On May 5, 2010, I was lucky enough to join the CCIM Institute, Louisiana CCIM, and IREM Chapter 55 representatives in conjunction with Louisiana REALTORS® in our descent onto Capitol Hill to meet with our Congressmen and Senators to discuss pertinent issues affecting our commercial real estate markets, clients, and interests. During this visit, we were able to meet with both Mary Landrieu (Dem.) and David Vitter (Rep.) and also with representatives from each of Louisiana’s seven congressional districts, including Steve Scalise (Rep.), Charlie Melancon (Dem.), John Fleming (Rep.), Bill Cassidy (Rep.), Charles Boustany, Jr. (Rep.), Rodney Alexander (Rep.), John Fleming (Rep.), and Joseph Cao (Rep.) along with their support staff and legislative liaisons. It was an enlightening and productive trip, and although we may have not immediately succeeded in lowering capital gains taxes for now and for good, we were able to discuss our position as commercial real estate practitioners on the following 2010 legislative priorities.
Capital Gains- Capital gains are currently taxed at a maximum rate of 15%, but in case you have been living under a rock, the 2001 Bush Tax cuts are set to expire at the end of 2010, and will revert back to 20% or higher as of January 1, 2011. Congress should encourage real estate investment by recognizing inflation and a tax differential in the calculation of capital gains from real estate, while stimulating economic investment, and consequently leveling the playing field for those who choose to invest in commercial real estate. IREM and CCIM Institute strongly support legislation to continue the capital gains rate at 15%. Increasing the capital gains rate would be especially detrimental to our industry at this time in our economy.
Carried Interest- As mentioned in last week’s article, a carried interest is designed to act as an incentive for a general partner to maintain and enhance the value of the real estate so that the operation of the property is a value-added proposition. The carried interest has historically been taxed at capital gains rates, just as the limited partner’s gains are taxed at capital gains rates. IREM and CCIM Institute urge Congress to oppose an increase to the tax treatment of carried interest for real estate partnerships. The real estate sector is facing an economic crisis. Making changes that would further hinder the flow of capital into real estate markets will prolong the weakening of our economy.
Leasehold Improvements-Although this issue is currently addressed in a package that subsequently raises taxes on carried interest it must be addressed regarding practicality. The permanent law 39-year recovery period for interior building improvements and build-outs is not economically realistic. Neither the leases nor the improvements are likely to last that long especially considering most commercial leases max out at five or ten year terms. A realistic cost recovery period, such as 10 or 15 years, provides an incentive for building owners to upgrade and improve their space. IREM and CCIM Institute urge support for legislation to extend the 15-year recovery period for leasehold improvements, and seek opportunities to make this provision permanent.
Term Extensions-As you may already know the next commercial real estate crisis is looming as many commercial loans are coming due. According to sources it is estimated that over the next five years, about $1.4 trillion in commercial real estate loans will reach the end of their terms and require new financing. Nearly half are “underwater,” meaning the borrower owes more than the property is worth. For properties that can support their current debt, a simple loan extension makes perfect sense. Most commercial loans are short term and refinance frequently. Instead of requiring a refinance at the end of a loan term (and having to deal with the equity gap), lenders could be encouraged to extend the term of the current loan. IREM and CCIM Institute ask Congress to urge the Federal Reserve and Treasury to provide guidance and encouragement to lenders on term extensions.
Accelerated Depreciation-Improved cash flow for investors/owners of commercial real estate would help to fend off some of the challenges the market faces. The most effective means of improving the cash flow on real property is to provide more generous depreciation allowances. We believe that some combination of accelerated depreciation (or shorter recovery periods) and passive loss relief would be significant investor incentives. IREM and CCIM Institute urge support for an accelerated depreciation model that will incentivize new investment in performing properties.
Mortgage Insurance-Commercial real estate loans are generally short-term sometimes even less than five years. The problem commercial properties are having is that when they go to refinance an existing loan, there can be a significant difference between the current appraised value of the property and the debt currently serving the property. A mortgage insurance program would not insure the entire value of the loan, but instead would offer insurance on the difference between the current value and the debt service on performing properties. IREM and CCIM Institute support a short-term insurance or guarantee program limited to performing properties, to cover the equity gap.
Carmen has been a practicing commercial real estate broker with Saurage Commercial Real Estate since 2001. She is a graduate of the Louisiana State University (LSU) E.J. Ourso College of Business and the LSU Flores Masters of Business Administration (MBA) Program with a specialization in Entrepreneurship and Real Estate Finance Her experience includes past employment as Regional Director of Leasing at Commercial Properties Realty Trust the for-profit arm of the Baton Rouge Area Foundation. Carmen’s affiliations include Louisiana REALTORS®, Greater Baton Rouge Association of REALTORS® Commercial Investment Division, International Council of Shopping Centers, Commercial Real Estate Women, Certified Commercial Investment Member Institute, National Association of REALTORS®, and Urban Land Institute. She is also an active volunteer on the board of directors for the Baton Rouge Gallery, LSU MBA Alumni Association, Junior Achievement of Baton Rouge, and the Junior League of Baton Rouge.
Saurage Company, Inc dba Saurage Commercial Real Estate was founded in Baton Rouge in 1991 with the purpose of providing exceptional real estate services with an emphasis on commercial property and property management. Saurage Commercial Real Estate offers to its clients a full range of real estate services including brokerage, investment advising, development consulting, REO disposition specialists, asset management, fee based consulting, tenant representation, and buyer representation. The staff of professionals includes combined experience of 50 years, as well as CCIM Designees and Candidates and recipients of Master of Business Administration.