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LI needs dose of trust and capital.

Simultaneously cursed and coveted, the real estate industry continues to play an enormous role in Long Island's economy, comprising as much as one-third of the economic activity in the bicounty region.

It is as much part of our economic fabric as high-technology, defense and tourism and it cannot be ignored by anyone who lives and works on an island of 2.7 million people.

As a result, if there is any hope of pulling Long Island out of one of the more painful recessions in recent memory, a cure will have to be found to restore strength, trust and vitality back into the national real estate market. To do so will require monetary leadership that, heretofore, has been lacking on Capitol Hill, the Treasury and the Federal Reserve Board.

But failure to act could allow real estate values to fall to the point where it could literally break the back of the nation's economy and certainly deepen the pain on Long Island.

To understand where we need to go, one needs to understand where we came from. The national debt in 1980 stood at $1 trillion. A decade later it had grown to $3 trillion, with a number of analysts blaming this debt as the sole reason for our current troubles.

But the reality is a bit more complex than simple debt. As a result of the 1986 Tax Reform Act, Congress effectively devalued $7 trillion worth of commercial real estate by 30 percent. Inadvertently, they put another $2 trillion anchor on the economy by destroying what had been a safe investment for banks, pension funds, insurance companies and individuals. The economy promptly head south at near sonic speeds.

The original logic behind the 1986 tax reform act was an effort by Washington to drive capital out of real estate and into the stock market where companies were expected to recapitalize, buying new plants and equipment and preparing for new world markets. As usual, Washington's timing couldn't have been worse.

The 1987 stock market crash rumbled across the nation and money driven into the market disappeared. Companies that Congress had hoped would retool were happy just to stay alive while the real estate market was bled white under the changed ground rules.

For Long Island, the crisis became even more complex. For example, the Shoreham aftershocks continued to deliver one rate increase after another -- prompting many an energy consuming company to flee the region. Meanwhile, an increasing number of commercial tenants began closing down and literally leaving their offices at midnight. In the process they left their landlords with rent arrears that toppled some office buildings into bankruptcy. Others began to refuse to pay property tax pass- alongs - further threatening the economic base of government, business and the region.

Some landlords, desperate to attract any tenant at any price, began renting below the cost of carrying the building, setting the stage for future financial disaster.

Combine these forces and Long Islanders may begin to understand why over a third of the region's economy is being pushed into Chapter 11. With revenue down, and no other sources of capital available to landlords and investors, it is believed that 75 percent of the major commercial buildings in Nassau County are now in receivership.

Yet < the retreat into bankruptcy for these major regional centers of commerce is not even a partial solution. Bankruptcy creates enormous economic wreckage for the region, rattling confidence in the business sector, leaving vendors and suppliers in debt and further stressing the banks that must now assume management of hundreds of thousands of square feet.

The arrival of the RTC on the scene is the economic equivalent of injecting a corpse with antibiotics -- to little too late and at an enormous cost to the taxpayer.

Already the strategy of allowing banks and buildings to fail is proving a disastrous course as what had been projected as an expense of several billion dollars is now over $100 billion and projected to top $500 billion. The RTC, charged with recovering the assets of failed banks, has become history's most expensive undertaker with the taxpayer as the pallbearer.

What is required is a drastic fiscal policy change that would restore sanity to the real estate market and solvency to the taxpayer's pocketbook. One such strategy would allow for the recapitalization of the commercial real estate industry throughout the country but especially on Long Island.

The mechanism for such a program would be federally issued mortgage backed bonds. With limited tax exempt status, a 4 percent interest and 90 percent of the instrument guaranteed by Washington, these bonds would be available to refinance perhaps up to one third of the existing mortgage on an existing commercial property. Half of the bonds would be held by the present lender and the other half sold to the public. Implementation of such a recapitalization program would have as dramatic an effect as FDR's first 100 days in office.

The result would be that banks and insurance companies would become "liquid" again, with one-sixth of their real estate investment portfolio becoming cash and one-sixth government-backed bonds as a portion of their first mortgages are acquired. These institutions would be able to begin pumping some several hundred billion dollars back into the nation's economy, making loans to sound, profitable businesses who have been redlined by the economy. And this program would provide just enough breathing room needed to return value to real estate investments so crucial to the region's economic base.

It's time America got on with the process of healing its gaping economic wound. Let's be honest with ourselves in admitting all the money spent to date on coping with the failures of banks, savings and loans and commercial property have been little more than burial costs. These are dollars lost to the economy -- trillions of dollars spent that have saved no jobs, provided no investment, sparked no new industry, created no new competitive advantage for the United States.

Through intelligent recapitalization we can begin to end the cardiac arrest that is contorting the face of America. We can restore the investment confidence of millions of people who thought real estate was as sound as a Treasury note. And we can begin to break the ice jam on credit that is threatening to end the livelihoods of tens of thousands of Americans. But it will take new, innovative programs if we expect to make a substantive difference in turning our economy around.
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Title Annotation:Insider Outlook; Long Island
Author:Rodolitz, Gary
Publication:Real Estate Weekly
Article Type:Column
Date:May 6, 1992
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