CRE Groups Race To Fight Tax Plan That Would Be Like ‘Dropping A Bomb On The Business Model’

A major real estate tax break has emerged as a key bargaining chip among Republicans assembling a budget that will cut taxes and slash spending, and CRE industry advocates are flocking to Capitol Hill to try to protect the deduction.

In a letter to congressional budget committee members this month, the largest commercial real estate trade groups banded together to lobby for the survival of the corporate state and local tax deduction commonly known as the corporate SALT deduction. 

“When somebody puts something on the table that's so devastating that it’s like dropping a bomb on the business model that we have, you can't be quiet,” said Sharon Wilson Géno, president of the National Multifamily Housing Council, a signatory to the letter.

Changes to the SALT deduction were included in a list of potential budget cuts that leaked out of a House of Representatives budget committee in January, compelling this month’s response from industry groups.

Eliminating the deduction for corporations would raise roughly $310B over ten years, according to the memo from the House Ways and Means Committee. But industry groups, led by The Real Estate Roundtable, warned that the impacts would be devastating. 

“It would lead to insolvencies and foreclosures, and it would cause self-inflicted injury to the U.S. economy, including unnecessary job losses, pressure on rents for families and individuals, and other inflationary cost increases for American consumers,” the groups wrote in the letter. 

The SALT deduction allows individuals and corporations to deduct local taxes paid from their federal tax bill. It's capped at $10K for individuals but has no upper limit for corporations, making it especially popular for companies in high-tax states.

State and local government policy varies widely, but in general property taxes account for roughly 40% of the operating expenses for U.S. commercial real estate businesses, according to the National Council of Real Estate Investment Fiduciaries. 

Eliminating the corporate SALT deduction would effectively increase property owners’ taxes by a similar amount, according to the Roundtable.  

The end of the tax cut was floated as part of negotiations for the broader tax bill expected to extend most of the changes put in place during President Donald Trump’s first term, with congressional Republicans huddling at the White House this week to hammer out their differences. 

Phillips Hinch, vice president of tax policy at the retail landlord trade group ICSC, said the end of the deduction would effectively erase any tax breaks companies saw from the 2017 Tax and Jobs Act in Trump’s first term. 

“They would probably be worse off, and we’ve been communicating that to lawmakers” Hinch said. 

The ranking members of both parties at the House Ways and Means Committee and the Senate Finance Committee didn’t respond to Bisnow’s request for comment.

Eliminating the corporate SALT deduction is just one of five potential changes to that specific tax policy floated in the leaked memo.

Two proposals would see the SALT deduction expanded for individuals, which could add as much as $500B in lost revenue, while the most aggressive cut would repeal the deduction altogether. That would raise $1T over 10 years, injecting much-needed revenue to offset the tax cuts that Republicans are looking to extend and potentially expand. 

“It's a big number, and we know that they are looking for what we call ‘pay fors’ in the system,” Wilson Géno said. “Anytime you have a big ‘pay for’ that somebody puts on the table, it looks juicy.”

The letter to lawmakers was signed by 18 of the industry’s leading trade groups, including the American Hotel & Lodging Association, CCIM Institute, Mortgage Bankers Association, National Association of Realtors and National Association of Home Builders.

The Real Estate Roundtable, a lobbying group made up of executives from top commercial real estate firms, sent the letter to members of budget committees in both the House and Senate. CRE industry advocates have been meeting with lawmakers on Capitol Hill in recent days. 

The response reflects concern from within the industry that the proposed end of the SALT deduction is more than political grandstanding and has real potential to make it into a Republican budget. 

“Sometimes policy ideas pop up, but they don't necessarily go anywhere. This one is definitely something we are considering very real,” Hinch said. “It seems to definitely have legs with some members of Congress.”

The change would further batter the commercial real estate sector, which was among the hardest-hit by the pandemic. High interest rates, insurance prices and operational costs are weighing on owners of all types of assets, and industry advocates say ending the deduction would be adding insult to injury. 

Proposals to eliminate the corporate SALT deduction have mostly been floated in recent months by members of the House Freedom Caucus, the far right wing of the Republican party, many of whom want to keep the individual deduction — or even increase it — and pay for it in part by eliminating the corporate deduction. 

But Wilson Géno said she thought lawmakers were starting to understand the negative implications of ending the corporate deduction. She met with lawmakers this week on Capitol Hill, and said that, despite her efforts, she wasn’t able to find out which lawmaker even suggested the idea in the first place. 

Getting rid of the corporate deduction is anathema to the promises Trump made on the campaign trail to lower costs and make housing more affordable, Wilson Géno said. It would amount to a massive increase in operational costs for multifamily owners, likely driving up rents and stifling development. 

“To do something like this would really fly in the face of what he's already stated is an important agenda item,” she said. “Ultimately, Congress passes taxes, but the President's got to sign the bill.”  

Commercial real estate investors would also get stung by the end of the corporate SALT deduction. Deals have been underwritten with certain financial metrics baked in, and a massive increase to federal taxes would threaten to undo their financial viability, Hinch said.  

Nareit, the industry group representing global REITs, also signed The Real Estate Roundtable letter. The group felt compelled to warn lawmakers about the potential “deleterious consequences” of eliminating the corporate SALT deduction, a spokesperson said in an email.   

“This approach is entirely at odds with taxing the profits of a business,” the spokesperson said. “It would result in numerous negative consequences, including job losses, pressure on rents, stress on the banking system, and reduced housing construction.”