Tax / Finance

The Basel III standards could have a significant negative impact on lending by banks to the commercial real estate sector. Several aspects of the standards would have harmful effects on the availability and cost of credit to commercial, multifamily, and single-family residential real estate borrowers and to the U.S. economy as a result.

Congress must ensure capital and credit markets meet the current and future needs of the commercial real estate industry. Strong oversight is needed to ensure that the actions of various financial regulators do not unfairly discriminate against the commercial real estate industry, or have unintended negative consequences on the availability of credit for real estate development.

On August 17, 2010, the Financial Accounting Standards Board (FASB), an independent body that establishes accounting standards for the private sector that are recognized by the Securities and Exchange Commission as authoritative, issued an Exposure Draft detailing proposed changes to standards governing how landlords and tenants account for their leases. The proposed changes are intended to increase transparency for investors by, among other things, requiring that the full long-term payments associated with the leases be shown on the balance sheet of the tenant as liabilities. Renewal options and contingent rents would be included when calculating liability under lease agreements. Operating leases would be capitalized and represented as current liabilities. Under the Final Rule, the standards for public companies must be implemented by 2019.

Learn about the issue of internet sales tax and its possible impact on commercial real estate.

A like-kind exchange or “1031 exchange” refers to section 1031 of the U.S. Internal Revenue Code. This section provides that capital gains taxes can be deferred in cases of exchanges of property held for productive use in a trade or business or for investment, provided the properties exchanged are comparable (“of like kind”). When the taxpayer ultimately sells the asset, the tax is paid. In commercial real estate, the provision encourages transactions because it enables investors to overcome the “lock-in” effect of tax rules, allowing them to remain invested in real estate while shifting resources to more productive properties or changing geographic locations.

The New Markets Tax Credit (NMTC) Program was established in 2000 as part of the Community Renewal Tax Relief Act of 2000 and aims to foster revitalization efforts in low-income and impoverished communities across the United States. The NMTC Program provides tax credit incentives to investors for equity investments in a certified Community Development Entity (CDE) whose primary mission is to invest in low-income communities. The credit equals 39 percent of the investment paid out over seven years: 5 percent each year for three years; and 6 percent in the final four years. The NMTC program has been used in conjunction with local efforts to spearhead redevelopment efforts, including commercial real estate development, in many areas.

The 2017 Tax Cuts and Jobs Act intended to allow businesses to depreciate investments in Qualified Improvement Property, such as interior improvements to a building’s interior, over a shorter period than allowed under prior law. However, a drafting error in the legislation forces property owners to take these deductions over a much longer period of time than was intended.

Prior to the terrorist attacks of September 11, 2001, insurers did not specifically exclude losses stemming from terrorist attacks on industrial and commercial office buildings. At that time, only “acts of war” were excluded from coverage from most insurance policies. In the aftermath of the attacks, however, and with the subsequent conduct of the United States on the “Global War on Terror,” the insurance industry testified before Congress that future terrorist acts could be construed as acts of war not eligible for coverage under their insurance policies.