March 27, 2009 – (RealEstateRama) — On February 17, 2009 President Barack Obama signed the American Recovery and Reinvestment Act, commonly known as the stimulus package. Overall, the stimulus is a mixed bag for the real estate industry, as it provides some significant benefits but several provisions beneficial to the industry were scaled back significantly in the final negotiations between the House and Senate.
One of the greatest disappointments for the industry came in the final negotiations between the House and the Senate over the net operating loss carry back. Under current law, businesses can carry back most losses in the current year up to two years and obtain a refund of taxes paid in those years. The House and Senate both approved drafts of the stimulus that would have allowed virtually all companies to carry back losses from both 2008 and 2009 up to five years. This would have provided substantial tax refunds to companies like homebuilders that made profits in the early years of the decade, but who lost money in 2008 and will likely suffer losses in 2009. But in the final negotiations, the provision was cut back to include only businesses with average gross receipts under $15 million, and it will only apply to losses for 2008. Nonetheless, the new net operating loss provisions will be a valuable option to consider for any business which suffered losses in 2008 and that meets the $15 million gross receipts threshold.
Three provisions of the stimulus should benefit the residential real estate market. First, the stimulus reinstated the increased FHA, Fannie Mae, and Freddie Mac conforming loan limits which expired last year. Last year’s stimulus package temporarily increased the conforming loan limits to a maximum of $729,500 for high-cost areas through December 31, 2008. For high-cost areas, the maximum conforming loan has been increased back to $729,500 and this amount will remain in place through the end of the year.
Second, the stimulus extends the tax credit for first-time homebuyers. Last year, Congress approved a $7,500 tax credit, but the credit had to be repaid, making it in essence an interest-free loan. The first-time homebuyer tax credit in the stimulus improves on the version passed last year because: (i) the amount of the credit has been increased to a maximum of $8,000; (ii) the new tax credit does not have to be repaid except if the home is sold within three years; and (iii) the credit will be refundable or claimable regardless of tax liability, which means that a taxpayer may use the tax credit to get a tax refund, not just to offset taxes owed. The tax credit amount is reduced for buyers with a modified adjusted gross income of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return and caps out for taxpayers with a modified adjusted gross income of more than $95,000 (single) or $170,000 (married). The credit will be effective until Dec. 1, 2009. While this represents an improvement over the $7,500 tax credit approved last year, the tax credit is substantially less than the $15,000 tax credit initially approved and the income limitations will be felt to a greater degree in the Bay Area, where many potential buyers are over the income limits.
Third, the stimulus contains numerous benefits for low income housing and homelessness prevention, including $2 billion for full-year payments to owners of Section 8 project–based rental assistance properties, $2 billion for the redevelopment of abandoned and foreclosed homes, $1.5 billion for homelessness prevention activities, $250 million for energy retrofitting and green investments in HUD-assisted projects. In addition, the stimulus allows state housing finance agencies to help buyers at closing by advancing the $8,000 tax credit amount as a loan using tax-exempt bond proceeds.
In addition to tax cuts, the stimulus provides for major appropriations for infrastructure, including $27.5 billion for highway construction projects; $20.5 billion for investments for transportation; $7.2 billion to expand access to broadband, $11 billion to renovate the nation’s electrical grid, $5 billion to weatherize low-income homes, $4.5 billion to make federal buildings more energy efficient and billions of dollars for school construction. Most of the money in the stimulus is not directed to individual states, but one “think tank” estimates that California will receive at least $65 billion in stimulus money. However, one of the biggest challenges will be meeting the stimulus package’s stated goal of getting the projects underway as soon as possible to provide the most immediate assistance to the economy. Since infrastructure projects require lengthy review and permitting, some speculate that it will be very difficult to get these projects underway quickly. The Fact Sheet provided in connection with the Conference Report on the stimulus highlighted the fact that states currently have road and bridge projects, public transit projects, clean water, flood control and other infrastructure projects totaling $96 billion dollars that are either “ready-to-go” or that could be under contract within 180 days, so in theory these funds could be utilized quickly but the challenge will be weaving through the approval process in a manner which allows the projects to start in a timely manner.
At the time of the signing of the stimulus bill, President Obama indicated that he would not rule out additional stimulus measures and there is speculation that an expansion of the net operating loss carry back may be considered again later this year.
Chris Hunter is Chairman of Morgan Miller Blair’s real estate group and represents privately-held companies on real estate matters and serves as local real estate counsel for national and publicly-held companies. His practice includes a broad spectrum of real estate matters, including development, finance, acquisitions and dispositions, leasing and partnerships and joint ventures. Chris also represents both national and regional banks in a variety of real estate lending matters, including workouts, loan modifications, receiverships and the management and disposition of REO properties. Representative clients for Chris include Pulte, KB Home, Mechanics Bank, Hill Physicians Medical Group, Appian Capital and the Hofmann Family Trust.
