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January 9, 2015

LEGISLATIVE OUTLOOK
The 114th Congress Convenes and Gets Down to Work on TRIA, Keystone; Critical Matters for Real Estate on Capitol Hill’s 2015 Agenda Include Tax, Energy, Homeland Security, and Immigration Policy

TERRORISM INSURANCE
Over 1 Million Businesses Breathe a Sigh of Relief as Congress Votes to Reinstate, Extend TRIA; Roundtable Applauds Lawmakers’ Swift, Decisive Action; Obama’s Signature Expected Soon

CAPITAL AND CREDIT
CREFC Survey: Search for Yield Will Drive Strong 2015 Commercial Real Estate Finance Market; New CMBS Issuance Expected to Significantly Exceed 2014 Volume


LEGISLATIVE OUTLOOK

The 114th Congress Convenes and Gets Down to Work on TRIA, Keystone; Critical Matters for Real Estate on Capitol Hill’s 2015 Agenda Include Tax, Energy, Homeland Security, and Immigration Policy  

The new Congress overwhelmingly passes TRIA as its first order of business. 

Next up is action on the Keystone XL pipeline – with a likely “Tenant Star” amendment. 

Myriad budget battles, expirations, and program “cliffs” loom on the horizon – to prompt inevitable showdowns between President Obama and Republicans now controlling both the Senate and House.

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Capitol Hill returned to work as the U.S. Congress convened for its 114th session. B oth chambers acted quickly to pass the Terrorism Risk Insurance Act (TRIA) with overwhelming majorities –  sending the measure to President Obama’s desk for his signature and thus accomplishing a top Roundtable priority.

Capitol Hill returned to work on Tuesday, as the U.S. Congress convened for its 114th session.  With Republicans holding the reins in both the Senate and House – and John Boehner (R-OH) securing his third term as Speaker while fending off a coup from about two dozen Tea Party members – the first orders of business were legislation to extend the federal terrorism insurance program and approve construction of the Keystone XL pipeline.

By Thursday, both chambers acted quickly to pass the Terrorism Risk Insurance Act (TRIA) with overwhelming majorities –  sending the measure to President Obama’s desk for his signature and thus accomplishing a top Roundtable priority.  (See story below.)    

Adhering to the commitment of new Senate Majority Leader Mitch McConnell (R-KY) to take swift action regarding Keystone XL, the Senate Energy and Natural Resources Committee on Thursday approved a bill for the pipeline’s construction.  The committee passed the bill along a mostly party-line vote, triggering a process for the full Senate to start considering the measure.  While the House passed the Keystone bill today – and the Senate could approve it as early as next week – President Obama has threatened a veto that will likely lead to an early showdown this year with the GOP-controlled Congress.  [The Hill, Jan. 8.]

As Keystone advanced, Senators Rob Portman (R-OH) and Jeanne Shaheen (D-NH) maneuvered to jumpstart components of their widely-supported energy efficiency bill.  In another move with significant implications for The Roundtable’s policy agenda,  Portman and Shaheen started rallying support to attach “Tenant Star”  and other building efficiency provisions as an amendment to the underlying Keystone bill.  “Tenant Star” – a measure long supported by a diverse coalition of real estate, manufacturing, and environmental stakeholders – is unfinished business from last Congress.  [Roundtable Weekly, Dec. 19, 2014.]  The Roundtable’s Sustainability Policy Advisory Committee (SPAC) was an early backer of “Tenant Star” and continues to advocate its ultimate passage.

 Shaheen Portman outside Capitol

In another move with significant implications for The Roundtable’s policy agenda,  Senators Jeanne Shaheen (D-NH) and Rob Portman (R-OH) have started rallying support to attach “Tenant Star”  and other building efficiency provisions as an amendment to the underlying Keystone bill.

Following the flurry of initial actions on TRIA and Keystone – and with the President’s State of the Union address scheduled for Jan. 20 – the 114th Congress faces no shortage of deadlines and “must do” items.  While Republicans will not relent in their efforts to dismantle Obamacare, numerous “cliffs” are dotted across the Beltway’s policy landscape this year that will demand attention.  For example:

On February 27, stop-gap funding for the Department of Homeland Security (DHS) will expire.  DHS’s sub-agency, U.S. Citizenship and Immigration Services (USCIS), is vested with responsibility to implement the nation’s immigration laws, and the imminent funding debate will implicate President Obama's recent executive actions on immigration that have rankled many Republicans. 

On March 15, the nation’s borrowing limit will be reached and the current “debt ceiling” will expire.  The Treasury Department will then need to resort to “extraordinary measures” to avoid default for several months.  Ultimately, Congress and the White House will need to strike a deal on the federal government’s ability to pay its debts – raising the specter of another government shutdown like the one that lasted for two weeks in 2013. 

On May 31, the current law authorizing highway construction and other surface transportation programs will expire.  The perennial conversation on transportation funding will have increased focus this year, as lawmakers consider the impact of falling prices at the pump on proceeds from gasoline taxes needed to keep the Highway Trust Fund solvent.  Similar to efforts pursued last year by The Roundtable and our allies, reform of the Foreign Investment in Real Property Tax Act (FIRPTA) will be offered as a source to help fund critical infrastructure programs.  [Roundtable Weekly, Nov. 14, 2014.]  

On June 1, key intelligence collection activities (such as orders issued from so-called “FISA Courts”) will expire.  With threats from the Islamic State rising; cyber attacks on companies, the energy grid, and other infrastructure increasing; and the world reeling from terrorist attacks this week in Paris, reauthorization of components of the USA PATRIOT Act will place national security issues front-and-center this year on Capitol Hill.  In terms of real estate’s response to the increasingly diverse “threat matrix” facing the United States, the Real Estate Information Sharing and Analysis Center (RE-ISAC) will maintain enhanced engagement on these matters. 

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Similar to efforts pursued last year by The Roundtable and our allies, reform of the Foreign Investment in Real Property Tax Act (FIRPTA) will be offered as a source to help fund critical infrastructure programs.

On June 30, the charter of the United States Export-Import Bank will expire.  Leading American companies and the broader business community are gearing up for another battle in Congress this year, to reauthorize the institution that supports exports of U.S. products by providing loans and insurance to foreign purchasers.  A “strange bedfellows” coalition of Tea Party Republicans and populist Democrats will surely oppose Ex-Im reauthorization. 

  On September 30, the current law authorizing the Federal Aviation Administration (FAA) will expire.  In 2015, the FAA plans to further implement its “NextGen” policies to modernize the nation’s air traffic control system, and issue regulations ranging from the commercial use of drones to rules that could affect the height of buildings near urban airports [Roundtable Weekly, July 25, 2014].  The FAA’s operation is key to the tourism and hospitality sectors of the economy, and the agency’s continued funding will be a top priority for Congress. 

Also on September 30, a financing program of increasing importance to the real estate industry – the “EB-5 immigrant investor program” – will expire.  Roundtable members report that use of EB-5 funds has surged in recent years as a layer in the capital stack for real estate, infrastructure, and other development projects.  Although there have been some reported cases of EB-5 abuse, The Roundtable has shown early support for key legislation that would responsibly reform and permanently authorize the program.  [Roundtable Weekly, Oct. 17, 2014.]  

Already expired – as of January 1 – are a list of tax incentives that again require extension in the new year.  Debate regarding another “extenders package” will have a “Groundhog Day” feel, as arguments are re-circulated to extend tax provisions important to real estate such as  15-year straight-line leasehold depreciation, the 179D tax deduction for energy efficient buildings, bonus depreciation, mortgage debt forgiveness, and other items.  [Roundtable Weekly, Dec. 19, 2014.]   

 2012 RER Annual Meeting wideshot

All of these issues will be addressed at The Roundtable’s annual “State of the Industry” meeting on January 27-28 .

In addition, changes in leadership in Congress’s tax-writing committees will spur debate and deliberation on comprehensive reform of the U.S. tax code.  With Senator Orrin Hatch (R-UT) and Representative Paul Ryan (R-WI) now at the helm of their respective committees, 2015 will be an active year in the tax policy arena as the Senate and House consider means to simplify the code and lower corporate rates.  With unified control over the Congressional budget process, House and Senate Republicans have an opportunity to put tax and fiscal reforms on a “fast track,” if they choose to do so. 

All of these issues will be addressed at The Roundtable’s annual “State of the Industry” meeting on January 27-28.  The general session on the 27th will be complemented by more granular focus on tax, capital and credit, sustainability, and homeland security matters as our policy-setting committees also meet over the course of the two-day session.

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TERRORISM INSURANCE

Over 1 Million Businesses Breathe a Sigh of Relief as Congress Votes to Reinstate, Extend TRIA; Roundtable Applauds Lawmakers’ Swift, Decisive Action; Obama’s Signature Expected Soon  

Just days into the new 114th session of Congress, U.S. lawmakers in both chambers overwhelmingly approved legislation to reinstate the expired Terrorism Risk Insurance Act (TRIA), and to extend the program through 2020. The bill, which is expected to be signed into law quickly by President Obama, will help avert would could have been a serious credit crunch in commercial real estate, billions of dollars in stalled or cancelled transactions, and a cascade of other downstream impacts on banks, investors, workers, financial markets, and the broader economy.

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Roundtable Chairman Robert S. Taubman (Taubman Centers, Inc.)  applauded Congress for making TRIA its first order of business in the new year.

The Real Estate Roundtable, which has been working intensively on this issue for two years — in conjunction with its real estate trade association partners and the Coalition to Insure Against Terrorism (CIAT) — applauded Congress for making TRIA its first order of business in the new year.

In a press statement on Wednesday, after the House voted 416-5 for TRIA reauthorization, Roundtable Chairman Robert S. Taubman (Taubman Centers, Inc.) said, “The Roundtable praises the bipartisan efforts of House leaders in reaching consensus on legislation that is essential for the economic well-being of the United States and its commercial real estate markets.”

Also that day, House Speaker John Boehner (R-OH) said TRIA “is no ordinary insurance program: it reinforces the vigilance of hardworking Americans and furthers our commitment to protecting our economy and homeland — responsibilities we’ve all been reminded of today in the worst way possible,” a reference to the terrorist rampage at French publishing house Charlie Hebdo.

Following yesterday’s Senate TRIA vote of 93-4, Roundtable President and CEO Jeffrey DeBoer praised Senate Majority Leader Mitch McConnell (R-KY) and Minority Leader Harry Reid (D-NV) for acting “quickly and decisively on this important economic security issue.”  DeBoer also expressed appreciation for the “dogged leadership of Sen. Charles Schumer (D-NY) in achieving” this week’s positive Senate action, adding, “We look forward to President Obama’s swift enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2015.”

Schumer was quoted on NPR.org yesterday as saying that the program benefits not only insurance companies, but individuals — “people who work in buildings, office workers, restaurant workers, those who work at shopping centers, sports fans, those who care about having new stadiums.” NPR also cited The Real Estate Roundtable and its characterization of TRIA as an “essential public policy” that will “aid job creation and support economic growth nationwide.”

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Following yesterday’s Senate TRIA vote of 93-4, Roundtable President and CEO Jeffrey DeBoer said, “We look forward to President Obama’s swift enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2015.”

With the law’s expiration on Dec. 31, close to 1 million U.S. businesses — and commercial property valued at more than $4 trillion — became exposed to potentially catastrophic losses, due to sunset clauses on terrorism insurance coverage that took effect Jan. 1. (Another 500,000 policyholders were due to lose this coverage as their policies came up for renewal during the year.) Potential workers compensation losses facing businesses during TRIA’s lapse have also been staggering, multiplying the risks facing the economy.

Also as of Jan. 1, DeBoer told the Commercial Observer (for a Jan. 7 report preceding the House action), the majority of U.S. commercial borrowers have technically defaulted, since most loan documents require some form of insurance against acts of terrorism. Without action by Congress to renew the law, DeBoer said at the time, lenders could begin to pull out of the market.

Roundtable Chairman-Elect William C. Rudin (Rudin Management Company, Inc.) and Roundtable Board member Richard Clark (Brookfield Property Partners) also voiced heavy concerns to Commercial Observer about their companies’ existing and future debt without TRIA.

In a December interview, Rudin told the newspaper, “Our political leadership needs to understand what happens if it doesn’t get renewed,” explaining that TRIA’s absence would hamper future developments for his and other firms.

For Clark, who co-authored an op-ed on TRIA in Politico this past November, “The biggest concern for Brookfield is that we have a number of development projects in big cities in the works, the most notable being Manhattan West in New York City. This is a project that will ultimately cost $5 billion to construct. To get the kind of financing in place that we’ll need to advance that development will require terrorism insurance.”

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Roundtable Chairman-Elect William C. Rudin, above, (Rudin Management Company, Inc.)  also voiced heavy concerns about TRIA this week in Commercial Observer  

DeBoer made a similar point in GlobeSt.com before Wednesday’s House action, saying that, without TRIA, “….a substantial number of financings and refinancing simply will not occur, causing unnecessary job losses.”  Similarly, in an op-ed for The Hill newspaper (Jan. 6), he stated, “... any business property coming to market for sale — or any business property seeking refinancing — or any new business property development proposal — now faces a significant new financing hurdle since terrorism insurance will be very difficult, and in many cases simply impossible, to obtain.”

The six-year reauthorization bill now awaiting the president’s signature is virtually identical to the compromise bill that cleared the House in late December — but ultimately stalled in the Senate (Roundtable Weekly, Dec. 12 and 19). In addition to extending TRIA through Dec. 2020, the measure will reform the program by:

increasing private-sector co-pays to 80-20% (up from 85-15%); 

gradually increasing the aggregate threshold at which government support becomes available (from $100 million to $200 million); 

increasing the amount that must be recouped by the federal government to $37.5 billion 

authorizing a study on bifurcation of the program, focused on conventional vs.  “NBCR” (nuclear, biological, chemical, radiological) attacks;

The Roundtable wishes to thank all those who let their voices be known on this critical issue. This includes  Roundtable members who contacted and/or visited their elected representatives in Washington and who signed onto coalition letters or op-eds; our partners in the multi-industry CIAT; organizations that published influential reports and/or hosted forums (e.g. RAND Corp. and Marsh), and congressional allies.

 Ed Walter Host Hotels SpringRT 2013 _2737

A special thank you to board member W. Edward Walter (Host Hotels and Resorts Inc.) for his tireless efforts to advance TRIA renewal on Capitol Hill.

A special thank you to board member W. Edward Walter (Host Hotels and Resorts Inc.) for his tireless efforts to advance this issue on Capitol Hill (including Senate Banking Committee testimony in early 2014) as well as with the news media (his most recent interview being with CNBC the day before Thanksgiving).

The Roundtable is hopeful that the bipartisan unity on display regarding TRIA — and the early legislative momentum it generated — will allow for productive debate and timely action on other important policy challenges. 

These include tax reform, immigration, cyber security, infrastructure modernization, energy efficiency retrofit incentives, and Internet sales tax legislation (“Marketplace Fairness Act”) — all of which will likely be discussed at The Roundtable’s upcoming 2015 State of the Industry Meeting on Jan. 27-28.

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CAPITAL AND CREDIT

CREFC Survey: Search for Yield Will Drive Strong 2015  Commercial Real Estate Finance Market; New CMBS Issuance Expected to Significantly Exceed 2014 Volume  

With ample capital and credit available to meet borrower demand, commercial real estate lenders see a robust 2015 year ahead, expecting new CMBS issuance to increase approximately 25 percent (compared to $91 billion in 2014), according to a survey of Commercial Real Estate Finance Council (CREFC) members released Monday.  

 CREFC 2015 Outlook cover x225 

With ample capital and credit available to meet borrower demand, commercial real estate lenders see a robust 2015 year ahead, according to a survey of Commercial Real Estate Finance Council (CREFC) members released Monday.

In an interview with GlobeSt.com (Jan. 5) about the survey results, CREFC President and CEO Stephen M. Renna emphasized the search for yield is driving liquidity. “The economy is flush with capital because of the low interest rate environment and strengthening fundamentals.  Hedge funds, money market managers and insurance companies are all increasing volumes. Insurance companies are buying bonds throughout the stack now, not just the most conservative tranches,” Renna said.

The top-line findings of the survey include:

New CMBS issues expected to exceed 2014 volume by approximately 25% (compared to approximately $91 billion in 2014) 

Banks and life insurance companies predict more balance sheet loans to be made to commercial real estate owners  

Underwriting predicted to be more aggressive with capitalization rates tightening, leverage increasing and credit quality slipping; investors are wary of trend

 Nonbank lenders, including private equity, indicate they will provide more loans, especially first mortgage loans, to commercial real estate

 Moderate interest-rate hikes in 2015 are not a significant concern

As loan maturities rise and property fundamentals improve, stronger economic growth is buoying the market, according to the survey.  “However, for growth to be sustained it is critical that the industry demonstrate underwriting discipline in the face of abundant capital and heightened competition,” Renna told GlobeSt.    

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CREFC President and CEO Stephen M. Renna 

Renna also cautioned that the industry will see a series of new regulations on banks and commercial mortgage lending come into effect in the next few years, including capital requirements under the international agreement Basel III and implementation of risk retention rules under the Dodd-Frank Act. 

Other Key Survey Findings:

Based on the expectations of underwriting valuations, 76% of survey respondents believe lenders will be “more aggressive” in 2015. 

 70% of survey respondents expect new CMBS issuance in 2015 to be in the range of $100 billion to $125 billion.

 89% of survey respondents expect balance-sheet lenders to originate more loans in 2015 than in 2014. 

 69% of survey respondents expect private capital (nonbank) sources to originate more loans in 2015 than in 2014.

The CRE Finance Council 2015 Market Outlook Survey also shows market participants’ expectations for new construction activity by U.S. geographic region, anticipated property performance by type for office, industrial, retail, multifamily and hotel investment, and projected conduit lending levels by property type.   The entire report can be downloaded here.  

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For questions about content/editorial matters, please contact The Roundtable's Xenia Jowyk at xjowyk@rer.org or (202) 639-8400. For layout or email delivery issues, contact RER's Scott Sherwood at rweekly@rer.org or (202) 639-8400.

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