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September 8, 2017

POLICY LANDSCAPE
President Trump Cuts Deal with Democrats to Provide Hurricane Harvey Relief, Raise the Debt Ceiling and Extend Government Funding Until Dec. 8

TAX POLICY
Real Estate Issues are Front and Center as President, Congress Ramp Up Tax Reform Effort

BUILDING ACCESSIBILITY – AMERICANS WITH DISABILITIES ACT (ADA)
House Judiciary Committee Passes ADA Reform Bill to Curb Frivolous Lawsuits

Q3 2017 SENTIMENT INDEX
Commercial Real Estate Industry Leaders Remain Confident and See Balanced Market Fundamentals for Q3 Despite Political Uncertainty


POLICY LANDSCAPE

President Trump Cuts Deal with Democrats to Provide Hurricane Harvey Relief, Raise the Debt Ceiling and Extend Government Funding Until Dec. 8

Congress returned from summer recess this week to pass a stunning deal reached between President Trump and congressional Democrats that provides immediate assistance to victims of Hurricane Harvey while delaying crucial fiscal deadlines until Dec. 8. (Wall Street Journal, Sept 8) 

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 Congress returned from summer recess this week to pass a stunning deal reached between President Trump and congressional Democrats that provides immediate assistance to victims of Hurricane Harvey while delaying crucial fiscal deadlines until Dec. 8.

The assistance package passed by the Senate yesterday and the House today provides approximately 15 billion dollars in disaster relief to communities affected by Hurricane Harvey; suspends the debt ceiling; and extends funding for government operations for three months. With Hurricane Irma bearing down on Florida, the package also extends the National Flood Insurance Program (NFIP) until December 8.

After today’s House vote (316-90), President Trump is expected to sign the package into law today. (Bloomberg, Sept 8)

The agreement between Trump, Senate Minority Leader Chuck Schumer (D-NY) and House Minority Leader Nancy Pelosi (D-CA) sets up another fiscal cliff scenario in December, when many government programs of importance to financial markets and commercial real estate will once again face the prospect of a shut down. 

Extensions for NFIP, EB-5; FAA Reauthorization Anticipated in Separate Measure

Although the legislative package passed by Congress extends funding for the National Flood Insurance Program (NFIP) and the EB-5 foreign investment program, re-authorizing the Federal Aviation Administration (FAA) – which is still scheduled to expire on Sept. 30 – was beyond the Continuing Resolution deal’s scope.  This past summer, both House and Senate committees with jurisdiction over the FAA passed measures to reauthorize the agency. The key difference between the two bills is that the House version (H.R. 2997) would privatize air traffic control operations, while the Senate bill (S. 1405) does not.

The bill introduced by House Transportation and Infrastructure Committee Chairman Bill Shuster (R-PA) also contains a provision that could affect the allowable heights of buildings near airports — the FAA’s One Engine Inoperative (“OEI”) policy change proposed during the Obama Administration.  The OEI policy could change decades-old standards and compel the FAA to consider the possibility of a plane engine failing on takeoff when determining if a structure poses a hazard to navigable airspace.  Approximately 4,000 buildings near 380 airports throughout the U.S. could be “non-conforming” if OEI policy changes were to take effect.

As the House and Senate move to resolve differences in their respective plans for FAA reauthorization this month, The Roundtable and industry partners will continue to advocate for inclusion of OEI “good governance” language for rulemaking and cost-benefit analyses in any package that Congress may ultimately pass before September 30.  ( Roundtable Weekly , June 23)      

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Transportation and Infrastructure Committee Chairman Bill Shuster (R-PA)

The EB-5 foreign investment program will now receive its seventh short-term extension since September 2015. (Roundtable Weekly, Dec. 18, 2015).  Discussions are expected to continue in the coming months among congressional offices and industry stakeholders about forging a longer-term compromise to reauthorize the program and improve its integrity, with long-overdue fraud deterrence measures and national security reforms.

Both the House and Senate are also working to improve and reauthorize the National Flood Insurance Program (NFIP) that has been extended until December 8.

Reauthorization of the NFIP is important for residential markets, overall natural catastrophe insurance market capacity and the broader economy. However, the NFIP's low commercial limits make it problematic for most commercial owners.  The Roundtable has advocated for a voluntary exemption for mandatory NFIP coverage if property owners have flood coverage from commercial insurers.

Flood insurance is typically available through commercial property insurance policies if the property is NOT located in a Special Flood Hazard or Coastal High Hazard area as designated in the flood zone maps – developed by the Federal Emergency Management Agency (FEMA), which oversees the (NFIP).    

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Along with our coalition partners, The Roundtable is supporting NFIP reauthorization with the inclusion of provisions that permit the "commercial exemption."

 

Under the NFIP, commercial property flood insurance limits are very low – $500,000 per building and $500,000 for its contents.  Lenders typically require this base NFIP coverage, and commercial owners must purchase Supplemental Excess Flood Insurance for coverage above the NFIP limits. A niche market of carriers typically provides this type of excess coverage.Along with our coalition partners, The Roundtable is supporting NFIP reauthorization with the inclusion of provisions that permit the "commercial exemption."

Amid other upcoming policy debates this fall such as tax reform and action on the Deferred Action for Childhood Arrivals (DACA) program, a new Fiscal Year 2018 budget resolution is also vital for policymakers to address.

For congressional Republicans to pass a tax reform bill with a simple majority of votes –  instead of the 60 usually needed in the Senate – a new budget resolution for FY18 must first be passed. This budget proposal, which provides an outline of federal spending priorities for next year, will include "reconciliation" orders for tax reform. Without reconciliation, a tax bill may not move forward this or next year.

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TAX POLICY

Real Estate Issues are Front and Center as President, Congress Ramp Up Tax Reform Effort

Congress returned to Washington this week with party leaders vowing to accelerate their push to pass comprehensive tax reform in 2017.  The fate of several tax issues critical to real estate remains uncertain, including the deductibility of business interest expense, cost recovery and depreciation rules, like-kind exchanges, and the tax rate applicable to pass-through business income. 

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President Trump and congressional leaders seek to present a united front on tax reform.

On Wednesday, President Trump traveled to North Dakota to rally public support for tax legislation.  His speech was his second major address on tax reform in less than two weeks.  His remarks focused on the complicated and wasteful nature of the tax system and its negative impact on U.S. businesses.  Referring to U.S. tax system as a “giant self-inflicted economic wound,” the President said that “our country and our economy cannot take off like they should unless we reform America’s outdated, complex, and extremely burdensome . . . tax code.”  

As President Trump and Congressional leaders seek to present a united front on tax reform, answers to basic questions are elusive.  For example, will the reduction in tax rates increase the deficit, or will rate reductions be paid for with offsetting changes to the tax code?   Will a reduction in the corporate tax rate be accompanied by a corresponding reduction in the tax burden on pass-through businesses?   Will the bill fundamentally change the way capital investment is taxed? In the case of real estate, no issue looms larger than a potential overhaul of how borrowing and debt is taxed.  

Today, the tax code recognizes that interest paid on business debt is a cost of doing business and therefore fully deductible for tax purposes.  The House tax reform blueprint released last June would deny a deduction for net interest expense ( Roundtable Weekly , June 24, 2016). The blueprint would also replace current tax depreciation rules with the immediate expensing of structures.   These proposals, if enacted, would represent a seismic shift in the taxation of real estate investment.  Yet, the joint tax reform statement issued in late July by the President’s economic team, the Senate Republican Leader, the House Speaker, the Chairman of the Senate Finance Committee, and the Chairman of the House Ways and Means Committee left the fate of both proposals unresolved. 

Other key real estate issues under consideration include whether tax reform will retain taxpayers’ ability to defer capital gain through like-kind exchanges, whether tax reform will include a reduced tax rate applicable to pass-through business income, and whether the pass-through rate will apply fully to real estate investors.   Transition rules, the future of the state and local tax deduction, and potential changes to FIRPTA and carried interest would also have important consequences for real estate activity. 

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President Trump   tweeted: “Republicans must start the Tax Reform/Tax Cut legislation ASAP. Don't wait until the end of September. Needed now more than ever. Hurry!"

The Real Estate Roundtable is actively engaging policymakers on all of these issues — meeting with Members of Congress, Treasury and White House staff, and the tax-writing committees to raise awareness of their likely impact on the industry and the overall economy.  Outside academic and economic research commissioned by The Roundtable has created a base of credible, fact-based evidence on the importance of interest deductibility, cost recovery, like-kind exchanges, FIRPTA, and carried interest to domestic investment and job growth.  In addition to building a real estate industry consensus on the key issues, The Roundtable is collaborating with other stakeholders on areas of mutual concern.  In the days and weeks ahead, direct outreach from industry leaders to policymakers will be critical. 

The agreement this week between President Trump and Congressional leaders, including Senate Democratic Leader Charles Schumer (D-NY) and House Minority Leader Nancy Pelosi (D-CA) at least temporarily resolved a number of pressing, must-pass issues, such as the debt ceiling and relief for Hurricane Harvey.  The agreement could create an opportunity for congressional Republicans to redouble their focus on tax reform.  That appeared to be the sentiment of the President this morning, who tweeted: “Republicans must start the Tax Reform/Tax Cut legislation ASAP. Don't wait until the end of September. Needed now more than ever. Hurry!"

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BUILDING ACCESSIBILITY – AMERICANS WITH DISABILITIES ACT (ADA)

House Judiciary Committee Passes ADA Reform Bill to Curb Frivolous Lawsuits

The House Judiciary Committee passed a bill on Thursday to address “serial suers” who seek to improperly profit from the Americans with Disabilities Act (ADA).  The “ADA Education and Reform Act of 2017” (H.R. 620) aims to curb the litigation mill of plaintiffs’ lawyers intent on recovering their fees by alleging minor and easily correctable impediments to building access.

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Tom McGee, President and CEO of the International Council of Shopping Centers (ICSC), thanked the House Judiciary Committee for "ensuring that the landmark [ADA] continues to protect disabled people from discrimination in their everyday life — from employment to accessing public places.” 

H.R. 620 would require a person aggrieved by an ADA violation, prior to going to court, to provide advanced written notice to the building owner that claims “actual” denial of access to a public accommodation – to restrain the pattern of “drive-by” lawsuits filed by unscrupulous lawyers who have never entered the property but nonetheless demand thousands of dollars to settle the case.  The plaintiffs’ notice would also specify the precise architectural barrier that impedes access, thereafter providing the building owner with a 120-day opportunity to correct the alleged ADA defect before a civil suit could commence.

House Judiciary Committee Chairman Bob Goodlatte (D-VA) issued a statement that H.R. 620 furthers the objective for citizen plaintiffs to legitimately enforce the business community’s compliance with accessibility regulations.  The bill “will improve access for those whom the ADA was designed to help instead of increasing fees for opportunistic attorneys.  These reforms will help the law work better for both Americans with disabilities and American business owners,” he said

Tom McGee, president and CEO of the International Council of Shopping Centers (ICSC), thanked the committee “for ensuring that the landmark [ADA] continues to protect disabled people from discrimination in their everyday life — from employment to accessing public places.”

“The retail real estate industry is fully committed to the collective goals of more accessibility and ensuring fair compliance with this important law,” he continued.

While H.R. 620 has attracted bipartisan co-sponsorship, the vote yesterday (15-9) broke along party lines as the committee reported the bill only with Republican support.  Democrats on the committee introduced a number of amendments, signaling a potential for further compromise as the bill advances in the legislative process.

ICSC cited recent statistics that the number of ADA lawsuits in federal court increased by 37 percent in 2016 from the prior year, and only a small number of plaintiffs have filed hundreds of lawsuits alleging potential ADA violations.

Other real estate organizations supporting H.R. 620 include the American Hotel & Lodging Association; American Resort Development Association; Building Owners and Managers Association (BOMA) International; NAIOP, the Commercial Real Estate Development Association; National Apartment Association; National Association of REALTORS®; and National Multifamily Housing Council. 

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Q3 2017 SENTIMENT INDEX

Commercial Real Estate Industry Leaders Remain Confident and See Balanced Market Fundamentals for Q3 Despite Political Uncertainty

Commercial real estate industry leaders that participated in The Real Estate Roundtable’s Q3 2017 Economic Sentiment Index remain confident and view market fundamentals as strong, although their optimism has waned for two straight quarters due to political uncertainty in Washington, D.C.

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The Roundtable's Q3 Sentiment Index registered at 50  — two points down 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.]

“In the face of geopolitical uncertainty, we continue to believe that the real estate industry will navigate headwinds and maintain a positive path forward,” said Roundtable President and CEO Jeffrey DeBoer. “As our Q3 Index shows our industry leaders continue to conduct business, asset values are stable, equity capital is widely available, and debt funds have stepped in to fill the void for the lack of construction financing we have been experiencing over the past year,” DeBoer added.

The Roundtable’s Q3 2017 Sentiment Index registered at 50 — two points down 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 51 decreased two points from the previous quarter. This quarter’s Future Conditions Index of 48, decreased by two points from the previous quarter, however, was the same in Q3 2016.
 
The report’s Topline Findings include:
 
• Although most responders for the Q3 report remain confident and view market fundamentals as strong, their optimism has waned for two straight quarters in light of the lack of regulatory changes in Washington, D.C. 

• While most responders feel market fundamentals are strong, they are experiencing hesitation around decision making on the part of their tenants/clients. This hesitation is due to uncertainty about market conditions and trepidation about the new administration in Washington, D.C. 

• Most responders feel high quality assets in primary markets are at peak pricing. A Few responders suggested asset prices may be beyond peak. Despite asset pricing being perceived as high, there are many bidders for the highest quality assets.

• Despite the perceived slowing of Chinese capital flowing into the US real estate market, most responders feel equity capital is widely available. In answer to the lack of construction financing, the debt funds have stepped in to fill the void.
 
Forty-three percent of survey participants report Q3 asset prices today are “somewhat higher” compared to this time last year, suggesting primary markets are at peak pricing due to aggressiveness in the debt market and vast amounts of available capital. However, with 55% of respondents said they expect values to be “about the same” one year from now, pricing may remain steady throughout the course of the next year.
 
DeBoer added “Despite the continued slow but steady course the real estate industry has been on, Washington policy makers must focus on bipartisan growth-oriented policies for the future. The Roundtable will continue to work with policy makers by sharing thoughtful, long-term views about policy initiatives that will continue to provide our industry and the U.S. economy with much-needed policy reform in Washington.”
 
Data for the Q3 survey was gathered in August by Chicago-based FPL Associates on The Roundtable’s behalf.  

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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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