of the taxand audit issues. Other times
it's coming in with a firmthat's just getting into a space
and a lot of how do I do thistype of questions.
Sean O'Toole (06:46):
It's great. Aaron didn't know this when he booked
you, but we I've actually beenan Armanino tax client for many
years, so.
David Erard (06:55):
Glad to hear that.
Aaron Norris (06:59):
So, no 'gotcha' questions, no.
Sean O'Toole (07:02):
No, no, that means I can.
David Erard (07:04):
I think, I think it's the opposite. Aaron, I
think it's fair game foranything.
Aaron Norris (07:09):
Okay, great. How does it feel to be a CPA headed
into 2021?
David Erard (07:14):
Oh, probably the same way, it feels to be a lot
of things heading into 2021. Ithink we're, we're all having to
adapt to things that you know,are unique in my lifetime,
certainly, you know, withstarting from, you know, with
Armanino, we're really fortunateto have a really good technology
platform to work from, you know,so we've had some adaptation to
(07:38):
people being outside the officeand having to work remotely. And
we've been forced into that.
Some of our clients, so it seemsa lot more of the adapting has
just been with clients who havetended not to have the best
infrastructure, and they reallylike paper-based systems. And,
you know, how do we getinformation when you're just
talking to somebody who might gointo the office one or two days
(07:58):
a week for a limited window tosign checks, and if they have
time to get us the information,we need to do the tax and audit
work. So, it's a, the adaptationhas been a lot of different
things. And we'll probably delveinto some of those as we talk
through different items on thecast here. But there's just
been, it's a, figuring out thatthe probably the biggest
(08:23):
challenge, quite honestly, isfiguring out, you know, we were
able to get our jobs done day today. So, that hasn't really been
the challenge. More just, youknow, how do we maintain our
culture without people beingtogether? How do we, you know,
how do we go out and meet peoplein the market when you're not
out, able to meet people in themarket. So, you're just kind of
(08:43):
adapting some things to make upfor the lack of in-person
contact. And you know, quitehonestly, the in-person contact
is really one of the more funparts of any job. I think that's
what makes any job worth doing.
It's the clients you work withthe people you work with the
(09:03):
culture of the office, thosewatercooler discussions, so,
it's figuring, a lot of theadapting is just trying to
figure out how to maintain some,you know, make sure people know
that we care, making sure thatyou know, everybody's got
different challenges because ofthe way we're having to do
things in schools being closedto just a lot of it's a we've
(09:24):
tried to be as flexible as wecan be and still meeting the
needs of clients and without,without overwhelming people.
Aaron Norris (09:33):
Real estate is a very paper-heavy industry. So,
that's a challenge if you'reworking with clients that aren't
paperless.
David Erard (09:43):
That is true. It's, it's a little bit the opposite
end. Sometimes, it's SiliconValley, which has a lot of
really new, a lot of slick stuffthat they're really comfortable
with and it's safe for realestate. It tends to be maybe a
little slower to adapt and takeon new things. and new ways that
we are seeing. But one thing I'mreally pleased with is both on
(10:05):
the client-side and internally,I really am proud of the way
everybody has been able to adaptin the way that we have been
able to get through 2020. So,going into 2021, I feel like
we're still holding on a littlebit and trying to get through
the nuance of not doing thingsthe way that we would like to
and being in person. We've got ayear under our belt of working
(10:26):
this way. And it's, it's at thispoint, it feels like we're
closing in on the end of amarathon, we hope things get
back to being the way they wereor you know, whatever new normal
turns out to be of hope we getthere sooner than later. And,
you know, I'm optimistic aboutwhat I see with our people and
our clients. But I'm alsorealistic about theirs, you
(10:46):
know, it's been a hard year. Andwe were just kind of still feel
everybody's got a little bit offatigue, both on the client
side, and then our team site.
Sean O'Toole (10:57):
What are the, what are the big, you know, what are
the most kind of common,especially among your real
estate customers, what are thekind of the common questions and
concerns you're seeing now, thatare kind of unique to this
environment? You know, I'm surePPP and how that works for
especially in the landlords andsome of these other folks and,
(11:18):
you know, tax credits around or,you know, forgiving rent. And,
you know, I don't know, thereare other things along those
lines.
David Erard (11:26):
Yeah, I would say it really depends on the type of
real estate and maybe the marketthat the clients are in, you
know, hospitality has a muchdifferent set of issues than
multifamily. And the PPPprograms and the relief
packages, if you follow whatthose have been geared around is
keeping people employed. And so,from, if you're just say, a
(11:51):
lessor of, you know, residentialor commercial property, you're
not it's not an employee heavytype business. And it's a, it's
a lot of the PPP incentivesreally haven't been call it
overly available to real estate.
And the ones, you know, theindustries that are getting
hammered, really are gettinghammered, you know, the
hospitality. You know, it's,it's very hard to, you know, I
(12:14):
think there's some, hopefully,some sunlight ahead for that
industry. But you know, forthem, it's been one set of
issues. And then for themultifamily, it's been a
different set of issues, youknow, with multifamily, there's,
there's kind of a few thingsthat are affecting them. One
would be because of the waypeople are working remotely now.
(12:36):
The market, a market or alocation that would have been
really attractive two years agomight not be, just for example,
if you had an apartment buildingnear a convenient metro stop
somewhere near a major citywould have been a trophy asset,
right, something that you knewto high demand for it. With the
change in demand for publictransit and people working more
(12:58):
remotely, you might see adifferent set of things that
people are really looking for.
So, instead of like convenience,and access, you might be looking
for a living space that also hasa very convenient workspace, you
might be instead of somewherewith a really nice gym, and
really shared common features,you might be looking for
(13:18):
something people may not be asinterested in having to share
space. And so you know..
Sean O'Toole (13:23):
Yeah... open space.
David Erard (13:25):
Yeah. So, adapting to kind of changes in demand
because this is like this typeof demand change is something
I've never seen yet. There'sgoing to just be some definite
shifts in what kind of realestate people are interested in
using, you know, from a, from anoperating perspective, a lot of
(13:45):
businesses have had peopleworking remotely now for a year
probably questioning what, whattheir real estate needs are
going to be in the future. So,it really depends on what type
of real estate you have, whichmarket you're in what made the
asset attractive before and whatmight make it attractive now.
And so just kind of adaptingthat way is what I see. Again,
(14:08):
with, with my client base, Ireally haven't seen, I've seen a
few cases where they've beenreally keen on the PPP programs
and there's a few clients thathave really benefited from
those. The other, you know,there's been a lot of clients
who haven't. And there's a lotof challenges right now with,
you know, stays on foreclosuresor evictions and things like
(14:31):
that. So, you know, people ifI'm handicapping at high level,
you know, depending on, itreally depends on your facts and
circumstances as to how much ofan impact this had on you. If
you had, as an example, youknow, a low income area and you
had tenants that may not be asconcerned about credit scores
(14:52):
and things like that, you'reprobably going to feel a bigger
impact than somebody that has,you know, a really nice building
with really nice units that havegood working spaces, because
it's just going to be a littlebit of a change in demand. And
there's also going to be alittle bit of a change in tenant
behavior.
Sean O'Toole (15:09):
Right, right. What strategies are you seeing or
suggesting, you know, for thosefolks that are having, you know,
hit and or, you know, have thatloss of income now, maybe you're
at a point where they'restruggling to make their
underlying debt payments, isthere any strategies there
(15:30):
that's helping these folks inhospitality and the hard hit
multifamily?
David Erard (15:33):
I think the one strategy I would always advocate
is just be be open andcommunicative with, with lenders
and other parties, if you haveobligations that you're not able
to meet. I don't think it'sgoing to come as a mystery to
anybody that like, for example,if you're a movie theater, yeah,
(15:54):
I don't think your landlordwould be surprised if you were
to start talking to them prettyregularly about what, what can
we do here. But right, so, andby the same token, I think
landlords have been a little bitconcerned about being approached
by people that didn't need helpunder the notes. So, landlords
are really trying to figure outwho it is that needs help, or
(16:15):
who's just trying to getthemselves, you know, a little
bit of a spiff. So, what one,back to the original point, I
think one thing would be justbe, be open and be in
communication with the peoplethat you have obligations to.
So, that'll give you the bestchance of succeeding and getting
them to cooperate with you. Icertainly wouldn't ignore
(16:37):
notices as painful as I'm surethey are to deal with and
assure, you know, it stinks tonot be able to meet your
obligations. But I think beingopen and realistic about what
you can do, and you're pullingwhatever levers you can pull if
you're, when you're really introuble.
Sean O'Toole (16:56):
Yeah, I think that's great. Great advice. And
it's interesting there, how yousaid how some are just using it
as an excuse to get betterdeals, I know, I have a bit of
commercial. And, you know, theonly real tenant that gave me
problem. So, this was mynational, you know, credit
(17:16):
quality, like the one that thebanks want to see when they go
to loan you money. That was theone that gave me trouble, all
the local ones that the banksdon't want to see, they were all
great, worked really hard,worked well with me. And all the
rest. And of course, thenational credit quality tenant
was the one that was a pain.
David Erard (17:35):
Yeah, it's interesting. And it's because of
that dynamic, I think, you know,there's gonna be a lot of
landlords that are going to beskeptical, as you know, the
first time they're approached.
So, I think if you keep, if youhave a consistent message, and
you stay to that message, andyou're doing everything you can,
and you're being transparent,that's probably the, the best
path, you look for opportunitiesto get relief. I mean, there
(17:57):
were some good tax provisions tobe able to monetize losses that
got put into some of the reliefbills. So, to kind of monitor
what, what options you have.
Sean O'Toole (18:09):
Can you walk us through those real quick?
David Erard (18:12):
Sure...
Sean O'Toole (18:13):
At a high level, not in super detail. But yeah.
David Erard (18:16):
Yeah, at a high level, very high level, one of
the flavor of some of the reliefbills on the tax side, was to
give the ability to get, tomonetize operating losses in a
way that you hadn't been able tobecause of some law changes in
2017. So, you were able to carrylosses back that you wouldn't
(18:38):
have been able to carry backunder the existing rules. They,
they took away some limitationson your ability to use business
losses, to offset other types ofincome and pay less tax. So,
just those types of things. Andagain, I don't want to go too
deep into the weeds on it, butjust they the flavor was they
tried to give a way for peopleto more easily monetize losses.
Sean O'Toole (19:03):
Specifically there, right. So, if you had,
you know, losses in 2020, whereyou were actually negative, you
could go back and apply those toprior years, and then actually
get cash back that you'dpreviously paid in taxes.
David Erard (19:15):
That's right.
Sean O'Toole (19:16):
A good way to sum that up.
David Erard (19:18):
Yeah, you're the perfect scenario would have
been, that you had a lot ofincome coming in to, say 2020
from the prior year or two. Andthen in 2020, you were able to,
you had a loss that you're thenable to carry back and reclaim
some of the tax that you hadpaid.
Sean O'Toole (19:35):
Yeah. Okay, good.
Aaron Norris (19:38):
I know Sean gets asked this question almost every
day, you know, when are theforeclosures coming? You have a
different perspective from thedistressed debt side. What are
you seeing?
David Erard (19:47):
Well, it's, so, surprisingly, it's not gonna
surprise me that we see more ofit. I think it'll trend that
direction. I am actually alittle bit surprised that we
haven't seen more yet. And someof it has to do with stays, like
I mentioned before, there'sit's, I think it's a good thing.
But there, it's, it's hard toevict people and it's hard to
(20:08):
foreclose on property with the,with some of the relief things
that local governments aredoing. So, I think that's, we
may, once those stays arelifted, and once things, you
know, part of it too is thecourts, it's hard to get on
docket right now. And it's hardto get things through a system
that isn't working at fullspeed. So, you know, you may see
(20:30):
more of that, and you may seemore, you know, as a lender, you
might see more of your, youknow, your borrowers getting
into distress and looking forways to exit. And so, with, with
distressed debt, you could lookat it either as kind of on a
single loan basis, how do I dealwith a borrower who's in
distress, or more, what I seemore institutional players doing
(20:52):
is might be looking at aportfolio of debt that, uh, you
know, an institution wants tooffload, figuring out how to
price that, buying it and thenworking it as best you can. And
so the, the opportunities Ithink, are going to be for the,
for the folks who are smartenough to price it right and
find a good, you know,opportunity. There's, there's,
there could be all kinds ofopportunity with distressed debt
(21:15):
for, you know, attractivepurchases. And again, if you
talk to most private equity typefirms, they would tell you that
a lot of their gains are on thebuy side more than the sell
side, you got to buy things atthe right price. So, if you've
got a good system and a good wayof valuing debt, and really
being able to look at collateraland being able to, the deeper
(21:36):
you can dive into the data andthe more you're able to analyze
it effectively, you know, thebetter you can calibrate your
purchase price, say onedifference, I'm seeing, at least
within my own clients now, saybetween now and the last
downturn, the last downturn,there were just a lot of heavy
distress with a lot ofinstitutions really offloading
things that are very, you know,attractive price from a buyer
(21:59):
standpoint. I haven't reallyseen that as much yet. Maybe
it'll get there. I mean, from,from a more global perspective,
I hope it doesn't get there, butyou know, just looking. So,
understanding how to price it.
And then also understanding thenuances, at least from the tax
side, the accounting side,distressed debt has a whole host
of issues that we think a lotabout, and your clients I think
(22:22):
are, there's a little bit of atraining or education on the
types of issues that come alongwith that, because you need to
understand, like how thesethings affect you as the buyer,
if you're going to be effectiveat working the best deal. Yeah,
there's, there's times whenyou're also going to need to
understand really how these sameissues affect your borrowers or
(22:44):
your tenants. So, that you know,what, what would the effect to
them and you know, what theimportant things are going to be
for them to negotiate.
Sean O'Toole (22:55):
Are you seeing transactions at all yet this
round?
David Erard (23:01):
In distressed or just generally?
Sean O'Toole (23:03):
Distressed.
David Erard (23:04):
Starting to see if I've got a few clients that are
launching distressed funds? So,I am seeing some movement that
way, I've got some clients thatnever stops doing distressed
funds. So, they're gonna keepdoing it. But I would say I
haven't been seeing quite asmuch of a lurch in the direction
of distressed as I did last timearound, but it might be a little
(23:25):
too early in the cycle still,and we may get there.
Sean O'Toole (23:27):
I got a lot of calls last March of like, 'Hey,
Sean, we used you last time, andI'm starting $100 million fund
or a $500 million dollar fund,and we're gonna go out and buy',
I'm like, maybe a little early.
And that was a year ago. So,it's still still doesn't feel
like it's really coalesced yet.
(23:48):
I'm not 100% sure. It's not asclear to me that it will, but
we'll it'll be interesting tosee. I mean, you know, you think
you would have seen some like anhospitality or something by now,
but it seems like, you know,banks and everybody's been
pretty patient so far.
David Erard (24:06):
Yeah, surprisingly patient to be honest. There
hasn't been in the last time in2006, '07, '08,'09. Whichever
year you look at. I think therewas a little bit of an
overreaction and a knee-jerk.
And you know, that, that createdits own set of issues, and
actually impressed in a goodway. I really haven't seen that
(24:27):
much this time around. Andmaybe, maybe we learned
something a decade ago or maybe,maybe there's other reasons for
it. But we're not at a point yetwhere I see like distress that
being you know, everybody'sdoing it type of thing.
Sean O'Toole (24:46):
Yeah.
David Erard (24:47):
It's more it's been more targeted by clients who
have had experience with it.
Sean O'Toole (24:51):
Well, certainly the regulatory framework changed
last time around from forcinglenders to get bad assets off
their book as quickly aspossible. To forcing them to
make every accommodationpossible to a borrower, so, that
just that alone tells me it'sgoing to take on the residential
side quite a bit longer. Ofcourse, the rules didn't change
(25:12):
nearly as much on the commercialside.
David Erard (25:15):
Yeah.
Aaron Norris (25:16):
Do you see any specific asset classes that
people are raising money toreally go after? That they're
excited about?
David Erard (25:24):
Yeah, there's some, like I mentioned, some starting
to look to launch distressedfunds. I think others are really
looking at that, there's allkinds of funds that are being
launched. And so, I think itdepends on what the expertise is
of a given client, I can't sayI've seen one, you know, I can't
(25:45):
see I've seen all of my clientsmigrating in the same direction
or looking at the same assetclass. Now, multifamily has been
really strong for the lastdecade, and I see it still being
strong, it's very desirableasset class that I see a lot of,
say, but for 2020, it was apretty quiet year until we got
close to the end, and thenstarted seeing, you know, a lot
(26:06):
of deals closing close to theend of the year. I think that
trend will continue. I think,you know, now that people maybe
have our legs under us, andprobably in a position to make
some decisions, I think you'llstart seeing more activity. And
I don't, you know, guess what,maybe one reason I'm on this
side of the desk and clients areon the other side is maybe I'm
(26:26):
not quite seeing what they'reseeing as far as where the real
opportunities are yet. But Iwould expect that there's going
to be, you know, in theindustries that have been the
hardest hit hospitality, like wetalked about, maybe some of the
commercial buildings,particularly, not so much
industrial, but you know,office, I think you'll, you'll
see some serious, some realtweaks there to what people
(26:50):
like, how the office spaces areconfigured, what is a desire, a
good target asset, you might seedifferent plans, have talked to
some architects and engineersabout, you know, the types of
conversations they're having.
They've been through a yearwhere a lot of it was
repurposing space to put peoplefarther apart, have less people
in the office at the same time,more sanitation, tape stations.
(27:12):
And so, having, I think, youknow, the open plans where you
have 100 people in a room in awar room, that doesn't, that may
be going the way of the Dodo,but you know, who...
Sean O'Toole (27:29):
It already was to some degree, I mean, there's
plenty of studies saying, it'snot a great way to work and
concentrate, it takes ussomething like 15 minutes after
an interruption to get back intothe zone. But, so, yeah, very
interesting. Um, let me shiftgears just a little bit and talk
about, you know, some of thechanges we might see coming. I
(27:52):
think, you know, one that getstalked about a lot is
elimination of the 1031, whichis part of Biden's you know,
proposed tax changes. Did yousee a lot of movement last year
of people saying, Well, I don'tthink that's going to happen,
but it might. So, I'm going tomove some stuff around or people
(28:16):
kind of not too, haven't beentoo worried about what have you
seen any, any action by clientsaround that?
David Erard (28:24):
I've had a number of clients that did 1031
exchanges, but it said, Ithought it was more in the
normal course than it wasspecifically because they were
concerned about losing theopportunity. I think it's
certainly something for peopleto keep an eye on. We, I haven't
really seen anything formal onthat yet other than proposals.
(28:48):
If it starts to get realtraction, then certainly be
aware that may accelerate some1031. So, that may prevent some
1031s from happening. But I'dsay at least from what I've seen
so far, the, the notion that itmay go away hasn't really
changed behavior, but it may bethat is, in part because we've
(29:08):
heard it's been several yearsnow that I've continued to hear
that that's something they'relooking at taking away. And
there might be a little bit of,you know, boy who cried wolf
type of feeling where it's been,yeah, you've told me I'm going
to lose it at some point. If Ilose it, I lose it, but we're
aware of that site. So, I'm notreally seeing a huge reaction to
(29:29):
it. But once pencil meets paperand or I guess the computer
version of that bills arewritten, we may see some change
in behavior and people wantingto accelerate those but to date,
I have not seen the potentialloss of 1031s driving a lot of
people to do them.
Sean O'Toole (29:49):
And what's, what are the chances? I mean, I was
shocked. I was actuallybenefited from one of these but
shocked that sometimes whenthese you know, tax law changes
go into, you know, effect, theycan be retroactive, you know, so
you're doing a 1031 exchangeright now, let's say this gets a
(30:11):
bunch of steam on it by the endof the year, what are the
chances that it's retroactivefor you know, 2021 is that
something you see happen a lot,very often, very rarely?
David Erard (30:23):
Very rarely on the federal side to have a scene
things take retroactive effect.
Usually, there would certainlyexpect some notice of that if
that was the intention. But somestates like California have been
a little bit more, or let's saymaybe a little bit less
considerate about making thingsretroactive. But on the fed
(30:43):
ral side, I would expect if I'mhandicapping it, and this is not
insider baseball, because I dont know. But if I'm han
icapping it, I would, I woud expect any change like tha
to be effective on the date ofnactment or maybe they'll giv
a small window and they'll saymaybe starting in 2022, tha
, that, that's no longer goig to be part of the code. Tha
(31:05):
's what I would expect.
Sean O'Toole (31:09):
That happens, there's a gold rush, I mean,
there'll be a big rush to movestuff around, it'd be really
interesting. So, it's somethingfor our investor customers just
to keep an eye on both for theirown interests. And for all the
activity that might happen if itdoes leave a window.
David Erard (31:25):
Yeah, and I think another thing for investors to
keep their mind on, which iseyes on which is in the same
kind of vein, you know, I'll trynot to be political here. But I
would say it's not hard tooverlook the fact that the
former president was a realestate guy, and that there's a
lot of people that don't havethe most favorable, favorable
(31:47):
opinion about the formerpresident. And so, I think
there's not, there's gonna bemaybe some political wind to do
things that would be detrimentalto real estate. Be in reaction
to that. And it is from an outI'm not certainly a political
analyst or anything, but I thinkwith the prior administration
(32:08):
made a point of kind of undoingand poking the eye of the
administration before them and afew things that they changed.
So, if, if you're, if youbelieve, like I do, that there's
a lot of childish, likemotivation into politics that we
see. It's not hard to imaginethat there's going to be a few
(32:28):
changes coming down, down theroad that are not going to be
favorable for real estate.
Sean O'Toole (32:33):
Yeah, I worry about that a little bit. My
only, like consolation, or, youknow, that I take there is that,
there's an awful lot of powerfuldemocrats that are, you know,
heavily invested in really, youknow, Pelosi's he's husband,
plenty of others that are, thatare very real estate heavy, too.
So, fingers crossed, we're,we're safe. But yeah, you never
(32:57):
know.
David Erard (32:58):
It's just, it's kind of just a question of
whether I know it hurts me, butit hurts you more. So, I like
it, is, that could be theflavor.
Sean O'Toole (33:07):
Ouch. Yeah
Aaron Norris (33:08):
We're trying to follow all the changes. So, the
CFPB is reviewing qualifiedmortgage rules. I'm interested
to hear if a state taxes changesat all. And here at the State of
California, and they're areporter got back to me today
about AB-1199. And excise tax onproperty owners in California
who own more than 10 properties.
So, real estate...
Sean O'Toole (33:30):
Rental income.
Aaron Norris (33:30):
Yeah, rental income. So, they're definitely,
real estate is seen as thatbucket of some money that they
can go after, you know, withrent control things in place,
it's, it could definitely putthe squeeze on some investors,
you have, do you take a lot ofquestions from real estate
investors that are nervous aboutnot just national, but state tax
regulation?
David Erard (33:50):
Oh, for sure. And I don't think that's limited to
real estate. I think there's oneof the reasons I think, you
know, California or New York,some of the states that do imp
se a lot of income taxes and othr taxes. I think there's gon
a be a lot of questions abot whether people want to sta
there and whether busnesses want to stay there. So
(34:12):
ot so much specific to real estte, but just as a, you know, fro
the regulatory environment, tohe tax environment to the des
rability and affordability. Thee's just a lot of reasons why
people are maybe looking at diferent markets as being att
active. I mean, I feel Idao, Utah, Texas, Florida, you kno
(34:33):
, don't mean to limit it to justhose states for any of you
listeners who live elswhere. But there's a lot of sta
es that I think are seeing a lotof new residents because of the
you know, they offer with thoe the people moving out of the
e these certain states, he hasa better opportunity and a bet
er environment to live and runa business.
Aaron Norris (34:52):
But then there, they move there and find out
they're in the same financialsituation. So, maybe you should
expect some things happeningthere as well. I don't know.
Like Las Vegas, right?
Sean O'Toole (35:02):
A lot of the states are in not in great
shape, either, right? I alwayslove how California gets called
a welfare state, but it's one ofthe few states that contributes
more to the federal governmentthan it takes. So, most of the
company, states callingCalifornia a welfare state are
actually welfare states.
Aaron Norris (35:22):
I, is Las Vegas still considering an income tax?
I forgot to look at that beforethe show.
Sean O'Toole (35:27):
Nevada.
Aaron Norris (35:27):
Nevada, yeah.
Sean O'Toole (35:30):
It takes a constitutional amendment
anyways.
Aaron Norris (35:32):
Okay. Yeah.
Doesn't mean that's not gonnahappen in another state, we're
all sort of facing these holesin budgets, as I guess the
point, so.
David Erard (35:40):
Yeah, I agree with you. And I think the thing that
people, that you people mightwant to keep an eye on is just
there are, there's a lot oftrends that are emerging from,
you know, in reaction to thelast year, year and a half.
Yeah, some of it, I think wasunder way a little bit where
people are looking for ways toescape high tax high regulation,
(36:00):
that trend is going to continue.
And other part of it is andmaybe adds on to it, and
snowballs that a little bit iswith people, companies now
discovering that they can dothis with the remote workforce,
you think there's going to beless importance on maybe where
the workforce is located. Andthere's just a little bit of a
different business dynamic aswell, as you know, some other
(36:22):
things that I think willcontribute to growth and some of
these other states.
Aaron Norris (36:27):
Do we think being able to write off state taxes
will come back?
David Erard (36:34):
Yeah. Honestly, if I were trying to add, advise the
Democrats, I would certainly saythat, that's something that wou
d be viewed favorably by mosof their constituents. You kno
, the flip side, I suppose is,if you're advocating the oth
(36:55):
r direction, you'd say, you kno, the rest of the country may
e shouldn't be subsidizing higer tax states for charging hig
er taxes and reducing the fedral taxes of their residents tha
way. But, yeah, honestly, ifwere advising the, the dem
crats on this one, I would sayyou know, that's something you
(37:15):
should really look hard at, becuse it would be viewed very fav
rably by a lot of people thasupport you.
Aaron Norris (37:21):
Okay.
Sean O'Toole (37:22):
Yeah, I think we'll see that one comeback. And
the argument, you know, that ison the other side is a little
bit of a red herring, becausemost of the states that benefit
from SALT are actually the onesthat contribute more to the
federal government than they getin return. So, despite the fee
ing that it's, it conributes less, and I don't kno
(37:43):
how true that actually is.
David Erard (37:45):
Yeah, I think most political arguments are red
herrings. I agree with you.
Aaron Norris (37:53):
What's, uh, I'm just curious, opportunity zones.
Do you have a lot of clientsthat took them very seriously? I
think a lot of Californiainvestors I know, got excited,
they read it. And they're like,oh, California doesn't apply. I
have to pay taxes, now. Did youhave a lot of people dig into
that or shine it on?
David Erard (38:11):
No, I think it was a very popular thing, actually.
And it was, it's one of the fewthings I can remember in the
last decade that's gotten a lotof bite, by, bipartisan support
for it. And it even if you don'thave say, a state benefit, the
Federal benefit might becompelling enough for people to
do it anyway. Because that, theway that program works is you,
(38:33):
you end up deferring the tax onthe gain from say, the first
sale that gives rise to the gainthat you reinvest. The real
benefit of the program is thatwhen you have the second sale,
after you've been in for 10years, you don't pay federal tax
on that gain, as long as you'vemet all the requirements. And
that's a, it's a really, Ithought it was a really clever,
(38:55):
really intriguing program. And Ihave seen quite a bit of
interest both from clients whowant to invest as well as from
clients who want to set up thefunds and bring investors in.
Sean O'Toole (39:08):
Aaron's also done a good job of pointing out that
it doesn't have to be like-kind.
And so you have this ability totransfer, you know, asset
classes and move and that also Ithink, is an underappreciated
piece of that.
Aaron Norris (39:24):
I've had quite a few conversations with Crypto
and Tesla stock owners for somereason, I don't know why.
David Erard (39:30):
Yeah, and if you, one other nuance, if you compare
it to a 1031, is with the 1031you have to reinvest everything.
And the first dollar that youdon't reinvest is taxable kind
of on down. So, 1031 you reallyhave to reinvest everything
where with the opportunity zoneprogram, you only had to
reinvest the gain portion. So,the big, you know, that was a
(39:53):
really big attractive thingbecause it required a lower
investment and I just thought itwas, again, I thought it was a
very clever program.
Sean O'Toole (40:02):
You transfer your gain out, and then, but you can
put the basis back in yourpocket. Interesting. I didn't
even know that one. So, that'sgreat.
Aaron Norris (40:11):
Early on, I was doing some research on it. And I
interviewed some people indowntown Riverside, where I
live, is an opportunity zone.
And it happens to be our Mayor'sinnovation district. So, a lot
of attention, I met witheconomic development people, and
I happen to know a lady in townthat was buying a lot of real
estate. I asked her like, do youknow about this? And she's like,
I have no idea what you'retalking about. And then I talked
to a few businesses, I knewwhere moving into her building,
(40:32):
I'm like, if you're raisingmoney, do you realize that you
could be raising money for yoursmall business, you don't have
to own the real estate, youcould be doing this? They're
like, no idea what you'retalking about. I just don't
think the word ever got out. So,you could have two businesses
being taking advantage ofopportunity zones, and nobody
was paying attention. It's sad.
David Erard (40:50):
Yeah, and it's, it's tough because it was, as
with any program, and I'd saythe same thing of the PPP and
some other things, you know,they're they get so difficult to
administer. And there's so manylike, foot faults and steps that
you have to manage. So, I thinkpart of it, maybe people weren't
familiar with it, the other partof it might be people hear about
(41:12):
it and start to look into it andrealize, wow, this is really
going to be complicated. And so,there's there's probably some a
lot of people that get drivenaway from programs that could
benefit from simply becausethey, they are necessarily so
complicated.
Aaron Norris (41:26):
Some some things I would definitely like to bring
up to ask you because I need areminder. I've had some people
in 1031 exchanges think that Ididn't identify them 45 days,
you know what, I'm just going todo an Opportunity Zone. From
what I understand that is notthe case, you can't switch from
a failed 45-day of 1031 exchangeand flip it to an Opportunity
(41:47):
Zone, you'd have to do thatbefore the 45-days
identification period.
David Erard (41:54):
I'm actually not sure on that one. Because they
think with the opportunity zoneprogram, you actually have, you
know, a window of time after thegain is originally recognized to
reinvest. I'm not sure if youhave a I'll call it a busted
1031, where you go intosomething intending to do it.
And then for whatever reason,you can't, you know, there,
you'd normally have just, it'sjust a taxable transaction
(42:17):
instead of a 1031. Exchange. I'mnot aware of a restriction on
being able to then turn aroundand take that gain and put it
into an Opportunity Zone. It'spossible that, that there is a
limitation I'm not thinkingabout, but I'm not aware of one.
Aaron Norris (42:32):
Because of the hot market, I only want to bring it
up because the Opportunity Zoneyou actually have more time to,
to identify and then also to doyou have to do a fair amount of
improvements. Can you mentionthat? What is it, you have to
improve it by 50%?
David Erard (42:46):
Yeah, I think you have to put in 50, or 50, or
100. And I'm sorry, I don'tremember, but you have to spend
a lot to renovate, or you haveto put a lot of money into the
asset. So, it isn't like you canjust go buy a rental building
and start renting it. So, youactually would you have to go in
and make some substantialimprovements to the building
(43:06):
part of the property, you haveto put money into the business.
So, it isn't just, it isn't justthat you buy something and
you're good, you actually haveto there are some things, there
are some steps you have to takeand drawing a little bit of a
parallel to the rules. REITshave these income and asset
testing requirements that youhave to meet. There's something
(43:28):
similar to that in theOpportunity Zone world where you
have to look at income and assettesting and make sure that
they're complying with theopposite on requirements, so.
Aaron Norris (43:39):
It ends up on your desk, that's a lot of work.
David Erard (43:42):
It does. Some, some of those do and others, you have
clients that invest and we alsorepresent a few firms that are
doing the Opportunity Zonefunds. So, from a testing
standpoint, advising, you'retelling them when they need to
do what, you know, it has been abit of a challenge, because
especially with some of the wellintentioned COVID relief bills,
(44:05):
you know, the periods that youhave to do things kind of shift
a little bit as they give you alittle bit more time to do X or
Y because you know, from, say,March of last year to July of
last year, in particular, theworld was a little bit frozen.
So, yeah, we get involved inhelping people manage through
that process. But it just peopleshould be aware that it is a
process.
Aaron Norris (44:27):
I was fascinated because they launched the
opportunity zones, and theycontinued to legislate around
it. So, they launched it andthey kept on changing the rules.
That's very uncomfortable.
David Erard (44:36):
Oh, it is. But if, if you look at that tax bill
from 2017, it was a verysignificant bill. Yeah, we were
still getting guidance on someof the more complicated
provisions in January of thisyear. So, it's, it's not just
Opportunity Zones. It's all ofit whenever you have a really
robust tax legislation, that theguidance that follows that is
(44:58):
going to be coming out foryears.
Sean O'Toole (45:01):
And then some cases probably and the rest,
even after that.
David Erard (45:05):
Yeah, and probably a little bit early for cases on
anything right now, andespecially with the courts being
working at full steam, I thinkthey just get it like the normal
judicial type of guidance thatyou might get, you're not going
to see in a normal kind ofcadence.
Sean O'Toole (45:21):
Yeah.
Aaron Norris (45:22):
Don't want any clients that become a case,
right? That's not always a goodthing.
David Erard (45:26):
Yeah, unless they win, then you're happy about it.
But you'd rather not fight thebattle if you don't have to.
Sean O'Toole (45:32):
For sure.
Aaron Norris (45:32):
You don't want to be the subject of a private
letter ruling?
David Erard (45:36):
Yeah, not not an unfavorable one, for sure.
Sean O'Toole (45:38):
Yeah.
Aaron Norris (45:40):
Now, Opportunity Zones, have lost some benefits.
If you did an Opportunity Zone,was it by the end of 2019? There
was an opportunity to get, wasit a 15% credit towards the
taxes owed? Is that how thatworked?
David Erard (45:53):
Yeah, so that, what they did was if you just because
of the way the program was laidout, and the timing, if you
invested, I think it was beforethe end of '19 15% of that gain
that you originally recognized,you got a relief. You didn't
have to pay tax on, it getsdropped down to 10%, or 5%. So,
(46:14):
there's a little bit less of aspiff as time went on, which
made it a little bit of abalancing act between do I dare
kind of do this not knowing whatall of the rules are yet, but
knowing I want the full spiff ordo I wait and see, make sure I
really understand the State ofPlay have more defined rules.
And understand that I'm going toget the trade-off is I'm going
to get a little bit less of abenefit.
Aaron Norris (46:36):
You saw people call it contacting you about the
opportunity, though?
David Erard (46:39):
We do.
Aaron Norris (46:41):
Okay. What are other opportunities are real
estate investors bugging youabout these days?
David Erard (46:48):
Oh, I think everybody's keeping a close eye
on, you know, what happens withtax legislation. So, I think the
general feeling is that taxrates are likely to go up and
not down. And understandingwhatever carve outs there are is
going to be important. You know,the carried interest has bee
(47:08):
another one, like something lik1031 exchanges that, you kno
, we've been hearing about forquite a while that people you
know, the, that tax break maybe taken away. And for those of
our listeners that aren't famliar with that term, I've hea
d it called Carried Interest orromote or, you know, Profit Par
icipation, there's a few diferent ways you'll hear it. It
(47:29):
as to do with normally a funsponsor. If their deal is suc
essful, and everybody does, wel, the fund sponsors do bet
er as the deal does better. So,a fund sponsor might get 5% of
he profits if the deal is lik, you know, successful but not
great. And they might get 20%of the profits if the deal is
eally good. And you know, thenumbers vary by deal and by spo
(47:53):
sor, but the idea is that thebetter the deal does, the mor
the sponsor earns, as a caried interest or a promote or pro
it. And so, there's been the noton for a while now that wha
ever they're earning really shold be considered earning and not
something that's, you know, theequivalent of a capital inv
stment. And so, that's of allof the things I guess I'm get
(48:15):
ing the most questions on or heaing the most about, it's pro
ably how likely is it that theactually make those rules eff
ctive. In 2017, had to buid, that they did look at thi
gs of like a three year holing period or less, is being sub
ect to not to capital gains rats, but to ordinary rates for cer
(48:37):
ain situations. Real Estate was't as affected by that as may
e a hedge fund would have beebecause of the type of gai
s you would get on a real estte deal relative to a hedge fun
that selling securities or somthing like that. So, getting a l
t more questions now about whahow likely, is it that rule cha
ges? What should I be ready forDo I need to tweak my agr
(48:59):
ements? How should I be thiking about things? So, I hav
all of the topics that I'm geting, you know, questions on, it'
like, where tax rates goig? What are going to be some car
e outs or, you know, other? Whabenefits do you expect us to
ose? And then at the top of thalist is will, will carried int
rest end up on the chopping blok? And are we going to end up
(49:20):
eing treated as ordinary incme on that, instead of, you kno
, capital or section 1231 gai, which is the way it's wor
ed historically.
Aaron Norris (49:30):
Through offering therapy sessions, like right
after CPA sessions, I see.
David Erard (49:36):
Or just happy hour, I don't know.
Aaron Norris (49:39):
How are you communicating all this? There
could be a lot of changes here.
Do you have a plan on you know,how you're wanting real estate
investors to plug in and sort offigure out what's going on?
David Erard (49:49):
Yeah, if I'm trying not to cry wolf on stuff. So, if
you if you pay attention to thenews every day, your life is
gonna be a lot more morestressful than it is if you pay
attention to time to time, orhave somebody monitoring the
right things for you. So, onething I tell people is maybe
don't pay attention every singleday. But on when, when there's
(50:12):
news of, you know, a proposedbill or something starts to look
a little bit more formal, we'llcertainly be communicating that
with our clients, letting themknow what we're seeing and
hearing. Like I said, thathasn't been a whole lot that I
felt like I had to communicateyet. Other than, you know,
there's a lot of changes thatmight happen when they do and as
(50:34):
these things get more clear,we'll let you know. But I worry
a little bit about, you know,taking a proactive step to
something that you don't needto. And I don't mean for that to
sound bad, it's good to beproactive and not reactive. But
you also maybe don't want to gothrough the expense and brain
damage, you don't want to changeyour business, you don't want to
(50:54):
make a hasty decision, becauseyou're worried about what might
happen. So, I'd say I would tryto tell people to stay the
course, focus on mate runningthe business as well, as you can
run the business, you know, dothe best that you can, if
there's a situation where westart to see something concrete
definitive, then if there's aneed to plan around that we, you
(51:18):
know, we'll do what we can. Butyou know, again, I would try not
to get too focused on possiblechanges and stay focused on
making sure you're doing thebest you can run in your
business.
Aaron Norris (51:30):
Very good.
Anything else we should know,headed into 2021? Before we end.
David Erard (51:36):
Oh, I wish I had something smarter to say. That's
just, I think, the Vegas, again,from a business standpoint, I
think just I worry the mostabout keeping preserving
culture, while we're all workingremotely. And I think, you know,
we've been on survival mode, andwe've been able to stay the
course so far. But you know,from a culture standpoint, from
(51:59):
a people standpoint, the bestadvice I can give is people
really matter. You know, on theclient side, your team really
matters. Relationships reallymatter. And so, we've kind of
had to put some of maybe thenormal relationship management
stuff that we would do on the,on the side, because we can't
be, we haven't been able to bein person. So, I'd say going
(52:22):
into 2021, I would just wanteverybody to be mindful about
how 2020 is affected all of us.
And really be aware thatultimately, everything we do is
centered around people andmaking sure we're doing right,
the right things for people andthe best probably the best
advice I could give.
Aaron Norris (52:39):
Sounds good. If people want to get a hold of
you, where should they be going?
David Erard (52:43):
So, you could find me on the Armanino website,
that's armaninollp.com. Name isDavid Erard. It's a little funny
last name, E-R-A-R-D. Or ifthere's a way I can send you an
email address to put up. Butit's just my first name
(53:04):
david.erard@armaninollp.com, ifanybody wants to reach out, and
my phone number is 949. Hang on.
Sorry, I'll have to look it upactually, cuz I don't call
myself very often. The phonedirect dial would be
949-396-1551.
Sean O'Toole (53:23):
That's good.
Aaron Norris (53:25):
Thanks so much, David, for joining us.
David Erard (53:27):
Thanks a lot.
Aaron Norris (53:29):
Thank you for listening to the Data Driven
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helps us out a great deal.
Thanks for listening, and we'llsee you next week.
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