Washington, D.C. – Throughout the economic downturn over the past two years, real estate has remained a stabilizing force. Congress and the White House must recognize its importance in revitalizing the nation’s economic fortunes during the coming year.
In a year when stock prices plunged, real estate provided a safe haven for many investors and residential real estate values increased sharply throughout many regions. Existing home sales, as well as new housing starts and refinancing, provided a sharp contrast to the economic woes hitting the rest of the country.
Though the performance of commercial real estate was generally not as strong, especially in certain regions, it continues to offer a strong vehicle for future economic growth. With President Bush signing into law the new terrorism risk insurance act late last year, much of the uncertainty has been lifted surrounding financing of commercial real estate and new projects.
For these reasons, BOMA International members have called on Congress to include real estate in the economic stimulus legislation that Congress and the White House have expressed as their highest legislative priority in 2003. At BOMA International’s recent Winter Business Meeting and National Issues Conference, over 250 commercial property professionals educated members of Congress on real estate’s tax recommendations, including the reduction or elimination of capital gains and amending the tax code as it relates to the depreciation of leasehold improvements to more accurately reflect the average life spans of tenant improvements. Specifically, BOMA advocates decreasing the current 39-year depreciation period to 10. BOMA believes that this would stimulate the economy in the short term and strengthen the economic engine for the long term.
Fortunately, the 107th Congress passed and President Bush signed two important tax law changes in 2002 that will help the industry. The first was a tenant improvement provision included in the $42 billion stimulus package passed early in 2002 that allows 30-percent depreciation bonus for qualified capital investments, such as tenant improvements. However, this bonus depreciation will expire in September 2004. The second provision extended the carry-back period for net operating losses generated in tax years 2001 and 2002 from two years to five years.
So what can we expect in 2003? A number of potential tax changes have been included in the stimulus bill proposed by the President and introduced in Congress at the start of the 108th Congressional session. The Democrats have also introduced a stimulus package, but one that differs significantly from the President’s. Tax simplification proposals may also be introduced that likely would range from sweeping reforms such as a flat tax or consumption tax to graduated changes that would include short- and long-term reforms to the tax system.
Options included in the stimulus package submitted by the President are sure to occupy a great deal of the debate early in the session. They include acceleration of the tax cuts included in the 2002 stimulus legislation and are scheduled to become effective in later years; making the measures included in the 2002 stimulus legislation permanent; increase in the depreciation write-offs for capital improvements; a new round of tax cuts primarily targeting middle-income Americans, but also including some business tax relief; and elimination of the double taxation of dividends.
As these options are considered, BOMA International has recommendations of its own that it has requested Congress consider. Along with permanent changes to the leasehold depreciation rules, BOMA is advocating that Congress extend the 30-percent depreciation bonus in the 2002 stimulus bill past the September 2004 expiration date. In addition, BOMA continues to advocate for elimination or significant reduction in the tax on capital gains. These measures would help energize a commercial leasing market that is not expected to recover as quickly as other sectors of the economy.
Congress should also consider extending the brownfields clean-up cost-expensing rules passed in 2002 and scheduled to expire by 2004. This is needed to continue the return of valuable commercial property in or near central business districts to the marketplace.
Finally, BOMA would like to see Congress include tax incentives to promote energy-efficient construction and upgrades to existing buildings. This is the most cost-effective way to encourage additional energy efficiency in this sector, and BOMA has long encouraged the inclusion of tax incentives for energy efficiency. Energy use in buildings represents almost one-third of all energy use, making increased energy efficiency of commercial buildings important to reduce America’s dependence on foreign oil and the long-term economic and environmental health of our nation.
So why should Congress listen? The real estate industry has the capacity to move the economy like few other sectors. Real estate is a major contributor to the economy, representing 20 percent of GDP, providing nearly $300 billion annually in federal tax revenues, and 70 percent of local government tax revenues. The performance of commercial real estate has historically been a key driver to economic growth in the long term and can do so again with help from Washington.
For more information on the issues discussed in this column, visit BOMA International’s website (www.boma.org) or call (202) 408-2662.