Talking Points: Leasehold Depreciation

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1 Talking Points: Leasehold Depreciation Current Law: Beginning January 1, 2015, tenant improvements must be depreciated on a 39-year depreciation schedule. BOMA Position: Depreciating leasehold improvements at a rate of 1/39th per year until the improvement goes out of service runs counter both to common sense and the reality of the marketplace. It is a hidden and inequitable tax on the commercial real estate industry. The tax code should be amended to more closely reflect the reality of the marketplace. Current Status: On December 19, 2014, a retroactive one-year renewal of the 15-year schedule (for the 2014 year) was signed into law by President Obama as part of the Tax Increase Prevention Act of This Congress, bills to make permanent 15-year leasehold depreciation have been introduced in both the House and Senate. In the House, Reps. Mike Kelly (R-PA) and Richard Neal (D-MA) introduced H.R. 765, the Restaurant and Retail Jobs and Growth Act. In the Senate, Sens. Bob Casey (D-PA) and John Cornyn (R- TX) introduced S. 394, the Depreciation Fairness Act of Both bills are slowly gathering co-sponsors but more are needed. Possibly, the best chance for 15-year depreciation this Congress is to be included in a tax extenders package that could be taken up at any time. Supporting Arguments: If possible, provide examples of how the uncertainty in the tax code negatively affects your operation. BOMA International supports legislation that would make permanent the 15- year depreciation period for leasehold improvements. This provision is relatively non-controversial, and through the years has had bi-partisan support in both chambers of Congress. Leasehold improvements are the build-outs to tenant space from floor to ceiling and everything in between.

2 A 15-year depreciation schedule more closely reflects the reality of the marketplace. Leasehold improvements typically don t last longer than 15 years before they are replaced. In fact, the vast majority of leases negotiated today range from three to seven years. JOB CREATION and economic stimulation: o Almost $250 billion is invested in commercial real estate improvements annually -- with $15 billion of that amount going to leasehold improvements. o An increase in leasehold improvements leads to an increase in output and employment of architectural and design firms, construction companies, building material suppliers and other construction-related services. Congress should not add additional deterrents to improving leased space. o Depreciating improvements over 39 years reduces investment in improvements that help foster productive economic growth. Effect on small businesses: o Small businesses are negatively impacted by 39 year leasehold depreciation treatment because they have a dynamic growth rate and their space needs change along with their growth. o These small businesses are already negatively affected by economic uncertainty.

3 Current Law: Talking Points: 1031 Like-Kind Exchanges Section 1031 of the tax code allows for the seller of an investment property to defer capital gains on the sale of that property if they purchase another investment property of similar kind (i.e., office building to office building or tractor to tractor) of same or greater value within a short amount of time, effectively exchanging the property for a like-kind and maintaining the money in an investment. The capital gains tax is paid ultimately when the final property is sold and the investment is cashed out. BOMA Position: Section 1031 has been an effective economic development tool, stimulating job creation and investment, and should be retained in its current form. The policy does not free a taxpayer from any obligation to pay taxes but merely aligns the payment with when the property is sold. Current Status: 1031 or like-kind exchanges are useful investment tools throughout real estate and other industries. Because of the misperception that like-kind exchanges are a tax avoidance mechanism, they have been targeted by a number of tax reform proposals seeking to find revenue generators. No current bills seeking to eliminate 1031 s have been introduced; however, making sure that Congress understands their economic importance and the detrimental effects a repeal would have both on real estate, the economy in general and tax revenue is essential. Supporting Arguments: Like-kind exchanges encourage investment. On average, taxpayers using a like-kind exchange acquire replacement property that is $305,000- $422,000 more valuable than the relinquished property, while replacement properties without using an exchange are cheaper or of equal value. Like-kind exchanges contribute significant federal tax revenue. In 34 percent of exchanges, some federal tax is paid in the year of the exchange. More importantly, over the long run, like-kind exchanges boost tax revenue because of the higher tax liability that arises in the years following the initial exchange.

4 Like-kind exchanges lead to job creation. Real estate acquired through a like-kind exchange is associated with greater investment and capital expenditures (i.e., job-creating property upgrades and improvements) than real estate acquired without the use of like-kind exchange. Like-kind exchanges result in less debt. When the price of the replacement property is close to or less than the price of the relinquished property, like-kind exchanges result in a 10 percent reduction in borrowing, or leverage, at the time of the acquisition. Repealing 1031 exchanges would increase taxes for thousands of commercial property owners. For a typical property owner who defers their gain on a commercial property, repealing like-kind exchanges would raise the effective tax rate on the taxpayer s investment (including rental income and gain; nine-year holding period) from 23 percent to 30 percent. Repealing 1031 exchanges would cause property values to drop. In order for a commercial property to generate the same rate of return for the investor prices would have to decline. In local markets and states with moderate levels of taxation, commercial property price would have to decline 8 to 12 percent to maintain required equity returns for investors expecting to use like-kind exchanges when disposing of properties. These price declines would reduce the wealth of a large cross-section of households and slow or stop construction in many local markets. Repealing 1031 exchanges would cause rents to increase. Over time, real rents would need to increase from 8 to 13 percent before new construction would be economically viable. These higher rents would reduce the affordability of commercial space for both large and small tenants. The price declines and rent effects of eliminating real estate like-kind exchanges would be more pronounced in high-tax states. Repealing 1031 exchanges would trigger a decline in real estate sales activity overall. Like-kind exchanges increase the liquidity of the real estate market. Properties that were acquired and sold between 1997 and 2014 showed that properties involved in like-kind exchanges had significantly shorter holding periods.

5 Talking Points: ADA Notice and Compliance Current Law: The Americans with Disabilities Act (ADA) is a civil rights law enacted in 1990, and Title III requires that businesses comply with basic nondiscrimination requirements that prohibit barriers to people with disabilities. Through Title III, private lawsuits can be filed without previous notice of violation or an opportunity to remedy the barrier. BOMA Position: BOMA supports legislation that protects the commercial real estate industry from drive by lawsuits by imposing notice and a compliance opportunity before commencement of a private civil action under the ADA. Current Status: Rep. Ken Calvert (R-CA) introduced HR. 241, the ACCESS (ADA Compliance for Customer Entry to Stores and Services) Act of 2015 that would amend the ADA and impose notice and a compliance opportunity to be provided before commencement of a private civil action. The Act would require complainants to supply building owners with a written notice of the barrier to entry that is specific enough to allow the owner to identify the issue and correct it. It would provide a 60-day period for the owner to communicate the planned remedy and an additional 120-day period to become compliant. Supporting Arguments: We support the intent of the Americans with Disabilities Act. However, there are many examples of ADA lawsuit abuses where the plaintiff is more interested in a quick financial settlement, not correcting the problem, removing the barrier, and gaining access to the property. These lawsuits do not serve the interests of the disabled community and are disruptive and costly to small business. We support legislation to require that a complainant provide written and specific notice of the ADA non-compliance to the building owner and allow time for the owner to correct the problem prior to filing a civil suit. This benefits all parties and maintains the intent and integrity of the law. BOMA believes that this legislation will lead to improved compliance with Title III of the ADA, help the disabled community have full access as

6 required under the law, and protect business owners from mal-intended lawsuits.