Long-Term Economic Value

It is clear that when the NAMA legislation is published later today, there will be a lot of focus on the question of long-term economic value and the European Commission’s guidelines for pricing assets transferred to government asset management agencies.

I have written about this issue before and don’t want to repeat myself. However, I’d like to emphasise two issues.

The first is that, while the Commission allows for assets to be transferred according to “long-term economic value” their preference is that assets be priced according to market value and the alternative approach should only be introduced where it is not possible to ascertain this value. On this issue, I am in agreement with Peter Bacon (discussed here) that the idea that there is no market value for Irish property investments is a dubious one.

It is true that there is very little activity in this market right now. But this partly reflects the fact that if developers sell at any reasonable price, they will incur huge losses and many will be bankrupt. In the absence of pressure from their banks (who are waiting for NAMA to take over the loans) the preference of developers is to sit, Micawber-like, hoping something will turn up that will get them back to solvency. However, despite the low levels of activitiy, one can, as Bacon has noted, use current residential house prices to come up with a maximum possible value for residential development land and in most cases this will imply a very large discount. Similar exercises can be undertaken for commercial development land.

This brings us to long-term economic value, which the Commission recommends be calculated “on the basis of underlying cash flows and broader time horizons.” I have taught asset pricing to Irish undergraduates on a number of occasions (in-depth notes here, shorter notes here.) The standard economic model that we teach for pricing an asset that you buy today and then delivers a sequence of cash flows D(t+1),D(t+2) etc is described by the present discounted value pricing model:

P(t) = D(t+1) / (1+r(t+1)+mu(t+1) ) + D(t+2) / [ (1+r(t+1)+mu(t+1)*(1+r(t+2)+mu(t+2) ] + ….

Where r(t) is the risk-free rate of interest and mu(t+1) is the risk premium associated with this project.

What we can see is that using this formula to back out the “long-term economic value’’ associated with an asset requires assumptions about three elements: The future path of cash flows, the future path of interest rates, and the future path of risk premia associated with this type of investment.

To give an illustration of the sensitivity of these calculations to assumptions, note that if D(t) is expected to grow at rate g each period and i(t) and mu(t) stay constant, then the formula collapses to the famous Gordon growth equation:

P(t) = D(t+1) / (r + mu – g).

As an arbitrary example, if we consider r=0.04, mu = 0.02 and g=0.02, then the long-term economic value for this income stream is 25 times current cash flows. However, if we drop the risk premium to mu=0.01, the multiple becomes 33 times, and if we drop it to zero, the multiple becomes 50 times. Similarly small changes in assumed risk-free rates or growth in cash flows can have major effects on the implied “fair valuation” of the asset.

My point here is that it will be very easy for any NAMA official who wanted to do so, to pluck out an appropriate set of assumptions about the future that will end up delivering whatever haircut is deemed desirable. In particular, I suspect it is possible that the valuations will completely ignore the risk premium element in pricing these assets and will make highly positive assumptions about future cash flows. And as long as the calculations are presented in a coherent fashion according to a model like the one above, I suspect that the Commission will declare that they have met the guidelines.

Finally, it should be remembered that this present discounted value model is just a model and very few economists have gotten rich over time using this model to detect whether assets are undervalued. All of these factors need to be considered before one could support taking €60 billion of Irish taxpayer money and investing it in these assets.

53 replies on “Long-Term Economic Value”

There are all kinds of implications for a state institution to knowingly value assets incorrectly….Corruption is one, but I suspect this can be used in tax law…

Example: I am self employed and have my own company… Can I use the NAMA valuation to sell my house at 80% of its peak value. My company is looking for an investment; its valued correctly…. it will beenfit the company as it will own an asset instead of paying tax.

I can rent it at market value…. While paying zero CGT on proceeds from the sale

After all, I can use the ‘long term economic’ value of the house as the price, using the same rationale or model NAMA will publish. Its as ethical as NAMA.

Im sure Revenue will object but Im sure theres plenty of tax consultants who will be looking at such opportunities….. A few more levels of indirection and Im sorted!

Murphy is getting the nod from “official sources”. We got the wink from Central Governor John Hurley when he said that NAMA would pay “through the cycle value” for the loans they will buy. NAMA may make sense in an intellectual sense. But it doesn’t make sense if it pays well over the odds for its assets.

All the signs are that we (Irish taxpayers) are being set up to be plundered.

The aim seems to be to ignore current values as these would expose the bankruptcy of the banks and trigger the nationalisation that Brian Cowen seems so allergic to.

To hear John Hurley speak of “through the cycle” values is grimly humorous. This is the man who – one year ago – said that the price volatility of Irish bank shares was “overdone”. They fell some 90% subsequent to his foolish and unnecessary comment. Irish bank shares have recovered only since NAMA has entered the equation. Bank of Ireland shares, as an example, have risen over 1000% (not a type, “one thousand per cent”) since then. That’s one measure of how much NAMA might be worth to Irish banks.

The evidence of bubbles worldwide is that they do not reflate quickly. The Nasdaq topped at about 5,000 in 2000. It has not come close to recovering that level since. The Nikkei peaked at about 40,000 in late 1989/early 1990. It has not come close to recovering that level since. The Dow Jones reached nearly 400 in 1929 – it didn’t see that level again until 1955. What value has “through the cycle” pricing in such a context?

“Through the cycle” pricing is just another ruse to provide a veneer of intellectual justification for what happens politically expedient.

If we pay 75% of the €80b face value of debt that should be priced at 25%, we will overpay by €40b. That is the equivalent of €20,000 for every person working. That is the bill we are being presented with.

@cormac lucey
I agree with you that we are about to be plundered.
Dr. Bacon is reported today as saying that the choice is market price or hope.
Now that is a new concept for valuing assets. At least he calls it as it is and not this economic cycle nonsense.
The real value of property is emerging from court proceedings and the discount
is horrendous – Irish Independent reports on 4m property in d4 now going to auction asking 1.8.
and this is a hope value

Karl, I’ll assume that you’re referring to the assets supporting the loans rather than the loans’ cashflow. The problem with using discounted cashflows is that many of these assets are generating no cashflows. So you’re going to have to guess what they might be. A second issue is that such cashflows will lag the initial investment by an unknown number of years (i.e. if the long-term economic value will take 15yrs, that’s a significant time to wait for an income, while paying a coupon to NAMA bondholders). Where cashflows are being generated, these will need to be stressed.

Re David Murphy – I’m in the market to buy some toxic debt if the price is right (admittedly maybe just an acre at agri :)). So it’s not a monopoly, more like a cartel.

KW’s post illustrates that the models to be used to ascertain real economic value are sensitive and are wide open to manipulation, negligent application and unreliability notwithstanding everything has been done correctly.

This highlights the need for oversight by (i) the opposition and other independent third parties and (ii) informed third parties representing the interests of the State (as opposed to the interests of NAMA). We need the facility for common sense objections and technical objections and we need total transparency. I think the opposition parties could suggest useful amendments in this regard.

KW’s post further highlights the misunderstanding of the reason for using real economic value, i.e. that market value cannot be ascertained.

It might be argued that as there is no funding available for large projects there is no real market for development land and opportunities. For example, if I go to my bank and tell them I have found a “ready to go site” at a good price and I want finance for acquisition and construction my banker is likely ring for security first and a psychiatrist second. The market does not exist at the moment even though there will be a market again at some stage, particularly for houses for families.

Zhou,

There is a market for these assets. It may seem extremely low, but there is a market. Acquiring finance to develop such assets is a seperate issue.

There is of course a current market value and in the peak boom period 2004-2006, developers competing for prime sites in Dublin for example, bid up values to ridiculous levels.

How long will it take for the peak prices to be scaled again in real terms?
5, 10, or 15 years?

Given the high degree of uncertainty, there appears to be a strong argument for clawback clauses given the expected backdrop of a very different credit environment to the mid-2000s.

Just wondering when you refer to management of these assets. Are the personnel involved equipped to deal with these assets, valuations and decision-making both in and outside the market.

i.e. I hope its not just a group of economists and accountants behind closed doors making decisions, when it would be more beneficial and attainable to have someone with formal property experience pulling strings.

Karl

As a general rule and without commenting on the particular applicability of the present value method for NAMA valuation purpose, it is quite possible to use this kind of pricing rule to back out real estate values.

Economists might not get rich doing so, but property investors do all the time. The variables you were fiddling with are either easy to accurately estimate or do not need estimation at all.

Risk premium just get absorbed into insurance costs and interest rates are just the fixed rates offered by the bank, so the market tells them. For rents, the expected real growth in an equilibrium economy should be zero – real rents are equally likely to go up or down.

Note these are equilibrium rents so there is no need to factor in for any uninsurable vacancy risk (you will always get a tenant at the market rental price).

We’ve gone back and compared actual yields with predicted yields and they do good enough to confidently price assets within +/- 10% of their true economic value.

@Ahura

If there is no finance for development then how can the market take account of genuine development potential?

You say there is a market for the land. Can anyone tell me of even one transaction of development land within the last 6 months? I believe Peter Bacon is right that there is a market for houses and house values together with building costs and risk weighting (analyse that!) can be used to guess at current to development land values. However, there is no market for such land that I know of.

@Graham Stull

“Risk premium just get absorbed into insurance costs”

What kind of risks are you talking about? Are you talking construction risk only or are you talking market fluctiations risk?

In terms of construction risk, some must be borne by the developer. For example one cannot insure against the vagaries of the planning process. One generally does not insure against unexpected ground conditions. Insurances are also often limited as it becomes uneconomical to get all professional advisers to insure to the level to cover the entire construction costs on a development. There is then the risk of purchasers or tenants breaching contracts. The list goes on. The developer bears a lot of risk and where it is transferred to another he bears the risk of their shortfall. That is why they are sometimes referred to as having balls of steel.

@Conor

Three words – “effective oversight” and “transpaency”.

Lundgren flagged this as being crucial.

then use agri values…. plenty of trading in that area at very reduced prices….

Remember zhou…. the problem isnt (or shouldnt be) for the public purse to provide a fair value…. or bail people out…. we dont want the shit….. the pain should be left with those who have gambled and lost…..and in the absence of anyone else to buy, the state should buy….at rates and conditions that ensure it is a good investment for the people of Ireland….

The 2 should be separated… buying distressed assets and bailing out banks…. anything else is state aid to Irish banks or embezzlement of public money.. even if its well meaning

@zhou

Oh, you are right about construction risks. These define the developer’s profit margins and are quite related to the tensile strength of his testicles, as you suggest.

But those are not the risks Karl was referring to in his NPV calculation. His risk variable was exponential along the life of the investment, which is why it could do such damage to the robustness of the value estimate.

Risks of this nature are quite insurable: Fire, acts of God etc.

As far as the risks of non-payment of rent are concerned, these are things that are highly constant and easy to estimate over time.

@Graham

Thanks for the correction. for my penance, I have gone and had a look at Karl Whelan’s short notes. If I understand them correctly then risk is determined by (i) the degree of uncertainty as to how much the asset will yield (which I take to mean market fluctuations, e.g. in rental yield) and (ii) the level of risk aversion in the market. How does one insure against such risk? Or do I have it all confused and the risks are insurable risks such as Fire, Acts of God etc?

@Garry

Your point is a fair one. The problems arise when just principles clash with practicalities. The state has limited expertise, ability and resources. The bankers and banks must be used in this exercise. A good investment is no good without functioning banks to underpin the entire economy.

Furthermore, the State is not omnipotent and cannot take what it wants and direct people’s activities with impunity. If the deal is structured to beiring the banks along voluntarily then huge practical and legal hurdles are removed. The long term hope is that regulatory reform will make this much easier if it happens in 20 years time.

However, we are where we are and there is no point in bemoaning the fact that the banks have rigged the game in their favour. Better to dictate that their price for co-operation should not be one penny above survival as trading entities and to take it from there.

“However, we are where we are and there is no point in bemoaning the fact that the banks have rigged the game in their favour. Better to dictate that their price for co-operation should not be one penny above survival as trading entities and to take it from there.”

Or nationalise.

Given that the government is compelling the banks to sell their assets to them, and not just offering them the opportunity, wouldn’t that add to the argument in favour of pricing them off some form of medium-to-long-term valuation, rather than today’s firesale bid in the (non existant) market?

In response to Garry’s example of selling his house to his company, no one is forcing you to sell your house, and no one is forcing your company to buy, but this is not the situation with the Irish banks.

@Michael Hennigan
In real terms prices will never get to their 2006 peaks otherwise we would be having another bubble. In nominal terms we might get to the 2006 peak sometime after 2025.

If the government is going to use the “long-term economic” surely they will be forced to publish every assumption used to calculate those values.

@Eoin

I have always argued against the idea that NAMA should be based on forcible acquisition of assets, partly for the reason you mention. If this is the road they are going down, I’d far prefer that they make take-it-or-leave it offers for assets and banks that don’t want to sell can keep them. Given the government’s avowed “over market value” strategy, however, I’d be pretty sure there wouldn’t be too many refusals if this were adopted.

By Post Author

It really, alas, doesnt matter. NAMA will go through with GP and FF support and we will all be left holding the bill.
Enjoy….

@zhou,

Well, its impossible to know what Karl had in mind really, without Karl himself entering this thread. But the way to mathematically interpret the term mu(t) for any t is that there is an (1/(1-mu)-1)% chance that some event will occur in t which wipes out the entirety of period t income.

What could that be, if a “period” is, say, a year? Well, there’s fire, asteroids, etc. But non-payment of rent for that period just doesn’ happen in the real world; they get cut off the plumbing long before that happens.

In practice, non-payment gets treated as part of the vacancy rates. Vacancy rates are one of the more constant variables you encounter in property investment equations.

The fundamental purpose of the legislation and NAMA is to get the banks lending again by removing the current pressure the impaired loans are placing on their capital requirements. The current use of a strict mark-to-present-market-value methodology is directly contrary to the basic purpose of the legislation. Even though such a methodology could be used, it won’t be, and for good reason. It would not improve the bank’s ability to lend and therefore would defeat the entire purpose of this elaborate exercise.

Look for valuations that test the outer boundaries of the European Commission’s guidelines for pricing assets. And look for leniency from the Commission with respect to the application of the state aid rules in this context.

http://www.eumonitor.net/modules.php?op=modload&name=News&file=article&sid=132924

I dont buy that at all…

Within a few weeks of giving the state guarantee, we learned of multi billion frauds in one bank which were facilitated by another… We learned of bank chairmen hiding multi million loans for years.

I can guarantee we will learn of more fraud when we open the can of worms that is the banks loan books….

Heres a few off the wall guesses

Loans securitised against the same properties with different institutions
Multiple loans for the same properties, all believing they hold security
Loans where the original paperwork has gone missing.
Loans to bank staff which are not performing.
Loans for which banks claim to have security but no written proof.
Loans securitised against property which was never owned by the entiry borrowing the money.
and on and on

The effect of which will be to render these debts worthless to NAMA.

I dont believe the banks or developers can be brought along voluntariarly at anything like ‘fair’ terms.

I believe once a developer is brought into NAMA, they must waive certain rights, sign consent forms, indemnify NAMA, open all books, all companies etc to the full gaze of the state….

Similarly for banks… If youre in NAMA, youre being rescued… then stop struggling and take your medicine.

I believe that particiation in NAMA should be optional for developers and bankers…. the loss of rights is so if a developer can avoid NAMA at all they are incentvised to stay out…If they are insolvent, they have lost and they stand to lose everything.

Similarly for the banks… every developer they turn over to NAMA for cleansing must cost the banks…. And if they dont hand over completed paperwork, indemnifications etc, they may just get the debts thrown back at them…..

So you have genuine conflict between banks and developers where a banks believes the developer is holding out on them…. We need to sweat every euro from these guys and have them shopping each other, it will be needed.

I think that at this time is fair to say while property investors can successfully make good estimations on the value of a property. However, at this time some of the previous years most successful property investors are now by their own admission technically insolvent. For that reason I’d say that at least their pricing model scouldn’t predict the current crisis.

While interpolating a model on historical data can be done, but as the investors in LCTM found out, extrapolating it reliably through turbulence into the future is another matter. I believe these times are turbulent and as a consequence I do not believe anyone with certainty can pick the model which will give an accurate value.

However, I do not believe it matters what price is being paid.

My belief is that either the insolvent banks and insolvent developers are liquidated and the productive parts of their businesses recycled or the Irish people and the Irish companies will have to pay for the losses the banks and developers have incurred.

The payments to the banks from the Irish people and Irish companies will either be one of two ways below (or as it seems a combination of both):
-be channelled through artificially high interest rates on borrowings, artificially low interest rates on saving and high fees. (they can do this due to the current lack of competition)
or
-through NAMA and a higher tax bill

The decision of whether or not NAMA is to be used at all or instead letting the banks be liqiudated is more relevant to how the Irish peoples money is to be used for creating long term value.

Some more thoughts about NAMA:
if the government were to buy assets for 45 billion which I presume the sellers have carried in their books at 90 billion. Wouldn’t that force the sellers to book losses of 45 billion for the year?

@Graham

mu_t is a risk premium capturing all the elements of risk associated with one income stream being more uncertain than another. For example, because stocks are riskier than bonds, investors expect a higher rate of return. In my opinion, there is a lot of uncertainty now about the final destination of the Irish property market, so I would argue that the risk premium for making these investments now should be very high.

@Garry. Shouldn’t the people running NAMA be wise to such worries? ie, before they accept a loan(asset) from a bank shouldn’t they check that no other bank has tried to sell them a loan secured on the same property?
And shouldn’t the legislation include something giving NAMA first claim on any secured assets?

Oh yeah, I forgot, NAMA only employs a handful of people and the banks will continue to administer the loans.

Silly me..

@Garry

There are certainly a number of conflicts:

State -v- Bankers
State -v- Bondholders
Bankers -v- Developers

The information disequilibrium between the State and the bankers is the most dangeous.

However, I think you have misunderstood some things:
– Firstly, developers will have no say in whether, how or at what price they are brought into NAMA.
– Secondly, NAMA will buy the loans and securities. For each item of security, the bank will have to submit a due diligence checklist. Any fraud or short-comings will be discovered pre-transfer.
– Thirdly, everybody has the option to stay out of NAMa by paying off their loans.
– Fourthly, the Banks cannot be allowed to pick and choose what goes into NAMA as nobody has confidence in them not to over-estimate the value of assets. The purpose of the exercise is to convince the world that namafied recapitalised banks are solvent.

My main concern about NAMA at this stage is what is being left out, not what is going in.

11 minutes to go. One can nearly smell the deep-heat wafting across optic fibres. Economists, journalists, party spin doctors, bankers lawyers and builders hold their breath…

Zhou,

Just because buyers and sellers have different expectations doesn’t mean the market isn’t functioning. A period with no transactions is reasonable, especially when a major correction is happening. Government interference (and banks facing insolvency) have also contributed to a low level of transactions – they seemed quite upset by ACCBank.

Re ” If there is no finance for development then how can the market take account of genuine development potential?” – a purchaser can price this risk in. It just means that the price is lower.

“The purpose of the exercise is to convince the world that namafied recapitalised banks are solvent.”

That is the best decription of the goal of NAMA, I’ve read. Somebody somewhere must have came to the conclusion that this is worth 60Billion.

I guess that the current aproach will do this but at the cost of rendering Ireland insolvent or just broke for decades.

My comments on NAMA were how I believe it should operate. As the biggest meanest vulture capitalist in the state which owns everyone that owes it money and cant pay it back, not a get out of jail card for toxic debt holders.

The long term economic value definition in the Act looks interesting-
(c) a reference to the long-term economic value of the property comprised in the security for a credit facility that is a bank asset is a reference to the value that the property can reasonably be expected to attain in a stable financial system when current crisis conditions are ameliorated and in which a future price or the yield of the asset is consistent with reasonable expectations having regard to long-term historical average

“reasonable” is the get out card. The question is reasonable to the taxpayer or banks/developers.
@Bill
“The fundamental purpose of the legislation and NAMA is to get the banks lending again by removing the current pressure the impaired loans are placing on their capital requirements”.
The evidence is that the banks in the UK and US have reduced their lending following their bailouts. The assumption that Irish Banks will provide necessary credit is flawed.

“a reference to the long-term economic value of the property comprised in the security for a credit facility that is a bank asset is a reference to the value that the property can reasonably be expected to attain in a stable financial system when current crisis conditions are ameliorated and in which a future price or the yield of the asset is consistent with reasonable expectations having regard to long-term historical average”

5 assumptions there I think….

Alice felt dreadfully puzzled. The Hatter’s remark seemed to have no sort of meaning in it, and yet it was certainly English. `I don’t quite understand you,’ she said, as politely as she could.

`The Dormouse is asleep again,’ said the Hatter, and he poured a little hot tea upon its nose.

The Dormouse shook its head impatiently, and said, without opening its eyes, `Of course, of course; just what I was going to remark myself.’

`Have you guessed the riddle yet?’ the Hatter said, turning to Alice again.

`No, I give it up,’ Alice replied: `what’s the answer?’

`I haven’t the slightest idea,’ said the Hatter.

More tea Lenny?

@ Brain Lucey. I make it six.

To break them down:

1. “Reasonably expected to attain”: Is this to say that the current market is somehow unreasonable? Or is it expecting the future markets to be more reasonable? I do hope they learn to behave.

2. “Stable Financial System”: I’ll have to switch to my Barry Buzan here. He says that for a free-market to work it has to be inherently unstable. By this he means that for the innovation needed to drive future efficiencies, the actors in the market have to be fearful of ‘staying still’ and thereby being over-taken by their competitors. Perhaps a ‘stable financial system’ is one with zero growth. Or no banks.

3. Current Crisis Conditions Ameliorated: The current crisis conditions are illustrated by falling GDP and rising unemployment. The crisis conditions will be ameliorated when one stops falling and the other stops rising. Still not going to be a good spot. Maybe they meant ‘reversed’ instead of ‘ameliorated’?

4. Future price or yield: Lick finger, hold up in the wind?

5. Consistent with reasonable expectations: Is this water Peter Bacon was talking about when he referred to ‘Hope’ values? I’m sure a first time buyer could argue that they have a reasonable expectation that house prices will continue to fall.

6. Regard to the long term Historical average: Are they going to take the long-term historical average price of a green field into account?

According to the RTE website,

The paper value of property and development loans NAMA is planning to take over from the banks is €90bn, however the current market value is far less. NAMA will pay the banks somewhere between those two figures, as it is required to take into account the long-term economic value of the property concerned.

So, the assumption is that prices have already overshot on the downside? Discuss.

@Kevin, if they are right then we all should be buying property now. Great returns guaranteed.

Because, for property price rises to be any good to NAMA they will have to beat both inflation and the coupons NAMA will be paying on the bonds (referred to as debt securities) it gives to the banks.

If they are right, a no lose bet.

Can anyone enlighten me as to what tax benefits banks may receice on losses as a result of NAMA loans? Also, if a large % of these toxic loans have not had interest even paid on them for some months are they to be treated the same as loans where repayments have been kept up?

@Kevin O Rourke
Discussing this issue with a senior FF member, they were firmly of the belief that overshooting on the downside was and had happened. Even when I showed em graphs they were in a river in egypt

@Lorkan: yes, indeed.

Remember the days when people like Morgan said there was a bubble. The standard lazy question they got from RTE interviewers was “why don’t you sell your house?” There is an equivalent question that could be posed today (and buying stuff with other peoples’ money doesn’t count).

@Brian: amazing. Or perhaps not.

The Minster for Finance on Morning Ireland seemed to indicate that the determining factor in deciding to use market value or not would be whether in respect of given tract of land there is a realistic prospect of it being developed profitably in the future.

@ Joseph

I never worked in D13 nor DAD5. They used to solely with banks and insurnce companies. Banking profits arise from loans producing income but also what would in the hands of normal companies be capital and therefore exposed only to CGT. We included it in the profits for CT, but did a little calculation that meant it was taxed at CGT rates in reality.
But for a loss on loans there would normally be a full deduction unless it was lent to an associate of a shareholder in a “close” company. As quoted companies can not be close for tax purposes, this does not arise and all transactions are treated as made in the ordinary course of business. Probably a balancing of the need for quoted companies to be regarded well by incestors even if they are being ripped off. Theoretically, a quoted company could be otherwise close or controlled by 5 or less associated persons. This may even have occurred in respect of AngIB in view of the share shenanigans, but as it is defunct, the tax treatment is not relevant to anything.
So the losses should all be allowable. But where another party pays to the company any sum in respect of these loans then the losses would be disallowable to that extent, but the issue could easily end up in the Supreme Court. The idea is to treat such amounts as if they were insurance proceeds. It is a wise idea for legislation to copper bottom this though!
Let me know if I am too obscure?

@Pat Donnelly
Theres a significant issue on future tax revenue (when we need all we can) here then it seems. Any thoughts on costs of same?

@ Brian Lucey
When construing statutory provisions, there are different rules for penal statutes. These are interpreted against the state and in favour of the accused or the taxpayer. That is because the state can enact new legislation to correct any perceived shortfall. There is no animosity in respect of amending tax law, from the point of view of the state: it is merely amended to redress the weakness or else a tax rate is adjusted upwards or inflation is allowed to increase, thereby automatically increasing tax take faster than the inflation. The state is regarded as never losing as it may make up the shortfall. Hence a desire to protect the citizen.

There are no real tax implications as currently we impose tax not on windows or hearths, as we did in the past. We impose it on vehicles etc. We also impose it on profits. There have been massive losses.

These can be carried back for up to 3 years in the event of a cessation of a business. Then tax paid to the state can be clawed back for the benefit of the creditors or possibly the shareholders, if the losses were not enough to wipe them out. But that requires a liquidation of the business if carried on by a corporate person. Given the amazing treatment of trade profits taxed at 12.5%, no one should be trading without incorporation.

If the trading continues (the modern conceit foisted by management upon shareholders who do not exercise wise control is that companies should be immortal, continuing onto obsolescence etc. An opm circus.) then the carry back is limited to one years previous profits, but in group situations they may be offset sideways.

But when losses continue, there is no tax advantage even when profits in earlier years were unjustifiably large, beyond that one year period. Given the nature of multi year projects it may be that the loss should be able to be carried back further than one year, but that is not the law when was in the tax office. Thus tax may have been paid on the earlier years profits, as ongoing projects require a booking of profit over their length, but if then losses occur that will only be paid back if liquidation occurs within a short three year period. This may have the effect of shortening corporate lives in recessions, that are actually depressions, as they will last long enough for cash requiorements to overbear the desire to continue a failing business. It also reduces government revenue.

The transfer of an asset to NaMa is a sale and the profit or loss is dealt with in the accounts of the vendor. Some land sales are of the capital of the business:banks need branches. Selling them is a capital transaction. A higher rate of tax applies than the 12.5% rate, but there is indexation relief if there is a paper profit. There may then be no gain at all. In respect of the stock of the bank loans and the assets secured thereon, they will be trade profits, by and large. But tax laws recognized that there was so much money to bemade from planning permissions an act of the state, that there are special regimes for the sale of development land. These attract I think, a 40% rate of tax. I hope someone will confirm or correct that. No indexation on the windfall gain only on current use value. Banks do not normally sell such land, so I doubt there is an exemption from this rule in the legislation. Sales of land will carry VAT also.

Sales to NaMa, even with a mark to market, may mean a profit. The securities fall to NaMa because other losses by the developer, not allowable for corporate profit purposes, say his/her private dwelling, yet some business assets show a profit. This will increase their liabilities in the bankruptcy of the developer…..

So overall, no joy for the executive there. As there will be deflation for the foreseeable, there will have to be legislative tax activity to redress falls due to that and to the massive holes in VAT and PAYE revenue as corporate activity declines.

I daresay the Revenue will deny it but the loss of the sub-contractors employed in the building and ancillary industries will affect income taxes only slightly as most did not bother with formalities. It is not an easy activity and there are no barriers to entry. So it is not perhaps too unfair, My grudge is with the likes of those gangers who later pop up as builders, having rorted, Aussie word, the tax system but not passing on much to their workers.

I am aware that you think there is some scope for evasion/avoidance, Brian, but could you be more clear? As I said on the Obama initiative, the resources angle is crucial. Employment in the Revenue is definitely justifiable as extra hands will bring in more revenue, but policy is to tread lightly on action against the thieving classes. A rising tide etc. There will eventually be tax marches as in 1979, but there will be plenty of mayo dressing as this fish is well rotted in the head! The current policy is to spend less rather than to tax more. That will change, sadly when the economy is less well placed to pay.

The major source of taxes evaded will be traceable through the banks, but thankfully, they will not be state controlled, due to NaMa. I recall that the ACC was state controlled and was happy to shaft the Revenue for DIRT, albeit on a smaller scale than the AIB.

Wow am I tired! Thanks I enjoyed that!

Pat
Excellent – have you thought of getting onto one of hte newspapers to do an analysis / op ed piece on the tax?
Im not sure i think there is scope for evasion, just erosion…

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