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February 1, 2013

STATE OF THE INDUSTRY MEETING
Roundtable’s Annual Winter Forum Spans a Range of Federal Policy Issues Affecting U.S. Commercial Real Estate Sector; Packed Program Features Dialogue With Eight Current, Former U.S. Senators


STATE OF THE INDUSTRY MEETING

Roundtable’s Annual Winter Forum Spans a Range of Federal Policy Issues Affecting U.S. Commercial Real Estate Sector; Packed Program Features Dialogue With Eight Current, Former U.S. Senators  

Against the backdrop of a generally brightening economic mood, renewed congressional wrangling on spending, tax and debt ceiling issues, and the potential for a bipartisan breakthrough on immigration reform, The Real Estate Roundtable held its 2013 State of the Industry Meeting on Wednesday — a gathering packed with insights and dialogue among senior real estate industry and trade association executives, six U.S. Senators, one member of Congress and two former U.S. Senators on a range of federal policy issues with implications for commercial real estate and the broader economy. These issues included:

The looming wave of “sequestration” budget cuts on March 1 (which would hit the Pentagon budget particularly hard, and which could erode recent improvement in the unemployment rate)

2013 SOI Kennedy Caucus Room back WS

The Roundtable's 2013 State of the Industry (SOI) Business Meeting featured dialogue among industry executives and policymakers on a range of federal policy issues in the historic Kennedy Caucus Room on Capitol Hill

The need for long-term deficit reduction, recognizing that entitlement/health care spending is the biggest driver of the nation’s unsustainable debt

Prospects for tax code restructuring — including potential limits on deductions (e.g., for charitable giving and state and local taxes) and so-called “loophole closing”

Renewed negotiations on U.S. borrowing authority (i.e. the debt ceiling) — now extended into mid-May

 The importance of regulators appropriately calibrating the credit risk retention rules to ensure a reliable new-issuance CMBS market

 Ensuring that the new Basel III capital requirements do not impede credit capacity for real estate 

  The need to reform protectionist tariffs on foreign investors established by the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) to encourage foreign investment in U.S. infrastructure

Taubman Perot Sen Coons and Isakson

 Left to right: Roundtable Chairman Robert S. Taubman (Chairman, President and CEO, Taubman Centers Inc.) and Ross Perot, Jr. (Chairman, Hillwood) with Senators Chris Coons (D-DE) and Johnny Isakson (R-GA) during The Roundtable's SOI meeting.

Immigration reform, including discussions about a possible “guest-worker” program for unskilled workers and policy changes allowing more highly-skilled (“STEM”-educated) workers to remain in the country 

The need to extend the federal terrorism re-insurance program beyond its scheduled expiration at year-end 2014, and how this is not just a “New York issue” or a “real estate issue” but a national economic challenge demanding a federal policy solution

Prospects for a more robust economic recovery and job creation, particularly in the wake of Wednesday’s disappointing 4th quarter 2012 GDP results (and this week’s 1-point increase in the unemployment rate, to 7.9 percent)

The need for a careful unwinding of the Fed’s sustained and unusually accommodative monetary policy — and potential interest rate risks for the recovering commercial real estate sector

The business portion of the meeting — held in an historic Senate caucus room on Capitol Hill — came after a joint meeting of the Real Estate Capital Policy Advisory Committee (RECPAC) and Research Committee, as well as a meeting at the White House between top Administration officials and a delegation of Roundtable board members.  

[The in-depth focus on specific policy areas continued Thursday, with meetings of The Roundtable’s Sustainability Policy Advisory Committee (SPAC), Tax Policy Advisory Committee (TPAC) and a joint session of the Homeland Security Task Force and Risk Management Working Group.]

Sen Schumer 2013 SOI x175

Sen. Charles Schumer
(D-NY)

Sen Ayotte 2013 SOI x175

Sen. Kelly Ayotte
(R-NH)

Kicking off the business meeting on Wednesday with their parties’ respective views on looming budget and tax matters facing the country as well as other issues were Senator Charles Schumer (D-NY), a member of the tax-writing Senate Finance Committee and a leader of his party who is now in his third term, and newcomer Kelly Ayotte (R-NH), a former state attorney general who is serving her first full term in the U.S. Senate.

As Schumer spoke of the challenges ahead in fixing the nation’s long-term budget woes — including where to find new revenue for deficit reduction — he discussed the likelihood of renewed efforts to curtail tax deductions and to close tax “loopholes.” This led to discussion about the possibility of new attempts to fix short-term budget challenges by permanently re-characterizing partnership “carried interest” as ordinary income, which would represent a dramatic increase in taxes on real estate at a time of fragile recovery from the Great Recession.

Owner-developers in the Roundtable audience explained that carried interest (or “promote”) has been used as an investment model in commercial real estate for decades, helping to compensate the general partner in a real estate business venture — often after many years — for substantial risks taken during development and sale of the project (risks such as liability for debts of the partnership, environmental contamination, operational shortfalls, construction delays, and lawsuits).  

Given the clamor on Capitol Hill for corporate tax reform — and for transitioning to a “territorial” approach that would eliminate double-taxation on corporate profits earned abroad — The Roundtable continues to urge policymakers not to “de-couple” individual and corporate taxation. Since many commercial real estate ventures are organized as S corporations, partnerships, limited liability companies (LLCs), or sole proprietorships, their income is subject to the tax rates faced by their individual owners — rates already increased under the New Year’s Day fiscal cliff agreement.

In terms of tax policy, numerous Roundtable members on Wednesday (and at Thursday’s TPAC meeting) also emphasized the need to encourage foreign equity investment in U.S. commercial real estate through legislation to reform the outdated and discriminatory Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

Cover image - 2012 Policy Agenda x175

The Roundtable’s newly released 2013 Policy Agenda (Finding Balance: A Policy Agenda for Long-Term Economic and Fiscal Health)  

As explained in The Roundtable’s newly released 2013 Policy Agenda (Finding Balance: A Policy Agenda for Long-Term Economic and Fiscal Health), the commercial real estate industry needs a capital infusion of roughly $620 billion over the next five years, to help rebalance maturing mortgage loans and facilitate owners’ ability to re-position and transition associated real estate assets to market. [This equity “gap” is due to significant erosion of equity in recent years (only some of which has been restored) as well as lender demands for more equity in transactions.]    

Schumer also touched on immigration reform, being one of the eight Senators who came forward on Monday with a bipartisan set of principles in this area. He and others at Wednesday’s Roundtable gathering expressed optimism that progress on immigration could help pave the way for other bipartisan policy achievements in the year ahead.

Ayotte focused on the need for a simpler, more growth-oriented tax code that lowers the corporate tax rate and boosts U.S. competitiveness abroad. In terms of deficit reduction, she focused on the need to drive down skyrocketing health care costs, saying that “doing nothing” is not an option, as this would lead to insolvency of key federal programs such as Medicare.

She also indicated that, in the wake of the November elections, there is a renewed appetite in Washington for revisiting elements of the 2010 Dodd-Frank Act to make sure it works in a more “sensible” way. In addition to codifying “too big to fail” and fostering the consolidation of smaller banks, she said Dodd-Frank is “a wet blanket on our economy.”

Sen. Angus King SOI 2013 x175

Sen. Angus King
(I-ME)

 Sen. Gillibrand SOI 2013 x175

Sen. Kirsten Gillibrand
(D-NY)

Numerous Roundtable members and trade association representatives (including the Commercial Real Estate Finance Council [CREFC]) raised issues on Wednesday with the simultaneous burdens imposed by Dodd-Frank securitization regulations (the 5% “risk retention” rules) and Basel III capital requirements, saying this could lead to higher borrowing costs (and restrain banks’ ability to lend for commercial real estate). Some also warned about potential limitations on business “end-users’” ability to manage every-day risks (such as interest-rate spikes) through over-the-counter (OTC) derivatives.

Also on the program was Senator Angus King (I-ME), who in November won the seat long-occupied by GOP moderate Sen. Olympia Snowe, and who could play an especially important role as a centrist and independent in an increasingly polarized Senate chamber. King, who is expected to caucus with the Democratic Party, said he saw a “ray of hope” for bipartisan action with Monday’s immigration policy announcement, and said he came to Washington “to make things work on a common-sense basis.”

In terms of the need for balance in Washington policies, he acknowledged the importance of regulation, but said they can be a terrible drag on the economy.

Also offering some fresh perspectives at Wednesday’s forum was Senator Kirsten Gillibrand (D-NY), first sworn in as a U.S. Senator in January 2009 to fill the seat vacated by now-Secretary of State Hillary Clinton (who will soon be succeeded by Sen. John Kerry).

Among other issues, Gillibrand emphasized the importance of extending the federal terrorism insurance program authorized by the Terrorism Risk Insurance Act of 2002 (TRIA) and its subsequent extensions; encouraging the “greening” of the U.S. economy — e.g., through financing incentives for energy retrofits of commercial buildings; and investment in infrastructure improvements such as high-speed rail, which she said could be advanced through public-private partnerships and the creation of a public-private infrastructure bank.

 2013 SOI Cafaro Panel w David Henry

Left to right: Debra A. Cafaro (Chairman and CEO, Ventas, Inc.), Sen. Chris Coons (D-DE), and David Henry, President & CEO, Kimco Realty Corporation)

The 2013 State of the Industry Meeting featured two panel discussions. The first, moderated by Roundtable member Debra A. Cafaro (chairman and CEO of Ventas, Inc.), focused on current market and economic developments as well as what policy actions to expect in 2013. Panel participants included: 

Senator Chris Coons (D-DE) , Senate Committees on Energy and Natural Resources; Foreign Relations; Judiciary

Senator Johnny Isakson (R-GA) , Senate Committees on Finance; Health, Education, Labor and Pensions; Select Committee on Ethics; Veteran’s Affairs; and Co-Chair of the Senate Real Estate Caucus

 David Henry, President & CEO, Kimco Realty Corporation

 Ross Perot, Jr., Chairman, Hillwood  

The second panel of the day focused on crucial issues and market developments regarding capital availability in real estate, which is directly and indirectly affected by the still-unfolding fiscal drama in Washington. Joining panel moderator and Roundtable member Richard Saltzman (president of Colony Capital) to discuss the difficulty of business planning in this kind of environment, and what specific commercial real estate contingencies should be planned for, were: 

Saltzman panel SOI 013 x250

Left to right: Robert Merck, Martin Burger, Richard Saltzman, Thomas Flexner, and Rep. Michael Grimm (R-NY)

  Rep. Michael G. Grimm (R-NY), a member of the House Financial Services Committee who is poised to introduce legislation extending the federal terrorism insurance program 

Roundtable board member Thomas Flexner , Global Head of Real Estate, Citigroup  

Martin Burger , Co-Chief Executive Officer, Silverstein Properties, Inc.  

Robert Merck , Senior Managing Director and Head of MetLife Real Estate Investors, MetLife  

Rounding out the day’s program was an after-dinner discussion with former Senators Kent Conrad (D-ND) and Jon Kyl (R-AZ) about deficit (and debt) reduction, entitlement reform, tax restructuring and other policy issues of the day. 

Kyle and Conrad SOI 2013

Left to right: former Sen. Jon Kyl (R-AZ) and former Sen. Kent Conrad (D-ND)

As former chairman of the Senate Budget Committee and a long-time deficit “hawk,” Conrad restated his concerns about the trajectory of the U.S. debt as well as prospects for a roughly $4 trillion “grand bargain” that would get the nation’s finances back on a sustainable path for the long term. Kyl, who sat on several top committees during his time as a Senator (Judiciary, Finance, etc.), who served in GOP leadership posts, and was a leading voice on immigration issues, offered perspectives on a range of vexing policy issues as well as a behind-the-scenes look at the legislative process itself.

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