
JONES DAY TALKS®: Real Assets Roundup: Episode 3 – One Big Beautiful Bill (OB3)
The “One Big Beautiful Bill Act” (or OB3) is overhauling policy for tax, real estate, energy and infrastructure investment. It brings changes to energy tax credits, on-shoring incentives, and real asset financing, creating new risks and opportunities for investors and developers.
In this “breaking news” edition of Jones Day’s “Real Assets Roundup” program, Jones Day partners Brian Sedlak, Sean Jackowitz, James Kinnebrew and Colleen Laduzinski talk about what to expect as a result of the OB3.
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Dave Dalton:
This episode of Jones Day's Real Assets Roundup is especially timely. Brian Sedlak and his panel are about to unpack the One Big Beautiful Bill Act signed into law by President Trump on July 4. This could be a game changer for participants and investors in the real assets space and really for nearly everyone else. Keep it here. I'm Dave Dalton. You're listening to JONES DAY TALKS®.
Brian Sedlak:
Welcome to the Real Assets Roundup, episode three for what I believe is the most Popular Real Assets podcast in the world. I'm your host, Brian Sedlak. I'm a partner at Jones Day and lead the real estate energy transition and infrastructure practice. Today we're going to talk about the One Big Beautiful Bill and its impact on real asset transactions.
In particular, energy, real estate and infrastructure. A quick reminder for listeners to check out previous episodes for more on Real Assets. Next time, we will continue our series on digital infrastructure when we talk about energy and data centers. But given the breaking news nature of the OBBB and the questions we have received from clients, we thought we should talk about that now.
So joining me today are my tax partners, Sean Jakowicz, James Kennebrew, and Colleen Laduzinski. So Sean, why don't we start out with you? Why don't you introduce yourself quickly and we'll go around the table just so everybody hears the voices?
Sean Jackowicz:
Thanks, Brian. My name is Sean Jakowicz. I'm a partner here at Jones Day in the Boston office along with Colleen, and excited to talk to you today about the One Big Beautiful Bill and what it means for tax credits.
Brian Sedlak:
And have we figured out a better name than OBBB?
Sean Jackowicz:
I've been trying to workshop big beautiful.
Brian Sedlak:
Okay.
Sean Jackowicz:
Just call it the big beautiful.
Brian Sedlak:
All right. I've tried OB3. But I'm not sure if it's getting any traction.
James Kinnebrew:
I kind of like that. Yeah, I like OB3.
Brian Sedlak:
Thanks. So James, tell us a little bit about yourself.
James Kinnebrew:
I'm James Kennebrew. I'm also a tax partner here at Jones Day. Resident in the Chicago office, sit not too far away from Brian. And I'm here to talk about some of the OB3's aspects when it comes to real estate transactions and just general real estate tax matters.
Brian Sedlak:
Okay. And then Colleen Laduzinski, partner in charge of our Boston office. Thank you for hosting us today.
Colleen Laduzinski:
Of course. Thank you, Brian for coming. I'm Colleen Laduzinski. I'm a tax partner here at Jones Day, and I have a focus in my practice on financing. And that's dead on the front end at issuance and dead on the back end at restructuring. As Brian noted, I'm the partner in charge of the Boston office here. And I'm happy to welcome you all to our office today for this recording.
Brian Sedlak:
And when are we moving to our brand new shiny new office? When does that take place?
Colleen Laduzinski:
Yeah, so next spring 2026, we will be moving here in Boston to South Station Tower, which is a brand new skyscraper going up over South Station. You can see it actually from the window right here. And that is a really great location. Iconic, it's building iconic. Location, brand new. We'll have amazing unobstructed 360 views of the city, the harbor, and it's going to be a phenomenal meeting place for our lawyers and our clients.
Sean Jackowicz:
And so for our listeners, you should just imagine a big, beautiful skyscraper.
Colleen Laduzinski:
There you go.
Sean Jackowicz:
Tied it all together.
Brian Sedlak:
I like it. All right, so let's start at a high level for those who might not be familiar with the OBBB or OB3 as we now call it. What is it and what are some of the key provisions?
Sean Jackowicz:
I can take that one. Let's start by setting the table. We go back in time to 2017. We have the first Trump administration and we have the tax cuts and jobs act. And the big takeaway from the TCJA was across the board tax cuts on individual rates going from 39.6 down to 37. Corporate rates going from 35 down to 21 and a number of other changes.
But really the keystone of that were the changes in rates. But the catch was that individual rates cuts expired or would expire in the end of 2025. So we now fast-forward to 2025. We have the second Trump administration. We have Republicans in control of the House and the Senate, but with small majorities.
And we have the signature aspect, the signature policy of the 2017 tax bill. The cut in the individual tax rates set to expire. So the table was set for Congress to do something. And really the big focus was extending those individual tax cuts. The CBO score came out yesterday, $3.4 trillion. About 2.9 trillion of that was due to the tax cut extension.
So that's really the centerpiece of this bill. And then everything else, it's a question of, well, how do you get this thing passed? How do you get enough votes in the house in the Senate? And so you have pluses and minuses. You have tax on tips. You have the debate over the salt cap. You have new spending on defense and the border.
And then you say, okay, well we have potential filibuster in the Senate because in the Senate you generally need 60 votes to pass any legislation. But there is an exception for this process called reconciliation. Basically the idea is, okay, we're going to agree on a budget and then we can pass that budget or the budgetary items with only a majority of the Senate, not the 60 votes that you need.
And so there are various budgetary guidelines, restrictions for doing that. And so we see a number of cuts make the tax cut extension doable in the Senate or palatable to some of the more conservative members of the House and the Senate.
Brian Sedlak:
Okay. So in terms of bottom line, are we really looking at about a 12 and a half trillion dollar change in taxes? Tax policy over the next 10 years and really focus on the tax cut extensions, the energy policy shifts, and on-shoring incentive? Is that kind of the bite-size non-tax lawyer's view of things?
Sean Jackowicz:
Well, obviously the cuts and the individual rates or the extension of the cuts I should say, are very important. But there are a number of, I'd say like a grab bag of tax changes or extensions. And many of those touch on real estate. So I wouldn't say it's a real estate focus bill or even an energy focus bill, but a number of the changes in the bill touch on these things.
Brian Sedlak:
So we've had a lot of calls through the years, Sean, on energy tax credits and tax attributes of energy projects and infrastructure projects. Maybe we drill down on that area of expertise of yours. How is the OB3 specifically impacting energy projects and broader infrastructure development?
Sean Jackowicz:
Sure. The big focus is on energy projects. So I talked about the first Trump administration's tax bill. The Biden administration also had a tax bill called the Inflation Reduction Act. And that created and expanded a number of different tax credits. Tax credits for producing electricity. For building electricity generating facilities.
For expanding the credits for carbon capture. Creating credits for hydrogen clean fuels, nuclear, a number of different areas. These created a lot of investment, a lot of interest in these sorts of projects. Somewhat ironically, mostly in the red states and the purple states. So in the south and the Midwest.
And these projects attracted something like a hundred billion in new investment. There was a lot of excitement about these credits coming out of the Inflation Reduction Act. And there was a hope that maybe given that they were focused in districts represented by Republican senators and representatives, that maybe they would continue in some form or fashion.
Well, what we saw with the One Big Beautiful Bill is that there was some curtailing of credits. So particularly solar winds were particularly hard hit. We also saw EV credits hit very hard because they're now repealed. But at the same time, there were general retention of many of these credits. So things like carbon capture, clean fuels and production tax credits and investment tax credits for technologies that are not solar winds. So like geothermal for instance.
Brian Sedlak:
Got it. So sounds like we will have to rely not on in essence tax credits to make these deals appealing as much as they were in the past. Probably not all tax attributes have disappeared. But it probably relates more to whether some institutions or companies view these renewable deals as the end rather than something more than just a tax credit.
But some institutions or companies, they want to do it from an ESG standpoint or a sustainability standpoint. Or quite frankly, just to create additional energy production where there's not enough energy. So this sounds like that's where we're at today.
Sean Jackowicz:
That's right, Brian. You hear from our clients that there's across the board interest in developing energy resources with every technology type. One takeaway here is that solar and wind have become more expensive with the loss of these federal incentives or the impending loss. And there are a number of wrinkles that we can get into, especially about foreign entities of concern. But the federal support that's been there, especially for solar and wind, not so much going forward.
Brian Sedlak:
Okay. Well maybe we'll jump to James real quick. And maybe you can tell us a little bit from the real estate side. And then probably we'll go back to you real quick, Sean, just to wrap up on the foreign entity of concern or I guess FEOC is what some people have been calling it. Just to wrap that up. So James, tell us from the real estate side, what's the impact?
James Kinnebrew:
Yeah, so from the real estate side, the impact, there's been a permanent extension of some of the 2017 or the TCJA Tax Act. As well as some new incentives to onshore some of the manufacturing capabilities that we may see with US companies bringing manufacturing back onshore. Some of the extension aspects of the bill are what was called the 199 Cap A deduction.
And what that is is for operating businesses that are in pass through entities like partnerships, LLCs or S corporations. The individual owners of those can take a 20% deduction from their income from those activities. It doesn't apply to service industries, but it applies to rental real estate, maybe property management and other types of actual operating businesses.
So that's now been made permanent. So that's a very big benefit to a lot of real estate investment firms. Along with the flow through type of income that is subject to the 199 Cap A, there's also re-dividend. So there's still a 20% deduction for re-dividends. And again, the 20% deduction really brings the top rates for that type of income down from 37% to 29.6%.
So there's substantial savings there, and that's again, made permanent. Back now is some bonus depreciation, which is a good thing for businesses. Bonus depreciation has gone back and forth throughout the past, I don't know, decade or so, and it was about to expire. And it had been limited, but now it's back to 100% expensing for certain tangible personal property that's placed in service.
That'll obviously help hotel operators. Any other number of maybe multifamily that has a lot of personal property embedded in their real estate businesses. May potentially be one of the key aspects of the bill is the new incentives for on shoring of manufacturing, which is a new 100% deduction for non-residential real estate that's used in a manufacturing business.
So again, I mean for companies that are going to build a new factory to bring back manufacturing, that could be a substantial benefit to them. Resulting in, again, substantial cash tax savings immediately and then over time as well. Finally, there's been some incentives for both rural investing and also an extension of the qualified opportunity zone plan.
And what the qualified opportunity zone system did is, it allowed taxpayers to defer their capital gains. So they could sell any aspect of property, recognize or realize capital gains, roll that capital gain into qualified opportunity zone property and then not defer the tax. That was set to expire at the end of next year, it's now been made permanent.
And one of the key aspects to the changes are they're going to make what qualifies for a qualified opportunity zone a little bit more difficult to qualify for. It's going to be lower income levels, not necessarily the continuous tracks next to the qualified opportunity zone to no longer qualify.
So there are some changes that make it more difficult to that. And there's a new emphasis on rural areas as well. Where there's an increased tax benefit to roll your capital gains into rural properties. So again, all of these are designed to spur development, both rural and rural America as well as in traditionally not well invested areas of the United States.
Brian Sedlak:
Okay. Well that's great, James. Colleen, we'll get you in a few minutes with respect to your views on winners and losers. But I guess one of the things I'm taking out of this is, through the push-pull of legislation and through the budget scoring, there are some winners, there are some losers loosely defined by me. And maybe wind solar is sort of a loser here.
Maybe expanded tax credits for clean fuels, biodiesel, nuclear carbon capture, hydrogen, maybe that's on the winning side. And it seems like it's the same way with respect to real estate. You talked about how maybe some of the on-shoring aspects have come out okay here. And then we were talking to Sean earlier about the FEOCs in terms of some non-US entities that may not have come out on the winning side here. Can you explain a little bit about the quote, unquote "FEOCs"?
Sean Jackowicz:
So FEOCs, I mean, this was an idea that we, at least in the tax realm saw with the Inflation Reduction Act, we had these limitations on EV batteries and whether those cars that had those batteries could qualify for tax credits depending on whether FEOCs were involved in the supply chain for the batteries.
This is really an issue about China. I mean, what we're talking about is does the supply chain in question touch on China? Are the taxpayers who are claiming these benefits that they somehow relate back to a Chinese entity? FEOC is defined as relating to Russia, China, North Korea, or Iran. But really China is the major player in the energy space there.
So what we've seen with FEOC under the OB3, there are two things. One, you have to ask if you want to claim a tax credit, is the claimant of the credit a prohibited foreign person? Which means basically, do they have impermissible connection to China? Do they have Chinese ownership in their cap table?
Does a Chinese entity have the right to appoint officers and directors? Do we have some sort of contractual arrangement that gives a Chinese entity effective control over the operations of a project? So there's a pretty complicated list of factors that we'll now have to work through anytime that someone's claiming a tax credit or selling a tax credit, which maybe we'll have time to talk about too.
So that's one aspect. The second aspect is, for any project where you're developing energy generation facilities, you have to ask whether too many of the components came from these Chinese linked entities. And there are percentages for different types of facilities. I think it's 40% for solar. 40% has to come from non-Chinese sources increasing over time.
And there's a concern, number one, that maybe it's not possible given the current state of the supply chain. Particularly in solar to meet that. There's a lot of Chinese presence in the supply chain, especially for solar and also for battery technologies. Second, I mean, how do you actually, diligence is how do you actually certify and comply with it?
There's some rules suggested in the statute, not particularly clear. Not particularly clear what to do about supply chain that goes 5, 6, 7, 8, or more entities. How are you supposed to collect that information? And what is the IRS going to accept as sufficient substantiation? There's a worry that maybe the cost of certifying all that or the risk of being found not to be in compliance is too great. And might negatively affect some of these projects.
Brian Sedlak:
Well, you did a great job of explaining something that's almost incomprehensible. But probably the main goal was to push the industry more towards on-shoring as we've been talking about. I know you've been receiving a ton of calls from clients with interest in China asking for advice. As well as clients who are looking for this as an opportunity to maybe purchase currently what I'll call FEOC owned assets. So I know you've been very busy with that. So thanks for spending the time to come and join us today.
Sean Jackowicz:
Anything for their Real Assets.
Brian Sedlak:
Thank you. Thank you. Thank you, Sean. We'd just like to shorten it to the Round up. So Colleen, we'll get to you. You're smart, and you seem like you have a pretty good crystal ball. But what have they missed here? Who are the winners? Who are the losers? Do you have a punchline that's come out of our discussion so far?
Colleen Laduzinski:
Well, first, Brian, I want to tell you that Brian said you are a winner. Do you recognize this? I am holding a wooden token, which was presented to me by Brian in Chicago the last time I was there. It's a wooden soup token, which he received when he was in Boston. Staying at a hotel that is owned by one of our clients.
And you were given that as a perk of having status at that hotel. You were given a wooden soup nickel that you could return for soup the next time you were in town in Boston. You gave it to me in case I ever needed soup when I got back to Boston. I'm giving it back to you now.
Brian Sedlak:
Thank you, Colleen. There's nothing that says summer in Boston like a crock of soup.
Colleen Laduzinski:
And I have to tell you, Brian, I've been carrying around that wooden soup nickel in my purse ever since you gave it to me as a good luck token.
Brian Sedlak:
Thank you. Thank you, Colleen.
Colleen Laduzinski:
Okay, so back to the OBBB. The biggest issue in the financing space that was a threat, a real threat and a real challenge I'll say. Rather than winners and losers, I'll talk about positives, negatives, challenges. A real challenge was what everyone was calling the revenge tax. This is section 899. When the house first put this out, it was extremely Draconian.
And then the Senate improved it a tiny bit. It did not end up in the final signed bill, which is really good for the market. Essentially, that would have imposed annual increasing punitive rates of withholding tax on any payments by US borrowers to lenders in certain discriminatory foreign countries.
Which is basically every country in Europe and Japan, Australia, Canada, you name it, right? So that ultimately did not get passed. That would have under the house version caused up to a 50% withholding tax on payments from US borrowers to any bank or lender funds, et cetera, in one of those jurisdictions.
So what that meant was Cayman Islands were back in style, but UK not so much. It would've really changed the landscape and it would've affected foreign banks as well as foreign funds like offshore funds or private credit funds that had offshore investors.
James Kinnebrew:
It could have been even worse than that because it would've not just affected the lending activities in the United States, but also all the equity investments. Again, by persons or governments located in these particular set of countries. That again, luckily was not included in the final bill.
Colleen Laduzinski:
Yeah. In terms of positives and the outcome, our foreign banks are tax-exempt sovereign investors in real estate funds. And other offshore investors in real estate and other funds got by without this potentially very punitive system. I don't know if we can be 100% certain that we'll never come back in a different form.
The reason why it went away before the act was signed was because basically the US government and G-7 made a deal that the OECD would recognize that our current system of taxation of foreign income from multinationals in the US was sufficient enough that we didn't need to adopt the OECD's pillar two, which is the global minimum 15% tax.
So for now, we're in the clear. But there were several weeks, if not months, it felt like months. I don't remember how long it was. Where we were talking to clients every day about these issues and how are we going to restructure so that we don't end up having to sell all of our debt positions, all of our loan positions to US banks or offshore like Cayman funds.
So it was very interesting time, and we were facing a lot of uncertainty in deals that were closing as well as looking at portfolios of our clients to look at their deals that had already closed and to look at the deals that they had in the pipeline. So big, big relief when the OBB was signed and that wasn't in it.
The other kind of piece of good news is that TCJA in 2018, limited US borrowers ability to deduct interest expense to 30% of annual EBITDA, which is earnings before interest, taxes, depreciation, and amortization. Now compared to pre 2018, that was a limit. But what was worse about the TCJA was beginning in 2022, the ability to deduct interest expense was limited to 30% of EBITDA.
So a real estate oriented company that has a lot of depreciation and amortization as well as any kind of manufacturing company and many, many other types of companies did suffer from 2022 through 2024 from that super tight limitation on the ability to deduct interest. What the OBBB did was it went back to the 2018 version.
Which is, okay when a company is determining its ability to deduct interest expense, it's limited on an annual basis to 30% of EBITDA. Which is a higher cash flow based way of looking at earnings as opposed to EBIT, which is more of a financial statement kind of way of looking at it, a much smaller number.
So that was a really nice change. There are some caveats to how that change works. Maybe not as relevant in the real estate space, so we won't get into it today. So those are the two sort of big ticket items. I don't know if anyone else has anything to add on the winners and losers, but I can --
Brian Sedlak:
No, that's very helpful, Colleen. Why don't you take us home here and then we'll wrap it up?
Colleen Laduzinski:
Yeah, the main thing to keep in mind is that this, at the end of the day was a tax cut bill. And in many of these provisions where we had these super favorable, like 100% expensing on tangible personal property and some of these other very relief like provisions, they are permanent. So tax cuts means more cash flow and more opportunities for investment, and really that's the thing to focus on.
Brian Sedlak:
Okay. Well, that's great. This has been a fascinating discussion. I really appreciate it. It's really on a multifaceted piece of legislation and it's going to have an impact on all sorts of assets. So Sean, James, Colleen, thank you for your invaluable insights. I know we could go on for a much longer period of time.
But here on the Roundup, we like to keep these in relatively bite-sized pieces. For more information, please visit jonesday.com and remember to subscribe to JONES DAY TALKS®, Real Assets Roundup to get advanced access to each episode of the Roundup and special subscribers only content.
Join us next time on the Real Assets Roundup as we delve into energy supply for data centers in part two of our series on digital infrastructure. We're going to try to do that one on remote in London, so we'll see how that goes. That wraps up episode three of the Real Assets Roundup. Thanks for listening. Now I've got to go find a cup of soup.
Dave Dalton:
Hey, thanks Brian. For complete bios, visit Jonesday.com. While you're there, check out our insights page for more podcasts, publications, videos, and other timely content. Subscribe to JONES DAY TALKS® at Apple Podcasts, and where else quality podcast content is found. JONES DAY TALKS® is produced by Tom Kondilas. I'm Dave Dalton, we'll talk to you next time.
Speaker 6:
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