GRAND RAPIDS — Although a formal GOP tax reform bill has yet to be introduced, executives in the commercial real estate industry are already expressing concern.
In particular, sources worry that any possible reform could include the removal of the 1031 Exchange, a tax loophole that allows real estate investors who sell a property to reinvest the proceeds into a similar, “like-kind” property and defer any tax payments.
At a panel discussion in Grand Rapids hosted by the West Michigan chapter of the Turnaround Management Association, commercial real estate executives noted that 1031 deals have been a major driver of industry activity as of late, specifically with regards to the returns investors expect to see, known as capitalization rates.
“1031 money is out there for sure. It drives our cap rates,” Jordan Jonna, an executive at A.F. Jonna Development LLC, a Bloomfield Hills-based firm focused on retail shopping centers in Southeast Michigan. “It drives our investments today. If you sell a property, you’ll be a little more aggressive in buying another one simply to roll your dollars and not pay tax. It makes common sense.”
The concerns expressed Jonna and others underscore the broader challenges inherent in tax reform, where each interest group has its own part of the code it wishes to preserve.
“Tax reform is going to make health care look like a piece of cake,” Sen. Bob Corker, R-Tenn., told reporters earlier this week, according to CBS News.
To that end, the National Association of Realtors (NAR), a Washington D.C.-based trade association for residential realtors, has already come out firmly opposed to the plan at least based on the early framework that’s been released.
The NAR, for its part, believes that any plan would likely lead to increased taxes on millions of middle-class owners and could likely disincentivize future homeowners.
“We have always said that tax reform — a worthy endeavor — should first do no harm to homeowners. The tax framework released by the Big 6 (this week) missed that goal,” NAR president William E. Brown said in a statement.
Depending on how any legislation gets put together, some economists believe there could be some bright spots for the construction and real estate industries.
“Construction would benefit from a plan that encourages more investment, brings home to the U.S. more investment,” said Ken Simonson, chief economist for the Associated General Contractors of America, an Arlington, Va.-based construction industry trade group.
“It’s going to have very mixed effects though,” Simonson said, adding that it’s unclear which industries would decide to invest their tax savings and what they might build as a result.
Locally, most commercial real estate brokers believe any major overhaul of the tax code — particularly an elimination of the 1031 Exchange — could have a chilling effect on real estate investment.
That’s according to Craig Black, an associate broker focused on multifamily apartment investments at Grand Rapids-based NAI Wisinski of West Michigan.
“Bottom line is, if 1031s go away, it will definitely impact the trades in the multifamily industry,” Black said. “If you can defer the taxes, it makes a much better investment.”