Joe Biden has been sworn in as the 46th president of the United States, ascending to the office after a tumultuous election and a transition period that included a violent raid on the US Capitol two weeks ago.
Though Biden will preside over a divided populace, a unified legislature is poised to advance much of his agenda unencumbered. With control of both houses of Congress and the White House, Democrats will have the power to make good on campaign promises that could both benefit and restrict private real estate.
On the one hand, Biden’s tax plan includes three measures that would threaten longstanding advantages for real estate: taxing long-term capital gains as regular income – effectively doubling the rate from 20 percent to nearly 40 percent for top earners – eliminating 1031 exchanges and ending the step-up in basis for properties after death.
Private equity real estate funds would be shielded from some of these changes by the tax-exempt status of their investors. But such reforms would have a chilling effect on transactions and property values, David Rosen, a partner and real estate specialist at Maryland-based accounting firm Rosen, Sapperstein & Friedlander, told PERE.
“If you had a doubling of tax rates, it is possible that many of the real estate transactions that closed in the last several years would never have happened,” Rosen said. “Sellers would not have been able to sell at those prices and buyers would not be able to buy at those prices either, because they are, one way or another, going to measure their economic return as a function of their after-tax net cash.”
Other Democratic positions, such as higher corporate and individual tax rates, tighter environmental regulations, stricter oversight of the financial sector and a higher minimum wage, signal a decidedly less business-friendly environment for the years ahead.
On the other hand, Biden’s agenda also includes substantial investment in green infrastructure and an expansion of the social safety net. The agenda also has provisions that could benefit parts of the real estate industry, including $10 billion of additional Low Income Housing Tax Credit funding, a crucial mechanism for financing multifamily investment.
Daryl Carter, chief executive of California-based Avanath Capital Management, a manager that specializes in affordable housing, said he was encouraged by Biden’s commitment to meaningfully increase the number of housing vouchers the federal government offers to subsidize rents for low-income households. “When people think about affordability, a lot think about affordable units but it’s also income,” Carter said. “The fact is, we have a bifurcated economy with haves and have-nots, and a game changer for the have-nots is a housing voucher, so we always lobby for more of them.”
Even if Biden’s ambitious policy objectives take a back seat to getting the pandemic under control, the monetary response to the crisis will necessitate more funding. “The government is almost left with no choice but to find alternative sources for increasing revenues,” said Craig Bernstein, chief investment officer of Washington, DC-based private equity fund OPZ Bernstein. He added that taxing businesses and high-income earners is clearly the Democrats’ preferred method.
Public and private optimism
Public equities investors have embraced Biden’s presidency, with REITs and other stocks rallying after his election and again after his confirmation on January 6, even as rioters sacked the Capitol. Part of that optimism is tied to the surety of additional stimulus. Biden’s $1.9 trillion relief proposal calls for direct payments to most households, an additional $25 billion in rental assistance, business support and $400 billion for covid testing and vaccination.
Private market groups are similarly sanguine. Along with its ability to pass relief packages more readily, a unified government means more predictability and fewer partisan battles than the Trump era saw, Jake Fingert, a former policy advisor to the Obama administration, told PERE.
“With the new administration, one thing I’m expecting is political stability,” said Fingert, now partner at Washington, DC-based proptech venture capital firm Camber Creek. “Real estate markets, like all markets, favor stability.”
From fear to acceptance
Heading into the November contests, the industry feared a so-called ‘blue wave’ that would carry Democrats to majorities in both the House and Senate and deliver Biden a strong progressive mandate.
Initially, that scenario seemed to be avoided. Republicans controlled 50 of 100 Senate seats after election day, meaning they needed to win just one of two run-off races in reliably conservative Georgia to hold the chamber. But Democratic upsets on January 5 resulted in a 50-50 split with vice-president Kamala Harris serving as the decisive vote.
With the blue wave now a reality, initial fear has transitioned to acceptance. “With control of both houses, the proposals put forth by president Biden in his initial tax plan will become top priorities, so at this point there is probably minimal opposition to passing significant tax reform,” Bernstein told PERE. “[The Democrats] can do whatever they want at this point.”
On December 16, the Real Estate Roundtable and a dozen other real estate industry groups sent a letter to Biden and Harris congratulating them on their victory and endorsing their views on housing, infrastructure and immigration. They also pledged to work with them to “improve the fairness and efficiency of the tax code.” The sentiment is one shared by others in the industry – that it is better to work with the administration than against it.
With strong ties to politicians on both sides of the aisle, Rosen said his clients – many of them large developers – feel there will be opportunity to do so, and they do not expect major tax reforms to pass without getting a chance to weigh in. Also, the Democrats’ narrow majority in the Senate means they will need unanimous support among their ranks, which is its own check on runaway tax hikes. “There are a couple of [Democratic] senators, based on their particular voting blocks, that would be hard-pressed to get behind a tax bill that was seen as too progressive,” he said.
Changes are coming to private real estate under the Biden administration, some that will help, others that will hurt. But one thing is clear: the industry will not enjoy the hands-off treatment it was expecting last fall.