Prospect of Higher Capital Gains Rate Kicks Selling Into High Gear
Daniel Geiger Sept. 21, 2012, 5:45 p.m.
With the city’s sales market quickly winding its way towards the last quarter of the year, real estate owners who have contemplated selling assets are kicking that process into high gear brokers say.
The final months of the year usually see a flurry of dealmaking as brokerage companies try to close out transactions in order to register commissions on their balance sheets.
This year there is added pressure however because of widespread concerns the capital gains rate will rise in 2013.
Most experts on the issue guess that revenue collected on capital gains will be bumped from 15 to 20 percent next year with the expiration of Bush-era tax cuts. A nearly four percent surcharge for President Obama’s healthcare plan is also expected.
“That kicks up the capital gains rate by about nine percent regardless of who gets into office,” James Nelson, a top sales executive at the brokerage company Massey Knakal said.
Now that President Obama’s chances at reelection appeared buoyed by Mitt Romney’s recent gaff in accusing much of the country of being government and entitlement program hanger-ons, many sales experts are expecting the rates to rise by even more – prompting sellers to scramble as a result.
“You’ve heard Obama say there should be no tax rate below 30 percent,” Mr. Nelson said. “Well that’s double the gains rates right now. I really feel it would be a bucket of cold water on the market next year.”
When Mr. Nelson mentioned the prospect of higher taxes to the seller of a small residential and retail building in the West Village at 239 Bleeker Street he said the person snapped into gear.
“When they first came to me, they said they were not in a rush,” Mr. Nelson said. “When I mentioned some of this, they became focused on selling this year.”
The added capital gains taxes a seller could pay could, for many, add up to no small sum. Peter Hauspurg, chairman and CEO of the sales brokerage firm Eastern Consolidated told The Commercial Observer that he had been recently tapped to handle the sale of a commercial building near the Port Authority bus terminal that he estimates will trade for around $65 million. If the eventual sale is in that range, he said, the seller would yield as much as $30 million in gains.
“If you take the best case scenario and say that the capital gains will only rise by about nine percent next year, that’s still a $2.6 million difference in taxes,” Mr. Hauspurg said. “Most people would much rather put that kind of money in their pocket so it’s creating a lot of pressure to sell by year end.”
Though most brokers say that three months still offers plenty of time to arrange deals, many also foresee complications as the new year draws closer.
Mr. Nelson said that deals that come to market later in the year will cater to a smaller group of all-cash buyers.
“Those are the deals that are going to have to have a big equity check because you’re not going to have enough time to get a bigger bank loan, which any lender would take time to write,” Mr. Nelson said.
Mr. Hauspurg said he was gearing up for a period of increased activity and getting ready for the heightened nerves of closing deals under the wire.
“There’s going to be a flurry of deals,” he said. “Let’s say you put the book out (marketing materials) and we get it out in a week. You’re going to want to shop it for three or four weeks, now we’re in late October. It takes two weeks to sign the contract, now it’s November. Now you have to go to a bank with the contract and they get an appraiser, write it up internally. Forget Christmas, you have to get it done before then, a banker having to do your deal Christmas week is not a happy banker.”
The cram spurs the question why sellers haven’t brought properties to market earlier in the year to avoid or head off the situation.
“Cap rates have continued to fall through the year meaning prices have risen,” Glenn Tolchin, an investment sales broker at Jones Lang LaSalle who is marketing several properties, answered. “So sellers were kind of rewarded for holding off hitting the market. There’s also the sense that the capital gains rate is politics and that something will be figured out. It only kind of dawns on people I think later in the year that the rate is really going to rise.”