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November 30, 2018

POLICY LANDSCAPE
Congress Returns for Lame Duck Session; Government Funding Deadline Threatens Partial Shutdown

TAX POLICY
House Ways and Means Chairman Kevin Brady (R-TX) Releases Tax Bill Addressing “Extenders” and Technical Corrections

TAX POLICY – BUSINESS INTEREST DEDUCTION
Treasury Proposes Detailed Rules for New Restrictions on Deducting Business Interest

ENERGY POLICY
Roundtable Submits Recommendations to Improve ENERGY STAR Scoring Models; EPA Seeks Additional Feedback from Building Owners


POLICY LANDSCAPE

Congress Returns for Lame Duck Session; Government Funding Deadline Threatens Partial Shutdown

Lawmakers returned to Washington this week for their post-election “lame duck” session, facing a Dec. 7 government funding deadline that threatens a partial government shutdown.

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Lawmakers returned to Washington this week for their post-election “lame duck” session, facing a Dec. 7 government funding deadline that threatens a partial government shutdown.

  • Seven FY2019 spending bills await congressional action by next Friday to fund the departments of Agriculture, Commerce, Justice, Homeland Security, Interior, State, Transportation and Housing and Urban Development, and several smaller agencies.  If Congress and President Trump do not reach agreement on an appropriations package for the fiscal year, these departments and agencies may be subject to a partial government shutdown or another short-term extension. Several immigration programs, including the EB-5 investment program, also face expiration on Dec. 7.   (USA Today, Nov. 28)  
  • A key issue in the funding negotiations is construction of a wall along the U.S.-Mexican border.  President Trump said he would "totally be willing" to shut down the federal government if $5 billion is not approved for the wall by Congress during a Nov. 28 Oval Office interview with Politico.  Senate Minority Leader Chuck Schumer (D-NY) and other Democratic leaders have pledged $1.6 billion for border security.  (The Hill, Nov. 29)
  • The lame-duck session could be the final opportunity for Republicans to pass significant funding for the wall, as Democrats will reclaim the House majority in January.   
  • A government program scheduled to expire today – the National Flood Insurance Program (NFIP) – was extended yesterday by Congress for the seventh time in 12 months.  The NFIP extension will also expire Dec. 7 unless Congress attaches a longer-term flood insurance extension to a spending bill, or passes another continuing resolution. (BGov, Nov. 30) 
  • The Real Estate Roundtable and 14 other industry groups urged Congress in a June 12, 2017 comment letter to reauthorize and reform the NFIP to help protect the nation’s commercial and multifamily business-owners, their properties, residents, and the jobs they create from the financial perils of flooding.  (Roundtable Weekly, Sept. 14, 2018)
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    The Roundtable is also part of a coalition advocating for the reauthorization of the Brand USA program – a public-private partnership that markets the United States as a travel destination to international travelers.

  • Legislation is needed to ensure that international visitor fees funding the program will not be diverted to the Treasury Department, as currently scheduled. The fee assessed on international travelers coming to the U.S. is matched 1:1 by funds from the private sector travel industry.  The letter states, “Without this funding, private sector partners of Brand USA are limited, and in some cases deterred, from marketing to highly valued international travelers.”  (VisitU.S. Coalition letter, Nov. 30)  
  • Brand USA is estimated to have generated international visitor spending since FY2013 that produced $486 million in federal tax revenue, and another $526 million in state and local tax revenue. (Return On Investment Analysis, Oxford Economics)

Lawmakers are scheduled to stay in session until Dec. 14 to close out the 115th Congress.

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TAX POLICY

House Ways and Means Chairman Kevin Brady (R-TX) Releases Tax Bill Addressing “Extenders” and Technical Corrections 

Hose GOP leaders yesterday delayed a vote on a $54 billion dollar tax bill released Monday (H.R. 88) by House Ways and Means Chairman Kevin Brady (R-TX) that includes tax "extenders" and technical corrections of importance to commercial real estate.  (Brady Statement, Nov. 26 and CQ, Nov. 30) 

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GOP leaders yesterday delayed a vote on a $54 billion dollar tax bill released Monday (H.R. 88) by House Ways and Means Chairman Kevin Brady (R-TX), above, that includes tax "extenders" and technical corrections of importance to commercial real estate.  (Brady Statement, Nov. 26)

  • Specific provisions affecting real estate include technical corrections to fix errors in last year's Tax Cuts and Jobs Act.  The bill would:
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    • shorten the cost recovery period for qualified improvement property, a new category of depreciable property that covers upgrades and improvements to the interior of nonresidential buildings;

    • clarify that the new 20 percent deduction for pass-through business income extends to REIT dividends received by mutual fund shareholders;

    • temporarily extend the expired deduction for energy-efficient commercial building property (Section 179D); and

    • temporarily extend other expired provisions affecting homeowners, such as a deduction for mortgage insurance premiums and a tax exclusion for mortgage debt forgiveness.  (Roundtable Weekly, Oct. 19) 

  • In October, The Roundtable along with 239 businesses and trade groups, wrote to Secretary Mnuchin urging the Treasury Department to provide administrative relief from a drafting mistake that increased the cost recovery period for qualified improvement property (QIP) to 39 years, instead of 15. (Roundtable Weekly, Oct. 12)  

It is uncertain when the wide-ranging tax bill will be considered but debate on the legislation may take place next week.  

Senate Democrats, whose support is needed to assure passage of any tax changes before next year, reportedly, "are determined to win concessions in exchange for providing votes to fix errors in last year's law.  (Wall Street Journal, Nov. 30)  Yet it remains unclear what concessions Democrats are seeking.  When asked about the bill's prospects in the Senate, Sen Charles Grassley (R-IA), the likely Senate Finance chairman next year, said "Not if brought up separately, only if it's put in the funding bill."  (CQ, Nov. 28). 

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TAX POLICY – BUSINESS INTEREST DEDUCTION

Treasury Proposes Detailed Rules for New Restrictions on Deducting Business Interest  

On Tuesday, the Treasury Department released proposed regulations governing the new limitation on the deductibility of business interest expense, including the exception for real estate businesses. 

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On Tuesday, the Treasury Department released proposed regulations governing the new limitation on the deductibility of business interest expense, including the exception for real estate businesses. 

  • Under the Tax Cuts and Jobs Act (TCJA), businesses generally can no longer deduct their interestexpense to the extent it exceeds 30 percent of their annual earnings before interest, tax, depreciation and amortization (EBITDA).  Business interest deductibility was a key issue in Real Estate Roundtable President & CEO Jeffrey DeBoer's testimony before the Senate Finance Committee shortly before consideration of the tax bill.  (Roundtable Statement for the Record, Sept. 19, 2017)

  • DeBoer testified that the proposal could have severe unintended consequences.  Noting that the cost of debt is a necessary expense that must be accounted for when measuring income, he testified that our capital markets are the envy of the world and that responsible, appropriate leverage helps entrepreneurs and contributes to economic growth and job creation. (Roundtable Weekly, Sept. 29 and testimony video clips)

  • The final bill included a critical exception from the interest limit for an electing real property trade or business.  An electing real property trade or business is defined broadly to cover: any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. 

  • In February, the Roundtable submitted comments to Treasury with recommendations for how the real estate exception should work in the case of tiered business structures, and in the case of businesses that involve both real estate and non-real estate activities.  (Roundtable Weekly, Feb. 23, 2018) 
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    Business interest deductibility was a key issue in Real Estate Roundtable President & CEO Jeffrey DeBoer's testimony before the Senate Finance Committee shortly before consideration of the tax bill.  (Roundtable Statement for the Record, Sept. 19, 2017 and video clips)



  • The proposed regulations are largely favorable.  Most importantly, the regulations clarify that partner-level borrowing qualifies for the real estate exception. Thus, at the election of the taxpayer, the real estate exception can extend to debt that is incurred by a partner to acquire an interest in a partnership that is engaged in a real property trade or business.  In addition, the regulations confirm the broad definition of a real property trade or business.  The regulations also clarify that capitalized interest, which commonly arises during the development of real estate, is not subject to the interest limit.

  • With respect to taxpayers engaged in both real estate and non-real estate activities, the proposed regulations generally would allocate and apportion debt based on the relative amount of the taxpayer's adjusted basis in assets used in those activities.  However, taxpayers would directly trace and allocate qualified nonrecourse indebtedness to the asset securing the loan (with no apportionment).  This latter rule should result in the allocation of a larger share of debt to assets qualifying for the real estate exception.

  • Some concerns remain.  Notably, the attribution rule that allows partners to qualify for the real estate exception based on partnership-level activities does not extend broadly to all upper-tier borrowing for investment in lower-tier real estate businesses.  Thus, except in limited circumstances, debt incurred by a taxpayer to invest in a corporation (or REIT) that is engaged in a real property trade or business is not eligible for the real estate exception. 

The Roundtable's Tax Policy Advisory Committee is continuing to review the 439-page regulatory package to understand its full implications for the financing of U.S. real estate.  Comments on the proposed regulations will be due 60 days after their publication in the Federal Register.

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ENERGY POLICY

Roundtable Submits Recommendations to Improve ENERGY STAR Scoring Models; EPA Seeks Additional Feedback from Building Owners

The Real Estate Roundtable on Nov. 26 sent recommendations to the U.S. Environmental Protection Agency (EPA) to improve the agency’s ENERGY STAR scoring methods, which rate a building’s energy efficiency performance.  (Roundtable Letter and Recommendations)

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The Real Estate Roundtable on Nov. 26 sent recommendations to the U.S. Environmental Protection Agency (EPA) to improve the agency’s ENERGY STAR scoring methods, which rate a building’s energy efficiency performance.  (Roundtable Letter and Recommendations)

  • Nearly 35,000 buildings and plants – representing more than 5 billion square feet of commercial space – have earned EPA’s ENERGY STAR.  Pension funds and other institutional investors frequently rely on the label as a market signal for well-managed assets with smaller carbon footprints.  Business tenants also seek to locate in ENERGY STAR-certified buildings to lower their utility expenses.
  • Last August, EPA announced the first updates to its ENERGY STAR scoring models in over a decade.  Initial analyses by The Roundtable’s Sustainability Policy Advisory Committee (SPAC) and other stakeholders indicated that EPA’s new models produced arbitrary scoring results.  Offices over 500,000 square feet in size, and buildings located in colder climates requiring more heating throughout the year, appear to have sustained the most significant ENERGY STAR score declines.
  • Roundtable President and CEO Jeffrey DeBoer in October told the Wall Street Journal, “Revisions to ENERGY STAR are much needed and very important.  However, to be truly effective the data sources and projections relied upon in the revision must be transparent and reflect industry leading practices.” (Wall Street Journal, Oct. 9)
  • The Roundtable's Nov. 26 summary and recommended changes to EPA’s scoring methods seek to ensure a level-playing field for the ENERGY STAR label – so that buildings of all sizes located in varying climate zones across the country are rated fairly.  
  • EPA has requested additional data from owners and managers to test its methods on specific buildings and portfolios.  Stakeholders interested in working with the agency to assess how particular properties have fared since new ENERGY STAR scores were released last August should consult EPA’s website, “How to Respond to Data Requests in Portfolio Manager.” 

EPA plans to wrap-up its review period and resume issuing ENERGY STAR building labels by next spring.    

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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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