2A — January 12 - 25, 2018 — M id A tlantic
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Mid Atlantic Real Estate Journal
Mid Atlantic R eal E state J ournal Publisher, Conference Producer ......................................Linda Christman AVP, Conference Producer . .................................................Lea Christman Associate Publisher ................................................................Steve Kelley Associate Publisher .................................................................. Kim Brunet Senior Editor/Graphic Artist ................................................ Karen Vachon Office Manager ..................................................................... Miriam Buttrick Contributing Columnists ........ Revathi Greenwood; Rachel Greenleaf and Kristen Burgers, Hirschler Fleischer; Ronald Diskin, Ronald DiskinAssociates Corp. Mid Atlantic R eal E state J ournal — Published Semi-Monthly Periodicals postage paid at Rockland, Massachusetts and additional mailing offices Postmaster send address change to: Mid Atlantic Real Estate Journal, 350 Lincoln St., Suite 1105 Hingham, MA 02043 USPS #22-358 | Vol. 30, Issue 1 Subscription rates: $99 - one year, $148 - two years, $4 - single copy
CRE Implications of Tax Reform in The Great Tax Race C Revathi Greenwood ushman & Wakefield announced today the release of The Great Tax Race, a research report on the impact of proposed tax reform legislation on the U.S. commercial real estate sector. Cushman & Wakefield anticipates that a version of tax legislation reform has an 80% chance of enactment by year-end 2017 with immedi- ate implications for financial reporting. The final ver- sion hinges on negotiations between the U.S. House of Representatives and Senate. Some proponents claim that proposed tax cuts will lift real, annual GDP growth closer to 3% from the approxi- mately 2% that has prevailed during the current expan- sion. However, most of their analyses do not consider the likely effects of tax reform on a higher-than-expected tra- jectory for interest rates or the impact of higher levels of debt that deficit-financed tax cuts will entail. When these are factored in, estimates of the GDP growth boost range from 3 to 9 basis points per year over the next decade. “While tax reform may have a modest impact on real GDP growth, overall, commercial real estate is a winner, though some sub- sectors fare better than oth- ers,” said Revathi Green- wood, Cushman &Wakefield Head of Americas Research. “Negotiations between the House and Senate will have a significant impact on pass- through entities’ passive investments, more so under the House version, which provides substantial benefits for in vestors. Multifamily looks to be a winner – at the ex- pense of single-family resi- dential – especially in states and municipalities with high state and local taxes. The retail and industrial sectors should see modest benefits, while the office sector will see minimal impact.” How tax reform legislation affects different aspects of commercial real estate: • Investment and capital markets: The majority of
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direct U.S. CRE investment, 61%, is held by pass-through entities – only 9% is held by corporations. Another 29% is held via direct or indirect tax-exempt entities. Passive investors in pass-through entities are likely to ben- efit substantially from lower rates under the House plan, but their eligibility for tax deductions is limited under the Senate proposal by wage provisions. REITs and pub- licly-traded partnerships, however, would be eligible for the full deduction without regard to the wage limita- tion. Should the Senate pro- posal be enacted, expect to see a shift over time towards REITs, as well as conversions to corporate structures. • Office: Corporations will be big beneficiaries, likely seeing a net tax cut of $400 billion over 10 years. But it’s anticipated that the tax cut will be preferentially used to return capital to sharehold- ers or reduce debt, rather than to increase corporate spending. There may be a modest pick-up in M&A ac- tivity leading to real estate consolidations. As currently constructed, the legislation likely will mitigate inversion and relocation risk for mul- tinationals, which may boost office demand in the U.S. • Retail: The retail sector pays the highest effective corporate tax rate of any sector of the U.S. economy and indeed the world—at or close to the maximum 35%. This is thought to under- mine retail’s international competitiveness as well. A lower corporate rate might encourage foreign retailers to invest more in their U.S. operations, larger corpora- tions and consumers with larger tax savings to spend more and retailers to in- vest additional capital in their own businesses and employees— all favorable
outcomes for the industry. Furthermore, about 98% of retailers are small busi- nesses with 50 employees or less who would directly ben- efit from special provisions for small businesses such as higher eligibility limits for cash accounting, favorable pass-through provisions and higher expensing provisions. • Industrial: We expect similar, modest positive im- pact on eCommerce, perhaps industrial’s key driver. Apart from benefitting from the corporate tax rate reduction, eCommerce also benefits from full expensing that is geared towards industrial business/capital goods/man- ufacturing. “Passage of tax reform legislation will prompt re- structuring and short-term market flux as investors adapt to a new regime,” said David Bitner, Cushman & Wakefield Head of Capital Markets Research. “A lot of the structuring around CRE transactions is dictated by the need to minimize taxes. Sweeping changes in the tax code could be the cause of material value leakage, and players in the industry are likely to respond by chang- ing their behaviors and tax structures to minimize tax exposure. Disclaimer: This press re- lease and the report ref- erenced is not intended to provide tax advice. Any tax information provided in this document is not intended or written to be relied upon for tax planning purposes. You should seek advice based on your particular circum- stances from an independent tax advisor. Cushman & Wakefield is a global real estate services firm with 45,000 employees in more than 70 countries helping occupiers and inves- tors optimize the value of their real estate. n
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