And now, the conclusion of this three-partseries:7) Taxes. The tax landscape will have ahuge impact on commercial real estate in 2010. Local, state andfederal politicians have proven time and again that they simply donot have the will to reduce spending. "Fiscalresponsibility" is not in their vocabulary.In 2009, nationally,sales tax collections were down 9% and income tax collections weredown 12%. Together, sales and income taxes make up roughly half ofstate and local tax collections. Property tax collections wereup slightly but are expected to fall as tax assessments catchup with falling residential and commercial real estatevaluations.At a minimum, cities will be working through thecatastrophic drops in revenue for the next 18 to 24 months as stateand local tax revenues tend to lag behind the downturns, as well asthe upturns, in the economy because of the time it will takefor collections to catch up with increasing store sales and higherincomes when they arrive.With tax revenues continuing to fall,several states are grappling to plug budget holes. Thecombined deficits of the states for 2010 and 2011 could exceeda quarter of a trillion dollars. Ten states have a deficit,relative to the size of their expenditures, as bleak as that ofnear-bankrupt California. In New York, we are literally down to ourlast dollar causing our governor to blast legislators in lastweek's state-of-the-state address for their inability to makedifficult decisions on spending cuts.Most states misused stimulusmoney by spending on new programs rather than adjusting tolean times, just like almost every individual and company has done.Now that the stimulus money will no longer be coming, the stateshave to pay for these programs with their own money, money theydon't have.So when states should be reducing expenditures tomatch a new normal of lower revenue collections, they have spenttheir way into a position which means they will have little choicebut to raise taxes to meet their constitutional balanced-budgetrequirements. This means more income taxes, more real estate taxes,more sales taxes, more taxes of every kind and on every level:local, state and federal.Capital gains taxes, on a federal level,will increase from 15% to 20% at the end of this year when the Bushtax cuts sunset. If the healthcare bill passes in its current houseform, another 5.4% will be added to that. The president hasmentioned potentially adding "only" 3% to 5% to the capital gainstax. Cumulatively, these could nearly double the capital gains taxin 2011 (which could stimulate some property sales in 2010).The taxlandscape could also change the way real estate transactions arestructured. Carried interests will now be taxed as ordinary incomeas opposed to capital gains, potentially altering new partnershipagreements for promoters.I am going to discuss 8)Inflation, 9) Capital on the sidelines, and 10) Monetarypolicy together as they are all interrelated and willcumulatively impact the direction of the commercial realestate sales market over the next two to three years.We believethat when unemployment peaks, real estate fundamentals will betheir weakest and values will be at their lowest. After the marketbottoms, we expect prices to bounce along that bottom for some timeas a fight between inflation, capital and monetary policy playsout. The winner of this fight will influence whether values bouncehigher or lower within a band around the bottom.Inflation isnow in check, at least as far as the core (which excludesvolatile food and energy prices) indexes are concerned. "Slack"(excess capacity) is the best predictor of inflation both at theaggregate level and in individual sectors of the economy.Slack is pervasive throughout the economy, not just in thewell-known data on unemployment and industrial capacityutilization.The significant increases to the U.S. money supply in2009 will, at some point, place tremendous upward pressure oninflation, likely causing it to rise above the Fed's comfort zoneof 1% to 2%. . When it does, the Fed will respond by raisinginterest rates. Increase rates exert downward pressure on realestate values.There have been billions and billions of dollarsraised to purchase distressed and core assets. Demand is beingseen, both domestically and internationally, from institutions andhigh net worth individuals. This strong demand has resulted incompetitive bidding for nearly all the properties we are currentlyselling.In 2009, we would routinely get 25 to 35 offers forincome producing properties and, amazingly, received over 50offers on every non-performing notes we sold. These numbersare due to the small supply of available properties and theoverwhelming demand we are seeing in the market. All of this"capital on the sidelines" exerts upward pressure on value.(Whilenot officially one of the "top 10" things to watch, we will also bekeeping an eye on the constrained supply of available properties.The market must de-lever which will, likely, cause additions to thesupply of distressed assets coming to market. The 2006 and 2007loans are the most underwater and most of them will bematuring in 2011 and 2012. We look for these to add to theavailable supply over the next two to three years. Increase supplywill exert downward pressure on property values.)How will the Fedsequence its exit from the market? Each of the possible strategiesfor this exit have negative implications for real estate values.The four most likely strategies include: 1) terminating the currentprogram of asset purchases (mainlymortgage-backed securities), 2) draining excess bank reservesvia reverse repos and/or term deposit facilities, 3) itstraditional method of raising short-term rates through parallelincreases in the federal funds rate and the interest rate onreserves and, 4) selling assets outright.Numbers 1, 3 and 4 abovewill increase interest rates. As these rates rise, they will putpressure on banks to make the difficult decision to either letspreads compress or pass the rate increases along to borrowers inthe form of higher mortgage rates. The Fed's current near-zerointerest rate policy is allowing the banking industry torecapitalize itself and bankers are getting comfortable with theenormous spreads they are able to achieve. While some spreadcompression is likely, higher borrowing rates are inevitable as theFed tightens.If the Fed chooses to drain reserves using reverserepos or term deposit facilities it will encourage banks topark reserves at the Fed, rather than lending them out, takingmoney out of the lending stream ie, less money available forcommercial real estate loans. Less available debt would exertdownward pressure on commercial real estate values.How thesefactors impact one another and the timing of them willprovide us with an idea of the direction of value over timeand the extent to which that direction has staying power.So thereyou have it; 10 things to watch in 2010: 1) unemployment, 2)corporate earnings, 3) credit markets, 4) gross domestic product,5) the housing market, 6) the political landscape, 7) taxes, 8)inflation, 9) capital on the sidelines, and 10) the Fed's monetarypolicy. It will be interesting to see how thesefactors perform and impact each other.As we enter 2010, I wisheach of you health, happiness and prosperity... and the hope andanticipation of better days ahead.Mr. Knakal is the Chairmanand Founding Partner of Massey Knakal Realty Services in New Yorkand has brokered the sale of over 1,050 properties in hiscareer.

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