Commentary: The jobs bill that will cost people their jobs

By Lawrence Pobuda
Monday, June 14, 2010

Unemployment rates are down in Maryland, Virginia and the District, and a sense of optimism in the region is finally emerging following the economic downturn that has affected businesses throughout our market and across the nation.

Yet the passage of legislation by the House -- legislation now being considered by the Senate -- could ultimately bring business investment to a halt and have a reverse effect on the small recovery we've experienced.

At the outset, HR 4213, the American Jobs and Closing Tax Loopholes Act of 2010, sounds promising. Unemployment rates are hovering around 10 percent nationally, and President Obama has said that jobs are his first priority.

Unfortunately, like so many things in Washington, what you see is not what you get.

HR 4213's scope is much larger than simply extending federal unemployment benefits. Its intent to "close tax loopholes affecting wealthy individuals and corporations" yields more damage than good, essentially dissuading commercial real estate developers from investing in new projects.

As a result, in this market and countless others, jobs will be lost and the ability of communities -- especially those that are already underserved -- to attract new business and revenue will be damaged. The value of commercial real estate in D.C. is powerful -- it creates thousands of jobs and houses employees of every sector, from federal agencies to government contractors to associations, and everyone in between.

Of most concern is the bill's significant change to the treatment of carried interest. HR 4213 would effectively double the tax on carried interest from 15 percent to 30 percent in 2011, and increase it to 35 percent in 2013. With new and increased taxes on unearned income, the tax impact on capital investment is even greater.

To understand the impact of this proposed change, it is important to consider the complex nature of commercial real estate development. An average real estate development can take three to seven years from inception to completion. At the start of the development, a general partner (the developer) takes a risk by investing capital and assuming additional partnership liabilities.

Throughout the development period, the general partner is not paid a salary on which he or she can depend; instead, his or her compensation is based upon the successful completion of the project and is not guaranteed. The carried interest is the long-term capital gain that is given to that general partner in return for the risk of pursuing and completing the project.

Real estate developers are entrepreneurs and risk-takers at their very core. They see opportunity in cities when many others only see blight. Our nation's economic system has historically rewarded risk-takers and job creators, yet HR 4213 creates disincentive for investment and saps commercial real estate professionals of their entrepreneurial appetite.

When the risk isn't undertaken, development slows. The nearly 5 million jobs created by the commercial real estate industry -- architects, engineers, construction workers, electricians, plumbers, building managers, maintenance staffs and more -- may be in jeopardy or simply won't materialize as developers decide that the investment risks are simply too high to overcome.

Congress should understand this cause and effect. Elizabeth Warren, chair of the Congressional Oversight Panel created to monitor the U.S. banking bailout, said, "There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public."

It's clear that mayors and cities fully understand the issue -- the U.S. Conference of Mayors, an organization representing more than 1,200 cities, including many in this region -- recently adopted a resolution to keep the treatment of carried interest exactly as it stands today. Elizabeth B. Kautz, the group's president, said, "Our objective is to make sure that our cities continue to be vital -- we simply cannot have even more barriers created by Congress or state legislatures that impact the vitality of our communities."

As the Senate considers this bill, it is essential that senators fully consider the economic impact of doubling the taxes on commercial real estate partnerships.

At a time when the real estate industry and the nation's economy are struggling, this legislation is a significant disincentive and creates yet another hurdle for entrepreneurs who would otherwise be contemplating new investment -- ultimately the source of new jobs.

Lawrence Pobuda is chairman of NAIOP, the Commercial Real Estate Development Association and a partner in the Stewart Lawrence Group in Minneapolis.

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