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November 10, 2017

TAX REFORM
Tax Reform on Fast Track as House Ways & Means Committee Passes Tax Overhaul and Finance Committee Releases Senate Version

CAPITAL & CREDIT
House Passes Legislation to Clarify Banking Rule Affecting Acquisition, Development, or Construction Loans

ENERGY POLICY
Real Estate Coalition Weighs-In to U.S. House on Possible ENERGY STAR Reforms

LABOR POLICY
House Passes Bill to Overturn NLRB’s “Joint Employer” Ruling


TAX REFORM

Tax Reform on Fast Track as House Ways & Means Committee Passes Tax Overhaul and Finance Committee Releases Senate Version  

Momentum on the GOP’s tax reform efforts rolled forward this week, as the House Ways and Means Committee yesterday approved a tax overhaul bill, which differs in significant ways from a tax reform proposal released the same day by the Senate Finance Committee.

Capitol reflection

Momentum on the GOP’s tax reform efforts rolled forward this week, as the House Ways and Means Committee yesterday approved a tax overhaul bill, which differs in significant ways from a tax reform proposal released the same day by the Senate Finance Committee.

Ways and Means voted 24-16 along party lines to pass the Tax Cuts and Jobs Act  (H.R.1) after Committee Chairman Kevin Brady (R-TX) released a 29-page amendment to the bill. (Summary of amendment and Amendment text).  Committee Democrats this week offered nearly two dozen amendments that all failed on party lines.  

The changes offered by Chairman Brady would bring the bill's cost down to approximately 1.4 trillion dollars over 10 years, which adheres to Senate rules to pass a final measure. The House bill is expected to receive a vote on the floor next week. (BNA, Nov. 9) 

Meanwhile, Senate Finance Committee Chairman Orrin Hatch (R-UT) yesterday released the text of the Senate's comprehensive tax reform proposal, which the Committee plans to mark-up on Monday, Nov. 13

On key issues affecting the commercial real estate industry — from business interest deductibility to cost recovery to like-kind exchanges —  both bills would largely ensure that real estate and real estate transactions continue to be taxed on an economic basis.  Business interest expense incurred in a real property trade or business would remain deductible; the cost of commercial real estate would continue to be recovered over an extended period (shorter under the Senate draft); and taxpayers could continue to defer gain on real estate like-kind exchange.  

The Senate draft proposes to shorten the cost recovery period for both nonresidential and residential rental property, which is consistent with recent research by MIT that found real estate economically depreciates much faster than previously recognized.

Roundtable President and CEO Jeffrey DeBoer commented on this week's tax reform developments: "The economy is well-served by tax rules that support healthy and balanced real estate markets while encouraging capital formation and investment.  If the final tax reform legislation is a pro-growth measure similar to the bills put forward thus far, the commercial real estate industry should be well-positioned to put more people to work as business investment accelerates and the broader economy improves." 

Jeff DeBoer Fall2016 Mtg x220 crop

Roundtable President and CEO Jeffrey DeBoer commented on this week's tax reform developments: "The economy is well-served by tax rules that support healthy and balanced real estate markets while encouraging capital formation and investment.  If the final tax reform legislation is a pro-growth measure similar to the bills put forward thus far, the commercial real estate industry should be well-positioned to put more people to work as business investment accelerates and the broader economy improves." 

The Senate tax reform draft differs in substantial ways from the House GOP plan approved yesterday in the Ways and Means Committee.  Chairman Hatch also released the following on the Senate tax reform plan: 

According to a White House statement issued yesterday, "The President is encouraged that the House and Senate have shown great unity in achieving our common goals of delivering middle-class tax relief, simplifying the burdensome tax code, and empowering American businesses to create more jobs, increase wages, and compete in the global economy. We will continue working with Congress to deliver tax cuts and reforms for hardworking Americans by the end of the year."

After House Ways and Means approved its bill, Chairman Brady commented, "Will there be some differences? Of course. That's the legislative process and we welcome that. We're eager for them (the Senate), after the House passes, for them to improve their bill as well, to work out and find common ground and send it to the president's desk this year."  (BNA, Nov. 9)

Some comparisons of the House and Senate bills, according to Bloomberg-BNA, include: 

Corporate Tax Cut  

  • SENATE BILL: A corporate tax-rate cut to 20 percent would be delayed by one year to January 2019.
  • HOUSE BILL: The corporate income tax rate would be a flat 20 percent starting in 2018.

Pass-Throughs  

  • SENATE BILL: For partnerships, limited liability companies and other so-called pass-through businesses, the legislation would provide a 17.4 percent deduction for non-wage income. The deduction wouldn't be available to many types of service businesses - except for those whose taxable income falls below $150,000 for joint filers or $75,000 for all others.
  • HOUSE BILL: Qualified pass-through business owners could choose to count 70 percent of their income as wages - subject to their individual tax rate - and 30 percent as business income, taxable at the 25 percent rate. Or, they could set the ratio of their wage income to business income based on their capital investment. 

Carried Interest  

  • SENATE BILL: Will be handled through an amendment in the Finance Committee, said Republican Senator Chuck Grassley of Iowa.
  • HOUSE BILL: The carried-interest tax break would be limited by tripling the length of time assets would have to be held to qualify for the capital gains rate of 23.8 percent. Under current law, an investment fund's assets must be held for a year or more to qualify. 
    Brady SOI 2017 x200

    After House Ways and Means approved its bill, Chairman Brady commented, "Will there be some differences? Of course. That's the legislative process and we welcome that. We're eager for them (the Senate), after the House passes, for them to improve their bill as well, to work out and find common ground and send it to the president's desk this year."

Interest Deductibility  

  • SENATE BILL: Would restrict interest deduction for businesses to 30 percent of adjusted taxable income, while allowing interest not allowed as a deduction to be carried forward indefinitely.  The limitation would not apply to real estate businesses and regulated utilities.
  • HOUSE BILL: Companies would be prevented from deducting interest expenses that exceed 30 percent of their earnings before interest, taxes, depreciation and amortization. The limit wouldn't apply to real estate firms and small businesses. Companies that use loans to finance high-cost inventory -  such as car dealers - will be given the ability to completely write off their interest payments. In exchange, those businesses won't be able to immediately write off their capital investments. 

State and Local Tax Deductions

  • SENATE BILL: Eliminates state and local tax income and property deductions for individuals.
  • HOUSE BILL: The deduction for state and local income taxes or sales taxes would be repealed, while the deduction for state and local property taxes would be capped at $10,000.

Home-Mortgage Interest Deduction  

  • SENATE BILL: Preserve the existing mortgage-interest deduction for home purchases with up to $1 million of debt.
  • HOUSE BILL: The home-mortgage interest deduction would be reduced for new purchases to $500,000 of debt from the current $1 million. The bill would also limit the deduction to one principal home, ending the break for second homes. 

Estate Tax  

  • SENATE BILL: Preserve the estate tax while doubling the current $5.49 million exemption for individuals.
  • HOUSE BILL: The estate tax would end after 2024, under a revision approved by the Ways and Means Committee. Before then, the current $5.49 million exemption for individuals would be doubled.

With the Senate's ambitious timeline to pass final tax legislation before Thanksgiving, The Roundtable and its Tax Policy Advisory Committee (TPAC) will continue to analyze key provisions in each bill as they head toward floor votes and possible reconciliation — and will play an active role in communicating issues of concern to commercial real estate to Washington policymakers.

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CAPITAL & CREDIT

House Passes Legislation to Clarify Banking Rule Affecting Acquisition, Development, or Construction Loans 

Legislation passed on Tuesday by the U.S. House or Representatives would clarify and modify the High Volatility Commercial Real Estate (HVCRE) Rules for certain acquisition, development, or construction loans (ADC).  The bill (Clarifying Commercial Real Estate Loans Act, H.R. 2148), would ensure ADC loans are appropriately calibrated so that credit capacity or economic activity is not impeded, while still promoting economically responsible commercial real estate lending.

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The bipartisan bill  introduced by House Financial Services Committee members Rep. Robert Pittenger (R-NC), left, and Rep. David Scott (D-GA), right, would clarify and reform the HVCRE Rule (part of the Basel III framework), which affects capital requirements for certain ADC loans.

The bipartisan bill introduced by House Financial Services Committee members Rep. Robert Pittenger (R-NC) and Rep. David Scott (D-GA), would clarify and reform the HVCRE Rule (part of the Basel III framework), which affects capital requirements for certain ADC loans.

Despite ongoing requests to regulators, necessary clarification for key elements of the HVCRE Rule have not been provided since the Rule’s effective date of January 1, 2015. As a result, ADC loan decisions for some banks have been negatively impacted – leaving some borrowers with fewer and potentially more costly sources of ADC loan capital.  (Roundtable Weekly, Oct. 13)

The bipartisan Pittenger-Scott bill would not eliminate the regulatory agencies’ ability to require banks to hold higher capital for HVCRE loans (150 percent risk weighting).  Rather, the bill would amend the Federal Deposit Insurance Act by clarifying what types of loans should be classified as HVCRE. 

Among the numerous technical clarifications detailed in the legislation, one provision clarifies that an HVCRE loan can be reclassified as a non-HVCRE loan – once development or construction has been completed, provided the lender is satisfied that cash flow generated by the real property is sufficient to repay the debt and expenses on the property. It would also make the following important changes:

• Once the development/construction risk period has passed, and the project is cash flowing, it would allow borrowers to use internally generated cash outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).

• Clarify that loans made to do general upgrades and other improvements on existing properties with rental income do not trigger the capital penalty.

• Allows banks to establish borrower land value as equity into projects as established by certain safeguards, such as a fully-compliant appraisal and thorough bank review.

• Exclude from application and compliance any loans made before January 1, 2015.

 Construction building blue sky x225

Since the HVCRE Rule’s effective date of January 1, 2015, ADC loan decisions for some banks have been negatively impacted – leaving some borrowers with fewer and potentially more costly sources of ADC loan capital .

Real Estate Roundtable President and Chief Executive Officer Jeffrey D. DeBoer commented on H.R. 2148 in April when it was introduced, stating, “Congressmen Pittenger and Scott are to be commended for recognizing the negative economic impact that the HCRE Rule is having on acquisition, development and construction lending and for taking steps to introduce legislation intended to correct these problems. The Roundtable and our coalition partners support regulatory agencies’ efforts to promote economically responsible CRE lending, and the Pittenger-Scott bill will help guide the agencies in clarifying and reforming the HVCRE Rule, while encouraging sound lending practices, spurring economic growth and creating jobs in local communities.”  (Roundtable News Release, April 26, 2017)

Separately, banking regulatory agencies on Oct. 27 published a Notice of Proposed Rulemaking (NPR) that proposes replacing the existing HVCRE exposure category used in the standardized approach with a new category called high volatility acquisition, development, or construction (HVADC) exposure with a 130 percent risk weighting.  Comments must be received by December 26, 2017.

The Roundtable is working to develop a response to the NPR (entitled “Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996.”) through its HVCRE Working Group, in conjunction with the Real Estate Capital Policy Advisory Committee (RECPAC).

Prospects for the legislative and regulatory efforts aimed at clarifying and reforming HVCRE rules will be discussed when RECPAC meets on November 30 in New York City.

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ENERGY POLICY

Real Estate Coalition Weighs-In to U.S. House on Possible ENERGY STAR Reforms

A coalition of 12 national real estate organizations, including The Roundtable, this week offered specific recommendations on a discussion draft of the Energy Star Reform Act of 2017, which was the subject of  Nov. 7 House Energy and Commerce Subcommittee hearing

 Welch McKinley

Representatives Peter Welch (D-VT), left, and David McKinley (R-WV), right, sponsors of the 2015 “Tenant Star” law, testified at Tuesday’s House hearing on the importance of EPA’s ENERGY STAR program to U.S. real estate.

The day before the subcommittee’s hearing on potential legislative reforms to the Environmental Protection Agency’s (EPA) ENERGY STAR program, the coalition detailed in its letter to policymakers how the program is an exemplary, non-regulatory example of private sector and government collaboration that should remain at EPA and receive appropriate funding. 

ENERGY STAR is a voluntary program run by the EPA and the Department of Energy (DOE) to provide consumers and businesses with information on energy efficient buildings, equipment, and appliances in the marketplace.  The subcommittee provided the “discussion draft” – short of an introduced bill – to gather input from stakeholders including the commercial, residential and product manufacturing sectors.

Some stakeholders in the appliance sector are asking that ENERGY STAR move to DOE as the lead agency.   Considering the real estate industry’s longstanding participation in and support of ENERGY STAR, the 12-member real estate coalition detailed their concerns about how  legislative efforts to reform the appliance side of the program may have unintended, negative consequences for EPA-certified buildings.

Today, an estimated 40% of the U.S. commercial real estate market is involved with the ENERGY STAR buildings program in some manner.  More than 450,000 commercial buildings covering 40 billion square feet of space actively use EPA’s on-line tool to measure and track energy use.

Given the importance of the program to real estate, the recommendations in the Nov. 6 industry letter include:

• The discussion draft, consistent with the underlying law that it would amend, should use text that carefully distinguishes ENERGY STAR appliance reforms from the buildings platform.

• To prevent confusion and inefficiency in implementing the program, EPA should continue to take the lead with DOE in a supporting role.  DOE’s assumption of a lead role may indeed make ENERGY STAR for appliances run more effectively, but the real estate coalition believes these efficiencies will be lost if ENERGY STAR for buildings shifts to DOE, which does not have the same history, culture and resources to run the long-standing, successful buildings program.

• With congressional passage in 2015 of the “Energy Efficiency Improvement Act,” also known as “Tenant Star” (since re-branded by EPA as “ENERGY STAR for Tenants”) – EPA’s and DOE’s respective, well-delineated roles should be preserved as the two agencies are in the midst of successfully and cooperatively implementing this 2015 law.

• Finally, the coalition emphasized that the discussion draft’s “No Warranty” section should cover buildings as well as products.  As currently written, the discussion draft language could create an implication to leave open warranties/private rights of action with regard to buildings that may lose their ENERGY STAR ratings from one year to the next (or see their scores drop).

As reforms to ENERGY STAR are discussed in Congress, The Roundtable, its coalition partners and its Sustainability Policy Advisory Committee (SPAC) will continue to engage policymakers and regulators to ensure the industry’s views are taken into consideration.

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LABOR POLICY

House Passes Bill to Overturn NLRB’s “Joint Employer” Ruling

The U.S. House of Representatives on Tuesday passed a bill to prohibit the National Labor Relations Board (NLRB) from implementing its expanded "joint employer" rule, which broadens the circumstances under which businesses can be held liable for workplace violations committed by their franchise operators, contractors, or vendors.

  2017_11_07 Joint Employer CDW Support Letter

The Real Estate Roundtable joined a coalition of approximately 180 trade organizations in a letter supporting the bill (H.R. 3441), sent to all House members

The Save Local Business Act (H.R. 3441) passed by a vote of 242-181, with eight Democrats joining Republicans. (The Hill, Nov. 7)

The day before the vote, The Real Estate Roundtable joined a coalition of approximately 180 trade organizations in a letter supporting the bill sent to all House members.  “Without a congressional solution, businesses of all sizes will continue to be exposed to unlimited and unpredictable joint employment liability,” the coalition letter states.

The previous federal labor standard (in effect for more than thirty years) held that two separate employers are “joint employers” only if both have “direct and immediate control” over employment terms and working conditions – e.g., both employers share responsibilities for hiring and firing, setting work hours, issuing direction to employees, determining compensation, and handling day-to-day record keeping.

Yet the NLRB upended this precedent in 2015 when it issued its decision in Browning-Ferris Industries of California, Inc.  Browning-Ferris replaced the “direct and immediate control” standard for determining joint employer with an expanded, vague test based on “indirect” and “potential” control over workers’ terms and conditions of employment.  The NLRB subsequently referenced the ruling in labor rights violation cases against McDonald's Corp., arguing the “parent company” was responsible for workplace actions taken by its independent franchisees.  (Roundtable Weekly – April 10, 2015).

This week's coalition letter refers to Browning-Ferris, explaining: “The decision has created immense uncertainty and undermined the relationships between a brand company and local franchise business owners, contractors and subcontractors, and businesses and their suppliers and vendors – all of which have created millions of jobs and allowed hundreds of thousands of individuals to achieve the American Dream of owning their own small business.”

  2017_Katherine Lugar

Katherine Lugar, president and CEO of the American Hotel & Lodging Association, said, "We are pleased the House passed this common-sense legislative fix to give small business owners the clarity and certainty they need and spur economic growth."

The House bill would amend the National Labor Relations Act and the Fair Labor Standards Act to restore policy that existed before Browning-Ferris. Under H.R. 3441, a company is only considered a joint employer if it "directly, actually and immediately" has control over essential terms and conditions of employment.

Responding to the House passage of H.R. 3441, Katherine Lugar, president and CEO of the American Hotel & Lodging Association, said, “Today’s vote is a win for the small business owners and entrepreneurs who represent three out of every five lodging businesses across the U.S., and the millions of men and women they employ. We are pleased the House passed this common-sense legislative fix to give small business owners the clarity and certainty they need and spur economic growth.”  (AHLA, Nov. 7)

Michael Layman, executive director of the Coalition to Save Local Businesses (CSLB) stated, “Full House passage of the Save Local Business Act means local businesses are one step closer to having needed clarity and certainty on joint employer. We are hopeful that the Senate will build upon the progress we have seen in the House and take action soon.”  (CSLB, The Facts on Joint Employer)

In the Senate, the legislation’s fate is uncertain.  Senate Health, Education, Labor and Pensions (HELP) Committee Lamar Alexander (R-TN) said in a Nov. 7 statement: “Today’s House passage of the Save Local Business Act is good news for the owners of this country’s 780,000 franchise businesses – health clubs, barber shops, neighborhood restaurants – who saw their path to the American dream threatened … I look forward to the Senate acting as soon as possible on behalf of every man and woman in this country who wants to realize the American dream of owning a small business.’”

In the courts, Browning-Ferris was appealed to the U.S. Court of Appeals for the D.C. Circuit, where oral arguments were held March 9 and a ruling is pending.  In the Supreme Court, a petition to hear a separate case (DirectTV LLC v. Hall) under the Fair Labor Standards Act  involving joint employment is pending consideration.

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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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