Focus: Commercial real estate industry worries over higher taxes as election looms

Brookfield Property Partners LP

28/10/2024 10:00

* 
      Industry seeks to preserve key tax breaks like
pass-through
deductions
    

        * 
      Campaign contributions from real estate, insurance and
finance
    

        * 
      sector favor Trump
    

        * 
      CRE faces $1 trillion debt, high delinquencies, and record
vacancies
    

        * 
      Key question for the industry is working out solution for
empty
office buildings 
    

        * 
      Many 2017 tax cuts are set to expire next year
    

  
    By Michelle Conlin
       NEW YORK, Oct 28 (Reuters) - The U.S. commercial real
estate industry is pushing for tax relief and incentives
championed by former Republican President Donald Trump to
continue in the next administration, as the sector struggles
with surging delinquencies, record vacancy rates, and elevated
costs of financing.
    Commercial real estate is especially vulnerable to higher
taxes because its high fixed costs make it less able to offset
them, according to industry trade groups. They said they are
particularly concerned about key tax breaks being retained or
left unchallenged in the coming years. 
    "'Do no harm' is the biggest thing with real estate
organizations," said David McCarthy, the managing director and
head of legislative affairs at the Commercial Real Estate
Finance Council, a nonpartisan trade group. "Given that the
nature of real estate is not super liquid, anything that raises
costs now would come at the worst possible time."
    Key measures that the industry is concerned about preserving
include pass-through deductions, like-kind exchanges and low
capital gains taxes. Trump has endorsed making his tax cuts
permanent although he has not been specific about these
measures. Many of his 2017 tax cuts are set to expire next
year. 
    So far, campaign contributions from the finance, insurance
and real estate sectors favor Trump, with $234.9 million
donations to the former president versus the $117 million in
giving to Vice President Kamala Harris, a Democrat, according to
data from politics money tracker OpenSecrets.  
        Industry trade group the National Association of
Realtors has also donated more to Republicans, with $5.2 million
to the GOP versus $3.9 million to Democrats.
    "Regardless of who is in office in January, we will be
dealing with the tax cuts ... expiring at the end of 2025, and
we want to keep those," said NAR director of commercial and
policy oversight Erin Stackley. 
    The Harris and Trump campaigns did not respond to requests
for comment.
    Among the real estate mega donors who have backed Trump are
budget hotelier Robert Bigelow's Bigelow Aerospace which donated
$14.2 million to Trump's Super PAC, the OpenSecrets data shows.
    Newmark Chairman Howard Lutnick's investment firm, Cantor
Fitzgerald, has given at least $6 million to the PAC. Lutnick
co-chairs Trump's transition team.
    Mega donors tied to real estate who back Harris include
Simon Property Group  SPG.N  heiress Deborah Simon, who has
donated at least $1 million, and Worthe Real Estate Group head
Jeff Worthe, who has also given at least $1 million, OpenSecrets
shows.
    Bigelow, Lutnick and Simon declined to comment. Worthe said
he supported being able to focus on "what's good for business,"
adding that he supported Harris because he wanted stability in
Washington. 
     
    TAX BREAKS 
    While some see signs of a market bottom, others argue that
the commercial real estate (CRE) industry needs time to recover
from high interest rates and work-from-home trends. Next year,
it will face $1 trillion wall of debt, a surge in office sector
delinquencies on commercial mortgage-backed securities to 11%
and record-high office vacancies in urban centers, according to
ratings agency reports. Falling interest rates may offer scant
relief.
    "Over the last 18 months ... operating costs have ... risen
dramatically at the same time the availability of capital and
credit have diminished," said Jeff DeBoer, CEO of the Real
Estate Roundtable, an invitation-only group whose members
include Blackstone, Brookfield Property Partners and Starwood
Capital Group. "All of that creates stress and challenges in the
CRE marketplace."  
    McCarthy said the industry specifically wants to see a
reauthorization of key provisions included in Trump's 2017 tax
cuts, including the 199A deduction, also known as the qualified
business income deduction. That is set to expire in 2025,
according to nonpartisan policy research group the Brookings
Institution. This allows owners of pass-through businesses and
partnerships, including CRE owners, to deduct up to 20% of their
business income from their taxable income. 
    Harris has not explicitly said, in campaign speeches and
filings, whether she will support the pass-through deduction,
though in her campaign documents she does state she would roll
back the 2017 Trump tax cuts for the richest Americans. Trump
said in speeches, interviews and campaign documents that he
would make tax cuts permanent, although it is not clear his
specific views on 199A.   
    Another measure of concern to the industry is 1031
"like-kind" exchanges, which enable real estate investors to
defer capital gains taxes by reinvesting proceeds of sales into
new purchases. Harris supports limiting this for high earners,
according to an analysis by the nonpartisan Tax Foundation based
on Harris's endorsement of President Biden's 2025 budget tax
proposals. Trump has not made clear specific views on 1031. 
    Capital gains tax rates are also of paramount concern.
    “When I talk to my members, the biggest concern they have is
what’s going to happen to the capital gains tax rate,” said
Aquiles F. Suarez, senior vice president for government affairs
at NAIOP, the commercial real estate development association,
whose members include top leaders from real estate firms such as
JLL and CBRE. NAIOP says it advocates for industry interests
rather than partisan politics. 
    Harris has proposed increasing the top capital gains rate to
28% for households earning more than $1 million annually from
the current rates, which range up to 20%. Higher capital gains
tax rates can discourage investors from selling properties,
reducing transactions.  
    Another key question for the industry is working out a
solution for empty office buildings across the U.S. 
    Adapting office towers into housing, a proposal that Harris
has supported, is an idea that will only be realistic for about
10% of the U.S.'s office stock, industry trade groups say. 
    Trump has not officially endorsed the idea of converting
offices into housing. 
    This is "the number one, two and three issue right now
because it affects the entire real estate market," said David A.
Nasatir, Chairman of law firm Obermayer Rebmann Maxwell & Hippel
LLP.

 (Reporting By Michelle Conlin; editing by Megan Davies and Nick
Zieminski)
 ((mailto:Michelle.Conlin@thomsonreuters.com; 646-223-5660;))