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February 10, 2017

TAX REFORM
Trump Promises Tax Announcement in Weeks as House Republicans Struggle to Gain Support for Specific Tax Reform Policies

ECONOMIC SENTIMENT INDEX
Q1 Survey: Optimism Among Commercial Real Estate Executives Leads to Increase in Economic Sentiment Index

FEDERAL REAL PROPERTY
GAO Recommends Enhanced Disclosure Policies for Foreign-Owned Real Estate Leased by Federal Agency Tenants


TAX REFORM

Trump Promises Tax Announcement in Weeks as House Republicans Struggle to Gain Support for Specific Tax Reform Policies   

President Trump said Thursday during a meeting with U.S. airline executives that his plan for “lowering the overall tax burden of American businesses, big league” is forthcoming soon, adding, “We’re going to be announcing something I would say over the next two or three weeks that will be phenomenal in terms of tax.”  (Bloomberg, Feb. 9).

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White House Press Secretary Sean Spicer said the Administration would roll out, in the next few weeks, “the outline of a comprehensive tax plan . . . that will address both the business side of the tax ledger as well as the individual rates,” and noted that “it’s going to be a comprehensive plan, something that we haven’t seen since 1986.”  

Following the President’s remarks, White House Press Secretary Sean Spicer said the Administration would roll out, in the next few weeks, “the outline of a comprehensive tax plan . . . that will address both the business side of the tax ledger as well as the individual rates,” and noted that “it’s going to be a comprehensive plan, something that we haven’t seen since 1986.”  Asked whether he was consulting Congressional leaders, Mr. Spicer stated that “the President himself has engaged with members of Congress to talk about this both privately and in bigger groups. . . .  there is a very large conversation going on to achieve bipartisan support for a package of this nature.”  (Press Briefing #11 by Press Secretary Sean Spicer Feb. 9).

During the presidential campaign, then-candidate Donald Trump offered two tax reform plans – one in September 2015, and the second a year later.  Both proposals included major marginal tax rate reductions for individuals and corporations.  The original plan would have phased in a “reasonable cap” on the deductibility of business interest expense.  The second version dropped the interest deductibility limitation in favor of an optional provision in which U.S. manufacturers could forego interest deductibility in favor of immediate, 100% expensing of their capital expenditures. 

Mr. Trump’s tax plans also proposed changing the tax treatment of carried interest.  The original plan promised to end the current tax treatment of carried interest “for speculative partnerships that do not grow businesses or create jobs and are not risking their own capital.”  Treasury Secretary nominee Steve Mnuchin was asked by Senator Sherrod Brown (D-OH) during the confirmation process whether he supports repealing carried interest.  He responded, in writing, that “[o]ur proposed Tax Reform plan will recommend repealing carried interest on hedge funds.”

House Speaker Paul Ryan (R-WI) and President Trump both appear intent on lowering corporate and individual income tax rates, but have still yet to find common ground on the details. 

A “border-adjusted” corporate tax plan favored by Speaker Ryan and House Ways and Means Chairman Kevin Brady (R-TX) proposes cutting the corporate tax rate to 20 percent.  It would also tax U.S. companies on their domestic income and imports while exempting their exports and offshore income. The border adjustability tax proposal has run into widespread opposition from retailers, oil refiners and other industries that rely on imports.  Major exporters, including companies like General Electric Co., have expressed support. (Bloomberg, Feb. 9)

Although a tax plan may advance in the GOP-controlled House, tax reform faces serious challenges in the Senate, where Republicans have 52 members and need 50 to pass a tax bill.  Senate Finance Chairman Orrin Hatch (R-UT) said last week he is unsure if the border-adjustment provision will make it into an eventual Senate tax package.

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House Speaker Paul Ryan (R-WI), left, and House Ways and Means Chairman Kevin Brady (R-TX).

Chairman Brady on Tuesday emphasized the merits of the border adjustability tax, stated there would be no exceptions or carve-outs for any industry and noted that House Republicans want tax reform to pass this year.  (Bloomberg, Feb. 7).  He added in a Bloomberg TV interview later that day that legislation to overhaul the tax code could be released during the first half of the year. 

Brady also briefed conservatives in the House Freedom Caucus this week, telling them that he is aiming to complete a draft revision of the tax code by this summer, according to Rep. Mark Meadows (R-NC).  Not all Republicans remain convinced on specific proposals such as border adjustability. "I’m not in favor at this point," said Rep. Darrell Issa (R-CA), adding that it may be less disruptive to impose a value-added tax on imports.

Rep. Vern Buchanan (R-FL), chair of the House Ways and Means Oversight Subcommittee, said during a Wednesday event at a Bipartisan Policy Center event that tax-writers are also considering different ways of blending full expensing and interest deductibility provisions as they work on ideas to overhaul the tax code.  The House Ways and Means Committee is exploring various approaches that businesses could choose to apply one tax break instead of the other or get a percentage of each, according to Buchanan.  “That's going to be a big issue and something that people are concerned about,” he stated.  (BNA, Feb. 8)

The Roundtable’s recently released 2017 Policy AgendaReal Estate: a Foundation for Growth – includes a section on Tax Policy that can be viewed here.

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ECONOMIC SENTIMENT INDEX

Q1 Survey: Optimism Among Commercial Real Estate Executives Leads to Increase in Economic Sentiment Index  

Commercial real estate industry executives are optimistic about Q1 market conditions while taking a “wait and see” approach to new Administration policies and potential tax reform, according to The Real Estate Roundtable’s Q1 2017 Economic Sentiment Index released today.

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Roundtable CEO and President Jeffrey D. DeBoer stated, “As our Q1 Sentiment Index shows, leaders in commercial real estate are cautiously optimistic about what policy changes may bring, yet concerned about any potential unintended consequences that could threaten real estate’s vast contributions to the U.S. economy.”

“The Trump Administration and a new Congress are aiming to unshackle the economy by focusing on  growth-oriented policies,” said Roundtable CEO and President Jeffrey D. DeBoer. “As our Q1 Sentiment Index shows, leaders in commercial real estate are cautiously optimistic about what policy changes may bring, yet concerned about any potential unintended consequences that could threaten real estate’s vast contributions to the U.S. economy.”

The Roundtable’s Q1 2017 Overall Sentiment Index registered at 55 — seven points up from the last quarter.  [The Overall Index is scored on a scale of 1 to 100 by averaging Current and Future Indices; any score over 50 is viewed as positive.]  This quarter’s Current-Conditions Index of 55 increased four points from the previous quarter, and rose 1 point compared to the Q1 2016 score of 54.  However, this quarter’s Future-Conditions Index of 55 rose nine points from the previous quarter and is up 10 points compared to the same time one year ago, when it registered at 45. 

The report's Topline Findings include:

• The Q1 Sentiment Index came in at 55, a seven point uptick from pre-election Q4. Reacting to the new administration in Washington, many are optimistic about potential market opportunities and the U.S. economy. Mitigating this optimism is concern around potential tax policy reforms.

• While optimism has been the most common reaction to the new Administration, many responders are employing a ‘wait and see’ approach. Most expect changes in the real estate industry as a result of the policies of the new Administration. 

 • Despite previous concerns about asset values nearing peak pricing, many feel that pricing has stabilized. Industrial properties are perceived as well priced while many are reporting a lessening of values for multifamily properties in gateway cities.

• Foreign capital continues to seek real estate investment opportunities in the US market. As a result, access to equity capital is plentiful. Construction lending remains challenging to secure, but for high quality, stabilized assets, financing is available with competitive terms. Asset pricing and debt constraints are concerning, general sentiment about the U.S. market is neutral to positive. Gateway markets have been identified as past peak pricing but many secondary and tertiary markets are intriguing for value-add investors.

Although 36% of survey participants said asset prices increased “somewhat higher” compared to one year ago, 43% of respondents said they expect generally flat valuations a year from now — reflecting the view that many believe pricing has stabilized for certain property types.  Some also noted that inflows of private capital currently favor equity to debt, dependent on the quality of the property. 

 Q1 2017 Sentiment Index chart 

The Roundtable’s Q1 2017 Sentiment Index registered at 55 — seven points up from Q4 2016.

DeBoer added, “The Real Estate Roundtable and its members want to advance policies that will spur job creation and economic growth, always guided first by research, data and reasoned analysis that inform policymakers’ understanding of all issues, particularly when making choices that affect real estate.  We hope our information will assist the policy discussion as lawmakers continue to charge forward on proposals that could have an enormous impact on our nation’s growth, prosperity and national security.”

Data for the Q1 survey was gathered in January by Chicago-based FPL Associates on The Roundtable’s behalf.  Download the entire Q1 report here.

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FEDERAL REAL PROPERTY

GAO Recommends Enhanced Disclosure Policies for Foreign-Owned Real Estate Leased by Federal Agency Tenants  

The non-partisan “congressional watchdog” agency, the Government Accountability Office (GAO) issued a report late last month  recommending the General Services Administration (GSA) disclose information about federal government leased spaces in buildings owned by foreign entities — particularly if the space is intended for a high-security purpose, such as classified operations and sensitive data. 

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The GAO report "Federal Real Property: GSA Should Inform Tenant Agencies When Leasing High Security Space from Foreign Owners"

With GSA responsible for about 8,300 leases of federal agency space in private sector buildings,  the handling of building access, maintenance and security fixtures falls under its jurisdiction. The Department of Homeland Security’s Federal Protective Service (FPS), shares the joint responsibility with GSA for protecting federal facilities and their tenant spaces occupied or leased by GSA.

The GAO report (Federal Real Property: GSA Should Inform Tenant Agencies When Leasing High Security Space from Foreign Owners) addresses:

(1) what is known about foreign ownership of high-security space leased by GSA,

(2) potential risks posed by such foreign ownership, and 

(3) policies and procedures regarding GSA's leasing of space from foreign-owned  entities.

The report uncovered GSA leases high-security space from foreign owners in 20 buildings for 26 tenant agencies, including organization that perform classified operations and store sensitive data.  Owners of the high-security space included companies based in countries such as Canada, China, Israel, Japan and South Korea. However, GAO was unable to identify ownership of about one-third of GSA's 1,406 high-security leases because ownership information was not available.

GAO’s report notes that “[t]he United States has long been open and receptive toward foreign investment,” and that the federal government is not prohibited from leasing space from foreign owners.  Accordingly, GSA is not required to divulge certain information regarding foreign ownership of the space when an agency or high-security purpose business is in the market to sign a lease. When leasing space, GSA is only required to determine whether the prospective lessor is a “responsible party” with the financial wherewithal to perform the contract and a satisfactory record of integrity and business ethics. As a result, federal agency tenants may be unaware that they are occupying foreign-owned space and not know whether they need to address any security risks associated with such foreign ownership. (Federal News Radio, Jan. 31)

Federal officials told GAO that occupying space in foreign-owned buildings could pose risks such as espionage, money laundering and unauthorized cyber and physical access. (ExecutiveGov, Feb.1)

The GAO concluded its report with recommendations that GSA determine whether the beneficial owner of high-security leased space is a foreign entity and, if so, disclose that information to the tenant agency for any needed security mitigation. Since the study and report was issued, the GSA has agreed to these recommendations.

The Real Estate Roundtable was among the organizations interviewed for the study. The Roundtable explained to GAO reviewers that many of the participants in commercial real estate transactions – such as mortgage bankers, brokers, and title agents – are unlikely to have significant and important information on beneficial ownership or potential money laundering activities. 

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For questions about Roundtable Weekly, please contact The Roundtable's Scott Sherwood at rweekly@rer.org or (202) 639-8400.

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