Throughout the years, our industry has faced legislative challenges, many of which have been fought at the local and state levels. It’s easier to understand the issues that impact us in our backyard, yet a national battle is brewing that will impact everyone in the commercial real estate development industry – and it is happening at a time when our economy is struggling to create jobs and our industry is mired in a severe downturn. The battle is over carried interest.
If you aren’t familiar with it, carried interest, also known as a "promote" or "promoted interest," is the interest on the long-term capital gain in a real estate partnership that is given to a general partner in return for the risk of pursuing and completing a real estate project. Legislation passed by the House of Representatives on May 28 re-characterizes these gains as ordinary income, doubling the tax on carried interest from 15 percent to 30 percent in 2011, with an increase to 35 percent in 2013. Why is this so important to our business?
A general partner in a real estate venture is "at risk" for not only capital contributions to the partnership, but also for all partnership liabilities, such as environmental contamination and lawsuits. A commercial real estate development takes years – from initial concept to opening – and this makes compensation earned at the end of the project unlike a salary earned through regular employment.
Today, it is a good bet that the general partner is also personally guaranteeing construction completion and payment of debts. Our current economy makes new development difficult, from securing new financing to securing tenants. Never before have the risks been greater and the challenges more daunting. Adding an additional tax burden to an already stressed industry may be considered "low hanging fruit" inside the beltway, yet the real danger lies well outside the beltway – in our communities.
The commercial real estate community has a strong ally in the U.S. Conference of Mayors, which recently adopted a resolution to keep the treatment of carried interest exactly as it stands today.
Elizabeth Kautz, president of the U.S. Conference of Mayors and mayor of Burnsville, Minn., described the proposed legislation as, "an urgent concern for all American communities." As Kautz stated, "Our objective is to make sure that our cities continue to be vital…we simply cannot have even more barriers created by Congress or state legislatures that impact the vitality of our communities. This legislation will affect every industry cluster – from developers down to building contractors, roofers, carpenters, plumbers, electricians…everybody."
I believe that NAIOP members have made a difference thus far by communicating our concerns about the legislation, and will continue to do so by demonstrating the real impact that this legislation has on the fundamental underpinnings of our industry and our economy. We pride ourselves on the entrepreneurial spirit of risk taking and innovation that are central to long-term growth and prosperity. This proposed legislation is a "body blow" when we can least afford it.
Across the board, NAIOP members have been actively contacting their elected officials, with thousands of letters flooding offices on Capitol Hill. If you haven’t already done so, I encourage you to have a discussion with your local elected officials about this proposed legislation and the negative impact it will have on the commercial real estate community.
Let your officials know the impact this legislation has on our communities. This legislation, while primarily targeted at hedge funds and private equity funds, has serious impact on our industry and future job creation. The unintended consequences are devastating.
Finally, please continue to support NAIOP’s legislative efforts. We have a talented and well-respected team on Capitol Hill that has been advocating for all of us since this issue surfaced in 2007.
The power of our national efforts will be greatest when we all become involved in this issue – an issue that reaches well beyond the Washington beltway and lands squarely on Main Street.