PANDORA PAPERS | A GLOBAL INVESTIGATION
This Block Used To Be For First-Time Homebuyers. Then Global Investors Bought In.
A corrections officer bought one, and so did a housekeeper and an electrician.
Over the past six years, 19 of the 32 homes on Tammy Sue Lane have been purchased by a billion-dollar investment venture, part of an unprecedented flow of global finance into the American suburbs. Less than 10 years old, the company has amassed one of the nation’s largest portfolios of single-family houses, becoming the landlord for tens of thousands of families.
The venture, Progress Residential, acquires as many as 2,000 houses a month through the use of a computerized property-search algorithm and swift all-cash offers. Progress executives boast that the company’s efficient management practices have been a boon to their tenants who cannot afford to buy one of the “entry level” homes.
But according to previously undisclosed documents and dozens of interviews with renters and former employees, Progress Residential has been ringing up substantial profits for wealthy investors around the world while outbidding middle-class home buyers and subjecting tenants to what they allege are unfair rent hikes, shoddy maintenance and excessive fees.
The plan sought to exploit the 2008 U.S. housing crash, which forced millions of homeowners into foreclosure and left a glut of cheap houses for sale. The financiers’ plan called for buying up tens of thousands of these properties at depressed prices and renting them to families who had lost their homes or, because of tightened lending practices, could no longer qualify for a mortgage.
To raise money for the project, Pretium Partners sent confidential invitations to people wealthy enough to put up at least $2 million. Executives projected annualized returns of 15 to 20 percent, according to a 238-page solicitation to investors in 2012. In total, Pretium Partners raised more than $1 billion, and the resulting real estate venture became Progress Residential.
The venture would “capitalize on the severe distress in the residential real estate market in the United States,” according to the pitch memo. The homes would be rented to families “who have been displaced by foreclosure or are otherwise unable to obtain financing despite being able to afford a home purchase.”
By 2019, according to a news release at the time, the venture had nearly doubled investors’ equity.
Progress’s most significant advantage, however, may be its ability to make all-cash offers, and quickly. A typical buyer must borrow money, and the financing arrangements can add uncertainty and delays.
All those advantages pay off for investors: In an analysis of more than 70,000 sales of single-family dwellings, university researchers showed that investors paid about 10 percent less than an individual buyer for a similar house.
The investors “have cash and the power to negotiate,” said Professor Abdullah Yavas, one of the researchers and the academic director of the Graaskamp Center for Real Estate at the University of Wisconsin. “They’re going to get a better price.”
An executive at Pretium Partners dismissed the idea that owning and renting are significantly different. Whether they’re renters or homeowners, people still must make a monthly payment — for rent or for a mortgage, Dana Hamilton, Pretium Partners’ head of real estate, said on the real estate podcast.
“I laugh because when people try and distinguish owning a home from renting a home, the reality is most people don’t own a home — they rent the home from the bank,” Hamilton said. “From the outside, it really looks the same.”
One key difference unacknowledged in her remark, however, is that a family’s monthly mortgage payments can build equity in the home; rent payments have no such benefit.
Hamilton said in the podcast interview that Pretium chief Mullen deserves praise for anticipating the needs of a wave of millennials who don’t have the means to buy a house. “He basically saw a generation coming and said, ‘How are we going to house them?,’” she said.
If the woman were honest, she would have said, "How can we profit most from them?"
The Pandora Papers contain Mullen’s first pitch to investors. It set out how they could achieve big returns, while minimizing taxes, by buying houses at discounted prices in the wake of the foreclosure crisis. In the near term, investors would enjoy healthy yields from the booming rental market, the pitch said; eventually, as housing prices rose, they could sell at a huge profit.
According to an expert who reviewed Pretium’s fund offering documents, the fund used a series of complex legal arrangements to aggressively shield profits from U.S. taxes.
First, money from foreign investors flowed into a partnership in the Cayman Islands, where it didn’t trigger the need to file U.S. tax returns, said Reuven Avi-Yonah, a law professor at the University of Michigan specializing in international taxation.
The Cayman Islands partnership then sent the money to a “domestically controlled” entity in Delaware, allowing investors to avoid steep taxes imposed on foreigners who profit from the sale of U.S. real estate, Avi-Yonah said.
The Delaware entity, in turn, invested the money in real estate investment trusts (REITs), which serve as legal owner of the rental houses. REITs are not required to pay taxes on earnings from rental income.
Asked about the tax arrangements, Pretium Partners said that “our investment vehicles are structured and managed in accordance with industry best practices.”
Yes, "industry best practices" written by wealthy politicians to enrich wealthy corporations. It was at this point that I got so disgusted at the amounts of money talked about in the article that I had to stop with the cutting and pasting.
The New American Corporate Dream
There is a new townhouse development that's been under construction for the last two years. It's finally finishing up. Not even open yet, and they are completely sold out. In what economy does that happen except some corporate entity swooping in and buying up all the houses and then turning around and renting them?
ReplyDeleteMeanwhile, rents in Phoenix—like the rest of the country—are skyrocketing. It seems there's a new condo or apartment complex on every corner that fills up immediately. HOW? WHO is buying/renting these places?
After reading your post, I guess we know now.
Mark - I have also wondered the how/who for quite a while. Yet, those buildings keep going up and the homeless camps keep getting bigger.
ReplyDeleteAlmost the same here in Canada and in Montreal so many condo builgings are rising averywhere in the city and the suburbs too.
ReplyDeleteThose condos are out of range for a «normal» mid class person with a income around $100 000 a year.
In 1986 I bought a house north of Montreal in Laval for $62 500 Can.
After our divorce, two years after in 2001, we sold it for $100 000..
In 2021 if you want to buy a similar house you'll have to pay around $350 000 or more because the houses are so rare that many a betting for the same house and it can skyrocket then.
For the condos, you'll have to think of a $400 000 investment but also think about the city taxe and the condo fees that are, in themselves, a huge among of money.
I'm now renting a 6 1/2 rooms appartment on a second floor for $875/month and I was lucky because I live here since 2007 and the rent was then $700/month.
The same style of appartment is now renting at $1 700 / month and even more if you rent a place in some of those new condos.
No one who earn a average salary can afford such prices.
What also happened since 1995 like in Vancouver, many Chineese wealthy people bought lot of properties and the prices skyrocketed then.
We are now having almost the same as Asians are discovering that the prices are less expensive here in Montreal than in Vancouver.
Real Estate is a boon for the wealthy. They buy it up when the chips are down for everyone else. It's how the very wealthy became even more wealthy over the years - even through the depression and recession.
ReplyDeleteJiEL - You are fortunate to have such a good deal on your apartment.
ReplyDeletePat - Money makes money.
Of course, even if you sell your house, as mine is now double its worth, to buy one means spending double or more for another place to live. The only people who benefit are the investors and the rich.
ReplyDeletetaurusd2 - That is, unfortunately, all too true.
ReplyDelete