Tax Impacts

Extention of Leasehold Improvement Depreciation/FIRPAT Reform

Posted on Monday, March 15, 2010

The Senate approved a $140 billion measure that includes $31 billion in tax "extenders," including a provisions to extend 15-year leasehold improvement depreciation and brownfields expensing.

15-year depreciation for leasehold, or tenant, improvements will help free up capital for job creation and other economic activity, by allowing the costs of constructing such assets to be matched more closely with the asset's actual economic life (7 to 10 years, the length of a typical lease term). The expiration of 15-year depreciation on Dec. 31, 2009 – and re-imposition of a 39-year depreciation schedule – amounts to a significant tax increase on real estate owners, just as they are facing sharp deterioration in net operating income, unstable property values, equity erosion, and tenant demands for significant lease concessions.

Brownfields expensing also would be extended temporarily (for one year) under the Senate and House extenders bills. By allowing commercial real estate owners to write off environmental cleanup costs in the year they are incurred (instead of having to wait until a property is sold), the provision helps offset the higher cost and risk associated with redeveloping contaminated – but still potentially valuable – brownfield sites.

In its February report warning of a potential tidal wave of commercial real estate loan losses for banks, the Congressional Oversight Panel (COP) identified FIRPTA as one of several tax policy issues that "complicate [loan] workouts and new investment in commercial real estate." The panel underscored the need for additional federal policies to support economic recovery and stabilize commercial real estate markets – with the top priorities being job creation, tax policies to encourage (foreign) equity investment in commercial real estate, and steps to restart secondary mortgage markets.

"Although many believe that billions of dollars in non-U.S. equity are waiting to be invested in U.S. commercial real estate . . . non-U.S. investors can be hit with double or even triple taxation on their investments in U.S. real estate," the report stated, in reference to FIRPTA.

The proposed reforms are "about bringing in foreign investment to be on equal footing if they invest in real estate versus non real estate."

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