Property Lines: Picking Sides On the Real Estate Policies of Biden and Trump
What does the commercial real industry want and when does it want it?
The 2020 election has been cast as the most existential, life-or-death election in history; it’s about the soundness of mind of the current and/or future president, it’s about two radically different visions of America, it’s about the pandemic and how to handle it, it’s about racism and corruption. One subject that is raised with shocking infrequency: policy.
With stark differences on display, the outcome of Nov. 3 could mean everything from new tax codes that real estate investors warn would freeze activity to different paths of recovery from the pandemic.
On one hand, it’s strictly business, and comes down to simple dollars and cents. The incumbent has opened the door for tax breaks and capital gains benefits and incentives, and the challenger is trying to reform those policies.
On the other hand, the election is very narrative-driven, with one vision for America against another, including suburbia pitted against city life.
And then there’s the global pandemic. The coronavirus crisis has sent the economy into a tailspin, and the outcome of the election will likely alter the course of the country’s recovery.
Whether President Donald Trump returns for a second term or America begins the Joe Biden era, the results will significantly change the dynamic of the commercial real estate world.
Suburban vs. urban
Trump has declared himself the president of the “suburban housewife,” among other things, and has drawn a line on the asphalt between cities and the rest of the country. He has railed against city leaders for what he and his administration have described as failing policies that lead to crime and poverty, and he claims that Biden will destroy suburbs by letting “low-income housing … invade” such neighborhoods around the country.
To emphasize the differences, Trump eliminated a 2015 rule that President Barack Obama enacted mandating municipalities develop plans to combat discriminatory housing practices if they receive federal financing. Biden would bring the rule back.
The pandemic has reportedly ignited a trend away from cities as workers nationwide leave for the suburbs, potentially escaping not only longer commutes but higher housing costs. Joel Kotkin, a fellow in urban studies at Chapman University, said that that trend will continue if Trump prevails.
“I think the Democrats will bail out the cities,” he said. “In some sense, the bleeding of the poor cities will probably slow down because it’ll be a treasure trove of federal aid to keep them afloat. If the Republicans win, I think the very rapid trend of people moving to the suburbs will continue to accelerate. I think the Democrats are going to do whatever they can to slow that progress down.”
Kotkin said he predicts Democrats will win the presidential election and possibly a Senate majority, and then implement policies that he says will not be very popular, such as eliminating single-family zoning and increasing spending on public transit systems that lose money.
Biden did release an extensive housing plan that, among many other initiatives, would “eliminate local and state housing regulations that limit affordable housing options and contribute to urban sprawl.”
“The vast majority of Americans live in suburbs and want single-family homes,” Kotkin said. “If you’re going to try to socially engineer how people live and where they live … It’s gonna be awfully hard to convince people that they’re going to give up their zoning, particularly in the red states. Democrats’ housing policies are so out-of-sync with what people want, and particularly with the pandemic.”
Biden’s plan would also establish a $100 billion affordable housing fund and provide tax incentives for the construction of more affordable housing, among other items.
The Trump administration, for its part, plans to end federal control over Fannie Mae and Freddie Mac. During the financial crisis in 2008, the government took control of both as they received more than $190 billion from the Treasury Department and went into government conservatorship. According to The Washington Post, the Treasury released a plan this month outlining different ways to remake the housing market, including a way to privatize the two entities that support half the country’s mortgages.
Biden has indicated he would approve more federal relief for Americans, while Republicans in the Senate have delayed a new stimulus package that the Democratic-run House of Representatives approved. Biden has also called for rent forgiveness, too, but has not released specific details for what that would look like.
The Trump administration waited until this month to enact a countrywide eviction moratorium, but it has received a lot of criticism, including from the National Real Estate Investors Association.
“The Sept. 4 Nationwide Eviction Moratorium launched by the Centers for Disease Control and Prevention is an absolute over-reach and in direct contrast to the state-by-state and county-by-county approach of the Trump administration and at direct odds to the successful prevention techniques being utilized throughout the country,” the association said in a statement. “Additionally, for the federal government to weigh in with such a heavy hand on state-level issues, and to essentially interfere with contract agreements between individuals is seemingly unconstitutional on its face.”
Trump’s eviction ban will last until Dec. 31. It does not cancel or forgive rent, and it applies to renters earning less than $99,000 who can demonstrate a substantial loss in income due to the coronavirus. Critics and housing proponents from the Community Housing Improvement Program and the National Multifamily Housing Council have said it provides little relief, if any, to renters. Meanwhile, landlords and property owners have said eviction bans don’t provide relief to them when they can’t collect rent from tenants.
Warren Berzack, national multifamily director for Lee & Associates, who is also a landlord, said he hopes the federal government approves more unemployment aid because the emergency funds secured at the start of the pandemic six months ago have dried up. That’s starting to affect multifamily owners in the form of tenants unable to pay rent.
“Each month in the pandemic basically the percentage of paid rents has dropped,” Berzack said. “Toward the beginning, it was like 95 percent, then 94, then 93. I think it’s now 85-87 percent. You’re seeing a drop with who’s paying rent each month. … I’ve heard of places where 50 percent of the tenants aren’t paying.”
There is a proposal from Biden that would directly alter the real estate industry, though many speculate how serious a proposal it is.
The former vice president would drastically limit 1031 exchanges so the government can collect more taxes to pay for a $775 billion plan for child and senior care for 10 years. He would limit “like-kind” or 1031 exchanges — which allow investors selling a property to defer capital gains taxes if they put those funds into another property — to people making less than $400,000 per year.
Of all of Biden’s real estate-related proposals, this has perhaps seen the most pushback from the industry.
Berzack said if the sale of a property goes to someone’s income, then almost every seller would be over the $400,000 threshold, essentially eliminating a major incentive to sell. Jeffrey DeBoer, president and chief executive of industry lobby Real Estate Roundtable, said that like-kind exchanges create greater opportunity for entrepreneurs from under-represented demographic groups.
“[It] has encouraged investment in affordable housing and other properties, generated state and local tax revenue, and spurred new jobs through labor-intensive property improvement,” DeBoer said in a statement. “Exchanges reduce the need for outside financing, leading to less leverage and debt on U.S. real estate. As a result, exchanges allow cash-strapped minority-, women- and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds.”
DeBoer also said like-kind exchanges are particularly important during downturns, when access to funding is less certain, and he predicts reinvestment would stop under Biden’s proposal. The Roundtable pointed to a 2015 study that found 1031 exchanges play a role in stabilizing rent, safeguarding property values, and strengthening the economy. It calculated that elimination of tax free exchange regulations would cause a significant reduction in investment and an $8 billion contraction in the construction industry as well as a loss of $26 billion in total economic activity.
Francis Greenburger, CEO and chairman of Time Equities, wrote a letter to Biden recently explaining why the proposal would be a mistake. Greenburger estimates that as many as two-thirds of real estate transactions would be affected, as at least one party is going into or coming out of a like-kind exchange. He told Commercial Observer that most involve small to mid-sized investors.
“The consequences of such a change will be totally disruptive and negative for the real estate and construction industries,” he wrote. “If investors are subject to a diminished reinvestment opportunity, they will be highly disincentivized to sell their properties and purchase new ones.”
He said that it is the mistake most people make when proposing this kind of change to think it will generate more revenue for the government. In reality, Greenburger said it will “do the reverse” since so many transactions will never occur without the tax break. Moreover, each 1031 transaction is supported by legal, investment, consulting, brokerage and other services, which generate taxed income. The exchanges often enable construction activities too.
Kay Properties and Investments, which operates a 1031 exchange marketplace, is on pace for a record year in 2020. Senior vice president Chay Lapin said clientele that utilize 1031 exchanges include “mom-and-pop” investors all the way up to some larger firms. But most are not considered professional investors.
“I think that’s what is unique about this specific tax code,” he said. “It’s ultimately available to a wider crowd than a lot of other tax incentive approaches. It’s very vital to a huge population.”
Lapin said Kay Properties has seen clients take advantage of exchanges during the pandemic if they’re dealing with a struggling asset like a multifamily building where rents aren’t coming in. Other small businesses that are closing or downsizing are also utilizing the exchange to maximize value.
“1031 exchange could also help people get some liquidity,” he said. “If a client was selling today, in a tough time, and they needed some money for X reason, they could sell their million-dollar building and do a partial 1031 exchange. So maybe they just exchange $500,000 of that, and pay tax on the other $500,000. It allows them to not get taxed completely but get liquidity for whatever might be going on.”
Lapin and Greenburger said reform proposals come almost every election year because “it’s a good soundbite.” (Indeed, Hillary Clinton proposed 1031 exchange changes in 2016.)
“As we fast forward, and they actually dig into it and they’re not just saying a newspaper quote, usually people step back and it doesn’t get enacted,” Lapin said.
Biden also plans to reform a new favorite new tool for investors: opportunity zones, or OZs. The opportunity zone program stems from the tax overhaul in 2017, and it aims to increase investment in economically distressed areas around the country. It does so by allowing investors who sell assets to delay or defer taxes for years so long as they put those proceeds into an opportunity zone investment. Trump’s bullet-point agenda for his second term includes “expanding opportunity zones.”
“We’re going to be expanding opportunity zones, and we will keep that going,” the president said earlier this month. “It’s been a tremendous program.”
At his State of the Union address this year, Trump said jobs and investments “are pouring into 9,000 previously neglected neighborhoods thanks to opportunity zones.”
“In other words, wealthy people and companies are pouring money into poor neighborhoods or areas that haven’t seen investment in many decades, creating jobs, energy and excitement,” he said.
Many groups have criticized OZs for failing to achieve their intended purpose, however. According to the Urban Institute, in the first two years since OZs became law, investment reached at least $10 billion and likely more than that. But the institute’s study found that it benefits developers more than designated communities. Lee & Associates’ Berzack said investors will generally pile into an area, which increases the prices and values and makes it less affordable for the people who were living there before.
“It definitely gentrifies areas, brings money into areas,” he said. “I guess the question is who does it really benefit? Is it benefiting the people in those areas? Or is it just benefiting the wealthy investors that are coming in to do what they’re doing, which is, for the most part because of tax benefits?”
Marc Wieder, partner in charge of the real estate services group at Anchin, Block & Anchin, said the OZ program has been a bit disappointing.
“You would have thought there would be a lot more activity,” he said. “From my observation, there’s been a lot less activity than I think people would have anticipated.”
He said one issue is that OZ developments have been taking place “in areas where development was happening anyway, and in areas that were already being gentrified,” and the OZ investments have continued ongoing improvements. He pointed to the selection process for tracts that qualified for the program.
“There are tracts in Brooklyn, particularly where there was plenty of development going on in parts of these areas, and they were already improved, but they qualified for opportunity zone tracts,” he said, adding that he’s worked on OZ projects where the developer already owned the land and planned a project. “The fact that it’s an OZ parcel was just an added bonus.”
Biden proposes requiring OZ investors publicly report their gains and better monitor how well the program is meeting its intended goals of helping and building up distressed and overlooked areas. He also wants to incentivize nonprofit groups to use OZ breaks.
“From the investor’s point of view, if the Democrats take over, and particularly if they take the Senate also, you’re going to be dealing with probably a harsher environment in terms of capital gains,” Kotkin said.