The Post-election Outlook for CRE

By Aquiles Suarez

NAIOP’s Government Affairs staff held a post-election webinar for our chapter executive directors, presidents and government affairs committee chairs to discuss what we believed would be the impact of the 2016 elections on NAIOP’s public policy agenda and the commercial real estate industry. The following is a summary of the major issues covered:

Tax Reform: While running as a candidate, President-elect Donald Trump’s tax reform plan had broadly stated goals of substantially lowering tax rates, including on businesses, while expanding the tax base by eliminating existing preferences and “loopholes” in the current tax code. Specificity was lacking, however, as to whether certain provisions affecting our industry would be maintained, and therefore questions remain as to where tax reform legislation could lead. Such questions include whether tax deferred, like-kind exchanges for real estate (also known as Section 1031 exchanges, for the relevant IRS code section) will be continued; whether depreciation of real estate assets would be radically altered (including replacing the current system with immediate expensing of buildings); and whether the interest on business borrowing would remain tax-deductible. On these issues, the Trump administration will be negotiating primarily with House Speaker Paul Ryan and House Republicans, who have put forth their own tax policy agenda.

Candidate Trump was specific on one tax matter important to NAIOP, saying that he would eliminate capital gains tax treatment for so-called “carried interests” (also known as a “carry”, “promote” or “promoted interests”), an issue that has been on NAIOP’s agenda for several years. Changing the tax treatment of carried interests from capital gains to ordinary income would have resulted in more than doubling the taxes on many real estate partnerships under the current tax code, creating a disincentive for many potential entrepreneurs who would not undertake the substantial risk involved in a real estate development project as a consequence. But under Trump’s proposed tax plan, businesses would have a reduced income tax rate of 15 percent, which Trump has said will also apply to partnerships. Depending on other changes to tax rates brought about by the final legislation negotiated through Congress, the net impact on our industry of eliminating capital gains tax treatment for carried interest may be substantially less than under the higher-tax regime contemplated under the prior code.

Comprehensive tax reform is a top priority for both the president-elect and House Republicans, and will be the focus of legislative activity in the first 100 days of the new administration, during which time NAIOP’s advocacy and involvement of its membership will be critical.

Infrastructure: Candidate Trump promised to spend $1 trillion over the next decade on infrastructure investment. How this will be paid for is unclear, because the source that the Trump campaign identified (revenues gained from repatriated overseas corporate earnings) has also been identified by House Republicans as needed to pay for lower tax rates. As a result, many expect much of this to be financed through borrowing, increasing the federal deficit. Trump has argued that lower interest rates provide an opportunity for the nation to invest in infrastructure, so increased borrowing may not deter him. But it will cause friction with deficit-hawks in the House. Thorny issues will arise in the debate, including increased use of private-public partnership (“P3s”) for infrastructure projects, as well as Republican efforts to provide relief from Davis-Bacon prevailing wage requirements.

Energy: NAIOP has always promoted responsible, sustainable commercial real estate development. To that end, we have worked with elected officials and their staff in congress to ensure that legislation promoting energy-efficiency building codes for commercial buildings included requirements that these be economically and technically feasible. Legislation sponsored by Senators Rob Portman (R-OH) and Jeanne Shaheen (D-NH) included language negotiated with NAIOP, but failed to make it out of a Senate-House conference prior to the election. Candidate Trump promised an aggressive push on expanding energy production, and to the extent that any energy legislation advanced by the new administration affects energy-efficiency building codes, NAIOP will be active in lobbying on behalf of the industry.

State and Local: Beyond lobbying our lawmakers at the federal level, the policy decisions reached at the federal level will have repercussions on NAIOP chapter advocacy efforts at the state and local level. For example, the fact that advocates for stricter energy-efficiency commercial building buildings will find it more challenging to attain their goals through federal mandates means they will increasingly shift their advocacy to passing local ordinances that achieve the same goals. We have already seen these efforts begin in earnest in major cities such as Denver and Orlando. Similarly, national housing groups unhappy with federal funding are calling for cities to look to commercial real estate fees as a revenue source to build affordable housing. NAIOP chapters will face increased challenges as a result.

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