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December 18, 2015

BUDGET & TAX POLICY; INFRASTRUCTURE; FOREIGN INVESTMENT
“Omnibus” Package Heads for the White House; Bill Represents Victory on Key Roundtable Priorities, Including FIRPTA, Leasehold Improvement Depreciation, Energy Efficiency Tax Incentive; EB-5 Extension Allows Space for Needed “Integrity” and Other Reforms

U.S. MONETARY & ECONOMIC POLICY
Fed’s First Rate Hike Since 2006 Signals Beginning of the End of Crisis-Era Monetary Policy, Though Future Tightening Expected to be “Gradual”; Much at Stake for Interest-Sensitive Assets Such as Real Estate


BUDGET & TAX POLICY; INFRASTRUCTURE; FOREIGN INVESTMENT

“Omnibus” Package Heads for the White House; Bill Represents Victory on Key Roundtable Priorities, Including FIRPTA, Leasehold Improvement Depreciation, Energy Efficiency Tax Incentive; EB-5 Extension Allows Space for Needed “Integrity” and Other Reforms   

House and Senate give final approval today to year-end spending-and-tax package; White House signals president’s intention to sign the bill;

Omnibus includes Roundtable-backed provisions expected to boost foreign investment into U.S. infrastructure and real estate; provide certainty for leasehold improvements; encourage energy efficiency upgrades in commercial, multi-family buildings; investment into low-income housing; 

FIRPTA provisions in tax “extenders” bill (Protecting Americans from Tax Hikes [PATH] Act of 2015) would cap years of advocacy efforts by real estate, reduce discriminatory tax treatment of real estate vs. other asset classes; 

Pending FIRPTA changes “the most significant” since the law’s enactment in 1980

10-month extension of EB-5 regional center investment program allows more time to build consensus on deep “integrity” reforms backed by The Roundtable and over 70 coalition partners as well as the chairmen of the Senate Judiciary, Foreign Relations, and Homeland Security committees; 

“Catch-all” bill also includes cyber information-sharing legislation supported by real estate and its “Commercial Facilities Sector” partners [See Dec. 16 press release - House Permanent Select Committee on Intelligence]; 

Capitol dusk

Capping months of legislative wrangling, Congress today gave final approval to a massive, $1.8 trillion spending-and-tax package that funds the federal government for the rest of the fiscal year (through Sept. 2016) and addresses key Real Estate Roundtable policy priorities.

Capping months of legislative wrangling, Congress today gave final approval to a massive, $1.8 trillion spending-and-tax package that funds the federal government for the rest of the fiscal year (through Sept. 2016) and addresses key Real Estate Roundtable policy priorities. The measure passed the House this morning by a vote of 316-113, followed soon afterward by final approval in the Senate (with a vote of 65-33), clearing a path for its anticipated signing by President Obama.

The bill’s numerous real estate-related provisions include long-sought reforms to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) and an extension of the EB-5 regional center investment program — both of which will help attract  more foreign investment into job-creating infrastructure and real estate projects in the United States. The tax “extenders” portion of the bill also extends some 50 expired or expiring tax provisions — including provisions governing leasehold improvement depreciation, energy efficiency and the low-income housing tax credit (LIHTC).

“The policies adopted by Congress today recognize the vast role that commercial real estate plays in the U.S. economy; these sensible, pro-growth steps will help ensure a more robust, more sustainable recovery over the long term,” said Roundtable Chairman William C. Rudin (Rudin Management Company, Inc.)

“The FIRPTA changes pave the way for new investment that will create jobs and help modernize U.S. commercial real estate and our aging infrastructure,” he added. “We thank our legislative allies, key staff, and our Tax Policy Advisory Committee (TPAC) for their untiring work on this issue, and look forward to the law’s signing by the president.”

Added Roundtable President and CEO Jeffrey D. DeBoer, “From middle class homeownership and low-income rental housing to incentives for investment in America’s commercial real estate and infrastructure, the end-of-year tax agreement reaches virtually every aspect of real estate ownership and investment in the United States.”

 Rudin podium x200 Annual15

“The FIRPTA changes pave the way for new investment that will create jobs and help modernize U.S. commercial real estate and our aging infrastructure,” said Roundtable Chairman William C. Rudin (Rudin Management Company, Inc.).  

The $680 billion tax-extenders portion of the omnibus bill was formally unveiled late Tuesday by House Leaders and approved overwhelmingly by the House on Thursday and the Senate today. The PATH Act of 2015 extends a host of business and household tax provisions — mostly for two years, although some are extended indefinitely (permanently). Key provisions of interest to real estate include: 

A permanent extension of 15-year depreciation for leasehold (tenant) improvements, which since January have been on a 39-year depreciation schedule.  The Real Estate Roundtable was closely involved in the enactment of the original 15-year rule in 2004.  The $20.3 billion measure will provide real estate owners with the greater certainty they need to undertake property improvements. Fifteen-year cost recovery allows for better matching of tenant “build-out” expenses with the typical lease term and economic life of such assets (7-10 years);

a two-year extension (and limited reform) of the 179D tax deduction for energy efficiency upgrades in commercial and multi-family buildings — providing an opportunity to press for broader reforms next year that would make the deduction more workable, easier to claim, and more effective at spurring “deep” energy efficiency retrofits;

Over 20 other real estate-related provisions, including: 

  • Permanent extension and modification of the increased expensing limitations in section 179, and elimination of the limit on use of the expensing allowance for qualified real property expenditures;
  •  Permanent extension of the temporary 9% minimum low-income housing tax credit (LIHTC) rate for non-federally subsidized buildings;
  • 5-year extension of bonus depreciation (gradually phased down from 50% to 30%) and extension of the benefit to qualified nonresidential real estate improvements;
  • 2-year extension (through 2016) and modification of the exclusion from gross income for discharge of qualified principal residence indebtedness;
  • 2-year extension (through 2016) of the treatment of mortgage insurance premiums as qualified residence Interest for purposes of the mortgage interest deduction;
  • 2-year extension (through 2016) of the section 45L manufacturer credit for energy-efficient new residential homes.

Pending FIRPTA Reforms “Most Significant” Since Law’s Enactment in 1980

   Jeff DeBoer podium Newseum

Roundtable President and CEO Jeffrey D. DeBoer lauded the FIRPTA policy changes in the omnibus package as “the most significant reforms of the Foreign Investment in Real Property Tax Act since its enactment in 1980.”

The PATH Act also includes major, bipartisan FIRPTA reforms that The Roundtable and others have urged for years as a means of attracting more foreign investment into U.S. real estate and infrastructure.

FIRPTA results in U.S. capital gains tax on the sale of an interest in U.S. real property (including real estate and infrastructure) by a foreign person.  Originally motivated by a combination of protectionism — particularly concerns in the 1970s that foreign investors were buying U.S. agricultural land — and perceived tax inequities, the FIRPTA rules contradict the general tax principles that otherwise apply to passive foreign investment. Today, FIRPTA discriminates against investment in real estate and infrastructure relative to other types of assets, such as stocks and bonds.

Specifically, the FIRPTA reforms — long championed by Ways & Means Committee Chairman Kevin Brady (R-TX), committee member Joseph Crowley (D-NY), and Senators Robert Menendez (D-NJ) and Mike Enzi (R-WY) — would: 

increase (from 5 % to 10%) the ownership stake that a foreign person can take in a U.S. publicly traded REIT without triggering FIRPTA;

allow foreign pension funds to invest in U.S. real estate and infrastructure without incurring tax liability under FIRPTA; 

extend the relief to interests in REITs held by foreign collective investment vehicles that meet certain requirements;

modify the rules for determining whether an entity is domestically controlled for FIRPTA purposes;

DeBoer lauded the FIRPTA policy changes in the omnibus package as “the most significant reforms of the Foreign Investment in Real Property Tax Act since its enactment in 1980.”  By breaking down outdated tax barriers to inbound investment, he said, “the FIRPTA relief will help mobilize private capital for real estate and infrastructure projects, such as roads and bridges, while driving growth in construction and related jobs.” 

Despite the recent enactment of a five-year highway-transit bill authorizing $330 billion in infrastructure spending, significantly more will be needed to fully repair and upgrade the nation’s aging infrastructure — underscoring the importance of more private-sector capital.  In today’s New York Times, University of California Berkeley Professor Kenneth Rosen projected that the FIRPTA relief in the PATH Act would generate $20 billion to $30 billion in additional investment in U.S. commercial real estate next year

DeBoer also applauded the certainty that the bill provides property owners as they seek to improve and upgrade real estate assets — whether for customized build-outs of leased tenant spaces, or for upgrades aimed at improving energy performance.

EB-5 Extension Sets Foundation for Continued Negotiations in 2016 to Reform and Improve the “Regional Center” Program

The EB-5 program received a short-term reprieve this week, as Congress extended authority for “regional centers” through next September 30 in the omnibus spending bill that passed the House and Senate on Friday. 

2015-11-19 EB-5 IMAGE letter x200 

A letter sent on November 19 to Capitol Hill by The Roundtable and a 70-plus-member coalition specifically backed EB-5 “integrity” reforms advocated by Senate Judiciary Committee Chairman Charles Grassley (R-IA), Senate Foreign Relations Chairman Bob Corker (R-TN), and Senate Homeland Security Committee Chair Ron Johnson (R-WI) to improve EB-5 regional center accountability.

As Roundtable President and CEO Jeffrey D. DeBoer remarked in a statement, “[t]he ten month EB-5 extension … provides The Roundtable and other stakeholders with another platform to help policy makers reach our mutual end goal of long-term, comprehensive, and necessary regional center reforms.” 

The Roundtable has long supported steps to fortify the regional center program with necessary “integrity measures” that have garnered bipartisan approval in Congress.  Most recently, The Roundtable joined a November 19 letter with myriad real estate, business, and regional center stakeholders – including the U.S. Chamber of Commerce and the EB-5 Investment Coalition – urging Senate and House leadership to reauthorize EB-5 with provisions to maximize protections for homeland security and deter evolving risks of investor fraud.  [Roundtable Weekly, Nov. 20, 2015]  

Senators Charles Grassley (R-IA), Bob Corker (R-TN) and Ron Johnson (R-WI), who chair the Senate Judiciary, Foreign Relations, and Homeland Security Committees, respectively, likewise called for an EB-5 integrity package in their own letter sent last month to Senate leadership.  [Roundtable Weekly, November 13, 2015]  As Grassley stated last June upon the introduction of a bill (S. 1501) he co-sponsored with Senate Judiciary Committee Ranking Member Patrick Leahy (D-VT), “[t]he EB-5 regional center program was created to benefit American communities through investment and job creation,” and that new legislation must “strengthen[ ] oversight, ensure [ ] greater accountability and transparency, discourage[ ] fraud, and provide[ ] a higher priority for national security.”  [Roundtable Weekly, June 5, 2015]

Legislative EB-5 reforms, aligned with recommendations from a Government Accountability Report released last August, continued to be proposed with the introduction on Thursday of the “EB-5 Integrity Act of 2015” (S. 2415).  Sponsored by Judiciary Committee Senators Jeff Flake (R-AZ), John Cornyn (R-TX) and Charles Schumer (D-NY), S. 2415 would, among other things, provide authorities for the Department of Homeland Security to: 

Conduct criminal background checks and obtain biometric information from individuals involved in the regional center program

Debar individuals and suspend or terminate regional centers based on program non-compliance and other factors

Deny or revoke immigrant investor petitions for reasons including fraud, misrepresentation, or national security concerns

Establish an “EB-5 Integrity Fund” with fees on applicants to pay for federal site visits that will further rigorous program oversight

Require thorough annual reporting and accounting requirements for regional center operators

Collect evidence for assurances that an investor’s funds are derived from legitimate and lawful sources 

Engage in a proper and non-preferential way with industry stakeholders to avoid favoritism in processing applications

These and many other topics are expected to be central to EB-5 reform negotiations that will continue in 2016.

Cyber Information-Sharing Bill Included in Omnibus

Three Roundtable-supported cyber security bills (H.R. 1560, H.R. 1731 and S. 754) that each passed their respective chambers earlier in the year with broad bipartisan support were recently merged into “The Cybersecurity Act of 2015” and inserted into the massive year-end omnibus spending bill (pp. 1728-1863).

This compromise legislation encourages private companies to voluntarily share cyber threat information with the government and one another. It gives companies immunity from lawsuits by shareholders and consumers for sharing the information. Such liability protections are necessary to incentivize data sharing with the government. 

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U.S. MONETARY & ECONOMIC POLICY

Fed’s First Rate Hike Since 2006 Signals Beginning of the End of Crisis-Era Monetary Policy, Though Future Tightening Expected to be “Gradual”; Much at Stake for Interest-Sensitive Assets Such as Real Estate   

Citing a moderately expanding pace of economic activity and other positive data, the Federal Open Market Committee (FOMC) on Wednesday unanimously approved a 0.25 percentage point increase in its overnight lending rate — the first increase in short-term interest rates in almost a decade.  At the same time, the central bank sought to reassure markets that future monetary policy tightening will come at a “gradual” pace.

Fed side shot x225

In the Fed’s latest so-called “dot plot,” seven out of 17 Fed officials projected that interest rates would rise to 1.375 percent by year-end 2016.

The real estate sector has warned for some time that abrupt changes in interest rates could hurt borrowers’ ability to repay existing loans, while potentially risking price declines in interest-rate-sensitive classes — or worse, renewed economic and financial market challenges.

In the Fed’s latest so-called “dot plot,” seven out of 17 Fed officials projected that interest rates would rise to 1.375 percent by year-end 2016, implying four quarter-point increases in the target range next year (The Street, Dec. 17).  For year-end 2017, reports MarketWatch, Fed policymakers anticipate a median federal funds rate of 2.4% (down from a prior forecast of 2.6%.

A Reuters poll of 120 economists suggests that the Fed will raise interest rates again in the next three months — although many of those surveyed reportedly believe rates won’t rise as quickly next year as policymakers have suggested

“We are confident that the actual pace of interest rate increases likely will be slower than that implied by the FOMC ‘dots,’” Citi’s head of North American Economics, William Lee, reportedly told Reuters for today’s article. “Not only are there downside risks to the outlook, but the FOMC’s own predilection for responding to financial market distractions likely will dampen the pace of rate increases.”

As Roundtable member Marcus & Millichap reported in its blog yesterday, this week’s long-awaited monetary policy action “closed the door on the extraordinary measures put in place to combat the financial crisis.”

 Yellen press conference x225 

Fed Chair Janet Yellen's news conference on the approval of the 0.25 percentage point increase in The Fed's overnight lending rate.  
(Watch video)

Reflecting increased confidence in the economic outlook, the Fed’s Dec. 16 statement noted “solid” increases in household spending and business fixed investment in recent months, along with ongoing improvement in U.S. housing markets. Additionally, the committee judged that there has been “considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective.”

U.S. employers reportedly added 211,000 jobs in November, and 298,000 in October (an upward revision of the Labor Department’s earlier estimate of 271,000).  “Headline unemployment” fell from 5.1% to 5% in October and is holding steady.

As for the pace of future monetary policy tightening, the Fed stated, “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

The difficulty of unwinding almost a decade of extraordinarily accommodative monetary policy (and historically low interest rates that have artificially driven up asset prices in recent years) was a key topic during The Roundtable’s 2015 Annual Meeting in June, in particular during a panel discussion led by Dr. Ken Rosen [University of California – Berkeley], and during a joint meeting of the Real Estate Capital Policy Advisory Committee (RECPAC) and Research Committee.  # # #

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