State of Commercial Real Estate
For a long time now, economists have been predicting that like housing markets, the commercial real estate market will cause the banking industries to fret. This comes as a result of an increase in the number of default cases where loans are not being able to be paid up.
However, a bill that was introduced by the government in January could help ease the situation by bringing about the much needed foreign investment to the sector. A group of congressman belonging to Bronx and Queens in New York City has introduced the Real Estate Revitalization Act of 2010 that serves to get rid of taxes that were part of the Foreign Investment Real Estate Property Tax Act (FERPTA) established in 1980. This tax scheme requires foreign investors to fork out almost 55% on capital gains from the sale of US real estate as taxes.
Eliminating this high taxation rate would help reduce the penalty that the FIRPTA tax imposes on those investors who invest money in the US real estate market. This would create an increase in liquidity in the current situation where the country’s economic health can be affected as a result of commercial real estate loan default cases. Removing the tax imposition would also entice new investors to look at US real estate since real estate investment would be seen as attractive as other US assets like bonds and equities which do not have tax impositions.
With the recent recession, real estate investors have become wary about the tax imposition. As the real estate market finds it way out of recovery after the recession, falling rents, property prices and occupancies increase potential capital gains and risk. As such, foreign investors may choose to invest in non-real estate options to provide a safety blanket for themselves. Currently, foreign investors account for only 10% of the total acquisitions in the commercial real estate industry. Removal of the high tax will only serve to increase this figure and save the commercial real estate market.
If this proposed bill gets passed, then US can see a surge in the amount of liquidity present in the real estate sector and bail out troubled loans. This would in turn TiThis help stabilize the real estate sector and the overall economy. An estimated US$1.4 trillion worth of loans will be due between 2010 and 2014. Of this, almost 50% are struggling. The passing of the bill will help balance these loans and may even offset the loss of government revenue through the removal of the tax.
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