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CRE Industry Cheers Trump’s Proposal to Cut Corporate Tax Rate, But Wants More Details

Neither a border adjustment tax, which would have a significant impact on the retail sector, nor changes to the way carried interest is taxed, which would affect real estate partnerships, were mentioned in the new plan.

The Trump administration unveiled the initial tenets of its tax reform plan on March 26, via a press conference held by Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn. But with specific details on the plan’s finer points few and far between, the initial response from the commercial real estate industry has been muted.

"It’s an outline, it’s not a plan,” says Martin Schuh, senior director and head of government relations at CRE Finance Council (CREFC), a trade association representing the commercial real estate finance industry. "We don’t know to what extent this would affect commercial real estate. The real test is going to come in Congress.”

The debacle that happened around the attempt to pass the American Health Care Act of 2017 makes industry insiders wary of the tax reform’s future, according to Steve Harding, CFO of commercial real estate services firm Transwestern.

According to the details of the plan that have been made public, commercial real estate investors might benefit from a lower corporate tax rate. With the objective to “make U.S. business the most competitive in the world,” Mnuchin said the new tax plan would reduce the “complicated and uncompetitive business rate” of 35 percent to 15 percent for corporate taxes. The estate tax is also on the chopping block, and if eliminated, could impact succession planning at family-owned real estate firms.

Schuh notes, however, that "15 percent is optimistic. My guess would be the tax rate settles in the low-20s."

In addition to the changes to the corporate tax rate, Mnuchin stressed the president’s goal of making a territorial system for taxing U.S. businesses, so that U.S. companies will pay taxes only on income made in the United States. This could potentially impact real estate firms with holdings overseas. Mnuchin also cited a one-time tax on profits made internationally, but the details on that measure are still being worked out.

Neither a border adjustment tax, which would have a significant impact on the retail sector, nor changes to the way carried interest is taxed, which would affect real estate partnerships, were mentioned in the discussion of the new plan. However, Mnuchin asserted that the administration’s tax plan would eliminate high income tax loopholes in general.

“Dropping corporate tax rates from 35 percent to 15 percent should spur investment by corporations; investment in people, plants and equipment. That would obviously be good for commercial real estate as companies would need more space,” notes Harding.

He adds that among the most pressing concerns for the industry would be the tax rate for pass-through entities such as partnerships and LLCs. Under the current tax code, the entities themselves are not taxed, and the taxes are paid by the partners at individual tax rates as high as 39.6 percent.

“A lot of real estate is owned in those structures, and if the Trump proposal includes a plan to tax those entities at 15 percent that would be a dramatic change in how income is taxed from partnerships and LLCs,” Harding says. He would also want to know what tax rate would apply to brokers who use LLC structures and receive commission through the LCCs.

The tax plan could be a “windfall” for real estate and investment finance industries (such as hedge funds and real estate funds), according to Marc Landis, partner at Phillips Nizer LLP, a full-service law firm. This would be due to both the lower effective tax rate for investors and because the proposal would get rid of the Affordable Care Act tax on investment income.

However, the tax plan, if passed, also has the potential to be a double-edged sword. “We don’t know how this tax cut will be paid for,” Landis says. “If the Feds need to borrow to cover an expanding deficit, interest rates will rise.”

A focus on reducing corporate taxes without raising offsetting revenue could lead to higher interest rates than would otherwise be the case, according to Heidi Lerner, chief economist at real estate services firm Savills Sudley. A reduction in the corporate rate by 20 percent corresponds to a $2 trillion reduction in federal revenue over the next 10 years, she notes, citing the Joint Committee on Taxation data that shows each percentage point cut in the corporate tax rate brings federal revenue down by about $100 billion over a decade.

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