Statement. On Behalf of the. Building Owners and Managers Association (BOMA) International. Committee on Ways and Means

Transcription

1 Statement On Behalf of the Building Owners and Managers Association (BOMA) International Committee on Ways and Means Tax Reform Working Group on Real Estate April 2013

2 On behalf of the Building Owners and Managers Association (BOMA) International, I want to inform you of our full support of your efforts to reform our nation s tax code. As you are aware, the commercial real estate industry is a major contributor to the U.S. economy and we are hopeful that you will be mindful of this as you proceed with comprehensive tax reform. Outlined below are our recommendations as you consider changes to the tax code that impact both the overall economy and the commercial real estate industry. BOMA International is a federation of 93 BOMA U.S. associations, BOMA Canada and its 11 regional associations and 13 BOMA international affiliates. Founded in 1907, BOMA represents the owners and managers of all commercial property types, including nearly 10 billion square feet of U.S. office space that supports 3.7 million jobs and contributes $205 billion to the U.S. GDP. Its mission is to advance the interests of the entire commercial real estate industry through advocacy, education, research, standards and information. 1. Depreciation Reform a. Leasehold Improvements As you are considering ways to bring the tax code into the 21 st century and more closely reflect market realities, BOMA International encourages the House Ways & Means Committee (the Committee) to consider permanently reforming depreciation schedules for certain components and upgrades for commercial buildings. First and foremost, the Committee should consider making the 15-year depreciation schedule for leasehold improvements a permanent part of the tax code. Leasehold improvements, also known as tenant improvements, include changes to walls, floors, ceilings, lighting, and plumbing to meet the needs of a new or existing tenant. In the commercial real estate marketplace, with the average lease running from five to ten years, such reconfigurations are commonplace. Building owners have operated for almost a decade under a number of temporary renewals of the 15-year depreciation schedule. Most recently, the 15-year leasehold improvement depreciation provision expired at the end of 2011, but was extended retroactively for 2012 and through the end of 2013 when Congress passed The American Taxpayer Relief Act of 2012 on January 2, Unless the provision is made a permanent feature of the tax code, it will need to be extended again before the end of This nearly semi-annual exercise by Congress to only temporarily extend this provision leads to uncertainty in the marketplace, costing jobs and other related economic activity involved in the build-out of tenant space in the commercial real estate industry. b. Roof Depreciation Another building component that should be depreciated in a way that more closely reflects the reality of the industry is commercial building roofs. Under the current tax code, building owners depreciate roofs on a 39-year schedule, the same schedule currently used to depreciate the life of the building itself. Because the average life of a commercial roof is just under 20 years, the 39-year depreciation schedule for commercial roofs makes little business or environmental sense. Permitting the depreciation of roofs on a shorter, more realistic schedule would encourage building owners to incur the added

3 expense of replacing older, less efficient roofs. With this added incentive to replace nonperforming roofs, building owners will help protect the integrity of the entire structure, increase the structure s energy efficiency, and add to the economy as a whole by spurring activity within the construction industry. c. Fire Sprinkler Depreciation Another crucial element in the tax code that should be reformed is the depreciation of fire sprinkler retrofits for existing buildings. Fire safety is a critical building performance issue for commercial building owners. Providing an incentive to accelerate the depreciation for fire sprinkler systems is a useful tool for encouraging the installation of fire sprinklers in many buildings and will assist in reducing the number of fires in which there is loss of life and property. The economics of building management are complex. This is true for all buildings no matter what their age. Older structures have the disadvantage of being designed and constructed under different requirements. Therefore, in older buildings, installation of a fire sprinkler system may not have been included in the initial building specifications. Due to financial obligations, many of which are competing, property owners are often unable to install sprinklers within these older structures. By providing a tax incentive, Congress would make a very positive impact on the places that our tenants and employees work, shop, dine, and relax. This change in the tax code would also act as an economic stimulus since it would provide much needed investment in real property and jobs for those who install the sprinkler systems. According to the National Fire Sprinkler Association (NFSA), fire sprinkler retrofits are very labor intensive and on average labor accounts for about 65 percent of the total cost of retrofit. NFSA also estimates that the average cost of retrofitting a fire sprinkler system in an existing high-rise building can range from approximately $2.00 to $3.00 per square foot. In some parts of the country, estimates are as high as $10.00 per square foot. The current tax code, which requires that the new system follow a 39 year depreciation schedule, makes overcoming this financial impediment more difficult. BOMA International recommends that the Committee consider a quicker depreciation schedule of 5 years to make such costly and important retrofits more financially viable. 2. Foreign Investment in Real Property Tax Act (FIRPTA) BOMA International would also encourage the Committee to consider how international investment in commercial real estate is unfairly treated by the tax code due to the Foreign Investment in Real Property Tax Act (FIRPTA). With the commercial real estate industry still in a state of recovery from the recent economic downturn, it s crucial to consider ways to encourage additional investment in commercial real estate to bolster short and long term economic growth. Enacted in 1980, FIRPTA discourages the investment of foreign capital in U.S. real estate by treating a gain or loss by a foreign investor from the sale of a U.S. Real Property Interest ( USRPI ) as if such gain or loss were effectively connected with a U.S. trade or business. Such policy is completely at odds with the tax treatment of other types of

4 investments by non-u.s. entities and, consequently, puts commercial real estate at a disadvantage when seeking foreign investment. Currently, a foreign investor faces no U.S. tax liability from income realized from other forms of investments, such as stocks and bonds or the interest earned on U.S. bank accounts, to name a few. In order to encourage continued growth and investment in the commercial real estate industry and overall economy, BOMA International requests that the Committee consider ways of reforming, if not completely repealing, FIRPTA from the tax code. 3. Taxation of Carried Interest Commercial real estate is a long-term, risk based investment which is regularly structured as a partnership, and therefore often involves a component known as carried interest. The use of a partnership structure has been a long-standing and efficient method for providing capital to commercial real estate ventures. The partnerships are made up of limited partners and general partners. The limited partner(s) provides the money and capital, has very little say in the operation of the investment and is simply looking for a return on the investment. The general partner(s) brings the sweat equity to the investment and does the day-to-day work making sure the property is properly managed and is compensated by a flat fee that is taxed as ordinary income. They are also offered an additional percentage of the profits as incentive to make the investment prosperous; this compensation is what is known as carried interest. When the general partner receives the carry it is taxed as a capital gain. It is paid only when, and if, the real estate investment actually is successful. BOMA International urges the Committee to maintain the current tax code s policy that all returns from carried interests be taxed as a capital gain. To amend the code in such a way that taxes carried interest as ordinary income will disrupt the investment relationship between entrepreneurs and their capital finance partners. In addition, such a drastic change would impact pension funds, endowments, charities and universities, which are typical investors in real estate. As a result, general partners will demand a greater share of the return to compensate for the increased tax. This means returns to the investors will diminish, affecting capital flow to real estate and other investments. A change in the tax code requiring carried interest be taxed as ordinary income would also disproportionately impact the small real estate entrepreneurs who may not have the same negotiating leverage as larger firms to pass on a carried interest tax increase to their investors or employ new investment structures to avoid the tax altogether. Should the Committee consider altering the taxation of carried interest in some form or fashion, it should do so in a prospective manner by applying only to partnerships formed at a time following implementation of the new policy and, therefore, permit deals made under the tax code s current rules to be taxed as a capital gain upon fruition D Tax Deduction Implemented in 2005, the Energy Policy Act included a tax deduction aimed at incentivizing commercial buildings to install energy efficient upgrades commonly referred to as 179D. The law was subsequently extended and now applies to energy efficiency upgrades placed in service

5 from January 1, 2006 December 31, 2013 in both new and existing buildings. Specifically, buildings are provided an accelerated deduction of up to $1.80 per square foot for energy efficient upgrades that achieve a 50 percent reduction in annual energy cost to the user, compared to a base building defined by the ASHRAE/IESNA Standard. The policy provides for partial deduction as well. While BOMA International supports the 179D tax deduction, very few buildings have been able to take advantage of this incentive. Legislation that would extend and improve the usefulness of 179D was introduced last fall in the Senate (S. 3591). S garnered widespread support from real estate, industry, manufacturing, and contracting stakeholders and we encourage the Committee to consider the principles as outlined in the bill, which include: Increasing the amount of the maximum deduction to $4.00 per square foot; Utilizing a sliding scale which allows greater deduction amounts as correlated to higher levels of energy savings and performance; Measuring energy savings and improvements by reference to the existing building s own consumption baseline; Making the tax incentive useable for a broader range of real estate owners and other stakeholders. We appreciate this opportunity to provide BOMA International s priorities for comprehensive tax reform and hope you will take these important matters into account as they impact the commercial real estate industry and overall economy. Should you have questions, please contact Karen Penafiel, BOMA International s Vice President for Advocacy, Codes & Standards, at kpenafiel@boma.org or