The $789 billion federal stimulus proposal agreed upon yesterday reportedly contains a tax relief provision that would help distressed commercial properties in New York City as well as nationwide, local real estate experts said.
The so-called cancellation of debt provision would postpone and stretch out the tax liability after commercial mortgages are reduced in loan workouts. This provision is important because owners are reluctant to cut their loans to lower levels in part because they often have to pay income tax on the amount of debt that is forgiven.
New York real estate professionals said the provision would lubricate the frozen lending environment. It was included in the Senate version of legislation passed Monday, but it remains unclear whether it would be in the final bill. The House is expected to vote on the legislation tomorrow. The Wall Street Journal reported today the tax provision was included.
Laurence Gluck, president of Stellar Management, which owns the troubled Riverton Houses in Harlem, said the legislation would help promote the buying and selling of distressed real estate.
The Riverton Houses apartment buildings have a reported $250 million in debt, but were valued at about $180 million in published reports. Other distressed properties such as 1540 Broadway, the Apthorp at 390 West End Avenue, Worldwide Plaza at 825 Eighth Avenue and 25 Broad Street are estimated to be worth less than their mortgages, according to real estate experts.
“I think relaxing the code to make [the tax liability] payable over time will be very helpful in getting these mortgages bought and sold,” he said. He did not say whether Stellar Management would utilize the provision.
The provision allows owners who buy back their mortgages at reduced levels to pay the tax liability on the forgiven loan over five years instead of being hit with the burden all at once. The first tax payments would not be due until five years after the loan was restructured.
The measure would assist commercial real estate owners who took out loans against properties at the height of the market. In many cases, owners find those loans are worth less than the total estimated value of the property.
Daniel Shapiro, a tax partner at accounting firm Berdon, said although the legislation does not remove the tax hit, it makes it easier to bear.
“It encourages people to do these types of transactions based on the economic merits and not based on the immediate tax bite,” he said.