WATCH: Bob Knakal on what tax reform could mean for CRE

Business interest deduction could be “round-house punch” to industry
September 08, 2017 08:16AM

There’s no such thing as a free lunch.

Tax reform could be a boon to the commercial real estate market, but it could also prove to be quite costly, Cushman & Wakefield’s Bob Knakal told Fox Business.

“The question is, what are the trade offs that would allow those cuts to come?” he asked.

Cuts to corporate rates, Knakal said, could spur companies to hire more people, which would drive demand for office space. But he said there are three big items on the table that could negatively impact the commercial real estate industry.

The most consequential, he said, would be if tax reform got rid of real estate owners’ ability to deduct business interest on their debt.

“[It’s] really the round-house punch that could really hurt the industry,” he said. “All businesses, but especially commercial real estate, rely on debt. And if that interest is no longer deductible it could really be negative for commercial real estate.”

Eliminating the 1031 exchange would also prove costly, as 70 percent of investors who sell property in New York City end up purchasing another property within six months to defer their capital gains tax, according to Knakal.

And if depreciation schedules were changed so that property owners could expense 100 percent of a building’s cost in the first year, it would “supercharge and overly juice the market to the point where we  may get construction of new buildings that’s unnecessary,” he said.

Knakal said the same thing happened in the early 1980s.

“We had what we used to refer to as ‘see-through’ buildings in the 80s because people built them you could see right through them,” he explained. “There was nobody in them.” [FOX]Rich Bockmann