By Charles P. Burke
As a businessman, property owner and real estate investor, I consult to and often partner with small real estate developers. With my more than twenty years of experience focused on the real estate industry, I am founder and president of the Massachusetts Academy of Real Estate, which licenses and provides continuing education to brokers and salespersons. Given what I know and have learned, now is not the time to inject instability in the real estate market, especially in light of the looming real estate crisis in China.
As policymakers, volatile variables make this a really poor time for initiatives which will create more instability. Unfortunately, some in the US Congress have decided to push such an initiative: an investment tax on small businesses. The concept of a business investment tax (also called a tax on “carried interest”) has floated around for a while; its latest incarnation comes as a bill introduced concurrently in the Senate and the House of Representatives by Sen. Tammy Baldwin (D-WI) and Rep. Bill Pascrell (D-NJ) (and numbered S. 781 and H.R. 1735, Acts of2019-2020 , respectively).
If passed, the investments targeted would become rarer – and that would prove unfortunate for many small businesses, who rely on partnership investments as an alternative to interest-bearing loans. Almost 14,000 businesses rely on this type of arrangement to increase cash flow and while minimizing debt.
In my scope of real estate activity, this type of financial arrangement is common. The flexibility offered by partnerships helps finance projects great and small, and is often critical to get a project off the ground or even over the finish line. By the time a construction crew breaks ground on a building, a developer may have spent five years and hundreds of thousands of dollars in early development, from design to environmental impact studies to zoning permit applications. Financing through partnerships (again, rather than through high-interest loans) gives a developer a chance to infuse needed cash into the project and establish creative ways to pay back investors (through revenue sharing agreements as well as long-term equity that comes back when a development is sold). The bill Congress is considering would affect these types of real estate project partnerships all across America.
Investments are a key element for many development projects, but are especially necessary for projects like affordable housing construction, where the eventual monetary returns are lower. Given the fluctuations in the housing markets over the past couple of years (and the last year in particular), the need for affordable housing has never been more acute. Raising business investment taxes now would discourage the investment these projects need. That means less affordable housing available at a time when housing prices are climbing. And it means further instability in business and residential real estate markets at a time when stability and certainty are needed.
If Congresses passes a business investment tax – whether through S. 781/H.R. 1735 or in any other form – they would indeed do great harm to our economy – harm that we simply cannot afford.
Charles P Burke owns a successful real estate academy for persons interested in entering the real estate field and getting licensed. (Massachusetts Academy of Real Estate in Braintree). He is also chief instructor at the academy, and he owns his own real estate properties and is a small business investor.