Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/818922
54 • May 2017 • Western Real Estate Business www.REBusinessOnline.com WREB 'S LEGAL EAGLES WEIGH IN From a new presidential administration, to NIMBY concerns, and the proliferation of small fitness studios, the West's top legal experts explain what you should have on your radar in 2017. TRUMP, REAL ESTATE AND THE CHANGES THAT COULD LAY AHEAD By Donna Holm, Senior Tax Manager, Sensiba San Filippo in San Jose, Calif. While President Trump was ex- pected to reveal his tax reform plan at a Joint Session of Congress on Feb. 28, he ultimately remained focused on short-term wins. With the repeal and replacement of Obamacare as a clear priority, we may not see the full tax package until summer. His plan for tax reform may remain unknown, but it is estimated that this plan may carry a $7 trillion cost. So, what compromises will take place as Congress wrestles with how to pay for these changes? For the real estate industry, there could be substantial benefits on the table. Pass-Through Entities Many real estate investors utilize pass-through entities in their forma- tion. Therefore, the possibility of an entity-level tax reduction would ben- efit the real estate and construction industries. The proposals include a flat 15 percent entity-level tax on rein- vested earnings, or 25 percent entity- level tax for active business income. The business cash-flow tax is gaining support in Congress. Corporate Tax Rates Both the House and the President support the integration of corporate and shareholder taxation (one level of tax vs. current double taxation). Trump's plan would lower corporate tax rates to 15 percent and eliminate corporate alternative minimum tax (AMT), while the House would low- er rates to 20 percent and eliminate AMT. Additionally, there will likely be a one-time 10 percent repatria- tion tax to encourage U.S. companies to bring back funds and profits held oversees. The House Ways and Means Com- mittee also favors a border adjustment tax (BAT) — a 20 percent tax on im- ports into the U.S., while eliminating taxes on U.S. exports. This could add $100 billion a year in new tax revenues. Many credits and deductions would also be eliminated, including the widely utilized Sec. 199, Domestic Production Activities Deduction. Carried Interest Trump has been vocal about clos- ing the carried interest "loophole." His plan would eliminate capital gain treatment, thus subjecting asset man- agers to an ordinary tax rate on their performance and incentive-based re- turns. The House has been silent on this issue. Like-Kind Exchanges Established in 1921, IRC Sec. 1031 allows for tax-free exchanges of like- kind property. Sellers of commercial real estate, including Trump, use this for deferral of taxes, which account for an estimated 30 percent of annual vol- ume. This could be a target for elimi- nation, and its repeal would affect the entire industry, including lenders, title services, real estate agents, etc. Depreciation and Interest Expense Changes to depreciation lives and interest deductibility could also affect real estate. Proposals include chang- ing useful lives of property and lim- iting interest deductions. One plan enables expensing tangible and intan- gible property at the time of construc- tion, or in the year of purchase offset with a loss of corporate interest ex- pense deduction. This change would generate large net operating losses to be carried forward, as carrybacks would end. The House plan would not provide an "elect out" provision, while the Trump plan would. Additionally, the deductibility of mortgage interest is at stake, which could affect real estate and construc- tion. This may sway taxpayers toward rentals rather than home ownership. Investment in Infrastructure Trump wants to boost the economy by upgrading the nation's infrastruc- ture. Beneficial for both real estate de- velopers and construction companies, the capital markets have responded positively to this initiative. Trump is proposing equity financing from private investors in exchange for tax credits. With a President who can attribute a large portion of his net worth to real estate, there are several proposals that could greatly benefit the industry. Un- fortunately, these proposals will be weighed with eliminations needed to pay for tax reform. With results un- known, it's important to closely moni- tor these proposals as they unfold in the coming months. DOWNSIZING: THE PROLIFERATION OF SMALLER TENANTS FOR LANDLORDS By Zach Siegel, Associate, and Tal Diamant, Shareholder, Brownstein Hyatt Farber Schreck LLP in Denver Retail landlords consistently face new challenges to their rent streams and delivery of promised investor returns. Although tenant trends are frequently short in duration and dif- fer from submar- ket to submarket, retail leases should ensure landlords maintain the flex- ibility to adapt to changing market dynamics. The pro- liferation of smaller operators is a prime example of a retail leasing trend that is challenging landlords to think dif- ferently about the makeup of a shop- ping center. Another trend to consid- er is the shift away from traditional retailers from the perspective of lease drafting, specifically in the context of prohibited uses. With these key issues in mind, a landlord must ulti- mately have an eye toward the future to maintain the flexibility necessary to respond to emerging trends and ensure an attractive tenant mix at its shopping center. Proliferation of Smaller Operators Many of today's traditional big- box retailers struggle to keep pace with new economic demands. Sports Authority, for example, closed all of its stores following Chapter 11 bank- ruptcy in 2016 and, in January, Macy's announced it would shutter 68 stores nationwide. As these and other large anchor tenants experience declining sales, smaller tenants with more spe- cific clientele have become some of the most attractive concepts for a shop- ping center. The health and fitness space, once dominated by large health clubs and gyms (e.g., 24-Hour Fitness and Bal- Holm Siegel Diamant W H A T ' S B U G G I N ' Y O U ? Pest Control for Professionally Managed Properties OFFICE RETAIL INDUSTRIAL RESIDENTIAL Eco-Friendly Solutions | Serving Southern California Pest Control Pigeon Control Termite Control Rodent Control Bee Control Gopher Control 1.877.522.2377 | www.AccessExt.com