Here's How Democrats’ Senate Control May Play Out With Net Lease

In July, President-elect Biden proposed ending 1031 like-kind exchanges for investors with annual incomes above $400,000 to fund child care and care for the elderly, which is projected to cost $775 billion over 10 years.

As the election approached, those in the sector grew nervous that a Blue Wave could possibly wash away 1031 exchanges, which would have could affect net lease volume.

“The most significant change to the net lease space could be the elimination of the popular 1031 Exchange which fuels a significant amount of overall transaction volume in the sector each year,” Matt Berres, executive managing director of Net Lease Capital Markets at Newmark tells GlobeSt.com.

But as Republicans performed better than expected, those fears subsided though the Senate runoffs in Georgia were still a slight concern. If the Senate remained a Republican majority, the debate over 1031 exchanges would have not likely make it to the floor.

Now, as Democrats Jon Ossoff and Raphael Warnock have claimed those Senate seats, many in the net lease business wonder what’s next. “Everyone in the sector will be watching over the coming months,” Berres says.

For right now, Berres sees more immediate challenges for Biden. “We believe net lease investors’ antennae are up, but it will be largely business as usual in the immediate term as the new administration will likely prioritize more pressing issues, like getting control of the pandemic,” Berres says.

But eventually 1031 exchanges might face challenges.

“You have to take people at that word, which is Biden said he was going to either modify or eliminate 1031’s for people [making] over $400,000,” says Randy Blankstein, president of The Boulder Group. “The fact that Congress isn’t divided increases that likelihood,” he tells GlobeSt.com.

While Blankstein doesn’t think there is “grave” concern in the real estate community, the chances increased that there is legislation affecting high-income real estate investors, which are the bulk 1031 participants.

“I don’t think the fear is elimination,” Blankstein says. “I think the fear is modification.”

If a new law affects those asking $400,000 and up, it could have a significant impact on the net lease, according to Blankstein. “If it’s a higher number, obviously that’s less impactful,” he says. “People are going to wait and see, but I think there’s some concern after the election. A lot of people thought we’d have a divided Congress and had let their guard down a little bit.”

Blankstein doesn’t sense panic in the market, even if the level of concern is elevated.” People are watching closely to see what Biden’s 100-day legislative agenda is,” he says.