To recap the issue briefly, Carried Interest is the percentageof a fund's, joint venture's or limited partnership's profits thata general partner takes as compensation. Such profits are taxed atcapital gains rates--15%--as opposed to ordinary income, which canbe as much as 35%.

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Carried Interest caught the attention of Congress last yearafter Blackstone co-founder Stephen A. Schwarzman received $600million in Carried Interest when the firm went public. Bills wereintroduced to treat income received by partners for performinginvestment management services as ordinary income, that is, for itto be taxed at 35% instead of 15%. Such a change would affectprivate equity and financial firms as well as real estatedevelopment partnerships.

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One of Barack Obama's proposals is to tax Carried Interest asordinary income. McCain, by contrast, would continue the currentpolicy of taxing it at capital gains levels, or 15%, according tothe NAIOP National, which has compared the two presidentialcandidates' tax positions on many issues, such as the AlternativeMinimum Tax--McCain wants to phase it out; Obama wants to extendthe patch--and the corporate income tax--McCain wants to reduce itto 25% from 35%; Obama wants to maintain it at its current level of35%.

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Of all of these issues, Carried Interest, arguably, will havethe greatest impact on real estate development, Terry Thompson,president of NAIOP SoCal and vice president Acquisitions with WCBProperties, tells GlobeSt.com. "It certainly is the most glaringdifference between their two positions for our industry and onethat could have a severe impact." Furthermore, the Carried Interestissue is likely to hit President Obama's desk--assuming, of course,that he wins the election tomorrow--in short order, Thompson says.Given the current economic situation there will clearly be a needto raise funds quickly; also of all the tax increases that could beimplemented this particular one might be viewed by taxpayers ascomeuppance for the financial system meltdown that necessitated a$700-billion bailout plan.

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However, Obama's proposals are not completely against the realestate industry's interests. The proposal to tax Carried Interestas ordinary income is unpopular in the real estate community--butas some in the industry point out--there are compensations with anObama presidency that would mitigate the Carried Interest taxchange to some degree.

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"If the capital gains taxes are increased, it would likelymotivate sellers to trade assets and enter into more 1031 tax freeexchanges, and thus grow those businesses further," Lawrence J.Selevan, principal with Chesterfield Faring Ltd., a merchantinvestment banking firm in New York City, tells GlobeSt.com."Bothcandidates will be forced to increase taxes on the upper middleclass in order to reduce the $700-billion-plus deficit," he says.However, he speculates that "an Obama led recovery will be faster,less painful, and more broadly spread throughout the system, thuscreating jobs faster." Obama would also focus on creating moreaffordable multifamily housing as well as on urban redevelopmentfor large mixed use and projects Transit Oriented Developments,Selevan concludes.

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Miriam Vock Sheehan, an attorney with DLA Piper who focuses herpractice on the taxation of exempt organizations' investments inreal estate and on the use of tax credits to promote real estatedevelopment, also notes that any change in the Carried Intereststructure "would not be well received by individual real estatedevelopers." That said, she tells GlobeSt.com, there are otherconsiderations. "Even the Obama capital gains rate is substantiallyless than capital gains rates of the recent past and stillsubstantially less than his top individual rate of 39.6%," shesays. "As long as there is such an ordinary income/capital gaindifferential there will continue to be a tax incentive for realestate investment. Notwithstanding this incentive, note that alarge percentage of the investment in commercial real estate is bytax exempt pension plans who are entirely indifferent to taxrates."

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There are no extenuating considerations, though, for Karla K.Dennis, CEO of Cohesive, a Tax Advisor Firm in Cypress, CA."Commercial real estate is going to be positively impacted underJohn McCain's plan," she tells GlobeSt.com. "His position oflowering corporate tax rates will enable any corporations sellingtheir commercial property to fare far better from a taxperspective, especially" if capital gains tax rates are notincreased. "Investors holding commercial property that are on thefence will consider possibly selling buildings outright since theywill have lower ordinary tax rates which come in to play during thegain on sale calculation."

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By contrast, she continues, under the Obama plan, a seller willexperience a much heavier tax burden, which may in turn keepbuildings off of the market. "An increase in capital gains rates to28% is really going to affect whether or not a person [thinks it isworthwhile to sell] commercial holdings," Dennis continues. "We mayend up with a much worse slow down in the commercial real estatemarket. Tax planning will become more than a key factor in decidinghow to maneuver your commercial real estate."

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