The Obama Administration and many in Congress must think the commercial real estate market is riding high and we’re living in 2005. Why else would they want to more than double the taxation on commercial real estate partnerships? With unemployment pushing 10%, commercial real estate and the economy as a whole are still not out of the woods. Congress’ attempt to enact one of the largest tax increases on commercial real estate to offset temporary tax breaks is out of sync with what will actually help the country and the industry recover.
In its attempt to market solutions to the American public that prove it was "doing" something to help the economy while at the same time going after the "rich," the majority in Congress crafted the ironically titled "Providing American Jobs and Closing Tax Loopholes Act of 2010." H.R. 4213 included an extension of unemployment benefits, extension of increased funds paid to Medicaid funding through the Federal Medical Assistance Percentage (FMAP) program, and a tax "extenders" package that typically gets renewed on a yearly basis. The extenders package included a one-year extension of two popular real estate tax breaks: brownfields remediation incentives and the 15-year depreciation period for leasehold improvements. And to pay for all of this, Congress proposed to change the taxation of carried interest from a capital gain (15%) to that of ordinary income (nearly 40%). With other relatively politically palatable revenue offsets such as a payroll tax on some S Corporations and other foreign tax compliance provisions, the Democratic leadership thought the bill would be a slam dunk. They were wrong.
What resulted was an all-out grassroots assault on Congress from virtually every part of the commercial real estate industry opposing the bill. BOMA International, along with the International Council of Shopping Centers, NAIOP, the Commercial Real Estate Development Association, National Apartment Association, National Association of Home Builders, National Multi Housing Council and Real Estate Roundtable, activated members in every congressional district across the country requesting members to call and write their representatives and senators and tell them to vote "No" on the carried interest tax hike. If legislators thought the carried interest proposal was only a Wall Street matter and not one felt by "Main Street," they know better now. BOMA members responded with hundreds of calls and letters telling legislators that this tax hike would devastate real estate investment and development as well as kill jobs by deterring entrepreneurial risk taking.
This proposal would be felt in every city and county across the country, and local governments have taken note. Both the U.S. Conference of Mayors and the National Association of Counties have come out with policy positions urging Congress to maintain the current capital gains treatment of carried interest. Their members, especially those in less affluent areas, recognize what the commercial real estate industry means to their local economy in terms of jobs and tax revenue. In fact, BOMA International’s recent economic impact study revealed that spending on office building operations alone supports, either directly or indirectly, 2 million jobs across the country.
Ultimately, H.R. 4213 skated by the House of Representatives and made its way over to the more deliberate Senate. The Senate tried, and failed, three times to obtain the 60 votes needed to limit debate and proceed to an up or down vote on a modified version of the bill. Industry pressure resulted in both chambers modifying their initial proposals. The House bill taxes carried interest as 50% ordinary income and 50% long-term capital gains for two years, then moves to a permanent 25/75 split (25% long-term capital gains/75% ordinary income) with an effective date of January 1, 2011. The Senate’s most recent proposal treats 50% as ordinary income beginning on January 1, 2011 through December 31, 2012, and then 65% thereafter. The rate is reduced to 55% for carried interest which is attributable to the sale of assets held for seven or more years, reflecting some sensitivity towards the commercial real estate industry where most investments are long term.
What course the debate over carried interest takes in the coming months is anyone’s guess. What is certain is that Congress has a limited number of legislative days to work with and few will want to take a tough vote on such an issue as the November elections draw closer. That said, the commercial real estate industry must continue to be vigilant, as few things are more dangerous than a politician with nothing to lose. B
Ray Mackey, Jr., RPA, CPM, CCIM, is chair and chief elected officer of BOMA International and chief operating officer with Stream Realty. He can be reached at email@example.com.