US Election Ahead – What it Means for Commercial Real Estate
With the US elections just days away, we decided to dive deeper into what these elections could mean to commercial real estate.
While real estate markets tend to be agnostic and perform well under both Democrat and Republican presidents, it’s important to be aware of the risk that comes not necessarily with the outcomes of the elections, but with election season. As elections create uncertainty, real estate investors tend to slow down during these times and take their time to evaluate the situation.
At Okapi AI we always strive to make risk more manageable by predicting it, especially in times of uncertainty. We’ve applied the same principles to examining the possible outcomes of the elections, and the potential implications for CRE. Before we dive into our insights, it’s important to note that this article is not partisan or political in any way, looking solely at the data at hand.
The Tax Angle
Taxes were a hot topic during this election season, and they are definitely on the minds of commercial real estate professionals across the board. Back in January, 62% of the 200 CRE professionals surveyed by Seyfarth for their Fifth Annual Real Estate Market Sentiment Survey thought that tax-wise, industry would be better off if President Trump stays in office, while only 4% thought Biden would be the better choice for commercial real estate. The survey took place before the COVID-19 pandemic hit, but the sentiment from CRE professionals who believe a recession is coming and the decade-long “landlord market” is about to end may be even stronger now.
3 points you should be familiar with:
While Trump revealed little about his tax plan, Biden has issued several detailed tax policy proposals during the Democratic primaries and has added a few since. For CRE, it seems corporate taxes would have the most impact.
- Biden is planning to increase corporate taxes. For example, he wants to raise the corporate income tax rate from 21% to 28% (the 2017 tax reform law dropped the rate from 35% to 21%). He has also called for a 15% minimum tax on large corporations.
- Biden also called for repeal of the temporary net operating loss (NOL) provisions contained in the CARES Act. That law, which was passed in response to the coronavirus-induced economic meltdown, allows NOLs in 2018, 2019 and 2020 to be carried back for up to five years. It also suspends the 80% taxable income limit for utilizing NOLs for 2018 through 2020.
- On the other hand, Biden is proposing some new tax breaks for certain businesses benefiting local workers and communities. For example, Biden has called for a new manufacturing communities tax credit that would promote revitalizing, renovating, and modernizing existing facilities. He also supports a new 10% “Made in America” tax credit for companies that invest in the U.S. This tax break can be meaningful for some of your tenants, as well as for the industrial real estate sector.
Beyond Presidential Elections
While the news focuses on the big-ticket presidential elections, there may be more at stake in other elections taking place, from the senate and congress to state and local government. For example, California will be voting on November 3rd on Prop 13, which aims to increase school funding by raising commercial real estate taxes.
What is it?
The proposed new initiative will create a “split” in the tax roll under which counties would assess commercial property at current (no more than two years prior) market value rather than according to acquisition value. Demonstrating this impact on a macro scale, a recent USC study estimates that approximately $11.4 billion in new tax revenue would be generated in just the 2021-22 tax year under a simplified model of the new tax law.
Who will it affect?
The act’s potential change to real property taxation can be summed up as follows: most “commercial and industrial real property” will be assessed at current market value rather than based on acquisition value, as at present. “Commercial and industrial real property” is defined as “any real property that is used as commercial or industrial property, or is vacant land not zoned for residential use and not used for commercial agricultural production.”
A special exemption is made for commercial property if its market value does not exceed $3 million, which figure will be adjusted for inflation every two years on a county-by-county basis.
Takeaway: Consider the Industry Mix
Analyzing the tax plans, we suggest mapping out the industries that stand to be most affected by either outcome. Whether it’s a manufacturing tenant that might thrive under Biden’s proposed tax break, retail businesses who might suffer, industries that rely heavily on China and may be impacted by a trade war or any business for which the question of opening or closing the markets due to COVID may be critical. A few industries that should be on your check list while examining risk:
- Imported goods
- Renewable energy
It’s key to understand the tax implications for your own firm but also take into account how additional taxes might impact your tenants financial stability and the termination risk they pose to your property. Review that potential risk and add it to the other leading lease risk factors you consider while planning your budget for 2021.