Roundtable Weekly -- December 20, 2019

Terrorism Risk Insurance Program

Seven-Year TRIA Reauthorization Passed as Part of $1.4 Trillion Spending Bill

A seven-year reauthorization of the Terrorism Risk Insurance Act (TRIA) was approved this week by the House and Senate as part of a year-end funding bill (H.R. 1865).  The provision reauthorizes TRIA through 2027, a year ahead of its slated sunset date of Dec. 31, 2020. (TRIA provisions on pages 1233–1236 of the year-end funding legislation). 

The measure is part of a massive $1.4 trillion congressional spending deal to fund the government until the end of the fiscal year – Sept. 20, 2020.  President Trump is expected to sign two separate funding bills to keep the government open past midnight tonight. 

Roundtable Chair Debra Cafaro (Ventas, Inc.) stated, “The Real Estate Roundtable is pleased that TRIA will be extended until 2027.  This federal terrorism insurance backstop was enacted following 9-11 and has been extended and reformed several times since. We cannot overstate the valuable safety and liquidity that the program brings to the US economy, businesses of all manner and commercial real estate markets.”

A long-term, “clean” reauthorization of TRIA, well in advance of its expiration, has been a top policy goal of The Roundtable.  This was achieved a full year ahead of schedule.  (Roundtable background on TRIA)

In addition to TRIA, the omnibus appropriations bill (H.R. 1865) contains several other positive measures affecting real estate.  The tax and funding extensions include: 

  • The EB-5 Regional Center Program, which provides visas to foreign nationals who pool their investments in regional centers to finance U.S. economic development projects.  The program would be extended until Sept. 2020.  Department of Homeland Security (DHS) regulations that took effect in November presently govern key elements of the EB-5 program regarding investment levels and Targeted Employment Area (TEA) definitions.   

  • The National Flood Insurance Program.  Without the extension, the program’s borrowing authority would have been reduced from $30.4 billion to $1 billion. The program would also be extended until Sept. 2020.   (BGov and CQ, Dec. 20)

  • Tax measures would be extended through the end of 2020.  They include (1) the section 179D tax deduction for energy efficient commercial building property; (2) the section 25C tax credit for energy efficient improvements to principal residences; (3) the section 45L tax credit for construction of new energy efficient homes; (4) the tax exclusion for home mortgage debt forgiveness; (5) the tax deduction for mortgage insurance premiums; and (6) the New Markets Tax Credit;

  • The Brand USA program would be extended through fiscal year 2027.  Brand USA promotes travel to the U.S. through a public-private partnership that is funded through private-sector donations and funds collected from foreign visitors to the U.S.

This week also saw the House pass legislation (H.R. 5377) that would temporarily raise and then eliminate for two years the $10,000 cap on state and local tax (SALT) deductions, which would be paid for by permanently raising the top individual tax rate to 39.6%.  This “messaging” bill is unlikely to be taken up in the GOP-controlled Senate and President Trump has also threatened to veto it.

After a flurry of year-end policymaking amid impeachment proceedings, both chambers of Congress recessed today and will return in early January.

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Opportunity Zones

Final Opportunity Zones Regulations Remove Uncertainty, Should Mobilize Real Estate Investment in Low-Income Communities

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The Treasury Department yesterday released final regulations implementing Opportunity Zones (OZ) tax incentives.  The details of the 544 pages of regulations are still under review, but the highly anticipated rules appear to embrace key Roundtable recommendations aimed at spurring capital formation and economic development in low-income communities.  (Roundtable comment letter, July 1, 2019)

The final regulations provide helpful guidance in several areas that should remove taxpayer uncertainty and allow productive real estate investments in low-income communities to move forward. 

Specifically, the final rules:

  • Clarify the types of gains that may be invested in opportunity funds and when.  For example, they amend a general rule in the proposed regulations that only capital gain may be invested in an opportunity fund.  The rules allow a taxpayer to invest the entire amount of gain from the sale of business property, which can include gain from the sale of real estate.

  • Clarify when gain may be excluded from tax after an investment is held for a 10-year period.  The proposed rules did not allow an investor to exclude gain when the subsidiary of an opportunity fund sold an asset.  The final regulations liberalize these rules, which should greatly facilitate the formation and operation of real estate-focused opportunity funds that invest in multiple properties.

  • Include important changes to how an investment is measured when testing whether an opportunity fund has substantially improved real estate.  The rules provide opportunity funds with greater flexibility to aggregate multiple assets.  For example, they permit a group of two or more buildings located on the same parcel(s) of land to be treated as a single property—thus eliminating the need to increase the basis of each building by 100 percent.

  • Allow a vacant property to be treated as being put to its original use in an opportunity zone if the property has been vacant for a continuous period beginning one year prior to the census tract’s designation as an opportunity zone.  The proposed regulations would have required a property to be vacant for five years.  A property that meets the original use requirement is not subject to the substantial improvement requirement.

  • Provide important refinements to the previously proposed working capital safe harbor.  The safe harbor provides opportunity funds with a minimum of 31 months to invest their working capital in qualified opportunity zone property, rather than the six months suggested in the statute. This longer runway aligns better with the practical realities of real estate investment.  The final regulations ensure that an opportunity fund that is using working capital to improve real estate will be able meet the opportunity zone requirement that it be engaged in a trade or business.

The most recent Roundtable regulatory recommendations were submitted on July 1, 2019.  The Roundtable also submitted prior letters on the OZ tax incentives in June 2018 and December 2018

The Roundtable has strongly supported the Opportunity Zone tax incentives since their enactment as a potentially powerful catalyst for transformative real estate investment in economically struggling parts of the country.  (GlobeSt.com interview with Roundtable President and CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick –July 16, 2018).

The Roundtable’s Tax Policy Advisory Committee and its Opportunity Zone Working Group will be analyzing fully this week’s 544 pages of rules and will report on the details during The Roundtable’s Jan. 28-29 State of the Industry meeting. 

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Foreign Investment in Real Property Tax Act (FIRPTA)

Bipartisan Senate Letter Urges Treasury to Withdraw IRS Notice Hindering Foreign Investment in U.S. Real Estate

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This week, 11 Senators sent a bipartisan letter urging Treasury Secretary Steven Mnuchin to withdrawal section 2 of IRS Notice 2007-55, which applies U.S. capital gains tax to certain types of inbound real estate investment transactions that were previously treated as nontaxable under the Foreign Investment in Real Property Tax Act (FIRPTA).  (Roundtable background on FIRPTA)

  • Specifically, prior to the Notice, a domestically controlled REIT could sell its assets and liquidate, and the liquidation would be treated as a sale of stock (and a foreign investor in the REIT would not owe U.S. capital gains tax).  This “sale of stock” treatment is consistent with how corporate liquidations are regularly taxed.  The IRS Notice reversed the longstanding tax treatment of these transactions and took the position that a liquidating distribution of a domestically controlled REIT is a taxable sale of the underlying real estate assets.
  • The letter, led by Sens. Johnny Isakson (R-GA) and Robert Menendez (D-NJ), notes, “This unintended tax burden discourages foreign investors from putting capital to work to create jobs and improve our communities.”
  • The group of Senators, which includes Senate Banking Committee Chairman Mike Crapo (R-ID) and the Democratic co-chair of the Senate Real Estate Caucus, Senator Ben Cardin (D-MD), requests that Treasury restore Congress’s intended treatment of liquidating REIT distributions, encourage increased foreign investment in U.S. real estate, and further spur job creation in the United States by reversing the IRS Notice.  According to the Senators, “trillions of dollars in global capital are estimated to be available that could be invested in the U.S. real estate market.  Our tax policies should welcome such investment, not discourage it.” (Senators’ letter, Dec. 18)
  • In addition to Senators Isakson, Menendez, Crapo, and Cardin, the signatories included: Sen. Pat Roberts (R-KS), Sen. John Thune (R-SD), Sen. Debbie Stabenow (D-MI), Sen. Rob Portman (R-OH), Sen. Steve Daines (R-MT), Sen. Tom Carper (D-DE), and Sen. Tim Scott (R-SC).  All eleven signatories are members of the Senate Finance Committee.  A similar letter was sent in October 2017 by 32 Members of the House Ways and Means Committee.
  • The Roundtable’s Tax Policy Advisory Committee (TPAC) Chairman Frank Creamer Jr. (FGC Advisors, L.L.C.), said, “The efforts of Senators Isakson, Menendez and the nine other signatories demonstrates the strong, bipartisan support for reducing the burden of FIRPTA on real estate jobs and investment.”  Creamer added, “FIRPTA is an outdated law that imposes a discriminatory capital gains tax on foreign investors in U.S. real estate and infrastructure.  It does not apply to any other asset class.  Outside of complete FIRPTA repeal, Treasury could take a meaningful regulatory step and repeal IRS Notice 2007-55.”
  • In April 2019, Representatives John Larson (D-CT) and Kenny Marchant (R-TX) introduced the Invest in America Act (H.R. 2210), a bill to repeal FIRPTA altogether.  The Roundtable and 19 national trade organizations – representing every aspect of constructing, developing, financing, owning, and managing real estate and infrastructure in the United States – wrote to Ways and Means Committee Members and other key House lawmakers urging them to support the legislation. (Comment Letter, March 28).

President Trump in early 2017 directed the Treasury Department to review existing tax regulations to identify rules that are unnecessarily burdensome.  Repeal of IRS Notice 2007-55 would represent another significant step toward reforming FIRPTA by reducing a tax regulatory burden.

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Roundtable In The News

Roundtable President and CEO Jeffrey DeBoer Recognized Among “The Hill’s Top Lobbyists 2019”

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The Washington, DC policy news publication The Hill on Dec. 12 released its annual Top Lobbyists list, with includes The Real Estate Roundtable’s President and CEO, Jeffrey DeBoer.

  • The list recognizes several Washington industry representatives for their 2019 advocacy efforts and recognizes “the people who wielded their clout and knowledge most effectively on behalf of their clients,” according to the publication.

  • The Hill  list also notes, “The ranks of Washington’s policy experts and influencers run deep, but these are the players who stand out for delivering results for their clients in the halls of Congress and the administration.”

  • The Roundtable’s DeBoer commented, “I am proud to work for an organization of industry leaders and with a staff of effective advocacy professionals who are all committed to a fact-based, non-partisan approach to economic growth policies – an approach that benefits the country, its communities and commercial real estate markets.  This recognition by The Hill is appreciated and is a compliment to all those who work with The Real Estate Roundtable.”

  • DeBoer was also quoted Dec. 12 in Bisnow on “5 Policy Issues That Could Affect Commercial Real Estate In 2020.”

  • During a whirlwind policy month in DC that saw the passage of a $1.4 trillion spending deal with many positive policies affecting CRE – and the United-States-Mexico-Canada Agreement – DeBoer participated in a discussion that addressed the USMCA and other national issues.

  • On the USMCA, DeBoer noted, "If you're in the real estate business, you want the underlying economy to be as healthy as possible, and the lack of an agreement here had been a drag on overall economic activity in the country."  He added. "This agreement will both be a direct benefit in terms of the trading of materials that are used to construct assets, but also an indirect benefit because the underlying economy and businesses that trade goods will benefit from this."

  • DeBoer also addressed the issue of affordable housing and GSE reform in the upcoming year.  He stated, "We want to see a positive debate where people talk about the real problems of housing availability in America, which has to do with the permitting process, the ability to develop dense properties, the ability to use the Section 8 and the Low Income Housing Tax Credit programs, and maybe those things should be expanded." DeBoer also said, “"GSE reform is not going to solve the housing problems, but it's going to be an aspect of housing reform in the country along with a variety of other things that need to be done."

These policy issues and others that will comprise The Roundtable’s 2020 National Policy Agenda will be discussed during the organization’s State of the Industry Meeting on Jan. 28-29 in Washington, DC.

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