Developers Get $366-Million Tax Break in Budget Bill

Hemmed in by the deficit, White House and congressional budget negotiators have been forced to jettison or scale back many of President Clinton’s domestic initiatives. But that has not stopped them from finding a few hundred million dollars for politically influential real estate developers.

Working quietly behind the scenes, the commercial real estate industry already has won from budget negotiators a lucrative tax break of $366 million over five years.

The provision, quietly approved by a House-Senate conference committee late last week, would make it possible for developers to avoid additional taxes when they are able to persuade their bankers to reduce the amount of loans that they must repay for office buildings and other commercial properties.

Such forgiven debt now is considered taxable income. But the White House and Congress have agreed to make a special exemption from that law for commercial real estate.

The revision would mean a windfall for developers from Orange County to New England who overbuilt in the 1980s and now are trying to get out from under mortgage payments for office buildings that sit empty.

Developers maintained that the provision is needed to provide stability to many of the nation’s hardest hit real estate markets. Industry officials also said that they will agree to other real estate tax measures to offset the costs of this provision.

Even so, the tax break has been approved at a time when many other tax incentives have been stripped out of the budget by congressional negotiators seeking to enhance government revenues to meet the Administration’s deficit targets and to fund other Administration programs.

The tax break was sought by a powerful coalition of real estate developers and bankers, including the National Realty Committee, the National Assn. of Realtors and the American Bankers Assn.

Indeed, the success of the real estate industry in a period of such fiscal austerity offers a glimpse of how some special interests are able to get what they want in Washington.

Tax experts here said that the Clinton White House agreed to the tax break to win the influential commercial real estate industry’s support for the rest of the budget. Clinton, facing tight votes on the budget in both House and Senate, has been scrambling for support from an array of groups and has shown a willingness to compromise on many elements of his budget in return.

Industry officials insisted that they did not cut any specific deal with the White House. But they acknowledge that the tax break was critical to their decision to support the budget. “Would we have supported the President’s budget without this?” said a spokesman for the National Realty Committee. “Tough question.”

The industry’s support can be crucial when it comes to tax and budget matters: In lobbying circles, the real estate industry is known as the “National Rifle Assn.” of tax lobbies. (The NRA has been highly successful at getting what it wants from Congress and the federal government.)

In fact, real estate, which traditionally makes some of the largest campaign contributions of any industry, has powerful allies in both the House and the Senate. Legislation introduced earlier this year and which included the new tax break had 138 co-sponsors in the House and 18 in the Senate, including Sen. Dianne Feinstein (D-Calif.).

“The real estate industry really knows how to play the game right,” said one Washington tax expert at a major accounting firm who works for real estate clients and asked not to be identified. “They supported the President’s plan on the House floor and they got their break.”

In an interview Monday, Feinstein said she supported the provision because it was badly needed by the struggling real estate industry in California.

The provision was not included in Clinton’s original budget. But when the legislation got to the House, a coalition of the industry’s supporters got the provision included. The Senate, looking for ways to save money as it sought to reduce the size of Clinton’s energy tax and other measures, dropped the idea.

But during the closed-door negotiations between House and Senate budget negotiators--and with the approval of the White House--the measure found its way back into the budget last Thursday.

“We have been sympathetic to the provision,” said Deputy Treasury Secretary Roger Altman, who is now acting as one of the Administration’s key spokesmen on budget matters.

Real estate industry officials said that the debt forgiveness provision would be paid for by another provision of the tax bill, which would reduce the tax deductions on the depreciation of new office buildings.

“This will be paid for, it is revenue neutral,” said a spokesman for the National Realty Committee.

Tax experts, however, complained that, even if the break is offset by other taxes, it may be poor economic policy because it means that the owners of new buildings will have to help pay for tax breaks that subsidize the failures of past developers.

“You are taking money from people building today and giving it to people who were building yesterday,” said another Washington tax expert who also works for real estate clients.