Thank you for sharing!

Your article was successfully shared with the contacts you provided.

(Read more on the debt and equity markets.)

WASHINGTON, DC-New rumblings from Congress to push for a change the way certain private equity transactions are taxed–specifically changing the tax characterization of Carried Interest–is beginning to alarm the real estate industry. Previously these changes were seen as less likely to actually become law if only because of the threat of presidential veto. If by some reason these bills were to become law the thinking until recently went, they were perceived–accurately or not–as being limited to private equity deals.

It has been widely reported that Sen. Charles Schumer (D-NY) is preparing new legislation that would raise the tax rate in all partnerships, not just private equity. Another new Congressional proposal is to link this issue to a revamp of the widely hated AMT (alterative minimum tax) schedule. Vetoing AMT reform, critics of the proposed law acknowledged, will be very difficult. Schumer’s office did not return calls from GlobeSt.com by press time.

“I wasn’t as concerned when these laws were first proposed, but now it is getting scary,” William H. Venema, chair in the corporate and securities practice of Epstein Becker Green Wickliff & Hall, PC and the managing partner of the Dallas office tells GlobeSt.com. “What they are doing–linking this to a popular proposal–is politically very astute. Before I thought for certain [President George] Bush would veto a proposed rise in Carried Interest taxes, but now he may have a hard time.”

Carried Interest, as many people now know post Blackstone’s IPO, is the percentage of a fund or JV or limited partnership’s profits that a general partner takes as compensation. Such profits are taxed at capital gains rates (15%) as opposed to ordinary income (which can be as much as 35%).

Ever since the IPO and the news of Blackstone’s co-founder Stephen A. Schwarzman’s $600-million payday when it went public, there have been calls from members of congress–and the introduction of at least two bills–to treat income received by partners for performing investment management services as ordinary income, that is, for it to be taxed at 35% instead of 15%. The spotlight has primarily been on private equity and financial firms, which would surely be affected. Of lesser notice, until now, has been the fact that these changes would also dramatically impact real estate development partnerships.

“In the real estate industry it is common for a developer to get Carried Interest,” William R. Ahern, an Orange County, CA-based partner with Allen Matkins tells GlobeSt.com. “It is given to him or her as consideration in finding the deal and seeing it completed from start to finish. If a bill like this is enacted it will affect their returns and might prevent them from undertaking certain projects with a lot of associated risk.”

Up until now, though there has not been much attention paid to the impact this change in law would have on real estate partnerships even though 46% of partnership returns are filed by the real estate industry, he says.

Linking these proposals to AMT reform may be the wake-up call the real estate industry needs, Venema says. “If successful, these bills could drastically change entrepreneurial activity in the real estate industry and may even be an opening salvo in a greater assault on the cutbacks in the capital gains tax.”

Portions of this article appeared in Debt & Equity Journal.

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?


Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join GlobeSt.com now!

  • Free unlimited access to GlobeSt.com's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com.

Already have an account? Sign In Now
Join GlobeSt

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.