DuGan: “If tax reform does goes through, the net lease sector absolutely will be impacted.”
NEW YORK CITY—While reflecting on the net lease sector’s past—which is familiar territory to a man who started working in the field in 1988—Gramercy Property Trust CEO Gordon DuGan offered a frank but uncertain assessment of the industry’s future late Thursday morning as the RealShare Net Lease conference’s keynote speaker.
“I don’t know how to think about a world where you can offset the entire cost of buying a building in the same year as the transaction,” he stated ominously. “If a company no longer can depreciate its assets, that can lead to some weird things happening.”
He was referring to the Financial Accounting Standards Board’s announcement last month of its new lease accounting standard. The organization now requires companies to report most leases on their balance sheets, putting an end to the off-balance-sheet reporting of assets and liabilities related to the rights and obligations created by operating leases.
However, the move isn’t that unlike another which once was made in the net lease space. “In the 1970s and 1980s, the business revolved around tax deals,” explained DuGan. “Companies were sold to investment partnerships; you’d buy a building, get a tenant for a 25-year lease and amortize it.”
He continued, “But new tax laws in 1996 changed that, prompting the business to shift to cash. Today’s environment is eerily similar.”
But there’s one school of thought DuGan wanted to correct. “The net lease business is a real estate business, not a credit one.” Going forward, he concedes, “the business may get slightly strange. If tax reform does goes through, net lease absolutely will be impacted. We will have to put pressure on lease terms.”
Some correction of real estate may be in store too. DuGan noted recent retail bankruptcy and mass closing announcements and stated, “The Unites States is over-retailed. This country averages about 15 to 20 square feet per capita of retail real estate while, in Europe, it’s about five square feet. In some Communist countries, it’s two square feet.”
But nevertheless, he still believes in real estate. “The real estate business is a great place to be,” declared DuGan. “There’s over $300 billion in dry powder for investors and global capital flows are better.”
For the future, he said, “tenant flexibility is going to be key. That will be the real driver.”
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