Mark Bonner: 00:11

All right. Welcome, welcome on another beautiful day in commercial real estate, and welcome to Draft Live. It's Friday, June 13. Friday the thirteenth, in fact. We're thrilled to have so many of you tuning in from across North America and Europe, and we appreciate all of you staying up very late across the pond.

Mark Bonner: 00:28

Thank you. We're also streaming live right now across social media. I am your host, Mark Bonner, Bisnell's editor in chief, and I'm coming to you live from New York. On today's program, we're digging into Trump's monster tax and spending bill currently barreling its way through the Senate and why CRE might end up the big winner or the biggest cautionary tale. We're talking QBI deductions, bonus depreciation, the SALT tax deduction, and a rent algorithm fight that's about to go federal.

Mark Bonner: 00:58

And finally, what does it all mean for all of us, commercial real estate? Joining us today to help break it all down, Eisner Amper, real estate tax whisperer, Ryan Sievers. He's a partner in the firm's National Real Estate Group who advises on REITs, funds, and private equity deals. And he also just coauthored a deep dive on the one big beautiful bill and all of its real estate provisions. You can check it out right now on eisneramper.com.

Mark Bonner: 01:25

Ryan, welcome to the program. I know you're dialing in from Dallas.

Ryan Sievers: 01:28

Thank you, Mark. Appreciate it. Glad to be here, and thanks for having me.

Mark Bonner: 01:33

Thank you. Okay. Before we dive in, a quick reality check. The big beautiful bill is still very much in motion. The senate is actively debating it.

Mark Bonner: 01:42

And while July 4 is the target, even Republicans have admitted this week that might be a stretch. Key pieces, SALT, clean energy tax credits, and business deductions, they're still on the table. So nothing's final yet, but we're going to break it down today as it is. It's a moving target, but one with extremely large implications for the real estate industry. With that, let's jump on in.

Mark Bonner: 02:10

Bonus depreciation. It's back. For years, developers have relied on bonus depreciation to make profit math work, project math work. The house wants to bring back full 100% write offs through 2029, but the senate might change the timing or make it permanent. Ryan, for commercial real estate folks waiting on the sidelines, is this really the spark to restart acquisitions and construction, or is debt still too expensive and timelines too unpredictable?

Ryan Sievers: 02:39

Well, I think, you know, debt is obviously expensive, but bonus depreciation and the deductions that come along with it are huge in terms of making some of the math work, penciling out deals and seeing if they make sense. I've had a conversation with a client or a prospective client actually a couple of days ago, and this was one of their main topics was we made deals in 'twenty two, 'twenty three that don't necessarily make sense today because bonus is tiered down. So right now, bonus is set to expire at the end of twenty six, at which point it goes to zero. The house bill right now would, as you said, put that back at a 100% through 2029. So it effectively kicks the can down the road three years.

Ryan Sievers: 03:24

You get full expensing, now, unless you get it in twenty seven, twenty eight, twenty nine. The senate has indicated a desire or a preference to make that permanent. It's incredibly expensive to do. So it may not happen, but that's the lay of the land. I think it absolutely helps the math in terms of does a deal make sense of it or can we squeeze it through and what is the tax consequence of that investment?

Ryan Sievers: 03:50

So I think it's probably, from a real estate standpoint, one of the biggest elements, in my opinion, of this bill.

Mark Bonner: 03:58

Is it enough to get deals moving again?

Ryan Sievers: 04:01

I mean, that's going to depend on the deal makers and the deal teams. Mean, does it do enough to move the needle for them? I don't know, but I certainly think it can't hurt.

Mark Bonner: 04:11

Okay. Okay, let's move on. More interest deductibility. The 2017 tax law started limiting how much interest you could write off. Now the House wants to reverse that, letting borrowers once again deduct more of their financing costs.

Mark Bonner: 04:26

But the Senate is still negotiating how permanent that should be. Are your clients taking this as a green light to layer on more debt again? Or are lenders and capital partners still in proceed with caution mode?

Ryan Sievers: 04:38

Yeah, I haven't seen clients looking at this from a let's lever up standpoint. Excuse me. I see it more of a, you know, real estate so the Tax Cuts and Jobs Act is what create a lot of these provisions that we're talking about today. And then that was effective back in '18 in Trump's term. And January, which is what we're talking about here, was created in that law.

Ryan Sievers: 05:04

And the real estate lobby or the real estate group industry fared pretty well in that bill. And they were given certain avenues to avoid applicability of 01/1963. Can make an election to completely disregard it. And you do that by taking slightly longer depreciation lines. So when that depreciation amortization add back end in 'twenty two, we saw a lot more entities, a lot more taxpayers that were suddenly faced with a limitation.

Ryan Sievers: 05:38

They didn't have to make an election before, but maybe now they did. And so they make that election. They're still not subject to interest expense limitation, but they have a little bit slower depreciation. Adding that back in now, I think, makes that math relevant again. In other words, you're likely to have taxpayers that again have to make the decision of, well, we haven't made an election out yet.

Ryan Sievers: 06:01

The limitation is now increased, so we may not have to. In other words, you can still deduct your interest, and you can have a little bit shorter life depreciation on your assets. Now, that may not be the case. It's going to be taxpayer specific. But real estate, I think, fares pretty well under the 163 J rules, and this certainly helps.

Ryan Sievers: 06:20

But the depreciation under the election versus not, it doesn't slow down that much. For nonresidential, it goes from 39 to 40. From residential, it goes from 27 out to 30. So outside of QIP, which is its own little story, the pay for isn't huge. So a lot of what One Big Beautiful Bill does on the real estate front is tweaking around the edges, frankly, in a lot of things that were instituted because of TCGA.

Ryan Sievers: 06:49

And this is one of them. It's certainly helpful, but for real estate, I don't know if it's a massive boost, let's put it that way.

Mark Bonner: 06:58

So you don't think that this will create a leverage situation where everything could come roaring back?

Ryan Sievers: 07:05

It doesn't strike me as that significant of a change for real estate. It might, it's always taxpayer specific. Your facts say, the analysis of whether they make this election or not is always going to include an analysis of QIP because that's subject to bonus. So it's going to depend on what kind of asset you're placing in service and when, how leveraged you are, which of a limitation without it. But in and of itself, it makes a difference.

Ryan Sievers: 07:34

But it's just a lot of real estate companies are already making this election, and so this is a moot point to them.

Mark Bonner: 07:41

Okay. Another line item in here, a QBI deduction rising to 23%. A lot of real estate pros, as you know, operate through LLCs or partnerships. The house wants to make the pass through tax break permanent, bumping it from 20% to 23%. But in the real world, does that extra 3% make anyone change how they structure a deal?

Ryan Sievers: 08:02

So on a pure pass through, it's about a one and change tax rate difference, because you're 23% on 37% is a little over a percent, something like that. It makes a difference. I think when thinking about this bill, what's important to think about is not just comparing it to what the state of events or state of law is today, but also what would happen if we did nothing. Right? So today it's a 20% deduction, but it's going to expire at the end of twenty five, at which point it's a 0% deduction.

Ryan Sievers: 08:36

Right? So, you know, in TCJA, they reduced the corporate tax rate from 35 to to 21. It's a huge decrease. And so effectively, they had to do something to equalize holding an investment via corporate versus not. And QBI was a way to align those rates so that you effectively weren't punished for the form of business in which you chose to make your investment, I.

Ryan Sievers: 09:02

E. Pass through versus corporate. Increasing the rate from 20 to 23 is helpful. It, again, shifts the balance of power to the partnership flow through side away from corporate, which I'm partial to partnerships. So I like that.

Ryan Sievers: 09:19

I also think QVI 19A is huge for debt funds and REITs because a REIT is I call it super status, a dividend from a REIT automatically qualifies for QBI regardless of income level, regardless of anything. It's just instantly in. And so debt funds, because of TCJA, a lot of them instituted restructures, and it's very beneficial to them. So to see that extended is huge.

Mark Bonner: 09:47

So it sounds like it's just a line on a K-one, something that you might see in tax prep software at the end of the year.

Ryan Sievers: 09:54

Yeah. Income from a flow through is going to tell you if it's QBI or not. And if it is and you can support it with, wages and and and basis, then, yeah, you get to deduct if this passes 23% of your income. So you're paying tax effectively on a net 77%. That's a huge win.

Mark Bonner: 10:16

Okay. Let's move on to SALT. The House raised the cap on state and local tax deductions to $40,000 but only for people making under a half a million dollars. That's a tough threshold for many CRE pros in places like New York or California or Illinois. And now the Senate may water it down even more.

Mark Bonner: 10:36

Is this provision just a political chess piece or will it actually help people in the industry?

Ryan Sievers: 10:41

So I think a couple of things. So it's at 40 right now in the house and it phases out starting with incomes of $500. The Senate has proposed the last March, not proposed, but they've discussed making that more like 30. And the real issue here is increasing the salt cap is incredibly expensive to do. And so if you're looking for an easy lever to pull to help you balance some math, adjusting the salt cap by a little bit equates to a lot of change.

Ryan Sievers: 11:16

So you're absolutely right. It probably doesn't help a lot of people that would phase out of it. But I think why it's relevant is because it is such a expensive proposition, and it is so important to quite a few members in the house. In other words, they cannot vote for a bill that doesn't include something on the SALT piece. And so when the Senate is over here pulling this lever and saying, well, we can free up hundreds of billions of dollars by lowering the SALT cap, they can't lower it too much because then the House is going to say, well, we just can't vote for that.

Ryan Sievers: 11:48

So it becomes this very political issue that they're going to have to figure out how to thread a needle on. The SALT cap, the home mortgage interest deduction, again, doesn't always impact commercial real estate, but it impacts people's cost of using our product, frankly. And so to the extent those items aren't deductible, increases the cost of using them. One thing I will point out, the original house version, there was discussion about limiting business self deductions. So that could be corporate income taxes and even potentially property taxes.

Ryan Sievers: 12:25

And that would have been, frankly, catastrophic to real estate because for a lot of real estate companies, that is an enormous expense and would flip you from a loss or small income to a lot of income. And so I think in this bill, there's good things, there's bad things, and then there's frankly omissions that are great. And that's one of them, is that that stayed off the table because that could have been really devastating to the industry.

Mark Bonner: 12:49

So as it stands, and again, this is a moving target, right? Who would benefit from this in real estate?

Ryan Sievers: 12:54

So if your taxable income is over $500, you're phasing out, think it's 500 to $600. I have to refresh from that. Basically, if your income's over that, you're dropping back down to $10,000 Now, what I mentioned earlier, you have to compare where we are now versus where we would be if we did nothing. And there's good things in this bill. There's bad things in this bill.

Ryan Sievers: 13:14

I think this one's kind of both, frankly, because, yeah, people in the upper middle class or whatever income range you wanna describe that as, they're gonna get some deduction for their property taxes and maybe some state income taxes. Incomes above that aren't gonna get anything, and and they're gonna be stuck at $10. That's kind of good. What's bad is, is think about what if we did nothing? This provision would expire entirely, and the $10,000 cap goes away, and we're back to deducting everything.

Ryan Sievers: 13:43

So we're happy about $40,000, really some people are, but you're thinking about where we are today and not where we came from and that we used to be able to deduct absolutely everything. Okay.

Mark Bonner: 13:56

If you're just joining us, we're talking big beautiful bill, the monster budget bill currently percolating through the US Senate and all of its implications for commercial real estate. We're talking to Ryan Sievers from Eisner Amper. Let's move on. Loss limits locked in, Ryan. Big projects usually mean big paper losses early on, and for years, developers could bank those as net operating losses to offset future income.

Mark Bonner: 14:22

The House wants to cut that off and make loss limitations permanent. If that survives Senate, what does it mean for how projects get capitalized or sequenced?

Ryan Sievers: 14:31

Yep. So the way TCGA approached this was business losses, trader business losses net were capped at 500,000 for a married couple, obviously indexed for inflation. And that was set to expire here, I think in 'twenty eight, have to refresh on that. But what it does is the tax law just really quick, it's really good at creating silos or buckets. And they put income and deductions in certain buckets and they don't let you offset them against each other.

Ryan Sievers: 15:03

And that's a really sneaky kind of backdoor tax increase. In other words, if you just looked at your net taxable income and applied a rate and you were done, okay, fine. But if they say, hey, you've got this loss over here, but you can't use it against this other income. You end up with net income. That's the same, that's a tax increase.

Ryan Sievers: 15:18

Right? And so $4.61 l is just another silo, another bucket. So right now, to deduct losses, you have to have basis. You have to have at risk basis. You've got passive activity loss limitation.

Ryan Sievers: 15:30

These are all buckets that you have to get through. And And now we've added four sixty one L, yet another bucket. And how it works now is, well, that would be expiring here soon. So again, remember where we are today versus where we could be. And the right now, if you have a excess business loss, which is a loss in excess of that 500,000, basically, the next year it converts to an NOL, which means you can use it for all sorts of things.

Ryan Sievers: 16:00

And this bill, the house bill, would would change that and say, no. It stays a $4.61 l loss. And so basically, that sits there until you have four sixty one l income in the future to absorb that loss. So it creates another siloed bucket that just sits there by itself. So I'll be honest with you, TCJA came out, we went through those provisions about the NOL conversion and frankly sat there and said, well, that has to be wrong.

Ryan Sievers: 16:28

They couldn't have possibly meant that. So I think this is one where maybe they meant this to be the way it works, but they didn't draft it that way. So now they're putting it to actually reflect that. But yeah, it's a significant one as well, potentially.

Mark Bonner: 16:45

So what bottom line? Should ground up developers be nervous?

Ryan Sievers: 16:50

I mean, a good tax answer is always it depends, and I hate to give you that answer, but it's going to depend on owner or partner level activity. In other words, if they have significant income from other sources, then it could impact them. They may not be able to utilize that trader business loss against other sources of income, and it could be significant. So obviously, I think what's important is to model that out and plan and think about what other sources of income do I have? Get with your tax provider, your tax whoever, and just model that and say, hey, I've got this coming.

Ryan Sievers: 17:25

Here's what I have in addition to it. How does it all fit together? And make sure you understand that.

Mark Bonner: 17:30

Okay. So let's move on. AI moratorium versus local zoning. Data centers are booming. Everyone knows it.

Mark Bonner: 17:36

They're a little controversial too. In some markets, they're already maxing out the grid, sucking up water, or facing noise complaints. Now the House bill includes a federal ban on local governments regulating AI, which critics say could tie officials' hands when trying to control where data centers go. If this moratorium sticks, are we headed for more lawsuits? And how should developers think about citing and power access?

Ryan Sievers: 18:03

Yeah, it's a great question. And I'll be honest with you. I did not know that that was in there in the bill until we talked the other day. And I've been thinking about it since. I think it's a really interesting issue in and what does it do?

Ryan Sievers: 18:18

You know, from from my perspective, how I'm thinking about it is, you know, if the states don't have the ability to regulate, you're creating inefficiencies there. I don't know how that works its way through the system. I think AI and its impact on a lot of things, public accounting being one of them, like, how does this all play out? I think it will be fascinating. I can tell you I have a lot of I shouldn't say a lot, but I have clients in in the in the data warehouse space and and businesses booming.

Ryan Sievers: 18:50

But how this impacts it, I think, will be interesting to see.

Mark Bonner: 18:54

Yeah, well, I mean, look, data centers are going through the roof. The whole industry has been turbocharged. We've all seen the headlines that trillions of dollars have been invested. But I think what's underreported and unappreciated is that in all these sites across The United States, they're running into major headwinds, right? So I mean, in your opinion, now that you've thought about it for a bit, Ryan, mean, this just going to be another fight that the data center industry has to wage?

Ryan Sievers: 19:17

Well, I think just like anything, the pendulum probably swings too far one way, then swings back. Everyone gets really excited about something and everyone rushes in. And then potentially reality sets in and you realize that it's not as easy as we thought. And potentially that is where data centers could be in the moment is it was this everybody's rushing in. It's the next wave.

Ryan Sievers: 19:37

Maybe it was the industrial of twenty twenty one or twenty twenty two, whatever it was. So everything goes in ebbs and flows and cycles, and this might be one. It's hard to say.

Mark Bonner: 19:49

Okay. Let's get into the federal ban on rent algorithms. In some cities, local laws have cracked down on algorithmic rent pricing tools, saying they drive up costs, but the House bill would ban those local restrictions for ten years. That could be a huge windfall for multifamily owners if it survives dissenting. Are your clients rethinking how they sent rents in light of this?

Ryan Sievers: 20:12

I'm not aware of any yet. I'm actually would be interested to have those conversations with them and and see how they're interpreting this. Again, you know, it could impact pricing decisions and strategies and things like that and potentially efficiency in doing so, But I'm not aware of anybody considering this yet. So I think we're still early on in that.

Mark Bonner: 20:36

Okay. So I've got a question from the audience. Does this apply to passive investors like me that own rental property directly, or is it just trader business taxpayers? Which I'm not sure what that's exactly in reference to.

Ryan Sievers: 20:50

If it's four sixty one l, I believe it would apply to all. It's not just passive. In other words, it's gonna go through all those buckets, and it applies.

Mark Bonner: 20:58

K. Now one other thing that we have on our list here is the IRA clean energy credits facing the acts potentially. Right? The inflation reduction acts spurred billions in clean energy manufacturing as well as offering tax breaks to upgrade housing and other buildings. But the House bill got so many of those credits, and now the Senate is weighing whether to follow suit or soften the blow.

Mark Bonner: 21:21

If those credits vanish, what happens to the pipeline for gigafactories, office renovations, SPAC labs, and warehouses that are banking on that support?

Ryan Sievers: 21:30

Yeah, mean, it's obviously impacted. When looking at all these provisions, I kind of actually went through and categorized good versus bad and ranked them in terms of how good and how bad. And I think that's obviously a significant impact because just like bonus depreciation, just like one thing we didn't talk about, 01/1979, the depreciation is increasing this bill. So all of these things that give back your investment dollars in a quick fashion via a deduction or a credit. A credit is a deduction on steroids.

Ryan Sievers: 22:01

It's a dollar for dollar. Those inherently impact the economics of the deal, of the development. So think there's no way that it doesn't have some sort of impact. Exactly quantify that, think it's difficult to say, but it certainly has an impact.

Mark Bonner: 22:18

Okay. The House wants to raise low income housing tax credit allocations, especially for rural and tribal communities. But materials are still expensive. Labor is hard to find, and interest rates haven't budged much. I guess we're going to find out next week if that comes to pass.

Mark Bonner: 22:34

Even if the credit passes, will developers jump at them or wait for a better financing climate?

Ryan Sievers: 22:41

So what I've heard on the low income housing piece, and that's not an area that I unfortunately spend much time. We have a group of partners that deal exclusively in that. And there's a lot of appetite for the low income housing credit. I think everybody likes it. So there's, you know, some of these provisions are sticky.

Ryan Sievers: 23:00

Some people like them, some people don't. And by people, obviously, representatives and senators, I think there's broad based support for this. It's likely to go through. Like we said, any credit, any enhancement to a credit program is going

Mark Bonner: 23:15

to be

Ryan Sievers: 23:15

beneficial. Specifically, how that's received by the market, I mean, it's got to be a positive, but specifically, I can't say.

Mark Bonner: 23:23

Right. And obviously, the the multibillion dollar, maybe even multi trillion dollar question here is, will it actually lead to more housing in The United States? I guess we're gonna have to wait and find out. Right? Okay.

Mark Bonner: 23:34

Last question here. I know you don't have a lot of experience here, but there's a lot of people in our audience that are really focused on this Opportunity Zone two point o proposal. The new version of the OZ program in the House Bill dials back some of the perks. Right? We're talking about those 8,700 tracks across The United States to spur development in communities everywhere, especially for ordinary income deferral and basis step ups.

Mark Bonner: 23:59

Does the real estate industry still see OZ as a strong tool or have the changes dimmed investor appetite?

Ryan Sievers: 24:07

Yeah. I think so what we have here is is kind of QOZ two point o. It's the next iteration of of the program. Excuse me. And so your 105% basis adjustments that were under the old program, those are limited with a single 10% base up now.

Ryan Sievers: 24:26

I think what's interesting in this program is there's an enhanced emphasis on rural areas. In other words, there's a 30% step up rather than 10%, so that can be an attractive tool to help spur rural investment. And you mentioned the $10,000 ordinary income piece. That's not eligible for that step up. But I think $10,000, in my opinion, isn't going to make anybody move unless they were already doing something.

Ryan Sievers: 24:56

But if you're going to throw an extra $10, why not? But yeah, I think that's a fairly de minimis number there. But, you know, I think it keeps the program going with a real emphasis or enhancement extension of kind of the rural element of the QSU piece.

Mark Bonner: 25:17

Yeah. And are they still worth it? Right? I mean, do your clients ask you about this, Ryan?

Ryan Sievers: 25:21

Well, what's funny is if you have a property that the zone runs down the middle of the street, a property on the left side of the street that's not in the zone and the property on the right hand of street that is in the zone, the one on the right side probably costs more. So just like a lot of tax benefits or tax consequences and deals, the tax benefits or costs are at least somewhat factored into that equation. So again, all of those things will come into the analysis of does it help? Does it make sense? And does it spur investment?

Ryan Sievers: 25:53

Probably does.

Mark Bonner: 25:57

Yeah. I think we have time for one more question. I got a question from the audience. Ryan, I'm curious to know how you project interest rates to change based on this bill, when we could expect to change, and how much the federal deficit might increase. Do you have a projection here?

Ryan Sievers: 26:13

I personally do not. I mean, you can look at estimates from the CBO and things like that. And I think it's it's pretty unanimous that it does expect it to add to the deficit. As far as interest rates, I mean, that's a a just a completely loaded question. You know, I think

Mark Bonner: 26:33

We're gonna find out next week. Right?

Ryan Sievers: 26:35

Yeah. People are calling for them to go down. Will they will they go down? You know, I'm a betting person, I guess my bet would be probably not. But again, that's not something that I'm really studying on daily or weekly basis, just kind of dealing with with the tax consequences of of the decisions that are being made by everybody on this call.

Ryan Sievers: 26:59

So

Mark Bonner: 26:59

Okay. I'm getting the hook here from my producer, Ryan. So I think that's all the time we have today. I wanna thank you for being here today. We're gonna be back with another episode of Draft Live next week, so don't miss out.

Mark Bonner: 27:12

You can sign up now at bisnell.comfront/events. And by the way, you can catch all the replays and highlights of today's episode on our site and socials. You can find Live on your favorite podcast app too. I like Spotify personally. We hope to see you all here at the same time, same place next Friday.

Mark Bonner: 27:30

This is Live. Have a great weekend y'all, and happy Father's Day.