Thomas J. Bisacquino
As the election spin cycle starts winding down, one conclusion has been eminently clear: Voters want Washington to produce. That can start happening immediately, when Congress and the president return to face a limited amount of unfinished business that nonetheless will play a significant role in our country’s continued recovery. For Congress, this means voting to extend the future of proven tax incentives and reauthorizing the Terrorism Risk Insurance Act during the final weeks of the 113th Congress.
America’s commercial real estate industry is a critical part of our economy, and last year grew at the strongest pace since the recovery began in 2011. Our research at NAIOP, the Commercial Real Estate Development Association, showed that the economic impact realized by the development process rose a significant 24.06 percent over the previous year, the largest gain since the market began to rebound. Industry spending for 2013 totaled $124 billion, up from $100 billion the year before. Commercial real estate contributed at least $376 billion to GDP last year, supported 2.8 million jobs, and produced $120 billion in personal earnings. Those indicators are all heading in the right direction.
Growth has been strong in 2014, and projections for growth in 2015 look bright. But this is contingent on good economic policy from Washington, which brings us back to taxes and terrorism risk insurance legislation. Congress needs to address both.
Federal tax policy plays a significant role in our industry. Absent a comprehensive tax overhaul, which we support, it’s critical that current tax policy be renewed so that investors and developers continue to take financial risk. Operating in an unsteady tax environment is unnerving, slowing the long-term investment decisions that fuel the economy.
Among the most important tax provisions to commercial real estate is the depreciation provision for leasehold improvements. When a tenant leases space, the owner configures it to the user’s needs. These build-outs, called leasehold or tenant improvements, are akin to home renovations but in a commercial setting. They employ a host of architects, engineers, and construction workers.
The existing tax regime allows these qualified leasehold improvements to be depreciated over 15 years which has incentivized investment. Without renewal, however, the depreciation schedule reverts to 39 years — far exceeding typical lease terms and resulting in high capital costs for building owners. The result: A chilling effect on build-outs and less need for the thousands of workers who do them. Congress can do better by extending this provision so that the development community has the consistency it needs to fund projects that strengthen our nation.
Another vital federal policy for developers and the jobs the industry creates is the Terrorism Risk Insurance Act, or TRIA. Terrorism insurance is required by almost every bank and financier for developers to obtain credit. Without TRIA, however, insurance companies will certainly not offer policies to fulfill the market need. This would slam the brakes on a host of new projects, since building owners would then be forced to bear all of the financial risk of a terrorist attack. Billions of dollars in new investment and countless jobs would be lost.
So TRIA is sound policy for the economy, but it is also good for taxpayers because it places responsibility for the first $100 million in aggregate losses on the insurance industry and private sector capital, not the U.S. Treasury. Even in rare exceptions when financial losses could exceed that threshold, the law includes payback mechanisms so the government can recoup amounts paid out to insurers following a terrorist attack. Without this private capital security blanket, the only source for terrorist attack recovery funding would be a much more costly, 100 percent-taxpayer-funded emergency supplemental appropriations bill. Indeed, a recent RAND study showed without TRIA, federal spending could increase by nearly $7 billion in the event of another terrorist attack along the lines of 9/11 or a major natural disaster like Hurricane Katrina.
Given all that is at stake — both in tax policy as well as TRIA — we are encouraged by statements of support from House and Senate leaders from both sides of the aisle. While there are inevitable differences of opinion, we believe there is significant bipartisan consensus that these policies have worked well and need to be renewed before Congress concludes its legislative business at the end of this year.
Our elected officials can certainly work together and get this done. It’s good for the economy, it’s good for job creation, and it is also precisely what the American people voted for on Election Day.
Let’s give the people what they want.
Thomas J. Bisacquino is the President and CEO of NAIOP, the Commercial Real Estate Development Association.