2012 election outcome could affect CRE stimulus legislation

The outcome of the 2012 election could have a substantial impact on legislation that is meant to stimulate the commercial real estate market and bring it out of its current doldrums. Investors looking to utilize the benefits provided by the current soft demand and low prices can utilize 1031 exchanges in order to lower their taxes on the sale of commercial property.

Many market participants are hoping that the results of the 2012 election will help to move along legislation that is aimed at bolstering the ailing market, according to National Real Estate Investor. There are currently various proposals whose passage would affect taxes, funding and regulations affecting commercial real estate.

The National Association of Realtors (NAR) is focusing on three areas which it feels are critical, the media outlet reports. The three areas include supporting small business loans, improving the liquidity that banks have available and assisting distressed borrowers.

The media outlet reports that the NAR is has expressed its support for a key provision contained in H.R. 1147, The Community Recovery and Enhancement Act of 2011. The component offers investors in distressed properties up to 50 percent bonus depreciation or $10 million, whichever is less. In order to qualify for the one-time bonus, a minimum of 80 percent of the equity investment must go to reducing the total debt burden, with the remainder going to improving the property.

The association also endorses a provision of H.R. 1723, the Common Sense Economic Recovery Act of 2011, which would allow commercial borrowers who are making their payments on time to extend the term of their loan instead of refinancing, according to the media outlet.

Although these two proposals could be highly beneficial to the commercial real estate market, the consensus coming from Washington lawmakers is that nothing will happen in 2011.

"We don’t expect to see any sort of broad change of key issues until the election is over a year from now, which just means more uncertainty during the entire election cycle and less confidence," Ed Padilla, chief executive of Northmarq Capital in Minneapolis, told the media outlet. "For us, it is less about the detail issues, such as whether you believe in the flat tax and how carried interest will be impacted [-} that list of issues goes on and on....The hope is to at least get from absolute dysfunction to something better, and maybe we can at least start moving forward on some of these issues after the election."

While the slim likelihood of acting on these proposals in 2011 may be discouraging, owners of commercial real estate can still benefit from the current market and use 1031 exchanges to realize tax benefits when selling one property and purchasing a replacement property.

A property owner can sell a building in one market and then use the proceeds to purchase a property in an area with lower prices. The primary benefit of setting up a 1031 exchange with a qualified intermediary such as Strategic Property Exchanges, LLC would be deferral of taxation. Selling one property and then buying another in a way that qualifies as a like-kind transaction would allow the owner to retain all the equity held in the original property.

Keeping all the equity that was held in the original building would allow the individual to utilize less leverage when purchasing the replacement property. This debt reduction would lower both interest costs and also debt payments. Reducing debt payments is especially helpful, as they are paid out of operating income, which can be taxed at rates up to 40 percent.

An individual who needs his commercial property to conduct business could engage in a reverse 1031 exchange, which would permit him to purchase the replacement building and then sell the original property without having to work within the time constraints that accompany traditional 1031 exchanges.