Will Trump Stump Growth in the Real Estate Entrepreneurial Market?
By: Racquel Richards
I) Introduction
According to the Business Dictionary, real estate is land and anything fixed, immovable or permanently attached to it such as appurtenances, buildings, fences, fixtures, improvements, roads, shrubs, trees, sewers and walls.[1] Commercial real estate is any non-residential property used for commercial profit.[2] They are commonly referred to as the physical spaces that inhabit businesses.[3] Commercial real estate includes properties such as strip malls, office buildings, malls etc.[4] Essentially, commercial estate is a location where commerce takes place. There are many reasons why investors choose to invest in commercial real estate, as opposed to residential real estate. While real estate as a whole is a great way to invest and generate steady and hearty income, commercial real estate is quite popular. Commercial real estate tends to yield a larger income revenue within the same amount of time that it normally takes for residential real estate to accrue income. For instance, a landlord of strip mall may be able to collect anywhere from $2,000-$2,500 per month per tenant within the building, while a landlord of a residential property might only receive $ 700 – $1,000 per month for the whole home based on the lease. However, in both cases the location is crucial. The more exclusive a neighborhood may be, the more expensive the lease tends to be.
The Trump Association has been notable for a myriad of reasons. One reason being President Trump’s strong background in real estate. Donald Trump’s fame is largely due to his incredible business empire composed of commercial real estate. The Trump Administration’s policies will affect both the economy and the industries that makeup the economy. Real estate is a focal point for economic prosperity for many commercial real estate investors in America. The Trump’s administration’s policies will increase the likelihood of success for commercial real estate entrepreneurs in the United States if it eliminates the Volcker Rule and passes tax reform.
II) The Volcker Rule
The Volcker Rule represents Section 619 of the Doff Frank Wall Street Reform and Consumer Protection Act.[5] The purpose of this rule was to prevent banks from using consumer deposits to cover risky purposes.[6] More specifically, this legislation keeps banks from trading on the accounts they own regarding securities like bonds, stocks or private equity firms.[7] The Rule is named after the Federal Reserve’s former chairman Paul Volcker, who originally proposed it.[8] The rule was initially introduced following the 2008 financial crisis.[9] Most people are aware that the bailouts were funded by taxpayer money.[10] The Great Recession quickly followed this crisis.[11] The rule was created by Congress in an effort to stop the practices that were perceived as associated with the financial crisis.[12] The rule was designed to reduce risks by making bank structures more transparent.[13] Under the operation of the rule, the number of conflicts that may surface when one part of a bank has different agendas than another could reduce in number.[14] The Volcker Rule has become something that many real estate investors detest.[15]
The rule is commonly detested because of the negative impacts it produces.[16] It poses over-regulation dangers on privately owned real estate including commercial real estate.[17] The effects of having so many regulations can cause significant amount of compliance costs which can burden small forms or firms that are startups.[18] For instance, if a new real estate investor is trying to create a real estate firm or business entity to include its real estate purchases they will be forced to endure costs that they may not be able to afford.[19] This could potentially put real estate investors out of the business. [20] Many times investors find themselves having to completely restructure their funds just to avoid or at least minimize the impact of the Volcker Rule on their real estate businesses. Many proponents of the elimination of the rule suggest that it would not be in the best interests of society to uphold the Volcker Rule, seeing as though private real estate had a central role in the recovery of real estate market after the 2008 financial crisis. [21] If the Trump administration is able to eliminate this rule, it is less than likely real estate investors would not be hampered in their entrepreneurial efforts.[22] By eliminating this rule, the Trump administration would be making it more plausible for commercial real estate investors to have more success because investors would be alleviated from the impacts of the Volcker Rule. [23] Instead of hiring financial advisors to devise ways to avoid the impact the rule will have on the economic growth of their real estate investments, the Trump administration would simply eliminate the rule.[24]
III) Tax Reform
Donald Trump was successful in this past election because of his tax reform aspirations. Many business minded people demanded a more simplified tax code from this new administration. [25] The economy is known for thriving in times where tax rates are lower and the tax code is clear and simple.[26] Tax rate reductions and the choice of tax status are crucial when looking at how this reform will be an asset to commercial real estate investors.[27] For instance, when real estate investors are REIT’s (real estate investment trust) and other partnerships achieve a single layer of taxation, they avoid having to pay double the amount of taxes.[28] When commercial real estate investors see the provisions within Trump’s proposed tax plan they would be more incentivized to purchase real estate.[29] In turn, this would increase the number and quickness of real estate transactions.[30] Ernst &Young provided an example of this scenario. A taxpayer with 200 million in unexpected taxable income may decide to acquire (or simply accelerate the acquisition) of real estate to avoid a 40 million tax liability.[31] This becomes especially important for real estate investors that work hand in hand with retailers as they serve as the investor’s tenants. Many times retailers who own a significant amount of real estate chose not to participate in leasebacks or property sales because of their tax liability.[32] Due to real estate being illiquid and capital intensive, the leverage and ability to deduct interest are paramount to those within the real estate industry.[33] Without the implementation of this deduction, entrepreneurs would have an incentive for companies to lease rather than own real estate.[34] This is due to the fact that the rental payment is fully deductible, plus it includes the implicit time-value-of- money component.[35] Based on a cost benefit analysis, this benefit would have to be weighed against the ability to immediately afford the cost of the building itself. Today’s real estate companies’ look to Trump’s tax reform with a bit of skepticism. A new plan poses new questions to be considered. In fact, according to Ernst &Young, they pose the following questions: 1) How would the 25% pass-through tax rate be applied? 2)Would it apply to all types of partnerships and all types of partners?3) Would it apply to all types of income earned by the partnership (e.g., rental income or dealer income)? 4)To what extent would the tax rate applied to a specific partner depend on the level of that partner’s involvement in the partnership’s business?[36] However, these questions aren’t necessarily considering private real estate investors.[37] With a simple tax reduction and a single layer taxation status, commercial real estate investors would feel more than confident about investing in additional property.
IV) Conclusion
Commercial real estate investors strive to provide quality spaces of other businesses. However, they also have businesses that they would like to be successful. By removing the over regulation that is associated with the Volcker Rule and creating a tax plan that allows real estate investors to pay the least amount of tax, commercial real estate investors would be more likely to prosper. Therefore, commercial real estate entrepreneurship will increase if the Volcker Rule is eliminated and tax reform is implemented.
[1] Real Estate, Business Dictionary (Oct. 9, 2017),
http://www.businessdictionary.com/definition/real-estate.html.
[2] Id.
[3] Id.
[4] Id.
[5] The Volcker Rule: What is it, and Why does it need changing? (Oct. 10, 2017), http://fortune.com/2017/04/06/volcker-rule-banks-donald-trump
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Seth Chertok, The Rise of the Dodd-Frank Act: How Dodd-Frank Will Likely Impact Private Equity Real Estate, 16 U. Pa. J. Bus. L. 97. (2013).
[18] Id.
[19] Id.
[20] Id.
[21] Id.
[22] Id.
[23] Id.
[24] An Update on US Tax Reform and Potential Implications for The Real Estate Industry
(Oct.12, 2017) http://www.ey.com/Publication/vwLUAssets/ey-us-tax-reforms-impact-on-real-estate/$FILE/ey-us-tax-reforms-impact-on-real-estate.pdf
[25] Id.
[26] Id
[27] Id.
[28] Id.
[29] Id.
[30] Id.
[31] Id.
[32] Id.
[33] Id.
[34] Id.
[35] Id.
[36] Id.
[37] Id.