Autobiography - The Galindo Group

Ram Galindo THE MAKING OF AN AMERICAN Page 153
investors for the use of their money. Payments to the lender are usually fixed so they
are predictable, periodical and senior to the investors’. The funds left after all those
deductions are made from revenue are the income stream that gives owners reason to
invest their savings. The present value of this future income stream is what determines
how much a buyer is willing to pay for it.
Of all the deductions made to arrive at this income stream the single most important one
is property (ad-valorem) tax. An increment in taxes of just one dollar per one hundred
dollars of appraised value may rob a given property, say a 250 unit apartment complex,
of almost a couple of million dollars of market value. If we take an example of a project
where the aggregate property tax rate is raised to 3.7 % from 2.7 %, suddenly an
apartment complex that was worth $16,000,000 before the tax rate increase is now
worth only $14,000,000 in the market. The extra 1 % siphoned off by local governments
hurts the cash return to investors by reducing their hoped for annual distributions by
$160,000. On a $3,000,000 investment this amount represent a drop in the yield of their
money of 5.3 %, enough to discourage many investors.
But more insidiously, it robs the corpus of their savings. Starting with an estimated
market value of $16,000,000, a realistic mortgage loan against such a project could be
$13,000,000, meaning that the owners had to invest $3,000,000 of their savings to build
the project. If, because of higher property taxes the cash throw-off for the owners is
now smaller, the project appraises for only $14,000,000 instead of the original
$16,000,000. Since, as said above, the loan is for $13,000,000, the owners’ equity has
been cut down to only $1,000,000. Thus, without a recession, without a natural disaster,
without any action of the economy, but simply by the action of a school board, city
government or other taxing authority, their investment is immediately devalued to one
third of what was paid in. This subtle and legal looting of investor’s savings is one of the
greatest pitfalls of real estate investments.
While the loss of value caused by high taxes is the worst effect of tax increments, public
decision makers should not forget its more obvious and immediate result. In the
example above a 1 % tax increase represents $160,000 a year reduction of return to the
owners. In all cases savers who invest their funds with the expectation of a return suffer
great damages when returns don’t materialize. Such an infringement by taxing
authorities is known to have destroyed the lives of honest investors who could not draw
a return or recuperate their original corpus. I think it’s very important that this grave
dislocation to the real estate industry be better understood by local government officials
as well as by lawmakers who should consider it in formulating public policy.
Despite all my misgivings about governmental abuse through excessive taxation, I
remain committed to the terms of My Creed, as given in Chapter 1. As I write this book,
I am in full swing preparing to build new headquarters for the Galindo Group of
Companies. This will be a landmark, albeit small, four level, granite and glass building
next to Aerofit Villa Maria, Bryan. In addition to my office, it will house a bank (which I
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