A Report from Wayne Caplan on Commercial Real Estate Political and Regulatory Issues

Wayne Caplan

As Council Chair of Political and Regulatory Affairs, the time has come for an update on some of the current issues facing the commercial real estate industry.

There are many issues to discuss at any given time.

While we are to a large degree paralyzed as far as anything getting resolved until after the November Presidential election, below is information on three of the more important / questioned items at the present time.

1.       The 3.8% TAX

Firstly,  there have been several requests out there for clarification on the 3.8% Tax that will be implemented as part of the Affordable Care Act (aka “Obamacare”, or ACA).

While there are a number of new taxes buried within the ACA, this particular tax has been falsely labeled as a tax on all real estate sale transactions (commercial and residential).

This is not the case, as it is an investment/income based tax, not one based on a given real estate transaction. However, there are ramifications to this tax, specifically to higher income earners.

This, in addition to a potential capital gains tax increase (which will happen if the Bush tax cuts expire at years end as scheduled) could be a reason for some investors/property owners to unload commercial property before the end of calendar year 2012, especially if they are not going to engage in a 1031 tax free exchange.

Below is a link to NAR’s description of the 3.8% tax for anyone who would like some clarification:

http://www.realtor.org/topics/health-care-reform/the-38-tax-and-health-care-reform

2.       Lease Accounting Standards

The Financial Accounting Standards Board (FASB) and their international counterpart (IASB) has proposed eliminating all operating leases, forcing companies to capitalize their lease liabilities on their balance sheets.

This change, if it goes into effect, would create large devaluations of all companies, big and small, with any leasehold exposure, not to mention greatly affect the length of lease terms that corporations are willing to commit to. All in all, this would have dire ramifications on both the leasing and investment sales parts of our brokerage businesses.

Below is a link to ICSC’s public policy page discussing this matter which has lots of links and discussion on the subject.

http://www.icsc.org/government/gr_issues/issue_details.php?s=5

While NAR, ICSC, and other real estate trade organizations have, if nothing else, delayed and clouded this potentially harmful new policy, it is still expected to be implemented in some fashion.

There cannot be enough discussion on this item with our elected officials and regulatory community.

3.       Sales Tax Fairness

The Main Street Fairness Act to level the playing field on sales tax collection between on-line and physical retailers has seen lots of progress.

There are bills in the House and Senate to ensure that physical retailers are able to fairly compete with on-line retailers.

While we all have enjoyed tax-free internet shopping, most people agree that traditional retailers are being endangered by on-line retailers having the advantage of not having to charge sales tax in many instances.

Below is a link to ICSC’s page on Sales Tax Fairness, and where it stands to date.

http://www.icsc.org/salestaxfairness/index.php

Prairie Spark Investment Forum

Recently I had the privilege of attending a special presentation by entrepreneurs of their business plans to a group of qualified investors. This was at the third annual Investment Forum Sponsored by Prairie Spark and Eastern Illinois University held at Sara Bush Lincoln in Charleston. I must say I was impressed. Not only with the people and the companies that were presenting but with the whole event. Here was a meeting of both business people with their ideas for start ups but also investors who could write checks if they decided to do so! There was also a group of high school students who were allowed to attend the event because of a special program they are enrolled in through their High School in Effingham. So here I was like a fly on the wall watching entrepreneurs make a case for investment in their businesses, investors diligently studying each presentation and students from high scholl drinking it all in! I was blown away! Would that every community could have such synergy between the business comunity, the educators and the banking and investment folks. I think that the are doing realy great things down in Effingham, Matoon and Charleston. Maybe there is something in the water. If so I want to drink the kool-aid! If you would like to learn more click www.eiu.edu/~cei