Building Sellers Play Beat the Clock Against Election Day

Who would’ve thunk that statements Barack Obama made in April would have repercussions in the New York investment sales market in August?

Building owners, fearful that a Democratic administration will raise capital gains taxes (or that a Republican one will do the same, given the proven flexibility of John McCain on myriad issues), are putting their buildings on the market so that they can sell them before Jan. 1. That’s the date at which any midyear ’09 tax hike would likely apply retroactively.

Here’s what unsettled them. On April 16, during the Democratic debate in Philly, ABC moderator Charles Gibson sternly queried Senator Obama about his former promise not to raise capital gains taxes higher than 28 percent—the top rate under Bill Clinton.

“That’s almost doubling if you went to 28 percent,” Mr. Gibson said in an accusatory tone. “But actually Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent and George Bush has taken it down to 15 percent. And in each instance, when the rate dropped, revenues from the tax increased, the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all?”

(Dean Baker, co-director of the Center for Economic and Policy Research, has since called those stats into question, and a 2002 Congressional Budget Office Revenue and Tax Policy Brief said that drops in the capital gains tax may just create the short-term illusion of tax revenue gains.)

Anyway, Mr. Obama responded: “Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness. We saw an article today that showed that the top 50 hedge fund managers made $29 billion last year, $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That’s not fair.”

Regardless of the merits of either argument, Robert Knakal, chairman of Massey Knakal Realty, said there would “definitely be an increase in the supply of available properties because of this dynamic. I think here is a fairly large percentage of people who are players in the market that think capital gains rates, both state and federal, are going to go up next year. I don’t know anyone who thinks rates are going to go down.”

Mr. Knakal said that worsening economic conditions mean lower tax returns, which means added pressure on politicians to find new sources of revenue. Three building owners who arrived at the same conclusion have since hired Massey Knakal to sell New York properties before the end of the year, and another four or five are considering doing the same.

Dan Fasulo, the managing director of Real Capital Analytics, said Mr. Knakal’s observations are likely sound. “We went through this four years ago when there was a possibility of an administrative change,” Mr. Fasulo said. “Sometimes tax considerations spook sellers.”

Tax considerations notwithstanding, might not the tanking real estate market dissuade building owners from selling?

“It all depends what your perspective is,” Mr. Fasulo said. “If you’re a mom-and-pop shop and have been holding an asset for 30 years, and you were looking to sail off into the sunset and just pay your 15 percent and be done with it, you’re not really looking at what’s going on right now in the market.”

Indeed, Mr. Knakal said his three new clients (none of whom would speak to us on the record) have no intention of reinvesting their profits to avoid the current capital gains tax. “They are happy with the way capital gains are now and are willing to pay the tax and put the money in the bank,” Mr. Knakal said.

To those cynics who might suspect all this talk is just a ploy to shore up real estate brokers’ depleted revenues, Mr. Knakal says peeshaw! “It’s empirical. It’s not just my far-fetched opinion.” And, added Mr. Knakal, capital gains increases will likely happen, whether the next president is an Obama or a McCain.

drubinstein@observer.com