The Treasury Department's tax reform proposal and the Reagan administration's plan to impose user fees on government-related debt would deal a major blow to real estate investment and the housing industry, according to two recently released studies.
The studies, sponsored by real estate groups, point to the huge role the industry plays in the nation's economy -- 54 percent of gross private investment went into structures in 1983, according to one -- and conclude that the sorts of changes envisioned could cause widespread economic dislocation.
The clamor for tax simplification and for reductions in the federal deficits has focused the attention of both Congress and the administration on the wide array of benefits that the real estate industry receives. The industry, for its part, has undertaken an intense lobbying and informational campaign to demonstrate to policy-makers that the benefits are socially and economically useful.
Backers of the two new reports characterized them as designed to provide facts and independent analysis for use in that debate.
The study focusing on tax reform -- done by Price Waterhouse, a big national accounting firm -- concluded that provisions of the Treasury proposal, and to a lesser extent of a plan advanced by Sen. Bill Bradley (D-N.J.) and Rep. Richard A. Gephardt (D-Mo.), could, "over time, significantly increase the cost of office and retail space and the cost of rental housing."
In addition, they could "reduce construction activity, lower the values of rental property and reduce the profitability of investment in real estate . . . with the result that potential investors will react by seeking opportunities for higher after-tax returns in other sectors."
J. McDonald Williams, managing partner of Texas-based Trammell Crow Co. and chairman of the National Realty Committee, which sponsored the study, said the Treasury proposal to index interest deductions to inflation, thus reducing them as inflation rises, would be particularly burdensome.
"If that were to pass, we would have to liquidate our company," Williams said.
Crow is the nation's largest real estate development firm.
Williams added that "we don't want to sound like nay-sayers just acting in our own interest. We believe there can be tax reform." He said he feels that depreciation periods could be increased from the current 18 years to 25 -- not the 63 proposed by Treasury -- and that tax-exempt bond financing for commercial projects might well be ended.
But Williams, like the Price Waterhouse report, emphasized that sharp reduction in tax benefits would result in a massive devaluing of real property.
"If demand for rental space is not increased enough to allow tax increases to be fully passed along in rents, some new projects that would be built under current law will cease to be viable," Price Waterhouse said. "That is an important message of . . . this report."
Commercial real estate is so overbuilt today that at least in the short run it is inconceivable that rents could be increased to make up the tax loss, Williams said.
He also said he believes that the Treasury has a strong "pro-stock market, pro-equity, anti-debt bias." The indexation of interest would make borrowing much more expensive, thus favoring the rich who could buy for cash.
The other report was prepared by a team of economists under the direction of Arthur J. Corazzini for the Homebuilders Ad Hoc Policy Group, an association of large homebuilders helped out in this project by several large mortgage banking firms as well.
This study, focusing on the secondary mortgage market, concludes that if the administration is successful in persuading Congress to impose user fees on debt issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corp. and the Government National Mortgage Association, interest rates on home mortgages will rise.
The study shows that "you cannot adopt a policy of user fees and expect no effect on interest rates," Corazzini said in an interview this week. "Mortgage rates will suffer" with respect to other forms of debt, he said.
This study concludes that a user fee of 8 basis points (eight 1/100ths of a percent) on Fannie Mae, Freddie Mac and Ginnie Mae would cost the nation 9,000 new housing units a year.
Likewise, efforts to choke off so-called builder bonds, a complicated device by which builders can create installment sales -- and better tax treatment -- on their houses, would eliminate 20,000 new homes a year, if successful.
"There has been a good deal of misperception on the part of the Washington policy community . . . that housing is a favored sector," said Corazzini. While that may have been true in the 1970s, it is not true in the '80s and "as a result efforts to squeeze the sector have been misdirected," he said.