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July 17, 2015

TAX POLICY
Highway Trust Fund “Patch” Would Extend Infrastructure Funding into December; Final Agreement Could Include Tax “Extenders”

PARTNERSHIP TAX AUDIT REFORM & "TEFRA" RULES
New Legislation Would Tighten Tax Enforcement of Real Estate Partnerships; Roundtable Urges Congress to Tread Carefully and Consider Potential Alternatives

CAPITAL & CREDIT
House Committee Hearings Focus on Dodd-Frank’s Adverse Effects, as Law Approaches Fifth Anniversary; Bipartisan Group of Senators Seeks Dodd-Frank “Fix-It” Compromise

FOREIGN INVESTMENT & U.S. ECONOMY
Reps. Amodei, Polis Seek to Build Bipartisan Momentum for Pro-Growth “EB-5” Reauthorization Bill, Highlighting Recent Resolution by U.S. Conference of Mayors


TAX POLICY

House Highway Trust Fund “Patch” Would Extend Infrastructure Funding into December; Final Agreement Could Include Tax “Extenders”  

With only two weeks left until the Highway Trust Fund’s (HTF) spending authorization expires — and lawmakers still struggling to find suitable long-term revenue sources — the House on Wednesday approved a roughly five-month “patch” to keep federal money flowing to states through Dec. 18 for highway and infrastructure projects (USA Today, July 15). 

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With only two weeks left until the Highway Trust Fund’s (HTF) spending authorization expires, the House on Wednesday approved a roughly five-month “patch” to keep federal money flowing to states through Dec. 18 for highway and infrastructure projects.

With only two weeks left until the Highway Trust Fund’s (HTF) spending authorization expires — and lawmakers still struggling to find suitable long-term revenue sources — the House on Wednesday approved a roughly five-month “patch” to keep federal money flowing to states through Dec. 18 for highway and infrastructure projects (USA Today, July 15).

The short-term HTF extension comes on the heels on another two-month HTF patch that extended funding from May 31 to July 31. The latest stopgap funding bill would give GOP lawmakers more time to hammer out a plan tying international tax reforms to a six-year highway funding bill (Bloomberg Politics, July 16).

The White House expressed support for the House bill on Wednesday, while emphasizing the need for a “multi-year bill with significant increases in investment to address the system’s maintenance and repair deficit, enhance safety, and lay the foundations for future growth in critical areas like freight movement” (Washington Post, July 15).
 
Many House Democrats reportedly opposed the new temporary funding measure, on the grounds that it fails to provide long-term infrastructure funding and to reauthorize the now-expired Export-Import Bank (USA Today, July 15). 

On the other side of Capitol Hill, Senate Republicans are taking a different approach to HTF reauthorization.

Senate Majority Leader Mitch McConnell (R-KY) is reportedly negotiating with Senate Environment & Public Works Committee ranking member Barbara Boxer (D-CA) over a roughly $80 billion package to keep the HTF afloat for another 2-3 years  (Bloomberg Politics, July 16).  An initial Senate procedural vote is expected on Tuesday. 

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 Senate Majority Leader Mitch McConnell (R-KY) is reportedly negotiating with Senate Environment & Public Works Committee ranking member Barbara Boxer (D-CA) over a roughly $80 billion package to keep the HTF afloat for another 2-3 years. 

However, important differences remain over proposed funding sources, particularly a GOP proposal to sell part of the U.S. strategic petroleum reserve; and a controversial  change to federal employee retirement plans that would raise more than $30 billion by cutting the rate of return on a popular retirement investment for federal employees.

“Lawmakers on Thursday downplayed the possibility that the retirement program would ultimately be targeted for savings, but without it negotiators will have a big funding hole to fill,” the Washington Post reported July 16

The Senate Finance Committee is expected to take up an HTF funding proposal on Tuesday — possibly attaching tax “extenders” legislation that would likely include reinstatement of 15-year depreciation for leasehold (tenant) improvements.

Committee Chairman Orrin Hatch (R-UT) reportedly said July 14 that his panel may consider adding the tax extenders package to the HTF funding proposal on July 21, although the schedule appears to be in flux.

Several lawmakers said the most likely scenario is a two-year extension of most, if not all, of more than 50 so-called tax extenders that expired at the end of 2014 (Bloomberg BNA, July 14). With Congress working on broader tax restructuring, the extenders will likely not be modified much at this point, lawmakers told BNA.

The House Ways and Means Committee is not expected to take up tax extenders until after the August recess.

Earlier in the week, CQ Roll Call reported that Rep. Kevin Brady (R-TX) was pressing for legislation to reform the Foreign Investment in Real Property Tax Act (FIRPTA), H.R. 2128, to be included in the House HTF extension, although it was unclear if “add-ons” would be permitted. [Last week, Sens. Rob Portman (R-OH) and Charles Schumer (D-NY), who co-chair a Senate Finance Committee working group on international tax reform, urged inclusion of the House FIRPTA bill in any international tax reform package.] (Roundtable Weekly, July 10)

The July 14 CQ report cited Real Estate Roundtable testimony last month that foreign institutions such as pension funds and insurers are “ideal partners” for a broad range of potential public-private projects — including “ports, bridges, airports, tunnels, toll roads, light rail, freight rail and other income-producing infrastructure assets.”

New Like-Kind (1031) Exchange Threat Appears  

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An article in  CoStar cited the LKE study rolled out by The Roundtable and coalition partners.

In other tax news, legislation (S. 1631, H.R. 2844) introduced last month by Sen. Bernie Sanders (I-VT) and Marcy Kaptur (D-OH) would limit like-kind exchanges (LKE) and change estate-and-gift valuation rules to pay for a new pension guaranty fund for workers whose employers have exited from multi-employer plans (The Wall St. Journal, June 19, 2015; and Pensions & Investments, July 13). 

The legislation was discussed in a CoStar piece yesterday that cited the LKE study rolled out by The Roundtable and coalition partners last week (Roundtable Weekly, July 10).
 
Repeal or restriction of 1031 exchanges has been included in the last two federal budget proposals by the Obama Administration, as well as within tax overhaul proposals introduced by the former chairmen of the House Ways and Means and Senate Finance committees (Rep. Dave Camp, R-MI, and Sen. Max Baucus, D-MT, respectively).

“The fact that this legislation is out there underscores the need to educate and inform Congress on how like-kind exchanges are executed and how common and typical they are in real estate transactions,” Roundtable Vice President and Counsel Ryan McCormick told CoStar.

Writing in the San Francisco Examiner on Wednesday, Realtor Bill Brown characterized like-kind exchanges as a “proven” means fueling the U.S. economy and a key factor in the success of his family’s real estate business. 

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PARTNERSHIP TAX AUDIT REFORM & "TEFRA" RULES

New Legislation Would Tighten Tax Enforcement of Real Estate Partnerships; Roundtable Urges Congress to Tread Carefully and Consider Potential Alternatives  

Newly proposed legislation from House Ways and Means Committee Republican Jim Renacci (OH) could have major implications for real estate partnerships, including their ability to raise capital and transfer partnership interests.  The Partnership Audit Simplification Act of 2015 (H.R. 2821) would repeal current “TEFRA” tax rules that govern the auditing of complex partnerships.  In its place, the bill would establish a unified regime for auditing partnership tax returns and collecting underpayments of tax at the entity (i.e. the partnership) level. 

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“The partnership audit reform bill is a serious legislative proposal which, in its current form, could have severe unintended consequences for our industry,” said Frank Creamer, left, chairman of  The Roundtable's Tax Policy Advisory Committee (TPAC).  The bill was proposed by House Ways and Means Committee Republican Jim Renacci (OH), right, who spoke at the TPAC meeting in June. 

In a striking change from existing law, the legislation would impose joint and several liability on current partners, prior partners (that were partners during the year being adjusted), and the partnership itself for tax liabilities identified during the audit process.  All partners would be bound by the decisions of a designated partnership representative. Tax adjustments would be calculated by reference to the highest statutory income tax rate (currently 39.6%), regardless of the character of the income or whether the partnership includes tax-exempt partners. The burden would fall on individual partners to amend a prior tax return and prove they are subject to a reduced tax rate.

Representative Renacci’s legislation is nearly identical to a proposal in former Ways and Means Chairman Dave Camp (R-MI)’s Tax Reform Act of 2014 (H.R. 1, 113th Congress).  It addresses concerns raised in recent reports of the Government Accountability Office (GAO) requested by the chairman and ranking member of the Senate Permanent Subcommittee on Investigations and Senate Finance Committee Ranking Member Ron Wyden (D-OR), as well as issues raised by the Treasury Inspector General for Tax Administration (TIGTA).  The President’s FY 2016 budget also proposes to redesign tax audit and adjustment procedures for large or tiered partnerships.  This week, the American Institute of Certified Public Accountants issued a comment letter critical of the legislation, noting that it may “create economic and legal barriers to new potential investors/partners.”

In response to the Renacci bill, members of the Real Estate Roundtable’s Tax Policy Advisory Committee (TPAC) have met with key Congressional staff, including counsel for Rep. Renacci, the Ways and Means Committee, the Senate Finance Committee, and the Joint Committee on Taxation.  In its outreach effort, The Roundtable has emphasized that legislation expanding partnership tax liability in a manner that unjustly burdens tax-exempt real estate investors and other partners could threaten capital formation, the transferability of partnership interests, and future real estate investment. 

“The partnership audit reform bill is a serious legislative proposal which, in its current form, could have severe unintended consequences for our industry,” said Frank Creamer, chairman of TPAC.  “We will work with Congress to ensure that any eventual legislation preserves and protects the role of real estate and real estate partnerships in the broader economy.”  The tax-writing committees have invited and encouraged The Roundtable to provide recommendations for ways to effectively address the issues raised in the GAO reports without imposing undue burden on taxpayers.  The Roundtable and TPAC are currently developing and evaluating potential alternatives.

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CAPITAL & CREDIT

House Committee Hearings Focus on Dodd-Frank’s Adverse Effects, as Law Approaches Fifth Anniversary; Bipartisan Group of Senators Seeks Dodd-Frank “Fix-It” Compromise  

With the Dodd-Frank Act approaching its fifth anniversary next week, the House Financial Services Committee (HFSC) has  launched a series of hearings to examine the law’s  impact on American consumers, the financial system and U.S. economy.  Meanwhile, a bipartisan group of U.S. Senators continues working to hammer out a compromise Dodd-Frank “fix-it” bill — in the wake of a May 21 vote by the Senate Banking Committee narrowly approving Chairman Richard Shelby’s (R-AL) reform proposal (Bloomberg Business, July 16). 

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During the hearing, House Financial Services Committee Chairman Jeb Hensarling (R-TX) asked "... more banking assets are now concentrated in the so-called ‘too big to fail’ firms. Pray tell, how does this improve financial stability?”  

Despite opposition to changes in Dodd-Frank, an important reform was enacted early this year as part of legislation to reauthorize the Terrorism Risk Insurance Act (TRIA). Another was included in year-end 2014 “cromnibus”  legislation, which funded most government operations through September 2015.

A key theme at the first of the House hearings, held last week, was that the 400 new regulations enacted to implement the law are a threat to the country’s financial stability, mortgage servicing industry publication . 

“What is undebatable is the fact that since the passage of Dodd-Frank, the big banks are now bigger; the small banks are now fewer,” Committee Chairman Jeb Hensarling (R-TX) asserted in his opening statement. “In other words, even more banking assets are now concentrated in the so-called ‘too big to fail’ firms.  Pray tell, how does this improve financial stability?” he asked rhetorically (HFSC summary, July 9). 

Witnesses reportedly testified that the  2010 financial reform law has undermined economic recovery and eliminated access to the financial mainstream for American families, particularly those with low  incomes.

They also countered arguments that the financial crisis was brought on by a lack of regulation, asserting that financial regulation had, actually, increased in the decade preceding the recession.

Witnesses also took aim at the controversial “Volcker Rule,” saying that it had hurt liquidity in capital markets, reducing their capacity to deal with potential future economic shocks.

“Five years later, we still do not know the full effects the Dodd-Frank Act will have on U.S. capital markets,” former SEC Commissioner Paul Atkins testified. “We do know, however, that the costs of Dodd-Frank have been borne not just by Wall Street, but by ordinary investors and businesses of all shapes and sizes.”

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“Five years later, we still do not know the full effects the Dodd-Frank Act will have on U.S. capital markets,” former SEC Commissioner Paul Atkins testified .

On Tuesday, July 21 — the date on which Dodd-Frank was signed into law five years ago — the conservative American Enterprise Institute (AEI) will hold a panel discussion  analyzing Dodd-Frank and what changes are necessary. Afterward, HFSC Chairman Hensarling will deliver a speech entitled, “Dodd-Frank Five Years Later:  An America Less Free, Less Prosperous and Less Stable.”

The second of the three HFSC hearings on Dodd-Frank is scheduled for July 28.

At The Roundtable’s annual meeting in June, a panel moderated by Dr. Ken Rosen (University of California –Berkeley) highlighted the burdens facing banks under overlapping Dodd-Frank and Basel III regulations, which could impede real estate liquidity and, potentially, force more capital out of the regulated banking system.

The Roundtable remains concerned about Dodd-Frank “risk retention” rules that could fundamentally alter the economics of commercial mortgage securitization and drive participants out of the commercial mortgage-backed securities (CMBS) market. Additionally, the Volcker Rule could harm real estate capital formation by pushing banks out of sponsoring real estate fund businesses.

As for Basel III, The Roundtable and coalition partners are particularly concerned about a new regulatory category of acquisition, development and construction loans — “High Volatility Commercial Real Estate” loans — which now face a 150% capital requirement.  Industry representatives say this requirement is making construction loans more expensive and forcing developers to go to nonbank lenders (Origination News, June 24).

In a March 27 letter to the Basel Committee on Banking Supervision (BCBS), nine real estate industry groups concluded that Basel III risk weight proposals could have a “deleterious” effect on CRE lending and the U.S. economy [Roundtable Weekly, March 27].

A new Basel III working group within The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) met for the first time on June 2 to discuss strategies for addressing the HVCRE rule, with follow-up conference calls conducted on June 18, July 8 and 16.  The group is comprised mostly of commercial real estate bankers from key institutions. However, The Roundtable would like to engage more borrowers, owners or developers who may be affected by the new rule.

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FOREIGN INVESTMENT & U.S. ECONOMY

Reps. Amodei, Polis Seek to Build Bipartisan Momentum for Pro-Growth “EB-5” Reauthorization Bill, Highlighting Recent Resolution by U.S. Conference of Mayors  

Reps. Mark Amodei (R-NV) and Jared Polis (D-CO) are circulating a “Dear Colleague” letter, inviting other House lawmakers to join them as co-sponsors of the “American Entrepreneurship and Investment Act of 2015” (H.R. 616).  The Roundtable-backed bill would permanently reauthorize the federal EB-5 investment visa program — due to expire Sept. 30 — while making reforms to enhance the program’s integrity.

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The Amodei-Polis letter notes a recent resolution by the U.S. Conference of Mayors calling on Congress to enact a “robust” EB-5 program.

The letter notes a recent resolution by the U.S. Conference of Mayors calling on Congress to enact a “robust” EB-5 program — one that “maintains the ability to deliver job-creating capital to urban areas, permanent authorization of the Regional Center Program, and streamlined approvals for all applications.”

The program, which has been in place for 25 years, encourages investment in job-creating projects across the country, generates millions of dollars in tax revenue at various levels of government, and represents an innovative financing mechanism that is increasingly part of the real estate “capital stack.”

An economic study released on June 25 concluded that EB-5 has a “disproportionately large” and positive impact on net U.S. job creation and domestic investment — generating a minimum of $5.2 billion in private investment between 2005 and 2013.  Importantly, these sizeable economic contributions come at no cost to taxpayers.

EB-5 investments have funded job-creating projects in all 50 states and across a range of industries, including health care, education, manufacturing, energy, agriculture, retail, hospitality, transportation, infrastructure, and real estate.

Separate legislation introduced in the Senate in early June would extend the EB-5 program for five years, while also making reforms to the program. (Roundtable Weekly, June 5, 2015)

For further information and resources, please visit the web site of the EB-5 Investment Coalition, which includes The Real Estate Roundtable.

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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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