BOMA Intl.'s annual North American Commercial Real Estate Congress and The Office Building Show® once again brought the approval of new policy statements for the association's advocacy efforts on Capitol Hill. The three new statements approved by the Board of Governors were on the issues of carried interest tax treatment, federalization of building codes, and energy-performance metrics.
Taxation of Carried Interest
BOMA Intl. supports maintaining current law that taxes the carried interest of a general partner in a real estate partnership as a capital gain. BOMA Intl. opposes altering the tax code to require carried interest to be taxed as ordinary income.
Carried interest is the percentage of the profits offered at the end of a successful real estate deal as an incentive to the general partner to help make the investment prosperous. It is considered compensation for the "sweat equity" and risk that the general partner is assuming as part of a real estate deal, and is paid out at the end of the deal only if it's successful. Concern over how carried interest is taxed caught the real estate industry's attention in the first half of the 110th Congress with the introduction of legislation by Rep. Sander Levin (D-MI), a member of the tax-writing Ways and Means Committee. Levin's bill (HR 2834) would require carried interest in all partnerships to be taxed as ordinary income. Currently, carried interest receives the same treatment as a capital gain, which is currently taxed at the 15-percent rate.
As is often the case, the legislative process can have unintended consequences affecting industries or individuals it initially did not mean to impact. In this case, Rep. Levin's attempt at tax fairness means that every type of partnership, including a commercial real estate partnership, is affected. Increasing the tax on carried interest in a real estate partnership would significantly hamper the entrepreneurial activity that builds communities, provides housing, creates jobs, rehabilitates neighborhoods, and grows our economy. Consequently, it was necessary for BOMA Intl. to add carried interest as one of its top legislative priorities. It is now advocating before Congress the negative impacts that a tax increase on carried interest would have on the commercial real estate industry.
Federalization of Building Codes
Also approved by the Board of Governors is a new policy statement regarding federal involvement in the development of national model building codes. The policy statement supports development of model building codes through a consensus process that encourages participation by all interested and affected parties within well-recognized and generally accepted and accredited organizations. It also confirms BOMA's support for the adoption of model codes by federal, state, and local authorities that have been fully vetted through this consensus process, and opposes federal legislation that would preempt the consensus process and "federalize" the model code development process by putting the federal government in the role of code developer. Also included is the opposition to efforts by Congress to mandate adoption and enforcement of specific model codes at the state or local level.
Recent proposals in Congress that would ultimately preempt the well-established consensus model code development process by mandating the development of these codes by federal regulatory agencies (and to also mandate the adoption and enforcement of these codes by state and local governments) helped trigger the development of this new policy. The latest example of this can be seen in energy legislation passed by the House of Representatives in August that would require the U.S. Department of Energy (DOE) to not only update the national model building energy codes and standards at least every 3 years, but also prescribe energy-efficiency targets that the codes and standards would have to meet. If enacted, the DOE's authority in this area would trump the consensus model code development process.
With climate-change issues front and center on the Congressional agenda, there is a strong likelihood that different regulatory programs to reduce carbon emissions, such as cap and trade programs, will be seriously considered.
If credits get established in the future, BOMA members need to be able to show what they are doing and what they have already done. Identifying an industry metric is critical to this process. In addition, BOMA would push to have any measures of a given building or portfolio's "improvement efforts" be measured not against "themselves," but against the average building in ENERGY STAR® (i.e. comparing against a building scoring 50 on the ENERGY STAR rating and the corresponding consumption measure to that 50 rating). This ensures that top-performing buildings and companies are not penalized, and further creates potential for greater value creation in a carbon-trading model.
For information on this and other issues, call BOMA Intl. at (202) 408-2662 or visit (www.boma.org).