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Proposed, "Simple" Budget Fix Would Bring Commercial Real Estate Market to its Knees

It's simple to fix the budget in Washington D.C. According to Fareed Zakaria, author and foreign affairs analyst who hosts "Fareed Zakaria GPS" on CNN, eliminate the mortgage interest deduction. Among recommendations that include removing tax deductions for employers that take health care deductions, scaling back Obama's health care overhaul, and increasing taxes, Mr. Zakaria recommends the destruction of the mortgage interest deduction, or the "sacred cow" that would take in a hundred billion dollars for the U.S. Government.  He emphasizes that our country's appetite for debt is fueled by this subsidy and that Washington D.C. should eliminate it and profit from the savings they can use to pay for the 1.5 trillion dollar deficit and 1.3 trillion dollar deficit next year. What Mr. Zakaria has forgotten is the effect of the mortgage interest deduction on home values. It's priced into market values today.  How would home owners, lenders, and the real estate and related industries recover? And what would the secondary effect on IRS revenues from such a contraction? What's more, watch out commercial real estate investors.  The mortgage interest deduction is one of the reasons commercial real estate investors buy commercial properties today: including depreciation, leverage, and appreciation.  The deduction provides them with the ability to take advantage of tax savings on their leveraged cash flows as well as to account for an expense incurred to leverage real estate in an effort to drive value. The removal of the mortgage interest deduction for commercial real estate would be catastrophic to property valuations across the country.  Returns would be significantly affected in an environment where we're already struggling to absorb corrected valuations, some of which are less than the debt. If you own property and wonder what the removal of the mortgage interest deduction would mean for your value, email me at Jeremy@Mansardcre.com with the words “Mortgage Interest Deduction” in the subject line.  Include your name, when you would like to be called, and the best number to reach you. I will contact you to schedule a time for you to invite me to your building for a free consultation.  We will discuss your current financials, market value, and how you can protect yourself from the possible elimination of the mortgage interest deduction with our Valuation and Asset Management Optimization Plan. To read Mr. Zakaria's commentary, click here. Get free weekly email updates of this blog. About the Author: Jeremy Cyrier, CCIM is the founder/principal of MANSARD Commercial Properties and member of the CCIM Institute faculty. He delivers thoughtful, large scale commercial real estate solutions to the individual challenges owners and tenants face. Jeremy Cyrier, CCIM was elected by Banker & Tradesman as one of its New Leaders in 2009. You may reach Jeremy at Jeremy@Mansardcre.com.