Developers Need To Stay On Top Of These 4 Federal Legislative Issues
Legislation at the federal, state and municipal levels can adversely affect commercial real estate development as much as market fluctuation, supply and demand or labor. Sperry Van Ness Chicago Commercial SVP Wayne Caplan pinpoints four pieces of federal legislation that can result in a downturn in commercial real estate, if developers aren't vigilant.
1. 1031 Like Kind Exchanges
Wayne (SVN's council chair of political and of regulatory affairs, Illinois Association of Realtors commercial committee appointee, and National Association of Realtors board of directors/commercial legislative & regulatory committee member) says the House and Senate have proposed repealing Section 1031 in recent years. President Obama’s FY 2015 budget also proposed limits on the deferral provisions of Section 1031. None of these proposals progressed and it won't be taken up in an election year, but if tax reform plans are introduced in the next Congress, they will borrow heavily from previous ones and will take years to accomplish. Section 1031 is important because it defers taxes when you move the proceeds from one deal into another. Wayne says 70% to 80% of the transactions he’s involved with involve a 1031 component.
2. FIRPTA Reform
The Omnibus Appropriations Bill passed in December included an amendment sponsored by New Jersey Sen. Bob Menendez and Wyoming Sen. Mike Enzi (shown) that makes it easier for foreign investors to put skin in real estate through REITs without having to pay taxes under FIRPTA. It’s a modest provision but Wayne says the legislation erodes the inequity of tax treatment that FIRPTA established. This would result in billions of dollars of additional investment in US real estate from foreign investors with no extra taxes coming in.
3. Marketplace Fairness
Two bills introduced in Congress last year, the Marketplace Fairness Act co-sponsored by Illinois Sen. Dick Durbin (pictured) and the Remote Transactions Parity Act, would create authority for state governments to collect sales taxes on Internet sales for goods that are delivered to their states, which would level the playing field between online retailers and their brick-and-mortar counterparts. Republicans have been fighting this for years, but Wayne says real estate developers have an unlikely ally in Amazon, which is now charging taxes in states where it previously wasn’t.
4. Lease Accounting
Wayne says one of the reasons Enron collapsed as quickly as it did was its off-balance sheet liabilities, such as synthetic leases. The International Accounting Board and US Financial Accounting Standards Board have called for a standardized approach to lease accounting and more transparency for items that should be on a company’s balance sheet. One goal: declaring operating leases as capital leases. If that happens, it can decrease the value of a company, prevent a firm from borrowing, and destroy the value of commercial real estate as tenants won’t sign long-term leases. A decision on new standards is coming out at the end of the month, and FASB is expected take a different approach from IAB that will mitigate the impact of capitalizing operating leases.