Shopping Centers Today

JUN 2017

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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J U N E 2 0 1 7 / S C T 7 promotes conservation and environ- mental policies (grants of conservation easement can be structured as tax- deferred exchanges). Eliminating it would adversely affect real estate and other businesses as well as reduce real estate values, which would in turn put stress on the banking system, it says. Billions of dollars are invested through 1031 real estate exchanges, and thousands of properties change hands because of it, notes Wiele. Among the consequences of scrapping it would be a sociological impact, he says. "Today we are all about urban in-fill, moving back to the cities; but if properties are not available to be sold because families that own city properties and have owned them for decades and have no tax basis left aren't really of a mind to pay a tax bill on something they don't need to sell — why sell it? On the other hand, if they can take a profit and move on to another property, then real estate guys like me, who are out rebuilding our cities, can continue to do so," he said. Critics say the thinking behind doing away with the 1031 — namely that the government should get its due in tax monies today and not tomorrow — is shortsighted. It fails to take into account the way investors will react, they say. If investors do not sell, then there is no profit to tax. A lack of clear thinking is also behind the way carried interest — the share of profits in excess of the amount an investor contributes to the partnership — would be taxed, these critics argue. Carried interest is now taxed as capital gains, but during his campaign, candidate Trump had pledged to change it to the higher ordinary income rate, essentially doubling the tax owed. "Carried interest has been part of the real estate industry for a long time and is often called the 'promote,'" said Hinch. "While the investing partners provide much of the financial equity for a project, the general partner is the active managing partner who takes on much of the risk, such as financial liabilities on construction guarantees and having recourse on loans. To compensate for that risk, the general partner is provided a carried interest — that is, when the property is sold, after the investing partners get their promised return on investment, the remaining profit is split between the investing partner In late April President Donald Trump unveiled his tax reform plan, but the one piece of leg- islation not addressed was a border adjustment tax. Retailers breathed a sigh of relief — sort of. "Some people think not including it in the plan is a positive statement about Trump's position on the border adjustment tax," said Rachelle Bernstein, vice president and tax counsel at the National Retail Federation. Retailers and developers, among many oth- ers that depend on imports to run their businesses, view the proposed border adjustment tax with deep concern. "The worst fear is that since many retail products are imported, this would raise prices for consumer goods, and that will hit the pockets of consumers, and they will shop less," said Phillips Hinch, ICSC's vice president of tax policy. "Also, if you are a clothing retailer and importing something with a very small margin, the way this tax flows through, you could possibly have more tax than you do income. Retailers are really worried they will not be profitable." The border adjustment tax would have a palpable impact on the cost of living, some say. "If I import goods from China, these goods are going to cost 20 percent more, because I can't deduct the cost of importing them, so I am going to have to eat the 20 percent increase or pass that forward to the consumer," said Bernstein. In addition, specialty apparel retailers have told Bernstein that at least 95 percent of what they sell is imported and that their tax bill would be three to five times larger than their profits. "Many retailers view this as an existential threat to their existence," said Bernstein. "Retail is already going through a transition in terms of how people shop, and this would add significant costs at a time when retailers are struggling to reorganize them- selves to begin with." — SB and the general partner." While observers note that the intended target of the carried-interest proposal is the hedge-fund industry, critics say it would inflict collateral damage on the real estate industry. "Profits on real estate projects are true capital gains, while the risk position those of us in real estate incur is something most hedge-fund managers don't ever see," Wiele said. To treat carried interest as ordinary income would certainly be problematic, Platt asserts. "That tax rate is 20 percent as opposed to the income tax rate, which can be over 40 percent," Platt said. The proposal "could take away the break and have carried interest taxed as ordinary income. This doesn't affect the management fees and regular income [that] general partners earn as the managing partners, but it would impact the compensation for the real risk that is associated with making business decisions." As Wiele puts it: "If I am … now compelled to pay ordinary income tax on those capital gains, that begs the question, 'Why don't I just set aside my entrepreneurialism and go get a job?'" n RETAILERS NERVOUS OVER BORDER ADJUSTMENT TAX

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