President-elect Donald Trump took much of the country by surprise with his election victory in November. Although it remains to be seen what a Trump administration means for the commercial real estate industry and the U.S. economy, it is likely that there could be some big changes ahead in 2017.
The Republicans are in a prime power play position with control of the White House and Congress. Republicans retained a slim majority in the Senate with 52 seats versus 46 Democrats and two independents. For the U.S. House of Representatives, the final tally was 247 Republicans and 188 Democrats.
Legislators are gearing up to tackle some big issues when the 115th Congress is back in session Jan. 3, and Trump is sworn into office Jan. 20. The Republican party is expected to push to get as much done as possible before the midterm election in 2018 when multiple seats in both the House and Senate will be up for grabs. Specific to commercial real estate, here are some key issues the industry is watching: banking regulations, tax reform, and infrastructure spending.
One of the priorities for a Trump administration will be easing regulations put in place in the wake of the Great Recession. Specifically, the House Financial Services Committee led by Chairman Jeb Hensarling (R-Texas) has introduced legislation that would eliminate pieces of Dodd-Frank, including new risk-retention rules for CMBS loans that are set to go into effect Dec. 24. Until now, the House had little traction in moving that legislation forward as it lacked support in the Senate, and it would have faced a veto from President Obama.
Rep. Hensarling has been vocal about his desire to completely repeal Dodd-Frank. However, there is likely still enough support in the Senate to stop that from happening. That may depend on what risks moderate Republicans in the Senate are willing to take when it comes to supporting Dodd-Frank versus supporting a repeal. The safer bet is that there will likely be enough support to rollback certain parts of Dodd-Frank, especially as it relates to lifting the burden on community banks.
For example, the National Association of Realtors, Real Estate Roundtable, and industry groups have supported the bipartisan “Preserving Access to CRE Capital Act” (H.R. 4620) bill sponsored by Rep. French Hill (R-Ark.) that would clarify the risk retention rules and create certain modifications that would ease the new requirements on the CMBS market.
Trump has a reputation for being pro-business, and he is expected to introduce some tax reforms benefiting commercial real estate owners and investors. President Barack Obama had proposed increasing the top capital gain tax rate to 28 percent, whereas Trump has said that he will keep the rate at 20 percent and also work to eliminate the additional 3.8 percent tax on Net Investment Income for those in the top tax bracket.
Republicans also are talking about allowing investment in buildings to be written off immediately - in one-year as opposed to being depreciated over 27.5 or 39 years under the current law. That could be good for the real estate industry, but it remains to be seen what the exact details are of that change and how it is structured.
On the negative side, Congress may introduce legislation that would create deniability of a deduction for interest expense. Leverage is an important part of real estate investing and deductions on interest can be significant. Taking away the deductibility of that interest could be a big negative for investors - even if there is a change to write-off the investment immediately.
In addition, 1031 exchanges are still on the chopping block. President Obama wanted to put a cap on the deferral of capital gains in an exchange to $1 million per taxpayer per year. Despite Trump's real estate background, some industry experts believe that 1031s could be in more danger of reforms than before.
The tax-deferred exchanges are widely perceived in Congress as a tax loophole that is not available to the average person. So, there is a concern by NAR and other industry groups that there is support, even among Republicans, to remove it from the code.
As part of his 2016 budget, President Obama proposed a six-year $478 billion infrastructure plan to improve highways, bridges, and mass transit systems. Trump has pledged his support to fixing America's inner cities and rebuilding infrastructure with a commitment that could reach as high as $1 trillion during the next decade.
The increase in infrastructure spending could both directly and indirectly benefit the real estate industry by stimulating the economy. Trump also has stated that he intends to encourage public-private partnerships and “harness market forces” to help attract new private infrastructure investments through a deficit-neutral system of infrastructure tax credits.
Yet despite the Republican majority, a Trump administration will still face some significant hurdles in moving legislation forward. First, the House and Senate don't always get along well or see eye-to-eye on issues - even when they are both controlled by the same party. Second, it is unlikely that the House and Senate will be able to pass legislation on significant issues with a big enough majority to avoid a filibuster. And, as seen in the past, a determined minority can slow the legislative process.