President-elect Joe Biden was inaugurated on January 20, 2021, introducing a shift in leadership and direction to the United States’ citizens. With this transition comes both positive and negative changes, directly impacting the landscape of the commercial real estate (CRE) industry. Let’s review what changes CRE investors should be prepared for.

The Biden Administration

Although no changes are expected to be implemented immediately, here are a few proposals the Biden administration has already introduced that may impact CRE investors.

Elimination of 1031 Exchanges

1031 exchanges are one of the most sought-after tax benefits offered by commercial real estate investments. Under the IRS code, investors are permitted to trade from one investment property to another, deferring capital gains taxes. However, President Biden has proposed a policy that could eliminate 1031 like-kind exchanges for high earning real estate investors. Profits from capital gains paid would then be allocated toward funding child- and elderly-care spending. According to the Biden campaign, “The plan will cost $775 billion over 10 years and will be paid for by rolling back unproductive and unequal tax breaks for real estate investors with incomes over $400,000 and taking steps to increase tax compliance for high-income earners.”

Strict Eviction Policies

Multifamily investors can expect to face further challenges during the eviction process. Under The Biden Plan for Investing in our Communities Through Housing, the president-elect’s team has committed to protecting tenants from eviction. “As President, [Biden] will work to enact Majority Whip James E. Clyburn and Senator Michael Bennet’s Legal Assistance to Prevent Evictions Act of 2020, which will help tenants facing eviction access legal assistance. He also will encourage localities to create eviction diversion programs, including mediation, payment plans, and financial literacy education programs.”

Other policies introduced in this proposal include the following:

●  Protection for homeowners and renters from abusive lenders and landlords through a new Homeowner and Renter Bill of Rights.

●  Elimination of local and state housing regulations that perpetuate discrimination.

●  Holding financial institutions accountable for discriminatory practices in the housing market.

●  Strengthening and expanding the Community Reinvestment Act to ensure our nation’s bank and non-bank financial service institutions are serving all communities.

●   Rollback of Trump administration policies that gutted fair lending and fair housing protections for homeowners.

Changes to the Opportunity Zone Program

Opportunity Zones were established under the federal Tax Cuts and Jobs Act of 2017. The act intended to spur investments in economically distressed communities around the country. Since its inception, more than 8,700 zones have been designated, and more than $75 billion in private equity has been collected for the Opportunity Zone program. However, recent reports from the Biden administration indicate dissatisfaction with the program. The Biden team believes the program has fallen short in supporting communities of color, small businesses, and homeowners, and instead, investors have been using the program to increase their returns. “In too many instances, investors favor high-return projects like luxury apartments over affordable housing and local entrepreneurs,” the Biden campaign said in a statement in late July 2020. As a result, the administration has proposed the following changes to the program:

●  Require recipients of Opportunity Zone tax breaks to provide detailed information about their Opportunity Zone investments, including a project’s impact on poverty rates, housing affordability, and job creation. A report released in November 2020 by the U.S. Government Accountability Office (GAO) noted that oversight of the program could be improved by beefing up collection of data about Opportunity Zones.

●  Review Opportunity Zone benefits to ensure tax breaks for investors are authorized only if a project clearly yields economic, social, and environmental advantages for a community “and not just high returns—like those from luxury apartments or luxury hotels—to investors.”

●  Provide incentives for Opportunity Zone funds to team up with non-profit or community-oriented organizations and produce a “community benefits plan” for each investment. Every plan would center on generating jobs for low-income residents and otherwise improving the finances of households within an Opportunity Zone.

Improvement of City Infrastructure and Funding

To promote growth, however, President Biden has made multiple commitments to improving cities via increased funding. In two proposals, The Biden Plan to invest in Middle Class Competitiveness and The Biden Plan to Build a Modern, Sustainable Infrastructure and an Equitable Clean Energy Future, the administration has identified the importance of improving our communities and their infrastructures, which will ultimately drive real estate values in cities across the country. His plans include but are not limited to, the following:

●  Transforming our crumbling transportation infrastructure, including roads and bridges, rail, aviation, ports, and inland waterways.

●  Cleaning up and redeveloping abandoned and underused Brownfield properties, old power plants and industrial facilities, landfills, abandoned mines, and other idle community assets.

●  Revitalizing communities in every corner of the country.

●  Upgrading 4 million commercial buildings.

●  Electrifying the building sector and increasing energy efficiency in a range of ways.

Should CRE investors prepare for change?

Many of the proposed changes depend on what Congress allows. And during the initial years of his administration, President Biden will have both the House and Senate on his side. The House, which has voted blue since 2019, was recently joined by the Senate following the Georgia Senate runoff elections. On January 6, 2021, both Georgia seats were awarded to Democrats, bringing favor to the Biden administration.

Although the proposals appear threatening to CRE investors, experts have reported that the Biden administration will increase stability to the CRE market, promoting high real estate values and increased velocity, following a year of economic turmoil. No real changes are expected to be implemented until post-COVID, providing investors security in their ability to reconsider their investment positions for 2021.

To learn more about how the Biden administration may impact your portfolio, reach out to one of our market experts.