What impact will the newly passed Tax Cuts and Jobs Act have on the industry in the short and long run?
Benefits should trickle down
By Mark Myers
Executive Managing Director
Institutional Property Advisors
My synopsis of the act is that it lowers corporate and individual tax rates and lowers taxes on wages. So, as long as the profits generated by the tax cuts are used to improve the overall financial health of the companies in our industry, and are used to enhance services provided to seniors, then the act will benefit our industry.
Some of the profits should be used to provide housing for customers who need affordable senior services, provide education for employees, and potentially provide employees a small slice of the ownership pie.
Expect rising cap rates
By Jeff Erhardt
Operationally, there may be increased pressure on availability of labor, wages and other operating costs with continued lower unemployment and higher rates of inflation due to a strengthening economy driven by the tax cuts. Increased costs could, however, be offset by higher rental rate growth in select local markets.
Longer term, there could be an accelerated increase in construction costs tied to labor and materials for new developments. Increased investor cost of capital with rising interest rates in a more robust economy could pressure cap rates upward.
The labor market will tighten
By Jeff Arnold
Chief Operating Officer
The United Group
In the long run, homes that cost more than $500,000 could be more difficult to sell in certain markets and states with high property taxes, like New York and Illinois. This could have a negative impact on absorption and new developments in lease-up.
In the short run, our industry’s great challenge will be attracting quality employees. These tax reforms should stimulate the economy and decrease unemployment rates even further.
Successful operators will have to adapt by looking outside the industry, and create effective recruiting and training programs to stay competitive.
Tax breaks a positive for all
By Ryan Saul
Senior Living Investment Brokerage
The newly passed law should have an overall positive impact on seniors housing. Despite the mainstream media trying to portray that this is a bad deal for most Americans, the reality is the middle class is going to benefit from lower taxes. It is the top earners, not the large corporations or middle class, that the changes will negatively impact the most.
The tax cuts will infuse more money into the economy, resulting in residents having more disposable income. Additionally, the positive sentiment due to the Tax Cuts and Jobs Act translated to an initial record run-up in the stock market.
Tax cuts and increased net worth will give facilities the ability to increase rents and increase margins.
Labor remains a major issue for the seniors housing industry. With low unemployment nationally, it is difficult to attract and retain quality labor. This puts pressure on wage rates. But corporations will benefit from tax cuts, which should give some relief and the ability to pay more competitive rates to attract quality labor.
Industry adjustments needed
By David Schless
The seniors housing industry and its residents will benefit in several ways from this reform.
On the business side, several factor will ensure seniors housing remains an attractive asset class for investors. Those include: lower corporate rates, deductions for pass-throughs, retaining the business interest deduction (securing clarification to include seniors housing was especially important), like-kind exchanges, carried interest and even programs to assist affordable development, such as the Low-Income Housing Tax Credit and public activity bonds.
Another especially good outcome for current and future residents is the preservation and enhancement of the medical expense deduction. Short-term and long-term impacts should remain favorable. Future guidance from the U.S. Department of the Treasury, plus rules, will be critical to the long-term success as well as industry strategies to adapt to the new rules.
Nonprofits will take a hit
By Mike Taylor
Senior Vice President, Head of Healthcare Lending
First Midwest Bank
At First Midwest Bank we do business with both for-profit and nonprofit providers. There are three important points I want to highlight:
1) The change in corporate tax rate has a negative impact on nonprofits’ cost of capital as their tax-exempt status becomes less valuable.
2) There will continue to be pressure on wages, especially given the number of companies that have already increased wages as a result of the tax cuts.
3) The tremendous amount of M&A activity and new development will continue. We do not foresee this slowing down as a result of tax reform.