By Scott Lynn
The Texas Battle Cry rang loudly in my ears as my colleagues and I meandered through Downtown San Antonio traffic on our way to the Texas ICSC and Deal Making Conference. To my surprise, stationed at the front gates of the Alamo, were a group of squatters waving “Occupy America” banners. CNN said these guys were occupying Wall Street…not a shrine to Texas Independence where fearless patriots sacrificed their lives!!!
As if a slow economy, zero job growth and nervous capital markets haven’t wreaked enough havoc on the commercial real estate industry, now we’ve got this so called “Occupy Movement” with their hands out grabbing for a slice of American Pie by going after the pockets of the wealthy, the entrepreneurs and the risk takers. Sounds like a frontal assault on the CRE business.
The battle flag of these Occupy Buccaneers reads “Tax Carried Interests.” The core belief of the Occupy Movement is to reduce the national deficit by increasing revenues. The “Carried Interest” is the share of profits that is paid to the sponsor or manager of the partnership. Carried interest profits are taxed at 15%…the current capital gains tax rate. The Occupy Movement attack plan includes increasing the tax rate on carried interests to 35%…the highest marginal income tax rate. Yikes!
It is estimated that over 40% of the existing private investment partnerships are real estate investment partnerships. A change in the carried interest tax rate would decimate the commercial real estate investment business, not to mention thousands of existing partnerships and entities that own commercial real estate.
How could these rebels propose something so unjust! After all, the carried interest is the way a partnership compensates the sponsor, developer or manager for taking the enormous risks associated with a real estate deal, such as operational shortfalls, construction delays, loan guarantees and environmental concerns. Moreover, it is these very real estate entrepreneurs we are relying on to get building and creating jobs so we can all get out of this mess! A pay cut doesn’t sound like a good solution coming from the very movement that seeks a pay increase for themselves via more entitlement programs.
HEAR YE, HEAR YE!! TO ALL Able-Bodied CRE developers, property owners, leasing agents, sales brokers , financiers , capital providers , title companies and every other soldier that touches our industry. The winds of war on the carried interest issue are not likely to pick up until after the 2012 election. However, now is the time to build the defenses by loading the muskets of political action committees allied with our battle cry, “Give Me No Increase to Carried Interest Tax, Or Give Me Death.”
Remember The Alamo!!!!!