(For the full story, please click on the latest issue of Net Lease Forum)
The exact language of the proposal remains elusive, but from what a variety of TIC industry sources have been able to gather, among potential revenue raisers floated by the Senate Committee on Finance to help bridge the budget-tax revenues gap was a proposal that would deem tenant-in-common investment interests not like-kind property for 1031 exchange purposes. There were some accounts that the proposal specifically targeted securitized TIC interests.
"Nobody knows the facts, but there was a proposal on the table to eliminate TICs under the definition of section 1031," says Tim Snodgrass, president of the Tenant-in-Common Association. He notes that typically during this sort of political process, economists are asked to "score" such measures for their potential impact as revenue raisers. "And what we understand is it was scored that if they did this, it would raise $1 billion."
At deadline, neither of two bills involved in the budget-reconciliation process had been put to a vote by Congress, but Snodgrass and others expressed confidence that the TIC-related revenue raiser is not being included in the final budget. Still, caution prevailed as this week began, for until legislation is voted on, there is little way to know with certainty what the fate of the TIC-related proposal is.
A spokesman for the House Committee on Ways & Means told TIC Monthly on May 5 that he had no specific information about such a proposal and that he was not aware of any of the House conferees making any public statements about this potential revenue raiser. He referred further questions to the Senate Finance Committee, where the proposed revenue raiser apparently originated, and that committee's press office did not respond to TIC Monthly's inquiry. The House committee is chaired by Rep. William M. Thomas (R-CA) and the Senate committee is chaired by Sen. Charles E. Grassley (R-IA).
While the industry's chief professional organization, TICA, was aware that questions about the TIC business have been asked on Capitol Hill the proposal's sudden appearance as a potential revenue raiser in the current budget legislation appears to have caught the industry off guard. "We had always recognized that this was a risk, we just didn't perceive it as being today's risk," Snodgrass adds. "There was no inference of clear and present danger."
But from Boston to San Diego, TICA leadership and TIC players of all stripes sprang into action last week, scrambling to find out what they could about the wording and the status of the proposal. They also pushed to get their voices heard by members of Congress, particularly key members of the Budget and Tax Reconciliation Conference Committee.
"From a positive perspective, look at how the industry mobilized from coast to coast," says John Balboni, a partner in the Boston office of law firm Sullivan & Worcester LLP. "Look at how many people got together and really rallied."
Some say the most alarming part is that such a proposal would be put forth only as part of a closed-doors process. And many point to the fact that even a threat to the 1031 exchange limited to TICs could, ultimately, have lead to a much broader impact on the 1031 exchange and commercial real estate markets. "We don't like them modifying 1031 exchanges behind closed doors," says Tom Heinemann, the National Association of Realtors' regulatory policy representative on commercial and real estate tax issues. "Nobody has had a chance to review the proposal. Nobody knows what it is.
Even if the TIC-related revenue raiser is not included in the final budget this go-around, this is likely to be just the beginning of the story, not the end. "As far as we know, it's off the table--but it's in the refrigerator," says Snodgrass. "It's got a wrapper on it, and somebody may try to eat us later."
As a result, TICA's leadership has promised even greater action and vigilance on the matter now and going forward, and has quickened the pace on lobbying and political action efforts that were already in the works. "We have a cohesive front, we've got capital, we've got some juice, and we are going to use it," Snodgrass vows. "The impending disaster has passed, but the danger has not."
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