Real Estate & Construction Monitor Newsletter - Summer 2018

Table of Contents


The Potential Impacts of Tax Reform to REITs and Real Estate & Construction Companies

On December 22, President Trump signed the tax reform bill, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018," into law, marking the largest change to U.S. tax policy since the 1980s.
With most of the provisions already in effect, it’s important that real estate and construction executives review the changes that occurred during the conference process to understand the impact to their companies. 
To help them navigate the key provisions affecting the real estate and construction industries, we’ve summarized the top considerations and implications below. 

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Economic Turbulence Ahead? Global REITs Confident They’ll Weather the Storm

By Stuart Eisenberg, national leader of BDO’s Real Estate & Construction practice

“What goes up, must come down.” That familiar refrain echoes in the back of economists’ mind every time the Dow soars to new record-breaking heights, a quasi-regular occurrence last year. After more than 70 record closes in 2017, the markets fell in early February and major indices posted their worst weekly declines in more than two years. REITs declined in tandem, with the FTSE Nareit All Equity REITs Index hitting its lowest level in 14 months.

Steep declines were short-lived, and the market started posting gains within the week. While indexes bucked the downturn in the immediate term, the dip is expected to usher in a period of increased volatility to an uncharacteristically calm market.

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Tax Reform and Partnerships: What You Need to Know

By Jeffrey N. Bilsky & William J. Hodges

The new tax law contains a number of provisions that will have a significant impact on partnerships and their partners. 

While businesses across many different industries are structured as partnerships, the structure is particularly common in the real estate and private equity sectors. The following discussion outlines several key partnership-related provisions and highlights several consequences these provisions may have on partners both in terms of annual operations as well as future capital transactions. 

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Bonus Depreciation Tax Reform Changes Make Cost Segregation Studies Essential

By Grant Keppel

With the recent passage of the bill known as the Tax Cuts and Jobs Act (TCJA), owners of commercial real estate now qualify for significant tax benefits, some of which are retroactive to the 2017 tax year.

Under the new tax regime, most owners who purchased either residential or non-residential property and closed on or after Sept. 28, 2017, can see significant tax benefits as a result of the bonus depreciation being applied to “used” property. For the first time since initial bonus depreciation provisions were passed in the Job Creation and Worker Assistance Act of 2002, owners and investors who acquire used property (property that has been used by previous owners) are now on an equal playing field as owners and investors who constructed or purchased “new” property. Under the new tax regime, qualifying assets that have a tax recovery period of 20 years or less, new and used, can now qualify for the 100-percent bonus depreciation provision in the assets’ first year of service (Note: While the term “bonus” is often misunderstood to mean an added benefit beyond the asset’s depreciable tax base, it is a boost to accelerate the tax depreciation in the first year the asset is placed in service).

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How Tax Reform Will Impact Construction

By Maureen McGetrick

Every type of industry is impacted by the passing of the bill known as the Tax Cuts and Jobs Act (TCJA), and the construction industry was not left out of the party. However, the precise impact will depend upon the structure of the business and the nature of its operations. For construction businesses organized as C corporations, the most significant changes are the reduction in the corporate tax rate, the 100-percent bonus depreciation deduction, the elimination of the corporate AMT, modifications of rules for use of certain accounting methods, and the limitations on interest expense deductions. A number of these items also impact construction companies organized as pass-through entities, either S corporations or Limited Liability Corporations taxed as partnerships (including General Partnerships, Limited Partnerships or Limited Liability Partnerships), but there are also considerations specific to flow-through structures, including the applicability of the deduction for qualified business income, also referred to as the Section 199A deduction. This article focuses on a high-level discussion of the important considerations construction companies should focus on in the wake of tax reform.

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Mall REIT M&A Could Accelerate

By Stuart Eisenberg

On the heels of Brookfield Property Partners’ acquisition of GGP, BDO USA Partner Stuart Eisenberg posits that retail REITs may have a bumpy road ahead. The second-largest U.S. mall operator, Brookfield Property Partners, is poised to expand its portfolio with the acquisition of retail REIT GGP, pending final shareholder approval. After rejecting an earlier bid, the GGP board approved a second bid by Brookfield for a total of about $15.3 billion in a combination of cash and stock priced at $23.50 per share, Reuters reported.

Many analysts say the deal significantly undervalues GGP’s assets. Markets did not appear to view the deal favorably, and mall REITs’ stocks slid the day after the announcement. Widespread investor skepticism towards retail may be to blame for GGP’s willingness to accept the deal. Announcement of nationwide store closings from name-brand operators and retailers may have created popular sentiment that all retailers and retail operators are suffering. For instance, after Macy’s announced more than 100 store closings last year, GGP’s stock fell despite none of the closures taking place in a GGP mall.

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Tariffs Spark Fears of Rising Construction Costs: Could Investment In Technology Be The Answer?

By Ian Shapiro

As U.S. trade policy decisions continue to dominate headlines, the uncertain future of high-demand import prices has business leaders and lawmakers anxious.

Earlier this year, President Trump announced a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports that took effect on March 23. While the European Union (EU), Canada, and Mexico were granted a temporary reprieve, Trump declined to extend their exemption.

China was the first to implement retaliatory tariffs on U.S. exports, such as soybeans, planes, and cars. Since then, the U.S. has been in talks with China to de-escalate the situation, but no permanent solution has been reached. After their exemption expired, Mexico announced $3 billion in tariffs against U.S. exports, including: pork, apples, potatoes, and bourbon. Canada and the EU both issued retaliatory tariffs as well.

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Single-Family Rentals: From Crisis‑Era Bargains to Thriving Market

By Stuart Eisenberg

Ten years removed from the financial crisis, the single-family rental (SFR) market has seen explosive growth. With mortgages at the center of the crisis, the resulting spike in foreclosure rates and housing prices challenged homeownership as the status quo. The crash brought an outpouring of demand into the rental markets. From 2005 to 2015, more than 8 million new rental housing units were built to accommodate that demand, according to Harvard University’s Joint Center for Housing Studies.

Real Estate Investment Trusts (REITs) and other institutional investors first entered the SFR arena during the heart of the crisis. The business strategy at the onset was simple: Purchase distressed assets and wait for the prices to increase, converting properties into rentals to supply the newly ignited demand in the meantime.

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Investing in REITs Around the World

By Stuart Eisenberg

Whether a U.S. REIT is courting international investors or investors are seeking acquisitions abroad, the landscape for foreign direct investment (FDI) is rapidly evolving.

State of FDI in U.S. real estate

Within the domestic market, the most notable shift is the decline in Chinese investment, historically the largest source of FDI. Chinese investors made $54.1 billion worth of acquisitions and $5.3 billion in dispositions since 2007, according to Real Capital Analytics. While China still accounted for the largest group of foreign buyers last year, Chinese investment in U.S. commercial real estate fell 30 percent.

This year, Chinese investors became net sellers of U.S. commercial real estate, selling off $1.3 billion worth of properties, which Real Capital Analytics notes is more than any single year before. The disposition trend is partly driven by Chinese investors’ financial distress, but it is also partly a consequence of China’s capital control restrictions on outbound investment.

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[1]   Disclaimer: Information in the publication is for reference only. Taxpayers should consult with BDO prior to making foreign investments, as several jurisdictions have tax legislation pending.