The bill, while applauded by many in the industry, makes long-term planning difficult; especially because Democrats have vowed to implement a pay as you go tax policy. Stephen Renna, Real Estate Roundtable senior vice president and counsel, says Democrats may not offer further extensions.
If these extensions are not pushed past 2008, when they are set to expire, only a small universe of developers will benefit, he tells GlobeSt.com. "That is not good for the taxpayer or for the government which is expecting to get a certain benefit from these extensions."
Environmental incentives were placed in the extender package at the last minute. Congress granted a one-year extension of the tax deduction for energy efficient buildings, which was part of the Energy Policy Act of 2005 and set to expire at the end of next year. "We weren't expecting that," Jason Todd, director of legislative and regulatory affairs at the Building Owners and Managers Association International, tells GlobeSt.com. "It was put in during a lame duck session."
The provisions grant a tax deduction for buildings that reach a specified standard of efficiency rating. There is also a tax deduction for partial improvements.
It is important to have a longer time horizon for this provision. A builder in the planning stage now would take four years to recoup the investment, which is past the deadline granted in this package. "All you are doing with this legislation is rewarding development that was already underway," Renna says.
The package also included a two-year extension of the 15-year depreciation for leasehold improvements as well as a provision that allows for the immediate expensing of brownfield remediation. These expired at the end of 2005; but now real estate owners and developers can get these benefits retroactively.
These were important, Renna says, because they continue a policy that more closely aligns the tax treatment of leasehold improvements with the economics of the transaction. In this case it will depends on the particular market whether the uncertainty of an extension will have an impact. In a market with low vacancy rates, a landlord will make improvements at market rates, and eat the cost of what he or she would lose in depreciation if the bill is not extended, Renna says.
It is always difficult to get tax extensions made permanent, Todd says, acknowledging that this can interfere with planning. "(BOMA) would have preferred a more permanent fix. We'll be working towards that."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
