Earlier this year, Think Realty started its own Government Relations Committee (GRC) to help spur REI-friendly legislation in state legislatures and Congress.
The Why Behind the Movement
Tackling issues like these often starts with semantics. In Think Realty’s Realty Matters article series last year, contributor Brian Wojcik spoke about the need to change the derogatory term “landlord” to “housing provider.” His articles covered the why behind industry advocacy and offered solutions to problems like affordable housing.
Wojcik writes: “As majority and primary suppliers for low-cost housing, independent investors can elevate the industry and add much-needed supply for low-cost affordable housing. The strength of your collective voice will serve as a catalyst to transform systemic causes of poverty and housing-cost burdens. Advocating for self, for renters, and for common sense supply-side policy for small-unit properties will propel change that is needed to improve the marketplace and provide added supply of low-cost rental units.”
He also pointed out that real estate investors are small business owners, a point Think Realty strives to be an advocate for and educator of across all channels.
“As an industry of small businesses, we need to capitalize our cumulative power to encourage government policy that supports and fosters creative solutions in the private sector,” Wojcik said.
And that is what a Government Relations Committee sets out to do.
What Is a GRC?
Texas-based real estate investor and industry advocate Chris Ragland with Ragland Realty and Management, LLC, signed on to be First Chair of the Think Realty Government Relations Committee (TR-GRC). He is also heavily involved with the GRC of Think Realty’s sister company, The American Association of Private Lenders.
“The Think Realty Government Relations Committee is an organized voice for the Think Realty membership base and beyond. Advocacy in the real estate space has long been a passion of mine. Having been the first chair for the American Association of Private Lenders sister committee, it made perfect sense for me to volunteer with Think Realty.
The TR-GRC works to advocate on behalf of real estate investors on key issues such as the federal eviction ban, which gave no consideration whatsoever to the real estate investor when it came to protecting tenants. Other important issues such as potential housing stimulus and opportunities zones are also key items of interest for the TR-GRC. Or the proposed changes to the 1031 exchange, a long-standing vehicle used to delay property taxes until more advantageous timing for the investor. While these are all issues that the TR-GRC will take up on behalf of the real estate investment community, we are also monitoring proposed legislation at the State and Federal level, ready to spring into action should an informed opinion be needed by legislators,” Ragland said.
When advocating for certain legislation, TR-GRC members are appointed to specific regions. For example, Chris Ragland has West North Central and West South Central (see map). Currently, there are seven members in the TR-GRC and there are nine regions. The group holds a monthly call to discuss current hot topics and devise necessary discussions with their respective regional constituents, potential ally organizations, and policymaker contacts in Congress and state legislatures.
Goals and Legislative Initiatives
Proposed tax changes at the federal level will impact real estate investors (e.g., capital gains) and current laws like The SAFE Act prohibit investors from doing the most they can to help communities and provide housing for more families. For example, in some states, if a housing provider owns a certain number of doors, they are not allowed to self-manage their portfolio and are supposed to enlist property management companies. Some states require investors to be licensed loan originators if they own more than a certain number of properties.
Other issues on the TR-GRC agenda include protecting the interests of housing providers by supporting clearer mandates on how tenants or landlords get housing support and retaining 1031 Exchanges. Anything that hurts housing providers’ bottom line in turn either passes on to tenants or contributes to smaller housing providers (small businesses) leaving the business.
Day on the Hill: The First Step of the GRC
In October, members of the American Association of Private Lenders and Think Realty gathered virtually for a day of meetings with staffers in Washington, D.C. to discuss proposed legislation that would impact housing providers and private lenders.
In 2019, each company organized an in-person Day on the Hill event and members were excited to continue the discussion that successfully began two years ago.
The purpose of Day on the Hill is to explain what housing providers and private lenders do for the real estate industry and to voice the effect of barriers that proposed legislation would impose.
AAPL and Think Realty are owned by Eddie Wilson. “It is important to establish who we are and how we can be of service to legislators. We take a consultative approach, and our methodology is one of advocacy,” he said.
Policymakers were responsive to concerns and the event’s 11 meetings with legislators on both sides of the political aisle helped raise awareness for the real estate investing and private lending industries. Staff requested additional information that would help them better understand these issues and the plight of their constituents.
Kat Hungerford, secretary for both the AAPL and Think Realty Government Relations Committees said,
“Throughout our advocacy efforts, we’ve found that our largest hurdle is that legislators do not see private lenders and real estate investors as small business owners who support communities and help homeowners into properties they would never have had access to otherwise. Instead, they hold a view popularized by reality TV, where the money is easy, and the underlying stories of blighted property recovery remain untold. Day on the Hill is our chance to tell the real story of what we do and why we matter.”
The main talking point at the 2021 Day on the Hill was Regulation D. Congress adopted Regulation D in 1982 to “to simplify existing rules and regulations to facilitate capital formation, particularly for small businesses, consistent with the protection of investors.”
“Protection” occurs by limiting private placements, in large part, to “accredited investors.” Accredited investors are defined by income or asset tests and/or credentials (CPA, attorney, broker dealer, etc.).
- Section 138312 will prohibit almost all self-directed IRA investments into private offerings and require IRA accountholders who have invested in these assets to liquidate their positions within two years.
- Section 138314 will prohibit an IRA accountholder from investing in a business if they or a family member is an officer of the business, or they own >10% of the company. Current rules only have the ownership threshold at 50 percent and require prohibited accountholders who have invested in these assets to liquidate within two years.
These provisions appear to be motivated by the highly publicized story about Peter Theil by Publica where the PayPal founder “turned a retirement account worth less than $2,000 in 1999 into a $5 billion tax-exempt piggy bank.”
AAPL and Think Realty’s position is to strike Section 138312 and 138314 from the federal tax bill, which if passed, would force self-directed IRA accountholders to move from private to public offerings; private lenders and private funds would face significant hardship to find new sources of capital; and small businesses would continue to struggle with recovery after already enduring economic effects of the pandemic. Small businesses depend on this universally popular provision, which since 2009 has raised more than $13.5 billion while only seeing a miniscule 221 SEC complaints.
Within the industry, private lenders and private funds that use IRA investments to deploy capital would face significant hardship to locate new sources and divest all current IRA investments within two years. This would in turn decrease the funds available to housing providers and local economies already struggling in the aftermath of the COVID-19 pandemic.
Beyond this urgent matter, ongoing topics discussed included Affordable Housing, Opportunity Zones, the Home Mortgage Disclosure Act, Bankruptcy, 1031 Exchange, and more.
Regulation D investments drive the success of small business. The median size of these offerings was $2.25 million and years since corporate inception was two. More than 60 percent of small businesses rely on private placements to raise capital and a significant share has unmet credit needs and are underrepresented minorities faced significantly higher hurdles in obtaining external financing.
An annual report from the SEC Office of Advocate for Small Business Capital Formation determined that the number of U.S. small businesses decreased 27 percent from January 2020 to September 2020, but that Americans started new businesses at the fastest rate in more than a decade.
According to the American Association of Private Lenders and what their members have learned from Day on the Hill discussions with policymakers, bill sections 138312 and 138314 originated under the following premises:
Preventing high-net-worth individuals from “abusing” the tax-deferred nature of self-directed IRAs by forcing divestment (“Peter Thiel Effect”). While other forced-divestment sections of the tax bill WOULD have this result, sections 138312 and 138314 simply force self-directed IRA accountholders to move their money from one type of investment to another.
IRA accountholders affected by the bill should not be investing in private offerings; they need more protection and do not have the investment knowledge to complete due diligence and make informed decisions about these offerings. According to the SEC, more than 5.9 million investors participated in Reg D offerings from 2009–2019, raising $13.576 billion for small businesses across 242,070 investments and with only 221 related civil complaints (a complaint rate of .001%). Between 93-97 percent of Reg D offerings included accredited investors, who according to Congress and the SEC, DO have the wherewithal to properly vet the risks of such investments. The reward for the nation’s small businesses universally outweighs the risk.
These sections will raise tax money to fund the bill’s spend. The provisions the GRC specifically objects to raise no new tax revenue, which will be further proven if/when the Congressional Budget Office scores these sections.
The House Ways and Means Committee has approved a comprehensive tax bill that, among other tax-generating proposals, includes numerous restrictions on IRA investments. The proposals have far-ranging impacts, but certain provisions will upend businesses that use self-directed IRA funds.
If passed as proposed, effective January 1, 2022:
The tax bill will prohibit almost all self-directed IRA investments in private real estate debt and equity while creating no new tax revenue.
Current self-directed IRA investors in mortgage funds or private trust deed investments will be forced to liquidate their positions within two years. The law has no carve-outs for redemption requirements of the offering documents.
IRA accounts will be prohibited from investing in any assets the account holder or any family of the account holder owns, meaning private lenders and fund managers will be limited in avenues to demonstrate that they have “skin in the game” to their investors.
Many high-income earners will be forced to take distributions from their IRA accounts well before retirement, dissuading the use of IRA investments altogether.
Call to Action
If you’re interested in becoming involved in this endeavor, please reach out to email@example.com to start the conversation. By exercising your voice as a housing provider and advocating for the real estate investing industry, you can do your part to invoke change for thousands of small business owners in the REI space. Informing legislators of all the good that real estate investors do is the first step in changing the narrative and shattering the stereotypes that plague the real estate investing industry.