Basel III Capital Accords
The Basel III standards could have a significant negative impact on lending by banks to the commercial real estate sector. Several aspects of the standards would have harmful effects on the availability and cost of credit to commercial, multifamily, and single-family residential real estate borrowers and to the U.S. economy as a result.
Basel III Capital Accords
Capital and Credit Availability
Advocacy
Congress must ensure capital and credit markets meet the current and future needs of the commercial real estate industry. Strong oversight is needed to ensure that the actions of various financial regulators do not unfairly discriminate against the commercial real estate industry, or have unintended negative consequences on the availability of credit for real estate development.
Capital and Credit Availability
Carried Interest
A “carried interest” (also known as a “promoted interest” or a “promote” in the real estate industry) is a financial interest in the long-term capital gain of a development. The “carried interest” is given to a general partner (GP), usually the developer, by the limited partners (LPs), the investors in the partnership. It is paid if the property is sold at a profit that exceeds the agreed-upon returns to the investors, and is designed to give the developer a stake in the venture’s ultimate success. This serves to align the interests of the GP with the investors by allowing the GP to share in the “upside” of the real estate venture. It also serves to compensate the GP for the substantial risks taken during development of the project and during the period prior to sale of the property. Carried interest has traditionally been treated as capital gains income taxed at favorable capital gains rates.
Carried Interest
FASB Lease Accounting Proposals
On August 17, 2010, the Financial Accounting Standards Board (FASB), an independent body that establishes accounting standards for the private sector that are recognized by the Securities and Exchange Commission as authoritative, issued an Exposure Draft detailing proposed changes to standards governing how landlords and tenants account for their leases. The proposed changes are intended to increase transparency for investors by, among other things, requiring that the full long-term payments associated with the leases be shown on the balance sheet of the tenant as liabilities. Renewal options and contingent rents would be included when calculating liability under lease agreements. Operating leases would be capitalized and represented as current liabilities. Under the Final Rule, the standards for public companies must be implemented by 2019.
FASB Lease Accounting Proposals
Internet Sales Tax
Learn about the issue of internet sales tax and its possible impact on commercial real estate.
Internet Sales Tax
Like-Kind Exchanges
A like-kind exchange or “1031 exchange” refers to section 1031 of the U.S. Internal Revenue Code. This section provides that capital gains taxes can be deferred in cases of exchanges of property held for productive use in a trade or business or for investment, provided the properties exchanged are comparable (“of like kind”). When the taxpayer ultimately sells the asset, the tax is paid. In commercial real estate, the provision encourages transactions because it enables investors to overcome the “lock-in” effect of tax rules, allowing them to remain invested in real estate while shifting resources to more productive properties or changing geographic locations.
Like-Kind Exchanges
New Markets Tax Credit Program
The New Markets Tax Credit (NMTC) Program was established in 2000 as part of the Community Renewal Tax Relief Act of 2000 and aims to foster revitalization efforts in low-income and impoverished communities across the United States. The NMTC Program provides tax credit incentives to investors for equity investments in a certified Community Development Entity (CDE) whose primary mission is to invest in low-income communities. The credit equals 39 percent of the investment paid out over seven years: 5 percent each year for three years; and 6 percent in the final four years. The NMTC program has been used in conjunction with local efforts to spearhead redevelopment efforts, including commercial real estate development, in many areas.
New Markets Tax Credit Program
Qualified Improvement Property
The 2017 Tax Cuts and Jobs Act intended to allow businesses to depreciate investments in Qualified Improvement Property, such as interior improvements to a building’s interior, over a shorter period than allowed under prior law. However, a drafting error in the legislation forces property owners to take these deductions over a much longer period of time than was intended.