The real estate and banking industry suffered a setback at the hands of the Senate Finance Committee last week through passage of tax provisions that will lengthen the amortization period for such identifiable intangible assets as core deposits and customers' lists and thwart efforts to facilitate restructuring of troubled real estate loans.
The panel also changed language in the House version of tax legislation that would have increased the tax benefits of owning commercial real estate, a blow both to banking regulators and insured institutions alike as the industry struggles to get out from under more than $400 billion in nonperforming commercial real estate assets. Language in the House version removing impediments to purchase of real estate assets by pension funds was retained.
But the industry is seen as likely to redouble efforts to ensure more favorable tax treatment for its industry, especially since the taxpayer will ultimately benefit if the Resolution Trust corp. and the Federal Deposit Insurance Corp. can sell real estate assets acquired from insolvent institutions at a higher price.
The inability to amortize core deposits over their realistic usable life was probably the most quantifiable disappointment to the banking industry in the House version of tax legislation. The decision of the Senate finance panel to mandate that only 75% of the amortization benefit can be deducted is exacerbating the industry's concern.
But of equal importance to bankers struggling to divest nonperforming assets were revenue-enhancing decisions made by the panel.
One of the most important deleted a provision in the House version of the legislation that would allow owners of troubled real estate whose debt has been restructured to postpone payment of taxes on the difference between the new principal amount of the loan and the original principal amount. Current Internal Revenue Service rules require owners to recognize the difference between the original amount and the restructured amount of the loan as income and pay taxes on it.
In its hunger for revenues, the Senate finance panel deleted a provision that would have given owners the ability to reduce the tax basis of real property by the amount of reduced indebtedness, thereby increasing capital gains when the property is sold.
The practical effect of taking this out is to risk more bankruptcies and foreclosures." said Cary Brazeman, a staff official of the National Realty Committee, an umbrella group of lenders, underwriters. brokerages and financial institutions involved in commercial real estate activities. "Under current law, it is cheaper to hand the keys back to the lender than incur this tax liability. It hurts safety and soundness, acts as an incentive to foreclosures and bankruptcies as well as continues the decline in property valus and what agencies and institutions can get for properties."
The Senate Finance panel also narrowed language in the House bill that would have allowed owners of commercial real estate to mingle their gains and losses on real estate activities. With those of other. non-real estate related activities. The House provision was ~revenue neutral" because it paid for the ability to mix non-real estate activities with real estate activities by extending the amortization period on commercial real estate to 39 years from 31 1/2 years.
Current law requires managers of commercial real estate to segregate their commercial real estate activities from all other activities, including such real estate-related activities as development and brokerage, and deduct losses or pay taxes only on the basis of commercial real estate gains or losses. The Senate Finance panel's version of the "passive loss" rules allows owners of commercial real estate to mingle only their real estate-related activities. But at the same time it reduced the amortization period on real estate to 38 years from 39 years.