MBA, Trade Groups Urge Fairness on ‘Carried Interest;’ Support for ‘INVEST in America’ Bill

The Mortgage Bankers Association and more than a dozen industry trade groups warned Congress that legislation and a separate Biden Administration proposal to change longstanding tax laws on “carried interest” could have damaging implications for Americans who use partnerships to develop, own and operate real estate.

In a separate letter, MBA urged the House to approve legislation that would enable local and regional transit agencies to play a role in solving the affordable housing issues in their communities.

In the coalition letter, a broad spectrum of America’s real estate trade groups urged Congress to preserve longstanding tax law as it relates to partnerships and profits interests—also known as carried interest. The coalition spoke out against H.R. 1068, the Carried Interest Fairness Act, as well as the Biden Administration’s budget proposal to tax carried interests as ordinary income.

“Well-intentioned but misguided legislation like the Carried Interest Fairness Act and the President’s budget proposal to tax carried interests as ordinary income, would result in an enormous tax increase on countless Americans who use partnerships to develop, own and operate real estate,” the letter said. “These sweeping changes, if enacted, would discourage individuals from pursuing their entrepreneurial vision, tax the sweat equity that makes real estate more productive and useful and slow economic growth. The results would be particularly harmful to industries that seek to build a business or asset with lasting value over an extended time horizon.”

If enacted, the letter said, the proposed changes would make it more expensive to construct or improve real estate and infrastructure, including workforce housing, senior living communities and industrial properties.

“Some development will not happen because the economic reward of carried interest could no longer compensate general partners for their higher level of risk,” the letter said. “For example, investments that support economic inclusion or carry environmental benefits—new affordable housing, commercial projects in long-neglected neighborhoods, or the remediation and redevelopment of land with potential contamination—could be passed up in favor of projects with greater certainty for the partners but less potential upside.”

In addition, the letter said, the proposals would have “profound, unintended consequences” for the main streets of cities all across our country. “Property taxes on real estate contribute 75 percent of local tax revenue and provide a stable and reliable source of funding for critical public services like education and law enforcement,” it said. “Prior studies have found that carried interest legislation could result in reduced construction activity, lower property values and decreased wages in the real estate industry.”

The letter said lawmakers should be enacting policies to mobilize and encourage capital formation for new real estate investment, not creating new tax barriers. “The false narrative surrounding the carried interest issue is that it targets only a handful of hedge fund billionaires and Wall Street executives,” it said. “On the contrary, the carried interest proposals are far more expansive than advertised. They would apply to real estate partnerships of all sizes—from two friends owning and leasing a townhome to a large private real estate fund with institutional investors.”

The letter noted real estate partnerships represent half of the four million partnerships in the United States. In 2018, those real estate partnerships owned $7.6 trillion in assets, owed $3.6 trillion in mortgage debt and nonrecourse loans earned $46 billion in net rental income, paid $28 billion in wages, and recognized $52 billion in net long-term capital gain.

“Most partnerships in all businesses reward the general partner with a share of the ultimate capital gain that reflects the risk they have taken—equity capital, assumption of business risk or through good old-fashioned sweat equity,” the letter said. “Reward for these latter forms of risk is ‘carried interest.’”

The letter emphasized H.R. 1068 and the President’s proposal would limit capital gain treatment only to taxpayers who have cash to invest. “Those who invest entrepreneurial innovation, risk taking and sweat equity would no longer receive capital gain treatment,” it said. “This would reduce economic mobility by increasing the tax burden on less-advantaged entrepreneurs.”

Joining MBA in the letter: The Real Estate Roundtable; American Hotel and Lodging Association; American Resort Development Association; American Seniors Housing Association; Asian American Hotel Owners Association; Building Owners and Managers Association International; CCIM Institute; Institute of Real Estate Management; International Council of Shopping Centers; Leading Builders of America; NAIOP; Commercial Real Estate Development Association; National Apartment Association; National Association of Home Builders; National Association of Realtors; and the National Multifamily Housing Council.

In a separate letter, and ahead of an anticipated vote this week, MBA on Tuesday sent a letter to House leadership urging support for H.R. 3684, the INVEST in America Act.

The bill, introduced by Rep. Peter DeFazio, D-Ore., with language from H.R. 3680,  the Promote Affordable Housing Near Transit Act, as introduced by Rep. Adam Smith, D-Wash., would enable local and regional transit agencies to play a role in solving the affordable housing issues in their communities. Smith’s provision would create a process for non-governmental entities with a satisfactory track record of developing affordable housing to receive a land transfer from a federal transit grant recipient at zero cost. Beneficiaries of donated land must agree to set aside 40 percent of total units as affordable for thirty years to households with incomes at or below 60 percent of area median income. The Department of Transportation would provide oversight, ensuring that participants only build housing that meets program requirements on land donated under the program.

MBA also supports inclusion of language from H.R. 2483, the Build More Housing Near Transit Act, as introduced by Reps. Scott Peters, D-Calif., Cathy McMorris Rodgers, R-Wash., Marilyn Strickland, D-Wash.; Derek Kilmer, D-Wash., Lisa Blunt Rochester, D-Del., David Scott, D-Ga., Ami Bera, D-Calif., Alan Lowenthal, D-Calif., and Tom Suozzi, D-N.Y., which would maximize federal investment in fixed-guideway transit by ensuring the Federal Transit Administration takes a holistic and quantitative approach to evaluating the potential for affordable and market-rate housing development near transit alignments and station areas.

“By making some minor but essential enhancements to the evaluation criteria for the FTA’s Fixed Guideway Capital Investment Grants Program (Section 5309 grants), this provision has the potential to positively impact the availability of housing in transit-served locations across the country,” wrote MBA Senior Vice President of Legislative and Political Affairs Bill Killmer. “While real estate and economic development potential is currently part of the Section 5309 grant evaluation process, each factor is considered individually rather than holistically. This proposal will ensure that projects ripe for affordable housing development are given additional scrutiny.”