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Wednesday, January 31, 2018

Impact of Tax Cuts and Jobs Act on commercial real estate lending

Banner_imgCommercial real estate and commercial lending stand to benefit from specific changes under the Tax Cuts and Jobs Act. The full impact of these changes however remains ambiguous.

Specific changes that will benefit the owner's commercial real estate include new deduction options both for investment in pass through companies and value-add projects. Perhaps most importantly the bill retains the carried interest provision.

Pass-through entities, more commonly known as LLCs or partnerships, own the majority of real estate and conduct the majority of real estate investment. Investors in pass throughs can now deduct up to 20% of their total investment in these groups under the new law. This change will encourage investment and expansion by these pass through entities, such as real estate trusts. Commercial real estate will no doubt benefit as a result of these new deduction options.

Commercial property owners also stand to benefit from new deduction options. Under the new law the cost of value add projects on nonresidential property can be deducted. Specifically the bill revises and expands Section 179 of IRS code. Under Section 179 the amount that can be deducted for value-add projects is effectively doubled, from 500,000 to $1 million. The types of expenses that can be deducted by commercial property owners has also been expanded under the new law. “Roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems,” can now be expensed under the new law, according to Allistair Nevius of the Journal of Accountancy. In essence the new law will encourage commercial property owners to invest in and add value to their existing properties.

Commercial real estate lending and commercial real estate will benefit as the law retains the carried interest provision.

The carried interest provision allows returns on specific investments such as real estate to be taxed at a lower rate. Under the carried interest provision returns on investments can be taxed as capital gains rather than income. Hedge fund managers and real estate investors can continue to take advantage of the carried interest provision under the new law. However the new law does make some changes to carried interest provision. Specifically investors and investment groups must now retain investments for a period of three years In order to take advantage of the provision. Real estate investment is unlikely to be heavily impacted by this change, as these investments are usually held onto for longer periods.

The pace of commercial real estate transactions and commercial real estate lending could slow as a result of the specific changes to the carried interest provision.

“There is the possibility that it could reduce the number of CRE transactions that occur on an aggregate basis,” said Vince DeCrow of Origin Investments. “The reason for this is that the chunk of CRE investments that are typically held for less than 3 years, CRE developments for example, would then have comparably higher odds of changing hands at a slower relative pace once the construction is complete (if complete in less than 3 years).” New developments completed in less than three years are likely to be held on to by investors for longer periods, so that these investors can take advantage of the carried interest provision. With fewer new developments on the market the price of commercial real estate could rise as a result of the specific changes to the carried interest provision. The full impact of the new tax law on commercial real estate remains uncertain.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
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About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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