Dec. 31 (Bloomberg) -- Fewer Americans than anticipated filed claims for unemployment benefits last week, pointing to an improvement in the labor market that will help sustain economic growth next year.
Initial jobless claims fell by 22,000 to 432,000 in the week ended Dec. 26, the lowest level since July 2008, Labor Department figures showed today in Washington. The number of people collecting unemployment insurance fell in the prior week to 4.98 million, and those receiving extended benefits jumped.
Companies are retaining staff as sales improve and production picks up. Gains in consumer spending, which accounts for 70 percent of the economy, may encourage more hiring in coming months, helping to bolster the rebound from the worst recession since the 1930s.
“It’s boding well for outright job growth,” said Stephen Gallagher, chief U.S. economist at Societe Generale in New York, who forecast claims would drop to 430,000. “It seems that some of the layoffs that took place in the early part of the year were excessive.”
Treasury securities fell after the report, pushing the yield on the benchmark 10-year note up to 3.89 percent at 10:41 a.m. in New York from 3.79 percent late yesterday. The Standard & Poor’s 500 Index was down 0.3 percent to 1,123.45.
Unexpected Drop
Economists forecast claims would rise to 460,000 from a previously reported 452,000, according to the median of 29 projections in a Bloomberg News survey. Estimates ranged from 430,000 to 490,000.
“What we’ve seen is definite stability and just a hint toward things trying to get better,” Jeffrey Joerres, chief executive officer of Manpower Inc., said in a Bloomberg Television interview today. The world’s second-largest provider of temporary workers, is experiencing “slow but steady increases in people who are out on assignment,” he said. “It’s a little in every office, which is a good sign because it’s broad-based.”
A Labor Department spokesman said last week’s figures were “consistent” with recent trends and were not influenced by any unusual factors. Even so, the week of the Christmas holiday is difficult to adjust for seasonal variations, he said.
The four-week moving average of initial claims, a less volatile measure, dropped to 460,250 last week from 465,750 the prior one. Claims are down from a 26-year high of 674,000 in the week ended March 27.
Continuing claims decreased by 57,000 in the week ended Dec. 19, reaching the lowest level since February. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs.
Extended Benefits
Today’s report showed the number of people who’ve use up their traditional benefits and are now collecting extended payments climbed by about 199,000 to 4.82 million in the week ended Dec. 12. Twenty-nine of the states and territories where workers are eligible to receive government extension have begun to report that data, a Labor Department spokesman said. Two states have started reporting data on the latest emergency extension, he said.
President Barack Obama this month signed into law legislation that included a stopgap provision to ensure that unemployment benefits weren’t cut off over the holidays.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 3.8 percent in the week ended Dec. 19, today’s report showed.
State Breakdown
Twenty-seven states and territories reported a decrease in claims, while 26 reported an increase. These data are reported with a one-week lag.
The government is scheduled to release its December payrolls report on Jan. 8. In November, the economy lost the fewest jobs since the recession began two years ago and the unemployment rate receded to 10 percent from a 26-year high of 10.2 percent the prior month.
Even so, Americans are concerned about their financial future. Fewer consumers in December believed their incomes will increase over the next three to six months, the Conference Board’s confidence report this week showed.
Warren Buffett’s Berkshire Hathaway Inc. is among companies that slashed employment in 2009. The Omaha, Nebraska-based company last week said it cut 21,000 workers from its payroll amid a slump at the firm’s manufacturing and retail units. The company and its subsidiaries now have about 225,000 workers, it said in regulatory filings.
Sunday, January 3, 2010
Companies in U.S. Expand at Fastest Pace Since 2006
Dec. 30 (Bloomberg) -- Companies in the U.S. expanded in December at the fastest pace in almost four years, signaling the economic recovery is gaining speed heading into 2010.
The Institute for Supply Management-Chicago Inc. said today its barometer rose to 60, exceeding the most optimistic estimate of economists surveyed by Bloomberg News and the highest level since January 2006. The gauge, in which readings greater than 50 signal expansion, showed companies boosted production and employment as orders climbed.
Stimulus programs and discounting have propelled a rebound in global sales that is reducing stockpiles, which may spur manufacturers to further increase production in coming months. Caterpillar Inc. is among companies that may recall dismissed staff, pointing to gains in employment that will drive consumer spending, which accounts for 70 percent of the economy.
“Manufacturing is now moving into recovery,” said David Sloan, senior economist at 4Cast Inc. in New York, whose estimate was the highest among economists surveyed. “Inventories are rebuilding and exports are looking strong, with the Asian economies looking firmer and the dollar weak.”
Stocks drifted between gains and losses. The Standard & Poor’s 500 Index was little changed to close at 1,126.42.
Exceeds Estimates
Economists projected the Chicago index would drop to 55.1 from 56.1 in November, based on the median estimate of 53 projections in the Bloomberg survey. Forecasts ranged from 52 to 58.5.
The group’s gauge of orders climbed to the highest level in more than two years and its measure of employment showed growth for the first time since November 2007, the month before the recession began. Indexes of production and order backlogs also improved.
Caterpillar, the world’s largest maker of bulldozers and excavators, will bring back some laid-off workers next year as sales improve, said Chief Executive Officer Jim Owens.
“We’ll gradually begin to call people back and to rebuild our overall sales and ability to ship product,” Owens said in a Dec. 11 interview with Bloomberg Television. “I think it will gradually begin to pick up as 2010 unfolds.”
Caterpillar cut about 18,700 full-time jobs and about the same number of temporary workers since December 2008 as the global recession reduced demand. The Peoria, Illinois-based company predicts 2010 sales will increase as much as 25 percent from the midpoint of the 2009 forecast range.
Early Indicator
Economists watch the Chicago index for an early reading on the outlook for overall U.S. manufacturing, which makes up about 12 percent of the economy. The group has said their membership includes both manufacturers and service providers, making the gauge a measure of overall growth.
The Tempe, Arizona-based Institute for Supply Management’s factory index probably rose this month to 54 from 53.6 in November, according to a survey median. That report is due Jan. 4.
The world’s largest economy expanded at a 2.2 percent pace from July through September after a yearlong contraction that was the worst since the 1930s, figures from the Commerce Department showed last week. Economists surveyed by Bloomberg forecast growth to pick up to a 3 percent pace in the fourth quarter and average 2.6 percent for all of 2010.
Exports rose for the sixth month in October as economies worldwide rebounded from the global economic slump. A 13 percent drop in the dollar since March 5 against a basket of six major currencies also making American goods more competitive to overseas buyers.
Inventories Increase
Inventories at U.S. companies rose in October for the first time in more than a year, the government said Dec. 11, a sign firms are boosting production in line with rising sales.
United Parcel Service Inc. Chief Executive Officer Scott Davis said Dec. 2 that shipping demand was starting to improve as companies rebuild inventory and consumers began holiday shopping. UPS, the world’s largest package-delivery company, is considered a bellwether for the economy because it handles goods ranging from auto parts to electronics to clothing.
“Inventory has gotten real low,” Davis said in a Bloomberg Television interview. “We think there will be some replenishment of inventories going forward, so the outlook is much better.”
The Institute for Supply Management-Chicago Inc. said today its barometer rose to 60, exceeding the most optimistic estimate of economists surveyed by Bloomberg News and the highest level since January 2006. The gauge, in which readings greater than 50 signal expansion, showed companies boosted production and employment as orders climbed.
Stimulus programs and discounting have propelled a rebound in global sales that is reducing stockpiles, which may spur manufacturers to further increase production in coming months. Caterpillar Inc. is among companies that may recall dismissed staff, pointing to gains in employment that will drive consumer spending, which accounts for 70 percent of the economy.
“Manufacturing is now moving into recovery,” said David Sloan, senior economist at 4Cast Inc. in New York, whose estimate was the highest among economists surveyed. “Inventories are rebuilding and exports are looking strong, with the Asian economies looking firmer and the dollar weak.”
Stocks drifted between gains and losses. The Standard & Poor’s 500 Index was little changed to close at 1,126.42.
Exceeds Estimates
Economists projected the Chicago index would drop to 55.1 from 56.1 in November, based on the median estimate of 53 projections in the Bloomberg survey. Forecasts ranged from 52 to 58.5.
The group’s gauge of orders climbed to the highest level in more than two years and its measure of employment showed growth for the first time since November 2007, the month before the recession began. Indexes of production and order backlogs also improved.
Caterpillar, the world’s largest maker of bulldozers and excavators, will bring back some laid-off workers next year as sales improve, said Chief Executive Officer Jim Owens.
“We’ll gradually begin to call people back and to rebuild our overall sales and ability to ship product,” Owens said in a Dec. 11 interview with Bloomberg Television. “I think it will gradually begin to pick up as 2010 unfolds.”
Caterpillar cut about 18,700 full-time jobs and about the same number of temporary workers since December 2008 as the global recession reduced demand. The Peoria, Illinois-based company predicts 2010 sales will increase as much as 25 percent from the midpoint of the 2009 forecast range.
Early Indicator
Economists watch the Chicago index for an early reading on the outlook for overall U.S. manufacturing, which makes up about 12 percent of the economy. The group has said their membership includes both manufacturers and service providers, making the gauge a measure of overall growth.
The Tempe, Arizona-based Institute for Supply Management’s factory index probably rose this month to 54 from 53.6 in November, according to a survey median. That report is due Jan. 4.
The world’s largest economy expanded at a 2.2 percent pace from July through September after a yearlong contraction that was the worst since the 1930s, figures from the Commerce Department showed last week. Economists surveyed by Bloomberg forecast growth to pick up to a 3 percent pace in the fourth quarter and average 2.6 percent for all of 2010.
Exports rose for the sixth month in October as economies worldwide rebounded from the global economic slump. A 13 percent drop in the dollar since March 5 against a basket of six major currencies also making American goods more competitive to overseas buyers.
Inventories Increase
Inventories at U.S. companies rose in October for the first time in more than a year, the government said Dec. 11, a sign firms are boosting production in line with rising sales.
United Parcel Service Inc. Chief Executive Officer Scott Davis said Dec. 2 that shipping demand was starting to improve as companies rebuild inventory and consumers began holiday shopping. UPS, the world’s largest package-delivery company, is considered a bellwether for the economy because it handles goods ranging from auto parts to electronics to clothing.
“Inventory has gotten real low,” Davis said in a Bloomberg Television interview. “We think there will be some replenishment of inventories going forward, so the outlook is much better.”
Commodities Heading for Best Year Since 1970 on Chinese Demand
Dec. 31 (Bloomberg) -- Commodities headed for their best year since at least 1970, led by a doubling in copper, sugar and lead prices, as Chinese demand compensated for the steepest slump in the global economy since World War II.
The S&P GSCI Index of 24 raw materials rose 51 percent, its best annual gain according to data on Bloomberg going back to 1971, as of 8:57 a.m. in New York. That outpaced the 28 percent gain in the MSCI World Index of stocks in 23 developed nations and 3.5 percent decline in Treasuries, according to Bank of America Merrill Lynch indexes. The S&P GSCI Total Return Index climbed 14 percent this year.
China, the biggest consumer of commodities such as copper and iron ore, expanded 9 percent this year, according to the median estimate of economists surveyed by Bloomberg. The nation imported record amounts of both raw materials this year, making up for weaker demand from countries such as the U.S., whose economy is forecast to contract 2.5 percent, and the euro zone, with a projected 4.1 percent drop. Commodities drew record investment of $60 billion this year, Barclays Capital estimates.
“If you look at the theoretical or global portfolio of assets that are out there, the percentage of commodities allocation is tiny, less than 1 percent,” said Kevin Norrish, a commodities analyst at Barclays Capital in London. “If you look at what investors think that they should have, clearly that would suggest there’s a lot of potential for growth.”
The Reuters/Jefferies CRB Index of 19 commodities has advanced 24 percent this year, heading for the biggest jump since 1973.
Lead Surges
Lead was the best performer among the main industrial metals traded on the London Metal Exchange this year, advancing 142 percent. The metal rose 387 percent this decade, making it the winner according to calculations by Bloomberg on Dec. 30 for 36 exchange-traded raw materials. Copper added 140 percent this year and 290 percent over the decade.
Lead for delivery in three months recently added $4, or 0.2 percent, to $2,415 a metric ton on the LME. Copper gained 0.6 percent to $7,375 a ton, paring a climb to the highest price in almost 16 months.
A report due tomorrow will probably signal the fastest expansion in Chinese manufacturing since April 2008, based on the median forecast in a Bloomberg survey of economists. The nation’s central bank will maintain a “moderately loose” monetary policy because 2010 will be a crucial year for strengthening the recovery, Governor Zhou Xiaochuan said today.
Among precious metals, gold rose 25 percent and headed for its ninth consecutive annual gain, the longest winning streak since at least 1949. The metal strengthened as a weaker dollar spurred investor demand for a hedge against the currency. The U.S. Dollar Index, a gauge against six counterparts, declined 4.6 percent this year.
Platinum, Oil
Gold for immediate delivery was 1 percent higher at $1,104.23 an ounce. Platinum added 57 percent and palladium jumped 116 percent in 2009 as investors anticipated improving consumption of the metals used in autocatalysts.
Crude oil advanced 78 percent this year and 210 percent for the decade. The Organization of Petroleum Exporting Countries, accounting for 40 percent of global oil supply, reduced output in response to the worldwide economic slump.
The fuel for February delivery gained 0.2 percent to $79.41 a barrel on the New York Mercantile Exchange.
U.S. crude-oil inventories dropped 1.54 million barrels to 326 million barrels in the week to Dec. 25, Energy Department data showed yesterday. Distillate fuel and gasoline supplies also declined.
Raw sugar traded in New York gained 129 percent on expectations that harvests in Brazil and India, the biggest producers, would be damaged by excess rain or drought. Sugar was the decade’s second-best performer, rising 341 percent. Wheat retreated 10 percent and corn added 2.3 percent this year.
The S&P GSCI Index of 24 raw materials rose 51 percent, its best annual gain according to data on Bloomberg going back to 1971, as of 8:57 a.m. in New York. That outpaced the 28 percent gain in the MSCI World Index of stocks in 23 developed nations and 3.5 percent decline in Treasuries, according to Bank of America Merrill Lynch indexes. The S&P GSCI Total Return Index climbed 14 percent this year.
China, the biggest consumer of commodities such as copper and iron ore, expanded 9 percent this year, according to the median estimate of economists surveyed by Bloomberg. The nation imported record amounts of both raw materials this year, making up for weaker demand from countries such as the U.S., whose economy is forecast to contract 2.5 percent, and the euro zone, with a projected 4.1 percent drop. Commodities drew record investment of $60 billion this year, Barclays Capital estimates.
“If you look at the theoretical or global portfolio of assets that are out there, the percentage of commodities allocation is tiny, less than 1 percent,” said Kevin Norrish, a commodities analyst at Barclays Capital in London. “If you look at what investors think that they should have, clearly that would suggest there’s a lot of potential for growth.”
The Reuters/Jefferies CRB Index of 19 commodities has advanced 24 percent this year, heading for the biggest jump since 1973.
Lead Surges
Lead was the best performer among the main industrial metals traded on the London Metal Exchange this year, advancing 142 percent. The metal rose 387 percent this decade, making it the winner according to calculations by Bloomberg on Dec. 30 for 36 exchange-traded raw materials. Copper added 140 percent this year and 290 percent over the decade.
Lead for delivery in three months recently added $4, or 0.2 percent, to $2,415 a metric ton on the LME. Copper gained 0.6 percent to $7,375 a ton, paring a climb to the highest price in almost 16 months.
A report due tomorrow will probably signal the fastest expansion in Chinese manufacturing since April 2008, based on the median forecast in a Bloomberg survey of economists. The nation’s central bank will maintain a “moderately loose” monetary policy because 2010 will be a crucial year for strengthening the recovery, Governor Zhou Xiaochuan said today.
Among precious metals, gold rose 25 percent and headed for its ninth consecutive annual gain, the longest winning streak since at least 1949. The metal strengthened as a weaker dollar spurred investor demand for a hedge against the currency. The U.S. Dollar Index, a gauge against six counterparts, declined 4.6 percent this year.
Platinum, Oil
Gold for immediate delivery was 1 percent higher at $1,104.23 an ounce. Platinum added 57 percent and palladium jumped 116 percent in 2009 as investors anticipated improving consumption of the metals used in autocatalysts.
Crude oil advanced 78 percent this year and 210 percent for the decade. The Organization of Petroleum Exporting Countries, accounting for 40 percent of global oil supply, reduced output in response to the worldwide economic slump.
The fuel for February delivery gained 0.2 percent to $79.41 a barrel on the New York Mercantile Exchange.
U.S. crude-oil inventories dropped 1.54 million barrels to 326 million barrels in the week to Dec. 25, Energy Department data showed yesterday. Distillate fuel and gasoline supplies also declined.
Raw sugar traded in New York gained 129 percent on expectations that harvests in Brazil and India, the biggest producers, would be damaged by excess rain or drought. Sugar was the decade’s second-best performer, rising 341 percent. Wheat retreated 10 percent and corn added 2.3 percent this year.
U.S. Stocks Retreat to Trim Biggest Yearly Rally Since 2003
Dec. 31 (Bloomberg) -- U.S. stocks fell as an unexpected decrease in jobless claims added to evidence the economy is strengthening enough to allow the Federal Reserve to withdraw more stimulus programs.
Hewlett-Packard Co. and Caterpillar Inc. lost at least 0.9 percent to lead the Dow Jones Industrial Average lower. The S&P 500 trimmed its 2009 gain to less than 25 percent after this year’s surge left it trading at 25 times its companies reported earnings, the most expensive level since 2002.
The S&P 500 lost 0.2 percent to 1,124.2 at 10:47 a.m. in New York. The Dow slipped 31.29 points, or 0.3 percent, to 10,517.22. Asian shares and stocks in the U.K. and France advanced, while most European markets, including Germany and Switzerland, were closed.
“There might be some fatigue in the stock market, despite momentum,” said Joseph Saluzzi, co-head of equity trading at Chatam, New Jersey-based Themis Trading LLC. “Jobless claims numbers show we’re heading in the right direction. However, you have to be careful with those weekly figures because they have a lot of seasonality and volatility. It’s also a double-edged sword. The better the economy gets, the more likely the Fed will raise rates.”
The S&P 500 has rebounded 66 percent from a 12-year low in March after governments around the world enacted stimulus measures to end the recession.
VIX Tumbles
This year’s rally has driven down the cost of protection from losses. The VIX, as the Chicago Board Options Exchange Volatility Index is known, has tumbled 75 percent to 20 since soaring to an all-time high of 80.86 in November 2008. It measures the cost of using options as insurance against declines in the S&P 500.
The S&P 500 has declined 23 percent since the end of 1999, its first drop for a decade since the 1930s. Including reinvested dividends, investors lost 0.9 percent a year since 1999, the first decade of negative annualized returns in the index’s history stretching back to 1927, according to S&P analyst Howard Silverblatt.
“The new year will probably end up being a good year,” Sam Stovall, chief investment strategist at S&P, told Bloomberg Radio. “Earnings are supposed to start picking up this quarter. We’ll probably see about a 10 to 15 percent gain in the S&P 500 in the second year of this bull market.”
YRC Worldwide Inc. slumped 11 percent to 89 cents. The largest U.S. trucking company said bondholders agreed to swap their debt for equity in the largest U.S. trucker, enabling the company to avoid a bankruptcy filing that may have resulted in liquidation.
Hewlett-Packard Co. and Caterpillar Inc. lost at least 0.9 percent to lead the Dow Jones Industrial Average lower. The S&P 500 trimmed its 2009 gain to less than 25 percent after this year’s surge left it trading at 25 times its companies reported earnings, the most expensive level since 2002.
The S&P 500 lost 0.2 percent to 1,124.2 at 10:47 a.m. in New York. The Dow slipped 31.29 points, or 0.3 percent, to 10,517.22. Asian shares and stocks in the U.K. and France advanced, while most European markets, including Germany and Switzerland, were closed.
“There might be some fatigue in the stock market, despite momentum,” said Joseph Saluzzi, co-head of equity trading at Chatam, New Jersey-based Themis Trading LLC. “Jobless claims numbers show we’re heading in the right direction. However, you have to be careful with those weekly figures because they have a lot of seasonality and volatility. It’s also a double-edged sword. The better the economy gets, the more likely the Fed will raise rates.”
The S&P 500 has rebounded 66 percent from a 12-year low in March after governments around the world enacted stimulus measures to end the recession.
VIX Tumbles
This year’s rally has driven down the cost of protection from losses. The VIX, as the Chicago Board Options Exchange Volatility Index is known, has tumbled 75 percent to 20 since soaring to an all-time high of 80.86 in November 2008. It measures the cost of using options as insurance against declines in the S&P 500.
The S&P 500 has declined 23 percent since the end of 1999, its first drop for a decade since the 1930s. Including reinvested dividends, investors lost 0.9 percent a year since 1999, the first decade of negative annualized returns in the index’s history stretching back to 1927, according to S&P analyst Howard Silverblatt.
“The new year will probably end up being a good year,” Sam Stovall, chief investment strategist at S&P, told Bloomberg Radio. “Earnings are supposed to start picking up this quarter. We’ll probably see about a 10 to 15 percent gain in the S&P 500 in the second year of this bull market.”
YRC Worldwide Inc. slumped 11 percent to 89 cents. The largest U.S. trucking company said bondholders agreed to swap their debt for equity in the largest U.S. trucker, enabling the company to avoid a bankruptcy filing that may have resulted in liquidation.
Tuesday, December 29, 2009
Proposed Tax Change for Real Estate Partnerships Has Investors Seeing Red
December 29, 2009
National Real Estate Investor
Several major commercial real estate groups are fighting a proposed federal tax provision that they say would have a devastating effect on real estate investment partnerships.
Commercial real estate groups contend that the Tax Extenders Act of 2009 (HR 4213) would more than double the taxes on carried interest received by general partners in real estate partnerships because the carried interest would no longer be taxed as capital gains at 15%, but as ordinary income with rates as high as 35%.
“That’s a huge increase at a time when the industry is on the precipice, so to speak,” says Thomas Bisacquino, president of the NAIOP, the Commercial Real Estate Development Association. “There really isn’t any real estate-related group that supports it. We’re trying to stimulate the industry. We feel it would create a huge impediment.”
The House of Representatives passed the “tax extenders” bill on Dec. 10. It would prolong a number of tax breaks currently scheduled to expire at the end of the year. Although the bill contains elements that benefit commercial real estate, such as an extension of tax credits for owners who conserve energy through retrofits or remediate brownfields, the prospective change in policy toward real estate investment partnerships has many investors seeing red.
NAIOP has issued a “call to action” to its approximately 16,500 members urging them to contact senators to defeat the proposal. If enacted, it could bring about the largest modification to the taxation of real estate in more than 20 years, since the Tax Reform Act of 1986, NAIOP said in its alert.
The group added that the proposed tax change would have an effect far beyond the Wall Street hedge funds whose practices originally gave rise to the proposal.
The Institute of Real Estate Management (IREM), an association of property managers, has sent a joint letter with the National Association of Realtors and the CCIM Institute, urging all 100 U.S. senators not to change the current capital gains treatment of carried interest for real estate partnerships.
Other organizations are expressing similar concerns. “Changing the current capital gains treatment of carried interests would undermine job creation and have a negative impact on commercial real estate values, which would devastate local property tax revenues and put pension fund investments at risk,” says IREM’s senior legislative liaison Vijay Yadlapati. “Just as importantly, such a policy would slow the national economic recovery.”
This week, in IREM’s latest legislative report, the group says the loss of capital gains treatment for real estate investment partnerships would turn long established taxation rules upside down and have a far-reaching effect. “Real estate partnerships, from the smallest venture to the largest investment fund, have a carried interest component. Approximately $1 trillion of commercial and residential properties are held by partnerships.”
The tax measure would put additional pressure on the commercial real estate industry at a time when it already faces heavy burdens, IREM notes, including a rapid rise in delinquencies and foreclosures and restricted access to credit.
Because of the health care debate, the Senate is unlikely to introduce its own version of the tax extenders bill until early in 2010. But the commercial real estate groups fear that the Senate could quietly add the tax measure affecting partnerships to any unrelated bill now under consideration.
The Senate Finance Committee intends to take action on its own “tax extenders” bill shortly after lawmakers return from the holiday recess in mid-January, says Yadlapati. However, it’s not known whether the carried interest provision will be included in that bill.
National Real Estate Investor
Several major commercial real estate groups are fighting a proposed federal tax provision that they say would have a devastating effect on real estate investment partnerships.
Commercial real estate groups contend that the Tax Extenders Act of 2009 (HR 4213) would more than double the taxes on carried interest received by general partners in real estate partnerships because the carried interest would no longer be taxed as capital gains at 15%, but as ordinary income with rates as high as 35%.
“That’s a huge increase at a time when the industry is on the precipice, so to speak,” says Thomas Bisacquino, president of the NAIOP, the Commercial Real Estate Development Association. “There really isn’t any real estate-related group that supports it. We’re trying to stimulate the industry. We feel it would create a huge impediment.”
The House of Representatives passed the “tax extenders” bill on Dec. 10. It would prolong a number of tax breaks currently scheduled to expire at the end of the year. Although the bill contains elements that benefit commercial real estate, such as an extension of tax credits for owners who conserve energy through retrofits or remediate brownfields, the prospective change in policy toward real estate investment partnerships has many investors seeing red.
NAIOP has issued a “call to action” to its approximately 16,500 members urging them to contact senators to defeat the proposal. If enacted, it could bring about the largest modification to the taxation of real estate in more than 20 years, since the Tax Reform Act of 1986, NAIOP said in its alert.
The group added that the proposed tax change would have an effect far beyond the Wall Street hedge funds whose practices originally gave rise to the proposal.
The Institute of Real Estate Management (IREM), an association of property managers, has sent a joint letter with the National Association of Realtors and the CCIM Institute, urging all 100 U.S. senators not to change the current capital gains treatment of carried interest for real estate partnerships.
Other organizations are expressing similar concerns. “Changing the current capital gains treatment of carried interests would undermine job creation and have a negative impact on commercial real estate values, which would devastate local property tax revenues and put pension fund investments at risk,” says IREM’s senior legislative liaison Vijay Yadlapati. “Just as importantly, such a policy would slow the national economic recovery.”
This week, in IREM’s latest legislative report, the group says the loss of capital gains treatment for real estate investment partnerships would turn long established taxation rules upside down and have a far-reaching effect. “Real estate partnerships, from the smallest venture to the largest investment fund, have a carried interest component. Approximately $1 trillion of commercial and residential properties are held by partnerships.”
The tax measure would put additional pressure on the commercial real estate industry at a time when it already faces heavy burdens, IREM notes, including a rapid rise in delinquencies and foreclosures and restricted access to credit.
Because of the health care debate, the Senate is unlikely to introduce its own version of the tax extenders bill until early in 2010. But the commercial real estate groups fear that the Senate could quietly add the tax measure affecting partnerships to any unrelated bill now under consideration.
The Senate Finance Committee intends to take action on its own “tax extenders” bill shortly after lawmakers return from the holiday recess in mid-January, says Yadlapati. However, it’s not known whether the carried interest provision will be included in that bill.
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