This week in New York, sister real-estate focused publication PERE held its inaugural CFO Forum, a day-and-a-half conference for senior private real estate finance, operations and compliance professionals. The event afforded these executives the opportunity to talk directly to their peers about the issues they face day-to-day, as well as directly question the investors, lenders and legal and regulatory experts who are impacting their roles in ever increasing ways.
On the first day of the event, Ryan McCormick, vice president and counsel at The Real Estate Roundtable, a Washington, DC-based industry advocacy group, provided an update on tax reform and tax policy developments affecting private equity real estate funds. At stake are such issues as the treatment of capital income, the taxation of foreign investors, pass-through tax rules, deferrals for like-kind exchanges and the taxation of investments by the tax-exempt sector.
On the capital income side, the biggest issue is the treatment of carried interest. McCormick noted that current legislative proposals seek to re-characterize any gain with respect to certain partnership profits as ordinary income. In addition, there has been some momentum towards rate equalization, whereby the need to finance a reduction in the tax rate of ordinary income has created pressure to eliminate or reduce the preferential rate on capital gains.
For foreign investors, the Foreign Investment in Real Property Tax Act (FIRPTA) continues to discourage inbound investment through a policy that McCormick called “punitive and discriminatory.” Legislation has been proposed to increase the tax-exempt cap on foreign investment from 5 percent to 10 percent, he noted. In addition, President Obama has proposed an exemption to FIRPTA for foreign public pensions.
Meanwhile, there is interest in repealing or modifying IRS Notice 2007-55, which McCormick said “changed the way that single-asset joint ventures were used for investments.” A return to the original rules would eliminate a number of difficulties faced by foreign investors, he noted.
“It is hard to explain to foreign investors why they are treated differently,” added Anthony Grimaldi, associate general counsel at TIAA-CREF, in a subsequent panel on tax issues.
With regard to tax rates on corporate versus non-corporate investments, there is a movement to extend entity-level taxation to public partnerships, large pass-throughs and other structures. Other proposals look to create a unified pass-through regime.
Unfortunately, much of this tax policy has been held up by the notion of broad-based tax reform. Currently, there is no separation between individual and corporate tax reform, so standalone tax bills have been put on hiatus, McCormick explained.
Whenever tax reform does occur, McCormick noted that the roundtable would support reforms that encourage capital formation, treat real estate consistently with other businesses, assure predictability for long-term investment through permanent rather than temporary rules and provide for a reasonable transition that minimizes dislocation.