- Washington, DC Mayor Reiterates Roundtable’s Call for Federal Personnel Return-to-Work
- GOP Speaker Votes Stymie Start of House Session in Divided 118th Congress
- Treasury Dept. Issues New Rules on Taxation of Foreign Investment in U.S. Real Estate
Washington, DC Mayor Reiterates Roundtable’s Call for Federal Personnel Return-to-Work
Washington, DC Mayor Muriel Browser this week reiterated views expressed by The Real Estate Roundtable to President Biden about getting more federal workers back to the workplace and converting underutilized commercial real estate spaces into affordable housing. (ABC News, Jan. 2 and Roundtable letter, Dec. 12, 2022)
Federal Employees & Remote Work
- “The federal government represents one-quarter of D.C.’s prepandemic jobs and owns or leases one-third of D.C.’s office space,” Bowser, above, said in her third inaugural address on Jan. 2. “We need decisive action by the White House to either get most federal workers back to the office most of the time, or to realign their vast property holdings for use by the local government, by nonprofits, by businesses and by any user willing to revitalize it.” She added that converting office space into housing is the key to unlocking the potential of a reimagined, more vibrant downtown. (MarketWatch, Jan. 4)
- Prominent DC office landlords sent a letter on Nov. 28 to the District’s chief financial officer about eroding local market conditions, including increased vacancy rates, lackluster leasing activity, equity flight, and a financing drought—especially for assets with high levels of vacancy. The landlords warned that DC may face a significant loss of tax revenue that could threaten the city’s fiscal health, and that other cities are experiencing similar conditions. (Commercial Observer, Nov. 29 and Bisnow, Nov. 28)
- A recent federal employee survey from the U.S. Office of Personnel Management reports that about 42% of federal employees “telework” at least a few days per week.
- The federal government maintains facilities in 2,200 communities, influencing local leasing activities, property values, and surrounding small businesses. (Roundtable Weekly, Dec. 16, 2022)
- Federal proposals aimed at encouraging more Americans back to the workplace, including enhanced child- care and eldercare benefits, are under consideration as the administration formulates its 2023 economic agenda. (Wall Street Journal and The Hill, Dec. 20)
- Real Estate Roundtable Chair John Fish, above right, and President & CEO Jeff DeBoer, left, wrote to President Biden last month about the consequences of federal agencies’ promotion of permanent remote work—and how remote work magnifies the ongoing, harmful economic impacts on cities, local tax bases, and small businesses. (Roundtable Weekly, Dec. 2 and Dec. 16, 2022)
- Roundtable Chair John Fish also recently responded to plans by the state of Massachusetts to vacate at least 355,000 square feet of its office footprint. Fish told The Boston Globe on Dec. 27 that government agencies at all levels should consider the effects on small businesses and property taxes when evaluating their back-to-office policies.
- The Roundtable comments also expressed supported legislation that could help facilitate “the increased conversion of underutilized office and other commercial real estate to much-needed housing.” The letter stated that incentives for conversion projects could be modeled on the rehabilitation tax credit as a cost-effective means to increase the housing supply, create jobs, and boost the local tax base.
How cities are responding to the impact to hybrid work arrangements will be one of several topics that Miami Mayor Francis Xavier Suarez, who also serves as president of the U.S. Conference of Mayors will discuss with Roundtable members at our Jan. 24 State of the Industry Meeting in Washington.
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GOP Speaker Votes Stymie Start of House Session in Divided 118th Congress
The protracted vote process for Republican House Speaker this week stalled the start of the new GOP House majority in a narrowly divided 118th Congress, portending difficulties ahead for policymakers to reach agreement on raising the debt limit this summer and passing FY24 funding for the government by Sept. 30. This speaker election is the longest since 1859. (Semafor, Jan. 6 | The Hill, Jan. 5 | Bloomberg Law, Jan. 3)
House Challenges Ahead
- Until a House speaker is elected, new representatives cannot be sworn in, lawmakers cannot introduce bills, and committee chairs (including leadership of the important tax-writing House Ways and Means Committee) cannot be confirmed. (BGov, Jan. 6 and ABC News, Jan. 5)
- Sen. John Cornyn (R-TX), an adviser to the Senate GOP leadership team, said raising the debt limit with a slim, five-seat Republican majority in the House that can be leveraged by a small group of staunch conservatives, “will probably be the single biggest challenge the House will have.” (The Hill, Jan. 5)
- Failure to raise the U.S. debt limit would lead to a first-ever default, causing financial chaos in the global economy. In 2011, an impasse between Republicans and President Obama over increasing the debt limit led to a temporary downgrade of the credit of the United States. The crisis ended after an agreement was reached to cut more than $2 trillion in spending over a decade. (New York Times, Dec. 9, 2022 and Washington Post, Dec. 5, 2022 | Congressional Research Service, Nov. 22, 2022)
- Additionally, funding for the government expires on Sept. 30, the end of the federal fiscal year. A legislative standoff on spending priorities for FY24 after Sept. 30 could lead to either a “Continuing Resolution” to fund the government programs at current levels or a partial shutdown. (CQ, Dec. 29, 2022)
The Regulatory Front
- The new Republican majority in the House is expected to bring intense oversight of government programs funded by the Inflation Reduction Act (IRA) passed by Congress in August—and increased scrutiny of proposed regulations that could impact commercial real estate. (Roundtable Weekly, Aug. 12, 2022)
- The IRA included nearly $370 billion in climate spending—the largest federal clean energy investment in U.S. history—with measures important to CRE. [See Roundtable Fact Sheets on the IRA & CRE: Clean Energy Tax Incentives (Sept. 20) and Revenue Provisions (Aug. 17)]
- The Real Estate Roundtable submitted extensive comments to Treasury and the IRS on Nov. 4 that address various clean energy tax incentives in the IRA. (Nov. 4 letter and Roundtable Weekly, Aug. 12)
- The Roundtable also plans to submit comments by Jan. 18 to the Environmental Protection Agency on EPA federal grant programs that could impact CRE.
- Securities and Exchange Commission (SEC) climate disclosure regulations are now expected by April. The proposed rules would require all registered companies to disclose material financial risks related to climate change, and may include new disclosure requirements for “Scope 3” GHG emissions. The Roundtable submitted extensive comments to the SEC about the proposal on June 10. (Roundtable Weekly, June 10, 2022)
Policymaking in the 118th Congress and regulatory proposals affecting CRE will be among the topics discussed during The Roundtable’s Jan. 24-25 State of the Industry Meeting in Washington, DC.
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Treasury Dept. Issues New Rules on Taxation of Foreign Investment in U.S. Real Estate
On December 28, Treasury and the IRS released new tax regulations affecting foreign investment in U.S. real estate.
- Among the changes, a proposed rule would repeal a long-standing private letter ruling that foreign investors have relied on when structuring inbound investments.
- Under current law, shareholders of domestically controlled REITs are not subject to the Foreign Investment in Real Property Tax Act (FIRPTA)—a statutory regime that subjects foreign investors to capital gains tax on their U.S. property investments.
- The proposal, if finalized, would expand the reach of FIRPTA by denying a REIT’s status as domestically controlled if a U.S. corporate shareholder of the REIT is foreign-owned. In other words, the rule would look through a domestic C corporation that owns the REIT, even if the C corporation is a U.S. taxpayer that pays U.S. income tax.
- The proposed regulation surprised foreign investors and real estate fund managers who have relied on a 2009 IRS private lettering rule, which held that a domestic C corporation that owns shares in a REIT is a U.S. owner for purposes of determining whether the REIT is domestically controlled.
- The proposed rule appears to conflict with policies underlying FIRPTA-related ownership attribution changes enacted in the 2015 PATH Act. As a practical matter, the tax consequences of the proposal are retroactive because they would apply to existing investments made years ago. (Weil Tax Alert and Skadden Insights)
Additional Provisions & Regulations
- Other provisions in the proposed regulations are more favorable. For example, they include rules that allow a sovereign wealth fund to preserve the tax exemption applicable to foreign governments if the fund has only a minority, non-controlling interest in a U.S. real estate business.
- Simultaneously, Treasury also released final regulations last month related to the FIRPTA exemption for foreign pension funds, which the Roundtable worked to enact in 2015. The final regulations are largely positive and should facilitate even greater investment in U.S. real estate by qualified foreign pension funds.
The Real Estate Roundtable’s Tax Policy Advisory Committee (TPAC) has created a working group to develop formal comments and respond to the recent Treasury releases.
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