Will Tax Bill Eventually Deliver for CRE?
By Erika Morphy
December 17, 2010
The House of Representatives has sent legislation that extends the Bush-era tax cuts as well as several other business-friendly initiatives to President Barack Obama for his signature.
For the most part it is a mirror image of the $858-billion deal that passed the Senate earlier this week. The crux of the package extends the tax cut as well as unemployment insurance-along with a new 2% payroll tax reduction for all workers. Energy and other tax breaks that were expiring this year have also been folded into the package. Some House Democrats balked at the last minute, protesting a revision to the estate tax, which exempts families inheriting up to $10 million. Democrats did win some measures of their own, in the form of government spending on certain projects.
In the end, neither side was completely disgusted or totally enthralled by the bill, which has largely been pushed by the president and the Republican party. The Democrats see it as adding to the nation’s ever-growing national debt, but Republicans wanted the tax cuts to be made permanent instead of extended for two years.
For the real estate community as well as the debt and equity market, and particularly the residential market, the bill’s passage is a net positive, says Dennis Yeskey, senior advisor and leader of the commercial real estate practice at AlixPartners.
The bill cuts Social Security payroll taxes and extends jobless benefits, key tax credits and mortgage insurance deduction-basically, all of this means people have a little more money in pockets, he tells GlobeSt.com. “The theory is that consumers will spend that extra money which will help the residential real estate market, which has been really hurt by the downturn.” Also, in terms of commercial real estate, increased consumer spending will benefit retailers, which will help the retail real estate market and eventually industrial real estate.
Finally, Yeskey says, leaving capital gains rate the same through 2012 is very important to commercial real estate “very, very important. One of the reasons is that the rate on dividends will remain the same as well-the REIT market is really a dividend play and this has the potential to help the REIT market.” Also, the bill has extended bonus depreciation, says Harvey Berenson, managing director in the Business Tax Advisory group at FTI Schonbraun McCann Group in New York City. “The law also extends 15-year depreciation for qualified leasehold improvements. This will also encourage investment in rental property.”
The bill’s passage will also go far to improve the mood in the business community, which should help, observers say. In discussions with local real estate professionals, the primary benefit they see from the passage of this bill is the removal of a big near-term uncertainty, Edward F. Manzi Jr., chairman and CEO of Fidelity Bank, a Leominster, MA based community bank, tells GlobeSt.com. “Generally speaking, for the decision-makers in the real estate investment community, less uncertainty is better because they can complete analysis and move forward with more clarity,” he says.
Based on the overall dollars saved by the bill, it won’t promote new development in the commercial real estate industry, agrees Scott Spector, a principal at Spector Group in New York. “However, the perception will be very attractive to developers and end-users and this will help to provoke more much-needed activity across the industry.”
Perhaps the most intriguing-but also the most amorphous-benefit of the bill is its promise to increase employment. The package has been forecast to create 3.1 million jobs, Peter Cohan of Peter S. Cohan & Associates tells GlobeSt.com. Whether that is worthwhile from a fiscal perspective-those jobs are coming at a cost of $276,774 per job, higher than the $254,857 per job cost of the $787-billion stimulus bill-is debatable, he says. But from a pure commercial real estate perspective, those jobs will all require new office, retail and industrial space.
The bill just may push the economy towards the tipping point of businesses seeking to create jobs because demand is there for their products and services, Cohan adds. “We are not at that point yet,” he says. Even with a 9.8% unemployment rate, businesses are ringing up profits just fine.
But businesses may have to step up hiring if they want to save face-even if they haven’t reached the point of responding to growing demand. The 20 executives that met with President Obama this week promised that if the bill goes through they will be on the road to hiring people again, says Howard Hammer, of Fiske & Co., a CPA and consulting firm in South Florida. “I don’t see how it can’t help…the government is encouraging businesses to buy equipment, to grow, and that will require more employees and new hires,” he tells GlobeSt.com.