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2017 NMHC Research Forum April 5-6, 2017 It’s been a long me… October 22, 1986 Charles Rangel ? Daniel Moynihan Robert Byrd ? James Baker Donald Regan Dick Gephardt Bob Dole John Stennis …this tax act was just an absolute catastrophe for the country, for the real estate Acve-passive -- you're absolutely right industry. Not everyone was happy -- a hundred percent right, and something has to be done. It has to be brought back. if you're a denst, and you're making 200 or $300,000 a year, and -- you can't invest now in real estate. The reason the stock market is arficially high, in my opinion, is there's no other form of investment.

…by having cut the high income tax rates to 25 percent, as an example, people don't have the incenve any more to invest. They're saying, "Why should I take a chance on invesng in low or moderate-income housing? I might as well just pay the , November 21, 1991 tax." Sanger, Sirmans & Turnbull (Land Economics, 1990) Kemp bill find effects on introduced REITS. Senate Finance Commiee passes tax reform bill TRUMP’S POSITION IN 1991

Real estate investment is virtuous because it has • a high multiplier • positive externalities

Incentives are justified • high tax rates • depreciation, ability to use losses

Adjust depreciation schedules to produce the right mix of real estate Simple model of tax reform and real estate c = cash-on-cash return c =​cash low/downpaymentcash flow =NOI −iLP −tax t = tax rate downpayment = P(1-L) L = leverage rate (loan as % of price) i = interest rate tax =t(NOI −iLP −​��/� ) n = loan amorzaon length B = fracon of price in building D = years on depreciaon schedule c =​NOI −iLP−t(��� −��� −​��/� )/�(1−�) P = Price

�=​(1−�)���/(1−�)�+(1−�)��−�​�/� If tax < 0 then P increases with t 2017 TAX REFORM

Lower marginal rates

Immediate expensing of investment • House blueprint: all investment (except land) • Trump plan: election, only for manufacturing businesses

End deductibility of net interest expense • House blueprint: all investment • Trump plan: election for manufacturing

Possible end of 1031 exchanges

2017 TAX REFORM Efects of proposals • Interest deductibility is relatively minor • Combo of rapid depreciation & ability to take losses is major • Real estate professional status could be lucrative

Quick Dep Int Ded Passive Limit Gap 1 1 0 46% Unlikely 1 0 0 31% Possible 0 1 0 -3% Possible 0 1 1 -3% Now 1 0 1 -4% Likely 1 1 1 -4% Unlikely 0 0 0 -7% Unlikely 0 0 1 -7% Unlikely 1031 EXCHANGES

Ling & Petrova – 10% decrease in commercial real estate prices

I find around 4% for apartments with normal leverage

Higher leverage increases the value of exchanges

OTHER POTENTIAL CHANGES

Cost segregation

Estate tax repeal, eliminate basis step-up

Real estate professional status Tax pass-through entities

Senator Boies Penrose (R-PA)

“I believe in the division of labor. You send us to Congress; we pass laws under which you make money...and out of your profits, you further contribute to our campaign funds to send us back again to pass more laws to enable you to make more money."