All posts by singlemalt

Native Angeleno and Industrial real estate agent since 1994.

The Interest Deduction: Origin, Who It Benefits, and Fiscal Impact

The below paragraphs are excerpted from “Economic Trends in California Real Estate: Realty Almanac 2018-2020“. It describes the mortgage interest deduction origin, whether buyer or seller reaps the benefit, and the fiscal impact upon the national treasury. After reading it you may come to agree with my view that this deduction should be phased out and the $70 billion in lost tax revenue could then be applied towards balancing the budget. 

Interest deductions took root in the late 19th century. The first federal income tax was established in 1894 and all forms of interest were deductible. However, homeownership was not what motivated Congress to enact such a policy. An interest deduction was viewed primarily as a business situation. Most people at that time in history paid cash for their homes (as is the case today in countries with less sophisticated financial systems). Mortgages were generally only taken out by farmers or investors.

Not until the 1950s did the home mortgage gain anything close to its current significance. Since then, the home mortgage has become the common concern of the housing industry. Without a mortgage, most tenants wait until they accumulate savings equal to the price. The tax deductions and exclusions are now considered entitlements for those homebuyers who need to borrow and for those homeowners who sell.

The true tax benefits to the taxpayer of interest rate deductions for buying and owning a home were lost long ago. They were arbitraged away by increased home pricing and interest rates. Thus, the benefits are passed on to the seller (increased price) and the lender (interest and charges on increased principal). The howl today by industry insiders is that prices will drop if the deductions go away: exactly the evidence that subsidies go to the seller and the lender, not the buyer/owner.

The interest deduction loophole costs the Department of Treasury over $70 billion in lost tax revenue annually, to the benefit of sellers and lenders received indirectly via the buyer. However, the majority of debt- encumbered homeowners don’t see much for it, except for the wealthier among them. Only half of the tax filers who are homeowners are able to claim the deduction. Usually, they receive less than $2,000 in reduced tax liability (the rest have no mortgages and thus no risk of loss).

More than 50% of the federal tax benefit is taken by those few homeowners with incomes exceeding $100,000. It is fair to say those wealthier homeowners have the least need for a subsidy as an inducement to buy a home, since they are financially capable and most likely to purchase anyway.

Coca-Cola Building in DTLA Arts District

The online coupon company, Honey, has signed a lease to occupy the former Coca-Cola syrup manufacturing plant in 2019. Hudson Pacific, the property owner,  paid $49 million in 2015 and renamed the site to Fourth+Traction. They purchased it from GPI who purchased it for $19 million in 2014. One of my colleagues and I represented the buyer in that sale, where they then more than doubled their money flipping it. The seller then was a woman related to the man that once occupied the building as a toy distributor, T.T. Toys.

The Honey lease follows other recent DTLA Arts District transactions such as Warner Music at the Ford Building and Spotify at the At Mateo complex.

Historical photo below showing occupancy of Coca-Coca at the building.  

Street Art on Los Angeles Buildings

Los Angeles has an abundance of street art, especially DTLA and in the DTLA Arts District. I, like many others, view “street art” as artwork in a public space that has a generally pleasing design. Contrast that with typical street-gang graffiti, which was primarily composed of unique typefaces and dominated the public realm prior to 2000. Graffiti is considered by most denizens as blight. Street art adds value to the public realm. Check out some great examples here: https://www.instagram.com/explore/tags/lastreetart/. A large portion of DTLA street art has been painted on industrial buildings.

Los Angeles Leads the Nation in the Creative Economy

According to the 2017 Otis Report on the Creative Economy of the Los Angeles Region:

  • With 747,600 salaried jobs in the creative industries, California far surpasses New York State, which has 478,100 jobs, followed by Texas at 230,600 jobs.
  • In a postindustrial society, activities based on creativity are an essential feature of a flourishing economy.
  • What unifies this dissimilar set of industries is the fact that they all trade creative assets in the form of intellectual property – the medium through which creativity is transformed into something of economic value. Within these industries, we find the intersection of art, culture, business, and technology.

California Tops List of Cold Storage Warehouse States

As shown above, California leads the nation in industrial cold storage cubic feet, that is warehouses with coolers and freezers. What drives this inventory of frigid distribution space? Metro areas have large populations along with food production facilities and food logistic hubs. California has major port activity along its coast to drive much of the logical demand.