America's economic crisis could insulate commercial real estate from at least one proposed legislative change that became a hot-button issue during the U.S. presidential campaign — an increase in the capital gains rate. Though the Democrats now control the White House and both houses of Congress, there's no appetite among lawmakers to boost the capital gains rate at a time when the U.S. economy is shedding jobs at an alarming rate.
However, The Employee Free Choice Act and tighter environmental rules that could place commercial buildings under Environmental Protection Agency regulation have a better chance at passing than before the November election.
Good news, bad news
During the campaign, president-elect Barack Obama supported an increase in the capital gains tax rate, which is applied to all gains on commercial real estate sales. Real estate lobbyists say the economic collapse virtually ensures that capital gains tax rates for investments held for at least a year will remain at 15% through 2009 and perhaps 2010, when they're set to increase to 25%.
“Because of economic worries, I think Obama will be easily persuaded not to do anything on capital gains next year other than to maybe lower the rate for small businesses,” says Jim Arbury, senior vice president of government affairs at the National Multi Housing Council in Washington, D.C. “He won't raise a lot of money from it because there aren't that many transactions going on.”
The outlook isn't as positive for the tax rate on “carried interest.” Usually, general partners who manage real estate and private equity partnerships are compensated with fees and a share of profits, typically “carried” with the partnership until partnership property is sold. Currently, carried interest is taxed at 15%. Past legislative proposals would have taxed it as ordinary income, hiking the rate to as high as 35%.
“Every time tax reform comes up, this will come up with it,” says Karen Penafiel, vice president of advocacy at the Building Owners and Managers Association in Washington, D.C. “There's going to be even less sympathy this time around because of what's happened on Wall Street.”
Arbury predicts the U.S. House of Representatives will pass carried interest legislation. “But the U.S. Senate has never voted favorably on this issue and had much more narrow legislation focused only at hedge funds,” he adds. “The Senate will take a much longer time than the House to look at this issue.”
Lobbyists' other worries
Though Obama and Congress may hold off on big tax increases, real estate lobbyists say the Employee Free Choice Act and environmental legislation also threaten the vitality of commercial real estate.
The Employee Free Choice Act, known as “card check,” would allow union certification if a majority of workers have signed union cards and there's no evidence of employee coercion. Opponents say it would result in fewer secret-ballot elections. The House passed the act last March, but Senate Republicans filibustered it in June.
“The House is going to pass card check overwhelmingly, as they did last year,” says Arbury. Because the Democrats don't have the 60 votes needed to cut off a filibuster, it will likely be significantly modified.
The main provision, which allows unionization without a secret ballot, may pass, but others may be tempered. Rather than requiring employers to submit to mandatory arbitration if they can't agree with the union on a contract, legislation may include stiffer penalties for employers that don't bargain in good faith.
Industry experts are also very worried about Obama's green economy plans. “That's one of the top issues we're very concerned about,” says Lisa Brechtel, commercial legislative and regulatory policy representative at the National Association of Realtors in Washington, D.C. “The signals are that Congress would like to regulate carbon monoxide emissions under the Clean Air Act, which means one million large commercial buildings would be subject to EPA regulation.”
A weak economy probably won't stave off stronger environmental regulations. “Climate change is now so caught up in green jobs creation and so many other facets of what the Obama administration wants to do with its economic stimulus package,” says Penafiel. “I don't think Obama will be addressing the economy first and then climate change. I think they'll be a little bit closer related.”
Now the waiting begins. “The economy is an evolving story,” says Brechtel. “It will play a very big role in how [Obama] proceeds with his agenda.”
HOT-BUTTON LEGISLATIVE ISSUES
The capital gains tax for investments held for more than a year stands at 15% for most investors. Under potential legislation, it could rise to 20%, or even 28%.
Carried interest is taxed at the current capital gains tax rate of 15% for most investors. Under proposed legislation, it would be reclassified as ordinary income, increasing the rate to as high as 35%.
The Employee Free Choice Act would allow employees to unionize if a simple majority of employees sign a union card. The U.S. House of Representatives passed it last year, but the Senate filibustered the legislation. Expect Congress to try to pass it again.
Environmental rules to govern carbon monoxide emissions, including those from commercial buildings, could land commercial buildings under Environmental Protection Agency regulation.
G.M. Filisko is a reporter and attorney based in Chicago who writes regularly on legal and real estate issues. She can be contacted at [email protected].