What A Unified Government Could Mean For CRE
The Georgia runoff elections for the U.S. Senate produced an unexpected result — a unified federal government under the Democratic Party at least until 2022.
While issues like the tax code, the future of opportunity zones and the future of 1031 exchanges were top of mind in the commercial real estate industry during much of the campaign, they aren't anymore, CRE executives say. Further relief for the economy, and for the industry, is front and center.
"Look for COVID relief and economic stimulus first, with tax reform, as mentioned in the Biden Tax Plan, put on the back burner until the crisis is contained," Capital Square CEO Louis Rogers said.
President-elect Joe Biden plans to immediately propose wide-ranging coronavirus-related stimulus and funding upon taking office, including substantial payments to individuals, eviction restrictions on landlords, payments to bail out state and local governments, and other matters dealing with logistics to expedite the vaccine rollout. Biden said last week he plans to unveil his plan Thursday.
Now that the Democrats have the upper hand in the Senate as well as the House of Representatives, elements of the HEROES Act will probably be revived and included in a new and much more robust stimulus package in the near future, consulting firm Tenant Risk Assessment CEO Bradley Tisdahl said.
"Joe Biden mentioned that the COVID relief bill that the president signed in December was a down payment on future stimulus," Tisdahl said. "Given the Democratic control of the government, it's now much more likely that there will be a more meaningful stimulus package. The relief act that was passed in December was fairly anemic, including from a commercial real estate standpoint."
Though the new relief plan is still being hammered out, some elements are fairly clear already. The package would include another $1,400 in direct payments to everyone. The president-elect has also called on Congress to take “prompt action” to raise the federal minimum wage to at least $15/hour.
In December, President Donald Trump signed a $900B stimulus bill that provided $25B for rental assistance, a relief measure that apartment landlords had been begging for since March. Most will be for households that are at or below 50% of their area median income, or households with members who have been unemployed for 90 days or longer. Households may receive assistance for 12 months, plus another three months if necessary.
The measure also added $300 to weekly unemployment benefits through March 14, and it authorized direct payments of $600 to most Americans. That might help some sectors of the real estate industry, since quick cash helps people with paying rent or buying from retailers. The bill also provided $300B for another round of Paycheck Protection Program small-business aid, along with cash infusions for schools, hospitals and vaccine distribution.
Last summer, the Democratic-controlled House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions Act, or HEROES Act, a $3 trillion stimulus package. The bill languished in the Republican-controlled Senate for the remainder of 2020.
The HEROES Act including more stimulus checks ($1,200 at that time) as well as extended unemployment, which would benefit CRE indirectly, such as by allowing renters to continue to make the mortgage.
More directly, the HEROES Act would have provided $175B to help Americans with rent, mortgage payments and utilities. Of this amount, $100B would have been for short- or medium-term assistance with rent and rent-related costs, while the other $75B would be allocated to homeowner assistance funds.
It is unlikely that the HEROES Act will be revived in its entirety, Tisdahl said, but it does illuminate the thinking of Democratic lawmakers. Direct rent relief would be especially welcome, he said.
Organizations that have pushed strongly for more assistance to landlords, such as the National Multifamily Housing Council, are cautiously optimistic about the prospect of direct relief for landlords.
“Regardless of the makeup of Congress, NMHC’s mission of advocating on behalf of our nation’s apartment industry stays the same," National Multifamily Housing Council Senior Vice President for Government Affairs Cindy Chetti said in an email to Bisnow.
"We look forward to working with the Biden-Harris administration and leaders in the House and Senate on our industry priorities," she noted. "[Those include] securing much-needed emergency COVID relief for the rental industry, housing professionals and our residents, as well as addressing the housing affordability crisis which the pandemic has just exacerbated.”
Individual sectors of the economy that have been particularly damaged by the pandemic are hoping that Congress will be open to more targeted relief.
"We're optimistic that the hotel industry will be receiving additional stimulus," Reveille Hospitality Chief Investment Officer Marco Roca Jr. said, though the specifics involved in supporting the industry are still unclear.
"The American dream is alive and well in the hotel industry," Roca said. "It would be unpatriotic to let the industry collapse, and there would be political ramifications."
In 2019, Roca pointed out, the hotel industry was responsible for more than one in 25 jobs in the United States. He added that a high proportion of hotel assets are owned by self-made entrepreneurs.
"Once there is an official transition of power, we believe that leadership on Capitol Hill and the White House will work together to pass a stimulus," Roca said. "That will assist the hospitality industry through the next few months until the COVID-19 vaccine is widespread."
Beyond the immediate prospect of a stimulus, further action by Congress is considerably more murky. Predicting what Congress will do even in the best of times is difficult.
Even so, CRE execs expect the newly Democratic Congress to push policy in directions mostly the opposite of what has happened during the Trump administration: higher taxes, more financial regulation, and stronger environmental, infrastructure and green initiatives.
Tax policy will be a hot-button issue later on. It is very likely that the ownership class, including commercial real estate owners, will face higher taxes in the coming years, possibly by canceling or rolling back the Tax Cuts and Jobs Act of 2017. That could be done without any Republican help, but it would require all 50 Senate Democrats to go along with it, which could prove problematic.
Not everything the incoming administration could do that impacts CRE would even involve direct action by Congress. The Biden administration plans to revisit each executive order put in place by the Trump administration and try to rescind as many of them as possible and issue orders of its own.
Regarding tax policy, the administration could direct the IRS to step up auditing of the kind of business structures that involve real estate, such as closely held partnerships, or S-corporations.
The potential impact of more robust tax enforcement looms large. In a 2020 report on uncollected taxes, the IRS estimated that an average of $441B (16%) of federal taxes owed annually between 2011 and 2013 weren't paid, mostly because taxpayers underreported their income. The IRS further estimated that it collected an average of $60B of those unpaid taxes during each of those years, meaning that $381B more per year in collections had been theoretically possible.
Going forward, the Congressional Budget Office estimates that increasing the tax agency's budget for examinations and collections by $20B over 10 years would increase revenues by $61B. An increase of $40B, which would need to be in a future budget allocation, would bring in an estimated $103B.
Real estate entities wouldn't be the only ones impacted by a more vigorous tax return enforcement, but they would probably be well-represented among them.
About 1% of standard corporations (C corps) are audited for the 2017 tax year. Audit rates for partnerships and S corps were 0.4% and 0.3%, respectively, for the same year, pointing to the potential for stronger enforcement among those structures, which often involve real estate ownership.
Real estate is a long-term investment, so future changes to tax policy weigh heavily on the industry, but not as heavily as the ongoing public health crisis.
“The most important issue for commercial real estate is the economic recovery, which I believe is dependent on vaccinations against COVID-19 and not additional stimulus," Pacific Oak Capital Advisors co-founder Peter McMillan said.
