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Callahan chief urges senators not to ‘overreact’

Testifying yesterday before the US Senate Finance Committee, Timothy Callahan warned lawmakers not to impose new taxes on private equity real estate fund managers.

Callahan Capital chief executive Timothy Callahan yesterday urged lawmakers not to “overreact” to the current economic climate by introducing new taxes on the commercial real estate industry.

Callahan, appearing before the US Senate Finance Committee, said it was vital for government to “shore up” consumer confidence but warned any changes to the tax treatment of private equity fund carried interest would “exacerbate an already difficult environmental for entrepreneurs and investors.”

“Not only would it impose a heavy tax on entrepreneurs of all sizes, it favors emphasizing debt in a time when our debt markets are in crisis,” he said at a committee hearing on the real estate market.

Callahan, who founded Callahan Capital in 2006, was formerly president of US REITs Trizec Properties and Equity Office Properties Trust, both of which are now owned or partly owned by The Blackstone Group.

In his evidence on behalf of the industry body, the Real Estate Roundtable, Callahan said the industry was in the midst of a serious downward cycle and that there would be some pain before the economy self-corrected.

But he stressed: “As daunting and dramatic as headlines are about the housing/financial markets crisis, it is important not to overreact to them.”

“Over-taxation could stifle entrepreneurs, hamstring borrowers and weaken the resilience of investors. Overly-aggressive regulation of lenders, risks tying the hands of the institutions best equipped to provide financing to credit-worthy borrowers. We urge a cautious and thoughtful approach on all fronts.”

On both sides of the Atlantic, private equity fund managers have come under increasing pressure over the issue of carried interest, with some tax authorities and politicians calling for increases to the rate paid on this performance fee.  In the UK, a rate hike on carry tax has already gone into effect. In the US, key members of Congress are pushing to have carried interest treated as ordinary income, as opposed to its current status as capital gains, taxed at a relatively low 15 percent.

The pressure against carried interest tax in the US has stalled since the Senate passed a bill to temporarily fix a widely reviled tax called the Alternative Minimum Tax (AMT). Unlike a similar bill passed by the House of Representatives, the Senate bill did not call for carry to be treated as ordinary income rather than capital gains – a move that would more than double the tax.

The UK Government has indicated it will go ahead with plans to implement a flat capital gains tax rate of 18 percent.