The Real Deal New York

Taking 1031s off the table would have an “atomic-bomb” effect: market players

By Rich Bockmann | February 23, 2015 01:30PM

Federal tax reform could have disastrous effects on the city’s real estate market if it shakes things up too much, industry players said this morning at a panel organized by the Academy for Continuing Education, a residential brokerage school.

1031 exchanges, also known as like-kind exchanges, are crucial to the market’s health, said developer Daren Hornig of Hornig Capital Partners, who joined Cushman & Wakefield’s Bob Knakal, Ian Reisner of Parkview Developers and Josh Schuster of DHA Capital on the panel, which was moderated by The Real Deal publisher Amir Korangy and held at The 3 West Club On 51st Street, home of the Women’s National Republican Club.

“If there was ever an issue with 1031s being taken out of this market,” Hornig said, “I think that would have an atomic-bomb kind of effect.”

The silver lining, according to Knakal, is that “tax reform is such a monumental task that it is not likely to get done.”

“And we hope it doesn’t get done,” he added, “because right now we would rather stick with the status quo.” Knakal said that while Congressional Republicans he’s spoken with favor lowering the corporate and marginal-personal tax rates, power dynamics in Washington could yield concessions on issues like the capital-gains tax, property appreciation schedules and 1031 exchanges – a program that allows sellers to re-invest gains without incurring a tax hit.

On a more local level, the panelists said there are few answers as to how Albany and the De Blasio administration will hammer out the details of renewing 421a when it expires in June. Developers now can combine the abatement with the 80/20 affordable housing program, though there has been talk of shifting that ratio. Meanwhile, tenant advocates are calling for an end to the controversial abatement.

“Is that going to go to 40 percent? Is that going to go to a 60/40 split?” DHA’s Schuster asked. “No one really knows, and it’s only four months until that sunset occurs and we haven’t heard much from the mayor’s office.”

Market-rate rentals in Manhattan really only work with a land basis around $200 per square foot, Hornig said, whereas affordable housing requires a basis somewhere around $20 per square foot, which means that developers need to be incentivized to go the affordable route.

On the mayor’s signature campaign issue to create or preserve 200,000 affordable housing units, Knakal said the plan has yet to produce any cogent details.

“The other day I was at a REBNY meeting and one of his top folks was talking about affordable housing for 45 minutes and all I got out of that speech was 200,000 units,” he said. “And if the mayor wanted 200,000 units or 400,000 units or 500,000 units, he could create them very easily by providing the right incentives for the private sector. With the wrong incentives, nothing will get built and so we’re anxiously awaiting details of what this program is going to consist of. But so far we haven’t gotten anything.”