US - The National Association of Real Estate Investment Managers (NAREIM) fears the new US presidential administration will make changes to the way carried interest is taxed and make real estate a less attractive investment and deterring entrepreneurs from taking risks.

Carried interest, the share of profits that fund managers of private equity and hedge funds receive as compensation for their work towards improving a fund's performance, is currently treated as capital gain and is therefore subject to capital gains tax (CGT) of 15%.

But Steve Renna, president of Washington DC-based NAREIM, told IPE Real Estate: "Democrat lawmakers believe fund managers are providing services so their share of an investment return should be taxed as income.

"This shows that they do not appreciate the long-term risk entrepreneurs in real estate and other investments take. The entrepreneur's return is subordinate to that of the investors, deferred until the end and conditional upon success.

"To tax their share of investment return as ordinary income is a disincentive for entrepreneurs to take risk - particularly for young entrepreneurs who are just starting out," added Renna.

Income tax is currently 35% for the highest earners but Renna fears fewer real estate investments will be made if carried interest is taxed as income because the advantages would be "much reduced due to the higher take burden".

"The treatment of investment return as capital gain is a basic construct of real estate investment which has worked for 35-40 years," said Renna.
The lack of liquidity is another issue at the top of the agenda for the US real estate industry at the moment, which according to Renna, needs $300-400bn (€215-287bn) a year to function.

"The Commercial Mortgage Backed Securities (CMBS) market in the US has declined from $237bn in 2007 to virtually zero now, with no upswing in sight. The regulators are telling banks that they have too much real estate on their balance sheets but the banks can't sell because there is no liquidity in the market," added Renna.

He believes the federal government must intervene to restore credit flows by guaranteeing newly-originated bank loans, providing non-resource loans to purchasers of loans on the secondary market and accepting current loan assets as collateral for federal loans. 

"In the current market, well-performing, highly rated loans of the most creditworthy borrowers cannot obtain refinancing; we need government intervention to assume some of the risk temporarily so a pricing floor can be established," said Renna.

NAREIM was set up in 1990 to provide a non-competitive environment for the key real estate industry players to discuss the challenges and opportunities in the industry. Its members, who must manage primarily equity-orientated real estate investments of at least $500m, currently manage over $500bn of real estate assets in total.