Carried Interest Fails to Carry the Day

The protestations that it would not materially impact the industry notwithstanding, a lot of my friends and colleagues in the commercial real estate industry are breathing a sigh of relief.  Once again, provisions taxing so-called carried interest as ordinary income will not be passing Congress.  Well, at least that's what everyone is saying.  Remember, health care was dead too at some point and we all know what happened there.

I understand the appeal of the law -- get those hedge funds! But it also goes after real estate with a vengeance.  Take your small to mid sized real estate developer who takes a risk by working on a brownfield or on a project in a marginal area or with IRRs that only work because of the nature of the investment.  So, those borderline deals go away, as to the leases, the sale, the construction jobs, the employment that comes with the finished real estate.  You get the picture.  What seems reasonable on the surface is a devil in the details.

Or, as Robert Green puts it (with a hat tip to David Bodamer)

Repealing carried interest is losing appeal as more and more leaders oppose its consequences, unintended or otherwise. It’s a growth killer in this weak economy and it’s un-American to tax small businesses with ordinary income after their lifetime of hard work to build up their business with risk capital. These entrepreneurs, including investment managers, deserve capital gains when appropriate. And remember, often times carried interest is ordinary income too.
Put another way, we are not by any means out of the woods yet, gang, at least not in my humble opinion.  Let's not do anything rash that could cause a double-dip in the market.  As it is the industry is not exactly, shall we say, robust.

Have a great weekend!

Carried interest isn't closing a loophole, it is a "revenue opportunity"

An excellent commentary from PERE (reg. req'd) on the whole carried interest situation can be read here.  Like politicians do they call it the “The American Jobs and Closing Tax Loopholes Act of 2010.”  What a riot.  

Now, I understand that experts are saying that this law will not impact a recovery (if indeed there actually is one going on).  After all partnerships are just one way of doing the deal (albeit the most common one) and there may be other tax efficient ways of doing so, but there is no denying that (a) returns will be lower, meaning (b) some people will not deploy as much money into dirt because the IRRs do not work, especially on the opportunistic side, and (c) some deals that "work" now will not work with higher taxes.  So, how this means more employment is a mystery to me.

And the "loophole closing" is sort of a laugher too. As PERE points out:

The introduction of a hybrid rate is an admission by lawmakers that current carry tax is in fact not a loophole but merely a revenue opportunity they never seriously considered until now. In fact, a code whereby GPs who hold investments for seven years or more enjoy favourable treatment on their carry shows Congressional faith in incentives for long-term investment.
 So there.  Here a tax, there a tax, everywhere a tax tax.  And have a good weekend!

SNDAs, hotels and lawyers

I am going to promote some lawyers other than myself today, because they deserve it.  I'm sure the social media "gurus" out there would say I am a moron for doing so, but I honestly do not care.  This blog is a resource and a fun project for me.  Hire me? Great!  Hire them?  Fine, too.  Hire no one at all?  Do so at your peril....

The law firm Goodwin Procter published what I think is an excellent article on subordination, non-disturbance and attornment agreements (SNDAs) recently that I would like to recommend to my readers.

This particular piece is in the context of hotel acquisitions rather than your "garden variety" SNDA that you might find in an office, retail or industrial deal among the landlord/buyer, tenant and lender.  The article suggests -- correctly in my opinion -- that buyers are getting stuck between the lender and the hotel operator on higher end hotel deals because of the competing interests of the parties.  The lender obviously wants as much control over cash as it can as well as maximum flexibility in terminating the operator and perhaps even reflagging or closing the hotel, while the management company wants the opposite. 

A related concept with hotel franchise agreements is the so-called comfort letter, stating that the lender can keep the flag of the existing brand in place following a foreclosure.  Here is another good article from David Neff at Perkins Coie on hotel due diligence that I happened to stumble across while researching this post.

Of course, some of you may be wondering why I am not talking about garden variety SNDAs, as they are also a hot topic.  I will probably get around to that soon.  If you are dying to read more about SNDAs in the meantime, I commend you to the always brilliant Joshua Stein of Latham and Watkins.  Look around his site and you will find some good materials on SNDAs and otherwise.

Notes from off the road

I feel like Clark W. Griswold, having just come off the road and 4600 miles of driving.  It was fun but tiring and I am paying the price for my trip with a wonderful summer cold. So if you will all indulge me, here are my thoughts about the last two weeks.

ICSC's RECon meeting in Las Vegas was great.  It was so good to put a few faces and voices together, some of whom I have known only by the latter for ten years.  We also had a great tweetup at the meeting; my only regret was that I could not stay the whole hour.  As to my sense of the show, the smaller size meant the floors were crowded. Not the Eisenhower Expressway at rush hour, but crowded enough.  Tenants were telling landlords that they wanted and needed to be in certain locations, but on terms that may have been a little less favorable to landlords -- perhaps shorter terms and more options, rent concessions, etc.  There may not have been the urgency of a few years ago (remember I was a first timer) but these meetings were, in my humble opinion, more than mere meet and greets.

If you want to drive traffic to your blog, say something about prominent politicians.  I had unbelievable traffic here after giving my candid views on the keynote speech.  But this is an industry blog, not a political blog.  And the carried interest tax did pass the House last week.

Hotels were, by and large, more crowded than I expected, but rooms were always available and often at reasonable prices.  I actually tried Hotwire two nights and would not repeat the experience.  I want a guarantee of the room type and the ability to make special requests (even if they cannot be granted); I also for whatever reason felt like a second class citizen.

I am shocked that a major hotel chain allows its franchisees to still have second floor walk-up units in their mid to high range flags.  When you travel with an 81 year old that is somewhat problematic, especially when the flag refuses to (or cannot) give you another room.

Kudos to Marriott, by the way.  They have a stringent book but it shows in property quality; even 30 year old properties (with periodic PIPs were still nice).  Ditto to Hilton.

The house we rented in Las Vegas was a great way to be in the city.  I am not much of a gambler and the Strip is just so crowded.  It was nice to have our own pool and jacuzzi, a kitchen and plenty of room to spread out. I would do that again in a heartbeat.

A 65 mph speed limit in rural Illinois is ludicrous.  The 70-75 mph (even 80 for one small experimental stretch) limits we encountered to our west were more reasonable. 

Everyone should take a long car trip at least once in his or her life. Yes, planes are convenient, but you miss the beauty of this country and its people when you travel by air.

Of course, post-vacation and post-ICSC traffic are keeping me busy, so let me stop here.  Back to work!