A Look Back at 1986 and Why the Apartment Industry Is Wary of More Hasty Legislation.

Tax Reform Act of 1986 coming to fruition is often remembered fondly as a time when business and political interests aligned, the clouds parted, and a Democrat-led Congress struck compromise with the Reagan White House to complete the first overhaul of the tax code in decades.

But seasoned veterans of the apartment housing industry have a far different story to tell. It’s a story of bankruptcies, jobs lost and investment opportunities stifled – sending damaging ripple effects across the industry in the years that followed.

“It was a catastrophe for the industry nationwide,” recalls 2006 NAA Chairman of the Board Joe Sharp, CAPS. “For a period of four or five years, we were in turmoil – it was a mess.”

Now leading his own property management consultancy in the Nashville area, Sharp first got his footing in the apartment industry in 1973, while attending the University of Texas at Austin. While going on to become the principal of two property management firms in the years that followed, Sharp also joined the Austin Apartment Association’s (AAA) Board of Directors in 1978 and rose to President of the association by 1985. A decade later, he would also become President of the Texas Apartment Association. 

By 1985, tax reform discussions began heating up in Washington, and the AAA – among other industry groups – knew they had to act. In fact, they even had an ally in Austin’s own member of Congress, Rep. J. J. “Jake” Pickle – who then was the third-ranking Democratic member of the tax-writing Ways & Means Committee.

“I must have gone to D.C. six times” as Congress debated the bill, says Sharp. “I’d even be at the airport to meet (Rep. Pickle)” when he’d return to Austin.

But ultimately, Sharp laments, they couldn’t convince the lawmakers that they needed to move more slowly and look at the long-term consequences. “So much of what happens in Congress is reactionary,” Sharp says.

For example, the ability to write off passive losses against taxable active income was phased-out during the following four years, without grandfathering, and depreciation went from 20 years up to 30 (a move that was like “throwing the baby out with the bathwater,” says Sharp). 

Because existing loans on properties had no personal liability, investors simply walked away from their investments only to get hit with phantom taxable gains; because the debt was written off, they became liable for taxes on money they didn’t receive. All this, coupled with a deregulated savings and loans industry, led to a perfect storm resulting in overleveraged and overvalued properties getting turned over to the S&Ls, causing them to be immediately undercapitalized.

“The company I worked for – one of the largest privately held homebuilders in the United States–had heavily invested in multifamily properties, which now suddenly got devalued. They wound up underwater and had to declare bankruptcy, eventually liquidating in 1988. And I watched a lot of my contemporaries declare bankruptcy to be able to recoup and get back in the business at some later date,” Sharp says.

A lot of people lost their jobs, adds Sharp – and he was one of them.

Now, three decades later, sweeping tax reform is on Washington’s agenda once again. And this time, Sharp says the lessons of 1986 should teach the industry and lawmakers that there must be a way to ease into tax reform without almost destroying an industry along the way.

 “We’re doing a better job now, but back then our apartment housing industry was not able to engage our grassroots,” he says. 

“We need to do a better job of going public with the unintended consequences [of changing tax laws]. If you’re only talking about the economic effects on me as the operator or me as the owner or investor, that’s not going to necessarily get you a long way; you have to really educate the public on the benefits of the industry to the overall economy and to people in general.”

And as for sending that message to lawmakers, Sharp recommends a different tactic – one that favors a groundswell of support over one executive tracking down their congressman at the airport. “We need to get voters writing letters to their congressmen, saying ‘this is what this proposed legislation is going to do to us, and we want you to think about it before you vote.’”