The Age of Wealth Redistribution

Our industry is likely at a key strategic inflection point. An inflection point facing an industry is discussed by Andy Grove, founder, and former CEO of chip maker Intel, in his book Only the Paranoid Survive. He describes a key inflection point as a time in the life of a business when its fundamentals are about to change. He cites six categories of cataclysmic changes: competition, technology, customers, suppliers, complementors, and regulation (emphasis mine). He explains that strategic inflection points creep up on you gradually. “They are often not clear until you can look at the events in retrospect.” [1]

We face a tsunami of adverse regulation which is increasing in force and effect and is unlikely to abate in our lifetimes. How can I make such a bold statement?

I do so after heeding the advice of technology entrepreneur Elon Musk whose fame extends across multiple industries, including space exploration, electric vehicles, and technology. Elon Musk often refers to the concept of “reducing things to first principles” in his problem-solving approach. First principles thinking is a problem-solving approach that involves breaking down complex problems into their fundamental components or principles to uncover innovative solutions that would otherwise remain hidden. [1]

We are familiar with most of the regulatory threats:

• Repeal Costa-Hawkins/Eliminate Ban on Vacancy De-Control
• Modify Prop 13
• Eliminate 1031 Like-Kind Exchanges
• Increased tax rates on decedent estates, gifts, and generation-skipping transfers
• Imposition of a California Estate Tax
• Raising the Capital Gains Rate
• Increase Medicare Tax Rate
• Increase Minimum Tax Rate
• Imposition of a Wealth Tax
• More and Higher Real Estate Transfer Taxes        
• Reparations
• Expansion of Rent Control and Regulations
• Endless varieties of litigation from laws written by lawyers and adjudicated by pro-tenant judges and juries
• Generational shifts in elected officials to younger people “educated” in schools that despise traditional property rights.

A “first principles” look at these and similar issues reveals an obvious truth; they all seek to address the enormous and rapidly increasing Wealth Gap between rich and poor in our country. Here are some things to know about the Wealth Gap:

1. The three richest Americans (Jeff Bezos, Bill Gates, and Warren Buffett) held a combined fortune of $248.5 billion in mid-September 2017, which was more wealth than the bottom 50% of the country. This means that just three individuals had more wealth than about 165 million people. [3]

• The share of aggregate wealth going to upper-income families increased from 60% to 79% from 1983 to 2016. [4]

• Upper-income families were the only income tier able to build on their wealth from 2001 to 2016, adding 33% at the median. On the other hand, middle-income families saw their median net worth shrink by 20% and lower-income families experienced a loss of 45%. [4]

• The top 10% of households by net worth hold nearly 70% of the country’s wealth. [5]

• America’s richest .01 percent have accumulated more wealth, but they have paid a smaller share of total U.S. taxes. [6]

• In 2019, 38.7% of households do not own a home and 41.2% do not have a retirement account. [7]

• Racial wealth inequality, particularly the Black-white wealth gap, is substantial in the US. In 2019, the median wealth for white households was $188,200, compared to $24,100 for Black households and $36,100 for Hispanic households. [8]

• Between 2001 and 2021, the median rent in the California increased 17.9%, while median household income went up only 3.2%.

• There are over 75,000 unhoused people living in L.A. County, reflecting a 9% increase just in the last year. In virtually every opinion poll, homelessness, and crime, it’s close relative, are the top issues for which there are no proven solutions; only calls for more funding.

Large wealth gaps can lead to social unrest, as marginalized communities become increasingly frustrated with their lack of economic opportunity and the concentration of wealth among a small group of individuals. This can manifest in protests, riots, and other forms of civil unrest. [9] The concentration of wealth among a small group of individuals can contribute to economic instability, as the economy becomes more vulnerable to shocks and disruptions. This can lead to recessions, financial crises, and other forms of economic turmoil. [10]

The wealth gap in this country is so acute that it will not reach any kind of equilibrium in the lifetimes of the readers of this article.

Governments address wealth gaps through a variety of means including income support or transfers such as government programs like welfare, free healthcare ,food stamps, [11] and increasing the minimum wage. Implementing policies that promote asset-building opportunities, such as homeownership and access to credit, can help marginalized communities accumulate wealth and close the wealth gap. Governments make investments in education, beginning in early childhood with programs like Head Start and Universal Pre-K [12]. Efforts are underway to make the tax code more progressive. And then there is the mother of all social programs-development and support of affordable housing. [13]

As you can see, all the mechanisms require the support of tax revenues. While all wealthy individuals will likely be affected by this, some will be less affected than others. The very wealthy have access to global advisors than can create mechanisms to shelter assets from taxation and confiscation and help facilitate the relocation of assets to more favorable jurisdictions. Apartment buildings are the low hanging fruit. They can’t be moved and there are restraints on evicting tenants. Landlords are stereotyped as rich and greedy and are universally despised.

Policy makers discovered during the COVID pandemic that Emergency Declarations can suspend private property rights, allowing legislators the freedom to do pretty much whatever they want during the pendency of an emergency which they define themselves.

There is an increasing drumbeat in the press highlighting housing issues. Just in the last few days while writing this article I saw these reports. The Los Angeles Times had the following titled articles: “Homeless, when you just can’t afford the rent,” “Homeless, vulnerable and ignored. Unhoused single women suffer high levels of violence, a study says,” “L.A. is roasting. Save lives by mandating A/C in rentals,” “Report looks at factors in Latino wealth disparity,” and “Finding common ground on stolen land. An anti-racism activist with Indigenous roots in California dreams of a united front in the fight for reparations.” The New York Times featured an article titled, “Does Your Representative Also Pay Rent?’ concerning the growing trend of legislators flouting their pro-renter bona fides by bragging of their status as renters. The New York Times also contributed “As Landlord in Past Year, King Charles Raked It In.” The Wall Street Journal published, “Resets Damp Affordable Housing Supply. As government protections end, landlords are free to charge market rates.” The New York Post offered, “NYC push for ‘Reparations.’ Fixing wealth ‘deprivation.’” In the L.A. Daily News we find, “Plan to end systemic racism advances. County wide racial equity strategic program will focus on five issues.” The Santa Monica Daily Press offered, “Some of California’s “cheapest” cities have seen the biggest tent hikes.” Again, all this in less than a week.

The Supreme Court won’t save us. Rent Control in some form or another has been around since World War II and it has never intervened. I remember when rent control passed in Santa Monica in 1979. Many owners said to me, “It will never hold up. It’s unconstitutional.” In the 44 years since, we have learned a disillusioning lesson; The law isn’t what it says it is. The law is what the judge says it is and judges are, for the most part, politicians in robes.

Most of the readers of this magazine live in a bubble. We live in affluent areas and rent to affluent tenants. So, it is easy to pretend to ourselves that the Wealth Gap problem doesn’t exist, is overblown and won’t affect us. Our rents are at all-time highs and have anesthetized us into believing, as many owners have said to me, “we’re fine.”

The Library of Congress lists the U.S. History Primary Source Timeline as follows: Colonial Settlement, 1600s, 1763, The American Revolution, 1763 – 1783. New Nation, 1783 – 1815. National Expansion and Reform, 1815 – 1880, Civil War and Reconstruction, 1861-1877, Rise of Industrial America, 1876-1900, Progressive Era to New Era, 1900-1929, Great Depression and World War II, 1929-1945, The Post War United States, 1945-1968. [14] 

I suggest we have entered a new era which can be called the Age of Wealth Redistribution.

If you really believe “we’re fine,” then you will do nothing except file this article with the junk mail.

If, on the other hand, you are no longer in denial and are awakening to the existential threats to our industry and your financial security, you should begin considering a way forward. There is no one-size fits all solution to this dilemma and I don’t pretend to have all the answers. Some options are repositioning some or all assets to other real estate types less politically radioactive than apartments, moving assets out of California to more business-friendly states, and converting property to a different use where allowable.

Let’s go back to Andy Grove who writes that most strategic inflection points creep up on you gradually. “They are often not clear until you can look at the events in retrospect. A strategic inflection point is a time in the life of a business when its fundamentals are about to change. The change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end. Given the amorphous nature of an inflection point, how do you know the right moment to take appropriate action, to make the changes that will save your company or your career? Unfortunately, you don’t. But you can’t wait until you do know: Timing is everything. If you undertake these changes while your company is still healthy, while your ongoing business forms a protective bubble in which you can experiment with the new ways of doing business, you can save much more of your company’s strength, your employees, and your strategic position.” [1]

{Sources: [1] Only the Paranoid Survive by Andy Grove; [2] Avil Beckford writing in theinvisiblementor.com; [3] Noah Kirsch reporting in forbes.com; [4] pewresearch.org; [5] aspenisntitute.org; [6] inequality.org [7] census.gov; 7[8] americanbar.org; [9] Lisa Camner Mckay writing in minneapolisfed.org; [10] Nicholas Birdsong writing in sevenpillarsinstitute.org; [11] piie.com; [12] belonging.berkeley.edu; [13[ imf.org; [14[ loc.gov