These asset backed loans are just regular loans with lower interest rates. So instead of getting $50M @ 11% they can get it at 4%. That's the extent of the "hack".
They then keep the ball rolling by refinancing at each expiry and just paying the interest (and hoping their assets maintain or increase in value)
Eventually those loans will need to be repaid and the money will need to come from realizing capital gains.
So if anything its a tax deferral scheme with a low interest rate and elevated liquidation risk. Which all raises the issue of being taxed twice on the same money. Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
I don't think any bank though is giving non-recourse loans for risky or depreciating assets (investors do that). It's usually for things that the bank is confident will be a good investment anyway if the loan goes sour - you default on the loan? Fine. But we keep the land.
Often they act as middleman, finding someone else that wants exposure to the startup when interest is oversubscribed.
Instead of two certainties in life being death and taxes, it's now death or taxes.
Uh, yes. But they can be repaid with refinanced loans based on the same assets... So no guarantee that the gains will be realized. And in the possibly long interim between loan issuance and maturity, the owner accesses liquidity via the asset and pays nothing in taxes.
Which all raises the issue of being taxed twice on the same money. Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
To clarify, I advocate that the loan issuance be a taxable event, where the cost basis of the shares are adjusted to the current price of the asset. So there would be no double taxation.
The interest on those loans is taxed as income which feeds back into the model.
Trivially fixed by simply letting you deduct the taxes paid when you took out the loan against the taxes owed when you actually sell.
While we're at it lets ban stock buybacks since all those are is a tax deferral scheme with utterly no other social purpose. Dividends are the correct way to distribute cash to shareholders. Full stop.
And get rid of stepped up cost basis on death - limit it to the IRS gift limit which is already ridiculously generous. Just to make it politically palatable so there are less sob stories about some "family" farm or company being force-liquidated to pay taxes.
So while it might be a feel good law, all it's doing is mixing around which cohort is paying up that year.
I agree that the step-up basis is pretty broken though.
I have assets that have a single cost basis of $1
they are now worth $100.
I take a loan secured against 10% of them. I have now taken a tax event against 10% of them.
I now pay taxes on a capital gain of $90 on 10% of them.
I now have an asset split into 2 parts. one with a cost basis of $1 (90% of my assets) and one with a cost basis of $100 (as I paid taxes on a capital gain to $100).
One can perhaps argue that when levaraging unrealized assets for loans, one always uses the lowest cost basis assets for determining taxable event, or perhaps first in first out of taxable events (and therefore paying tax, is an out then an in).