With...legal and business insights | Episode 2 : Real estate

In episode 2 of our With… Legal and Business Insights podcast, Joe Morales is joined by Vasiliki Yiannoulis, a real estate partner at Withers. She discusses the investment in U.S. real estate and major changes on the tax law. Joe and Vasi also discuss the enactment of the Tax Cut and Jobs Act and how it can affect some U.S. investments.

Listen to the full episode:


J. Morales: Welcome to With… Legal and Business Insights. I’m your host, Joe Morales and I’m back with the second episode in our series. We’ve designed this podcast to provide a platform for discussion of various legal and business issues. Last time we featured a conversation with Michael Rueda, the head of Withers Bergman’s US sports practice, about the firm’s sports capabilities in issues related to soccer player development in the US. In this episode, I’m joined by Vasi Yiannoulis to discuss the impact of recent US tax law changes on US real estate investment opportunities. Remember, you can use the links in the show notes to provide feedback on any podcast episode and we encourage folks to let us know how we’re doing. Another reminder, we’re not providing any legal advice via this podcast. The information contained in this podcast is for informational purposes only and does not constitute legal or other advice. You shouldn’t rely on this content and we don’t accept liability to any person who relies on this content. Legal provisions changed frequently. Any commentary in this program should be reconfirmed before any action is taken. This podcast material is not intended to be used and cannot be used by anyone for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. With the legal disclaimer, once again out of the way, let’s turn to today’s guest, Vasi Yiannoulis is a real estate partner who joined Withers Bergman in 2014 and she’s been practicing in New York City for almost a decade. Vasi currently splits time between our firms offices in New York City in Greenwich, Connecticut. Her practice primarily focuses on commercial real estate matters and she routinely assist private and institutional clients with a variety of real estate transactions including property, acquisitions and dispositions, loan transactions, title matters, and leasing transactions.

When Vasi is not practicing law, she likes to travel the world and it’s also a lover of sports. In fact, colleges expressed interest in recruiting her to play basketball when she was in high school, but fortunately for all your real estate investors out there, she chose to be an attorney instead. She recently coauthored an article called the Tax Cuts and Jobs Act, a boon for us commercial real property investment with two other, Withers attorneys, James Brockway and William Kambas. We’ve included a link to the article in this episode’s show notes as part of our conversation, Vasi explained a bit about the firm’s real estate practice and her expertise. And then we talked about reasons why the US real estate market is an attractive investment opportunity and the impact of the recent US tax law changes. Okay. So I’m here with my colleague Vasi Yiannoulis, who is a partner in our New York and Greenwich Offices here in the US. Today we’re talking about investment into US real estate and some major changes in the tax laws that make that an attractive proposition for foreign investors and US investors alike. So Vasi, thanks for joining me today, spending otherwise billable time with me is always appreciated.

V. Yiannoulis: Sure thing. I’m glad to be here, Joe.

J. Morales: Great, so let’s kind of start with some general background for the audience. As a general matter, what makes New York City and others and some of the other US markets like Miami attractive for Real Estate Investment?

V. Yiannoulis: Well, traditionally, the US has been attractive for real estate investment because it’s a stable market, especially places like New York and Miami and other gateway cities like San Francisco. They’re just a great place for investors to park money because the money is safe there. And you know, on top of that, places like New York attends to grow, and even when the market is not doing well in places like New York, you know, real estate tends to hold its value. So in general it’s just a good investment proposition.

J. Morales: Okay. So historically these are the places where investors are parking their money. Now I understand the TCJA, what does that stand for? I guess educate me a little bit on that cause I have jotted down on my notes as the abbreviation.

V. Yiannoulis: Okay, it’s the tax cuts and jobs act, which Donald Trump signed into law on December 22nd, 2017. It’s made some substantial changes to the tax law for almost all types of taxpayers, but you know, in particular it is thought to be extremely favorable to commercial real estate investment.

J. Morales: Okay. And that’s what I got out of the article that you had sent me to prepare for this conversation, that there are, I guess there’s icing on the cake now for folks that are looking to invest in the US real estate market. Could you walk us through what some of those are or why that is?

V. Yiannoulis: Sure. So you know one of the biggest changes was the 21% corporate income tax rate. You know, prior to that, the income tax rate was much higher. I think it was somewhere in the 30s. And so now it’s a 21% rate, which is significant change. In fact it was 35%, so it lowered the tax rate from 35% to 21%, which is huge. You know, on top of that, there’s a 20% deduction for qualified “pass through entities”. And you guessed it, commercial real estate entities do qualify for this deduction. On top of that, the mortgage interest and salt deductions, state and local income tax deductions are not limited for investment into commercial real estate. So while they’re limited on the residential side, on the commercial side, they have not, there is no cap. So you can continue to take the deductions that you would have taken, you know, prior to the law coming into place.

J. Morales: Okay. So someone like me who is searching for a private home in New York and deciding between New York and Connecticut is taking this into account as a, you know, a small time residential purchaser, but you’re saying that on the commercial side those folks, investors are still getting the same benefits of the, they were getting before the law was passed,

V. Yiannoulis: Correct. That’s exactly right. So while you might think twice about, you know, investing in a residential property, you, wouldn’t have that issue on the commercial side. On top of that, the 10 31 rules have been retained for real estate where they haven’t been for other assets like art.

J. Morales: Okay. Well that’s interesting. So in some respects, maybe real estate is, you know, someone maybe that was thinking about investing in an art collection, these got very expensive in terms of, you know, collection values. Now maybe that investor instead of putting their money into art here in the US is thinking, let me get in the commercial real estate game and stuff.

V. Yiannoulis: Sure. I mean, you know, I mean, like again, real estate is just a safe investment generally in the US especially, particularly in places like New York. And now these rules are just, they’re making it even more attractive. Possibly for obvious reasons, considering who our president is and what his business is. But you know, this was a really welcome change for investors in commercial real estate.

J. Morales: You think it’s enough to push people over the edge? Now, I’m going a little bit off script, but I mean, in terms of people that were maybe on the fence about investing in the US market

V. Yiannoulis: Sure. I mean, you know, definitely. I mean the, these tax rules are now so much more favorable that, you know, it used to be that, you know, some investors might hesitate because, you know, the tax implications of, of investing in real estate in the US, we’re not in consequential now. I mean with these new rules, you know, it just makes it that much more attractive. And you know, we’re starting to see some investors who are, who have decided that the time is right now to come in and make these investments. And you know, of course, the new bill is sort of encouraging people to think about what type of investment to make. So, you know, we’re seeing people who have more of an interest now in investing in multifamily properties for example. And that is because, you know, with the, the limitation on the SALT deductions on the residential side, they think that that renting is going to become more popular in high tax jurisdictions like New York. And so investing in, you know, in a multifamily property could be seen as potentially a good one, a good investment, just because they’re going to be more renters in the market than there are buyers.

J. Morales: Right. So going back to my example from before, I’m seeing that I’m not getting the benefit of the SALT deduction anymore under the new law in New York. I individually may be more inclined to continue renting and therefore the demand for, for multifamily housing in New York continues to run, you know, rises or starts to rise and therefore those are safer investments for the, for the investors.

V. Yiannoulis: Sure, and we’re seeing that, you know, we’re seeing that there’s more interest in sort of the multifamily buildings then there would’ve been prior to prior to the tax change. So, but yeah, I mean it definitely makes commercial real estate as a general matter more attractive. But then, there are also sub categories within commercial real estate that like multifamily buildings that now look even more attractive.

J. Morales: Okay, another thing you and I talked about before we started the conversation was the idea of these opportunities zones that, well I’ll let you explain it more about kind of what they are in practice, but you know, to me breaking it down, it was kind of like New York City once upon a time was an opportunity zone before the gentrification and cleaning it all up like in the 90s and so forth. So yeah, tell us a little bit about that and then what you guys are seeing on that front.

V. Yiannoulis: Okay. So, you know, essentially, so to your point about New York City, once upon a time was an opportunity zone and no longer, no longer really is. It’s a very, you know, it’s very expensive to, to invest in New York City real estate, even though the time is ripe to do it. It’s just a very expensive market. There are zones that have been identified, in this new tax bill, which are, have been called “opportunities zones”. And there are some major tax benefits to investing in these opportunity zones. So their cities like for example, New Haven in Connecticut and Bridgeport, which are ripe for development. And the Treasury Department, I believe is supposed to come out with new regs, very soon, which will give guidance to investors in terms of investing in these, these opportunities zones. But there are a number of them identified in this tax bill across the country. It’s probably one of the most progressive provisions in this tax bill. And it’s going to encourage investment into sort of these tertiary markets, which actually might be a good investment proposition because you’re getting, you know, not only is it less expensive to invest in these markets, you know, compared to a gateway city like New York or Miami. You know what, on top of that, you know, if this thing really takes off and you invest in the right market, you know, it could be that you end up doing very well investing in those places. And you know, in addition, get, a number of tax benefits that you wouldn’t have gotten otherwise

J. Morales: So those investments are more speculative because of the geographic area where there are being made and sure there’s work to be done there. I guess I would describe it.

V. Yiannoulis: That’s right. But it’s, you know, it’s a higher risk, higher reward proposition, right. I mean, in New York, you’re, you know, the risk reward is going to be a little bit different. I mean, you’re going to go in and you’re going to know that you’re probably going to do, you’re probably going to do well investing in New York, but you know, it’s going to be a high investment and then, you know, the reward is going to be sort of commensurate with that. It’s not, you know, whereas here it’s like, it’s a high risk in the sense that, you know, you’re investing and you’re not sure, you know, if the city might take off. Maybe it doesn’t. But you know, it’s a relatively lower amount, but the rewards are much higher if you know, if this bill does what it’s supposed to do. Right.

J. Morales: So New York and Miami and places like that that are established, I mean, you kind, you know what you’re getting and you’re paying a premium for it because the returns are, I don’t want to say guaranteed because nothing in life ever is, frankly, but you have a very good sense of, of what’s going to come of that investment, whereas these other opportunity zones, I mean, you may, you may hit a home run, you may strike out, but the bill’s design, or the law, I suppose now is designed in a way that encourages folks to, I guess, take the take the chance.

V. Yiannoulis: That’s correct. That’s exactly it. Yeah. So, you know, the thing that I would recommend to potential investors at this point is; A, you know, evaluate sort of where you would want to invest in the US and talk to a tax lawyer, a real estate lawyer of course too. But also somebody was tax capabilities who can tell you sort of, you know, what, what are the tax benefits and then also think about how you want to structure the investment because that’s going to be important under this new law. The traditional way of structuring a real estate investments may not actually be your best bet now.

J. Morales: So if you’re doing the new investment, we’re talking about evaluating the tax implications of the new law, talking to the real estate attorney to discuss structuring options. What about the folks that have already invested in, are already sort of in play, you know, under the old regime. Can they do anything? Is there stuff that they should be asking their advisors to do on those fronts as well or, or what’s the deal there?

V. Yiannoulis: Sure, I mean you know, I would, we would totally recommend that, you know, people who already have real estate investments look at their structure and see if they can’t restructure those investments to be more tax efficient under the law for sure. You know, for example, what we’re seeing a lot of now, is that, you know, people are investing in their, they’re still setting up, for example, limited liability companies to make their investments, but they’re electing to be treated, you know, electing for the limited liability company to be treated as a corporation for purposes of the tax bill. Because, you know, going back to the point earlier you know corporations now have the 21%. And, and people who are, you know, who currently have investments in real estate, you know, again, they should do the same thing, sort of reevaluate, you know, the investments in the structures that they currently have in place and see what can be changed to, you know, to maximize the tax benefits under the new rules.

J. Morales: Okay. So if you’re already in the investment game here, all is not lost. There are opportunities to, reevaluate or restructure potentially where you can take advantage, I suppose, over the benefits offered by the new law.

V. Yiannoulis: Yeah, that’s right. And that’s why we say you should come talk to a Withers person because this is really what we do.

J. Morales: All right. So I think that’s a good synopsis of the TCJA for, for our audience. With all my guests, I like to give them an opportunity to just describe a little bit about themselves and their practice. So, you know, take the next 90 to 120 seconds to give us the elevator pitch for a long elevator ride. If you will.

V. Yiannoulis: No, thanks Joe. I mean, I appreciate it. I am a commercial real estate attorney who has been practicing in Manhattan and actually nationwide, I’ve done deals all over the country for, you know, almost the past decade. I do all kinds of commercial and deals, but you know, my specialties in commercial, I do dispositions, acquisitions, leasing, financing, joint venture agreements, you know, anything that has to do with, with sort of investment into commercial real property. For the most part, you know, I can, I can pretty much do it, including after the deal agreements such as development agreements and, you know, construction agreements, et cetera.

J. Morales: Because its not just about buying the dirt. There’s more to the story than that.

V. Yiannoulis: That’s right. There’s more to the story then buying the dirt. There are a number of agreements that you would enter into after you’ve, you know, after you’ve purchased the thing. So, so we do it all. Well, most of it. And if we, if we don’t do it, if it’s something really specialized like zoning or, you know we’ll know who to get.

J. Morales: Okay. That all sounds great. Well, thanks again for joining me and thanks to the audience for listening and thank you. This concludes the second episode of With… Legal and Business insights. Thanks for tuning in and listening, and a special thank you to Vasi Yiannoulis for participating in today’s episode and offering her insight, you can find links to the firm’s website and this episode’s show notes as well as links to provide feedback and to contact Vasi and me. Once again, I’m your host, Joe Morales. I’ll speak to you next time on With Legal and Business Insights.

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