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Comprehensive tax reform could be ‘really bad’ for real estate, observer says

What Donald Trump's presidency will mean for financial markets is still a mystery, and private real estate insiders do not appear to have a better read than anyone else on what is coming.

Still, at a conference this week in California, there seemed to be more delight than dread at the political wild card being dealt so late in the real estate cycle — even if, as one observer warned, comprehensive tax reform is a possibility. The so-called Trump bump, manifest in the public markets, could turn out to be a mountain, and market volatility in any case benefits stable alternative investments like real estate.

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IMN's Winter Forum on Real Estate Opportunity and Private Fund Investing was held in Laguna Beach, Calif.
Source: S&P Global Market Intelligence

Nevertheless, Green Street Advisors President Jim Sullivan's warning on the first day of IMN's Winter Forum on Real Estate Opportunity and Private Fund Investing in Laguna Beach stood out for its stridency.

"Everybody in this audience should be paying attention to comprehensive tax reform, because there’s a whole bunch of stuff in it that’s really bad for real estate," he said, citing the abolition of interest deductibility and 1031 "like-kind" exchanges, whereby a seller off-loads a property and acquires a replacement without creating a tax liability, as possibilities.

Sullivan later added: "It’s probably a coin flip, as to whether comprehensive tax reform happens or not, but it’s something I think everyone in this room should be paying attention to."

Real estate experts have said the elimination of 1031 exchanges, in particular, would be devastating for the industry, insofar as prospective sellers would forgo transactions to dodge the tax hit, and capital would dry up in the space.

However, Sullivan's counsel did not dampen the mood of attendees, all of whom cited still-strong demand for real estate and a steady flow of capital into the space from overseas investors.

"It’s amazing that there’s so much capital that’s still flooding into the market, and that real estate investment is still so appealing and attractive, and that investor satisfaction is so high," David Kessler, partner and national director for real estate with the professional services firm CohnReznick LLP, said.

AECOM Capital Chief Executive John Livingston echoed the attitude of the crowd when he said he remains bullish on the U.S. economy. On a panel, Livingston pointed to the country’s continued appeal as a safe haven for global capital, the "Trump factor" notwithstanding.

"We’re all sitting here thinking, 'What’s the Trump effect? And what’s the foreign affairs effect? And what’s the Brexit effect?'" he said. "No one seems to know."

In an interview, Warren de Haan, managing partner of the commercial real estate finance outfit ACORE Capital, said a level of optimism not seen in eight years has crept into the space since the election.

He said of the Trump administration's evolving fiscal policy: "It would lead you to believe there's going to be growth, there's going to be infrastructure building, there's going to be inflation, and there's going to a reduction in taxation. Provided the economic growth is there, it should be a very healthy economy. Whether he can actually effect any of the change remains to be seen.”

Later in the day, one panelist pulled out of his coat a Magic 8-Ball, the popular toy for fortune-telling and advice-seeking, to provoke the crowd.

"Some very, very smart people in the United States were wrong, not by a little margin but a huge margin, on so many factors last year that I’ve come to the conclusion that we’ve got to rely on a different source … to predict what’s going to happen this year," Mark Jacobs, managing director at Oaktree Capital Management said on a panel, presenting the toy.

Jacobs' ploy was intended as a playful rebuke of experts who claim to know what is coming in 2017.

"Based upon what happened last year, I don't think anyone can predict the future," he said, later adding: "Flip a coin, or rely on an 8-ball. There's so many factors that can go into what's going to happen this year. I think you just have to focus on your own business and let the chips fall."