House Lawmakers Focus on Institutional Ownership of Single-Family Homes
Rent increases, financial barriers to homeownership, and the growing role of institutional investors in single-family home markets were the focus of two hearings in the House this week. Committee Democrats blamed corporate landlords for exacerbating affordable housing problems as Republicans emphasized high inflation and excessive government spending as the root causes. (Axios, June 29 and GlobeSt, June 30)
Views from the House
- During the June 28 House Financial Services Subcommittee on Oversight & Investigation hearing, “Where Have All the Houses Gone? Private Equity, Single Family Rentals, and America’s Neighborhoods,” Chair Al Green (D-TX) stated policymakers are examining “… troubling issues regarding the mass predatory purchasing of single-family homes by private equity firms, including the adverse impact predatory purchasing has had on first-time home buyers, the working class, and people of color.” (July 28 House committee hearing memo)
- Subcommittee Ranking Member Tom Emmer (R-MN) countered that an 8.6% inflation rate is the cause of current affordable housing challenges—and Congress should focus instead on lowering the cost of living for Americans. (Hearing video, June 28)
- A June 29 full committee hearing entitled, “Boom and Bust: Inequality, Homeownership, and the Long-Term Impacts of the Hot Housing Market” included testimony from Sam Chandan (above)—Director of the Center for Real Estate Finance Research and Professor of Finance, NYU Stern School of Business—and a member of The Real Estate Roundtable’s Research Committee. (July 29 House committee hearing memo)
- Chandan cited Freddie Mac research published this month that shows, “Nationally, the institutional investor share of the market has risen since just prior to the pandemic, but still only accounts for approximately 2.5 percent of home sales. By way of comparison, individual investors and other non-institutional investors account for 24 percent of the market, nearly ten times the institutional share.” (Chandan’s testimony and hearing video, June 29)
- Chandan also noted that housing equity gaps and the shortfall of affordable housing can only be addressed with a long-term, multifaceted approach that includes reforming local building codes and zoning, improving the supply of construction materials, and investments in public transportation that open new land development opportunities.
- David Howard, executive director of the National Rental Home Council, submitted a statement for the hearing record that included: “As a multitude of data consistently shows, the answer to the question posed in the title of this week’s hearing, ‘Where Have All the Houses Gone?’ is they were never built. Simply stated, the supply of housing in the United States has not kept pace with demand.”
- Roundtable President and CEO Jeffrey DeBoer, above, stated, “Expanding the supply and availability of affordable housing deserves a coordinated local, state, and national policy action plan. Local zoning restrictions, permitting issues, and the oversized influence of NIMBYs—coupled with high and now significantly rising labor and material costs—are the true factors limiting housing supply, and in turn, increasing housing costs.”
The Roundtable’s 2022 Annual Report states, “The affordable housing shortage is one of the most important and complex political problems in America, and The Roundtable continues to work with our national real estate organization partners to jointly advocate for policies that will help enhance the supply of safe, affordable housing.” (Housing section, 2022 Annual Report)
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New Research Details Trends in Like-Kind Exchanges and Impact on US Economy
New research highlights emerging trends related to real estate like-kind exchanges (LKEs) and their growing importance to the US economy. The report by EY economist and former Treasury Deputy Assistant Secretary for Tax Analysis Robert Carroll was presented to The Real Estate Roundtable’s Tax Policy Advisory Committee (TPAC), above, on June 17. EY partnered with the Real Estate Like-Kind Exchange Coalition, which includes The Roundtable, to produce the updated LKE report with 2021 data. (TPAC slide presentation, June 17)
LKE Data and Trends
- LKEs under section 1031 of the tax code allow businesses to defer capital gains tax on the disposition of real estate if the gain is used to acquire replacement property of like kind within six months.
- The EY report—“Economic Contribution of the Like-Kind Exchange Rules to the US economy in 2021: An Update”—updates EY’s prior research that used LKE data from 2019.
- The survey found that the dollar volume of like-kind exchange activity and number of transactions increased by 70% between 2019 and 2021. The increase was identified by a survey of qualified intermediaries as the US economy recovered from the COVID recession.
- According to the author, the increase in LKE activity “is likely due, in part, to the transition of many qualified real property assets to new or modified uses to meet post-pandemic business models and tenant needs, a trend that may continue, at least to some degree, for the next several years.”
LKE Economic Impact
- The EY report estimates the impact of like-kind exchange rules on the cost of capital and assesses the likely impact of section 1031 on investment decisions and investment levels. EY’s significant findings include:
- Job growth and labor income
Overall, economic activity generated by Section 1031 exchanges in 2021 supported 976,000 jobs and $48.6 billion of labor income.
- Gross Domestic Product
Like-kind exchanges generated $97.4 billion in value added in the United States in 2021. “Value added” measures a sector’s or industry’s contribution to the production of final goods and services.
- Federal, state, and local tax revenue
Taxpayers engaged in like-kind exchanges—along with suppliers and related consumer spending—were estimated to generate approximately $13.1 billion in federal, state, and local taxes during 2021.
- Job growth and labor income
- The EY research builds on the groundbreaking academic research on LKEs commissioned by The Roundtable and other members of the Real Estate Like-Kind Exchange Coalition at the height of the tax reform debate. This work by Professors David Ling (Univ. Fla.) and Milena Petrova (Syracuse U.) was subsequently published in 2020 in the peer-reviewed Journal of Real Estate Literature here and here.
The Roundtable’s Tax Policy Advisory Committee (TPAC) will continue working to raise awareness of the role that like-kind exchanges play in supporting the health of the US economy and the stability of real estate markets.
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EPA Highlights Federal Resources to Help Standardize State, Local GHG Laws on Buildings
The U.S. Environmental Protection Agency (EPA) released a policy brief on Tuesday that provides a “formal recommendation” on metrics that states and cities should consider as they may develop GHG-related mandates on commercial and multifamily buildings.
Trends in Building Performance Standards (“BPS”)
- A national BPS law does not exist (and is not on Congress’s horizon) for emissions limits or efficiency requirements on private sector buildings.
- Nor do U.S. agencies have any current ability to create a general federal building energy code or enact rules that establish GHG mandates on real estate assets, as made evident by yesterday’s SCOTUS decision in West Virginia v. EPA. (SCOTUSblog, June 30)
- However, a number of states and cities have developed or are considering their own climate-related building regulations according to the National BPS Coalition launched by the Biden Administration.
- Local BPS laws can require CRE owners to pay for energy efficiency retrofits and building electrification projects—or else pay fines and penalties.
- The White House Council on Environmental Quality (CEQ) is creating a BPS for buildings owned by the federal government. Development of the “federal BPS” is reportedly delayed because of “data shortfalls.” (Bloomberg Law, June 29)
RER Seeks Voluntary Federal Guidelines
- The Real Estate Roundtable has repeatedly expressed to policymakers—including the Federal Energy Regulatory Commission (FERC)—that workable, federal-level, voluntary guidelines are needed to help standardize the “hodge-podge” of divergent local laws that can vary in their regulations on buildings.
- The Roundtable’s June 10 comment letter to the SEC urged the creation of a “safe harbor” for proposed emissions disclosures that are based on the best available GHG calculation tools, standards and data offered by federal agencies. (Roundtable Weekly, June 10).
- EPA branch chiefs heard from The Roundtable about the need for federal guidance to help unify local BPS laws at the June 17 meeting of the Sustainability Policy Advisory Committee, above. (Roundtable Weekly, June 17) SPAC is chaired by Tony Malkin (Chairman, President, and CEO, Empire State Realty Trust) and vice-chaired by Ben Myers (VP, Sustainability, BXP).
EPA’s Recommended BPS Metrics
- SPAC members participated in a number of EPA-sponsored “workshops” that led to the recommended federal BPS metrics.
- EPA’s recommended metrics are intended to “develop consistent policies that reflect the business realities faced by building owners.” (EPA's Policy Brief and Recommended Metrics publication, above)
- Specifically, EPA recommends that any locality considering a BPS should focus on measures within a building owner’s ability to control—such as “on-site” reduction of energy usage or “direct” GHG emissions.
- EPA also recommends that any energy-usage intensity requirement should not be “one size fits all.” Rather, BPS rules should be “normalized” to reflect variables such as a building’s type, hours of operation, and weather conditions.
- EPA’s recommendations are preferable to other proposals that could make CRE owners responsible for how “clean” the electric grid should become—an issue beyond owners’ control. (Roundtable Weekly, April 9, 2021).
A number of localities are contemplating laws to ban natural gas and other fossil fuels within their borders. EPA’s encourages any such jurisdiction to consider long-term, published, and incremental “phase-out” schedules so building owners can “plan for costly and difficult equipment replacements.”
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Roundtable Weekly Will Resume Publication on Friday, July 15
Roundtable Weekly will resume publication on Friday, July 15 after Congress returns from the holiday recess. Recent issues of RW can be searched by keyword here.
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