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  Carried-interest Tax Hike Assailed

By Andrew Tangel
April 8th, 2009

  A tax increase proposed by the Obama administration that would hit managers of hedge funds as well as real-estate and other partnerships has prompted an outcry by some insiders, but a relative shrug from others.

The change, part of the president's proposed 2009 budget, would raise the tax rate that managers of those partnerships pay for their compensation.

Managers currently pay the capital-gains rate of 15 percent, but the proposed budget — which has yet to be approved by Congress — would treat managers' fees or "carried interest" pay as ordinary income, taxable at rates of as high as about 40 percent by 2011, when the economy is expected to have recovered. A Michigan congressman introduced similar legislation last week.

The National Association of Industrial and Office Properties, a commercial real estate development group, said the proposed increase in taxes would have a "broad, devastating impact" on commercial real estate and would deliver a "severe blow to entrepreneurs," hampering the development of projects.

Rutgers Business School professor John Longo expects the proposed increase to affect many real estate partnerships, depending on how they're arranged. In many arrangements, partners get a percentage of profits when, for example, investors buy a building, fix it up and sell it at a higher price.

Jim Maurer, president and chief operating officer of Cofinance Inc., the Hackensack-based arm of its Luxembourg parent Cofinance Group SA, said increasing taxes on carried interest would make equity financing harder to get for real-estate investors — particularly troublesome now that debt financing (bank loans) has become difficult to get, especially for deals greater than $100 million in value.

Cofinance often partners with hedge funds or pension funds in real estate ventures, acting as the managing partner. If managers of real estate partnerships demand higher compensation because of higher taxes on carried interest, funds and their investors will get less return, Maurer said.

Lower returns could dissuade investors from distressed buildings, he said. "Or they may end up moving their investment dollars out of real estate."

David Violette, president of the Industrial and Office Real Estate Brokers Association of the New York Metropolitan Area, another industry group, said: "I can't see how it wouldn't have a negative impact."

Not everyone was concerned about the proposal. Michael Seeve, president of Mountain Development Corp. in Clifton, said: "Most real estate people wouldn't care, because they're not like hedge funds' [managers] that are just getting fees for arranging investments," he said.

"I don't welcome the extra tax but I don't think this is so terrible," added Seeve, who is an officer with NAIOP's New Jersey chapter. "And I do recognize that our government has a lot of bills and bonds to pay.''

Treasury officials have yet to detail changes in the Obama administration's proposed budget. Treasury Secretary Timothy Geithner said in March congressional testimony that the proposed increase would "restore fairness to the tax code" by taxing hedge fund managers like ordinary American workers, such as teachers.