Issues Impacting Local Real Estate

On December 17, EisnerAmper hosted a virtual roundtable for real estate principals in the Bay Area, giving industry leaders a unique opportunity to help each other navigate the current environment. Moderated by Wells Fargo Regional Sales Manager Dan Shapiro, and featuring Bay Area Council Senior Vice President of Public Policy Matt Regan and EisnerAmper Tax Director Ling You, the interactive discussion focused on the current tax environment and general business concerns.

Tax Environment

With new legislation proposed by the incoming Biden Administration, it is no secret that the tax implications can have a major impact on real estate investors, operators and businesses. Ling gave the participants, which included industry leaders from many asset types including retail and multifamily, a brief overview of the potential tax landscape moving forward.

From a federal taxation perspective, Ling addressed the prospective increase in the top individual tax rate to the pre-TCJA level of 39.6% as well as an increase from 20% to 39.6% on capital gains and qualified dividends. She also addressed the hotly contested issue around the elimination of IRC Sec. 1031 exchanges, which many feel will not happen, despite being proposed during the campaign. Ling shared that she has seen a surge of estate planning activities due to the fear that the estate exemption will drop to $3.5 million or sunset to $5 million after 2025.

From a state and local taxation perspective, Ling touched on the recently failed California Proposition 15 and commented on the impact of San Francisco Propositions F and L on businesses.

General Business Environment

The biggest takeaway from this virtual gathering was around the business environment, both locally in the Bay Area and across California. It was a sobering experience to hear how many businesses, both large and small, have chosen to invest and do business outside of the Bay Area and California because of the tax and legislative environment. As we have seen recently in the news, larger companies such as Tesla, CBRE and Palantir have begun to leave California. If companies of this caliber continue to leave, the resulting effect could be a loss of jobs, tax revenue and real estate values throughout California.

The San Francisco metropolitan area has already begun to see these changes, as commercial rents have dropped 7.8% since the start of the pandemic (the largest drop in the country). The steep drop in rent speaks to the effects of businesses leaving because of the tax policy, combined with the impact of the pandemic.

Despite this less than upbeat conversation, many of the participants agreed that 2021 brings new opportunities and a chance to change the business environment for the better.