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On August 4, 2022, Senator Charles Schumer (D-NY) announced that carried interest changes, strongly opposed by ICSC, would be removed from the Inflation Reduction Act of 2022. This action was made at the personal request of Senator Kyrsten Sinema (D-AZ) after intensive outreach by ICSC’s government relations team and our state volunteers.
“We are extremely pleased that carried interest has been dropped from this legislation,” ICSC President & CEO Tom McGee said. “These changes would have unfairly penalized projects that use financing from outside investors. Creating a successful development requires substantial upfront risk and costs by the developer. Disincentivizing this risk taking would have impacted our industry’s ability to reposition properties that have been impacted by COVID and react to ongoing consumer trends in the market.”
Carried interest – or “the promote” in real estate terms – is frequently misrepresented as only benefitting a slim section of wealthy private equity and hedge fund managers. In reality, more than half of partnerships in the U.S. are real estate related. Roughly 70% of ICSC members say they have used carried interest in their deals.
Despite opponents’ claims, developers are not managing investors’ money but are using it to finance their projects. Outside investors are only brought into a deal after a substantial pre-development phase. Depending on the scope and complexity of the project, this can be a multi-year process, during which the developer purchases an option or buys the property, completes required permitting and environmental impact studies, prepares architectural plans, and secures the approval of the local municipality or state authorities. Developers are also responsible for cost overruns and potential litigation. Without a developer willing to undertake these risks, the project wouldn’t happen.
Limiting carried interest would result in different tax treatments depending on a development’s source of financing. A self-funded project or one entirely underwritten by a bank would continue to be taxed as a capital gain. One funded by equity capital, however, would be at risk of being taxed as ordinary income – a difference of 17 percentage points. Such disparate treatment would unfairly penalize entrepreneurs who lack deep pockets.
Please contact Phillips Hinch, Vice President of Tax Policy, at phinch@icsc.com if you have questions.