RISK TAKERS BEWARE, HR 2834 IS OUT TO GET YOU!

Implications: This article provides a straight forward analysis of the tax implications of the passage of HR 2834 as well as how it would impact the most common form of incentive to real estate development. Passage of HR 2834 will force developers to find a new method of tax avoidance or greatly reduce the level of their risks and pace of construction.

Analysis: Carried interest --- sometimes called simply "carry"---is the share of profits the general partners of a fund or partnership receive as compensation, despite not contributing any initial funds.

If carried interest is taxed as ordinary income, general partners will owe billions more in federal income taxes.  Although aimed primarily at the highly publicized abuses of the Hedge Fund Partners, its unintended consequences will severely disrupt the age old benefits of real estate developments, particularly the shopping center world.

It has been widely accepted that shopping center developers have a well defined level of "sweat equity" simply because of the months or years of work that is required well in advance of any deal coming together.

However this writer, while acknowledging his lack of a working familiarity with the current tax codes, thinks the shopping center industry is over reacting because there are several obvious ways to avoid the problem and in today's world most of the large scale development is being done by public companies who are not going to be impacted by HR 2834.