Robert Stanger: bullish on shelters, a bear on tax reform

If you think the changes blowing over tax shelters are about to tear the business apart, think again. ``In 1985, sales of public partnerships are up 36 percent from the same time last year,'' says Robert Stanger, publisher of the Stanger Register, which tracks tax shelters, including limited partnerships. ``And, in the last few months, private placements are 60 percent higher than they were in 1984.''

Why has the tax shelter business continued to expand, when it seems to have been under attack from a collection of tax laws dating back to 1979, a tougher stance by the Internal Revenue Service against abusive shelters, and the prospect of tax simplification?

``You can conclude,'' Mr. Stanger said in an interview during a recent visit to Boston, ``that this is the last-olive-out-of-the-jar theory.'' In other words, investors are betting that the rules behind any tax-advantaged investments made now will be ``grandfathered'' and allowed to stand after a tax reform bill passes. Tax shelters: wrong name?

Even with the threat of tax changes, Stanger says, the limited-partnership business has nothing to fear. One reason is that many of them aren't really tax shelters.

``Most of the publicly registered partnership business, as opposed to private-placement business, is in the area of what we call income partnerships,'' he says. ``That is, partnerships that, for instance, buy properties with no mortgage debt or partnerships that actually make mortgage loans. In other words, they create entirely taxable income. There's no shelter associated with this part of the partnership market.

``This represents three-quarters of the publicly registered and sold limited partnerships. So the business is clearly one of providing economic investment vehicles, irrespective of tax considerations. That is an altered focus compared to what happened in the late '70s.''

One reason for the surge, Stanger believes, is that ``real estate has been a very good investment. And these partnerships are really mutual funds of real estate. They allow small investors to aggregate modest capital amounts and go out and buy a large building.''

``There's just not a very big market out there for strictly shelter and there never has been,'' he contends. ``A quarter of a million people have taxable income of $150,000 and above, and 30 million people have a taxable income of $30,000 and above.

``So there's a very large market of people who have a modest income and net worth and are trying to protect themselves against inflation. . . . There's zero return on your tax bill payment, and hopefully there's some positive rate of return on an alternative investment you might make.''

Also, he says, the term ``tax shelter'' seems to have acquired ``a negative connotation, for an activity that is encouraged by the federal government.''

``If I buy a piece of equipment and earn an investment tax credit, that's a shelter,'' he explains. ``Congress passed the law providing for investment tax credits to stimulate equipment purchase. So I do what they ask me to do. I go and buy a piece of equipment to improve the level of productivity in the United States, and I'm excoriated for having purchased a tax shelter. If they're going to have investment incentives, they shouldn't complain when people use them.

``Now if you're going to talk about fraud and abuse, nobody defends that and nobody ever has. It's a minor part of the business and it continues to be.'' Tax reform: no reform

As for tax reform, lately known as Treasury II, Stanger is not impressed.

``I think Treasury II is a bad idea,'' he snaps. ``We have a tax bill that's doing two things. One, it's removing many, many investment incentives, to the tune of $232 billion. And it's shifting the burden from individuals to corporations, which has got to lower the investment rate in the US.''

On the plane to Boston, Stanger put together some averages of revenue gain-and-loss numbers based on data from the Treasury Department and the congressional Joint Committee on Taxation.

Overall, he says, the tax package winds up with individual and corporate tax cuts of $492 billion. To make this up, repeal of various deductions for individuals, including the deduction for state and local taxes, brings back $240 billion. Other proposed changes, which he says would increase the taxes on savings and investment, bring in $232 billion more, for a shortfall of about $20 billion.

Also, Stanger says, the tax bill for individuals is reduced $119 billion, ``with no proof that changes in net taxes for individuals ever result in any changes in the savings or investment rate.''

At the same time, he says, the tax bill for corporations is increased $119 billion.

``So my bottom line on the thing is, it's a bad idea.'' Cheers for IRS, though

While he is critical of one government proposal affecting limited partnerships, Mr. Stanger has nothing but praise for the Internal Revenue Service's efforts to crack down on abusive shelters.

``I think it's great,'' he says. ``I think their efforts are to be applauded. I think it's necessary, I think they're doing a good and effective job, and I think everybody involved in the legitimate investment industry is in favor of it, and I think it's long overdue. Whether they have the budget, namely the number of administrative personnel necessary to do it, I don't know.

``You see, I have a view about abusive shelters. That is, everyone who ever bought one knew he was buying an abusive shelter.'' Real estate: mixed picture

Of three of the major forms of legitimate, nonabusive limited partnerships -- real estate, oil and gas, and equipment leasing -- Stanger sees some good prospects in real estate. A discussion of real estate, however, starts with the statement that one can't generalize. There are different types of real estate, of course, including office buildings, multifamily residences, and shopping centers. And there are different locations -- different cities, and even different circumstances within the same c ity.

``But, having said you can't generalize, I'll proceed to generalize.

``Office space is very overbuilt, in general. There are vast market differences, but it's got to be a fairly risky investment at the current time.'' Stanger maintains that in the next six months to two years, however, the office market, like much of the cyclical real estate industry, will turn around.

In the meantime, other areas of real estate, including apartments and shopping centers, look good. For the shopping centers, this is particularly true of small community centers and unenclosed ``strip'' centers where a row of stores faces a parking lot.

As for apartments, investments here are doing better, because the leveling off of house prices has slowed construction of single-family homes. As a result, families, especially young ones that need housing, are looking for apartments. ``So there is still a tremendously viable marketplace for multifamily rental. And there hasn't been a lot of it built.'' An inflation hedge

Interestingly, Stanger says, lower inflation really hasn't hurt the outlook for real estate investments.

``One of the great myths about real estate is that the real return fluctuates with inflation. In other words, if inflation rises the real return rises, and if inflation comes down, the real return comes down. That is not true. It is true for nominal return, but not real return.

``Return adjusted for inflation in real estate is about the same, namely, 3.8 percent above the level of inflation, regardless of what the inflation rate is.'' Oil and gas: drippy

Looking at oil and gas, Mr. Stanger is not enthusiastic, at least for the short term.

``There is an excess worldwide production capacity in oil, which is substantial. And we haven't done anything to increase industrial demand or demand for oil. We haven't made a dent in the excess supply yet. So this current market condition is likely to continue for some time. But when you start talking years, no one knows how to predict it accurately.''

If someone is ``compelled to play oil and gas,'' then, Stanger says, he would rather go with a drilling program than proven reserves. ``Lightning can always strike,'' he notes. ``And, you get a better immediate tax write-off.''