Roundtable Weekly - July 12, 2019
Policymakers Under Pressure to Raise Debt Ceiling Before Summer Congressional Recess
New forecasts that the federal government may be unable to pay its bills by the first half of September have put pressure on policymakers to raise the nation's debt ceiling before Congress departs for summer recess – or face the prospect of a national default.
The House of Representatives is scheduled to leave for a six-week recess on July 26 and the Senate one week later; both are set to return on Sept. 9.
- If the debt limit is not increased to meet the nation's financial obligations, the government could miss payments to federal employees for salaries and pensions, debt service to foreign lenders, and potentially interest payments on the federal
- Today, Treasury Secretary Steven Mnuchin wrote to House Speaker Nancy Pelosi (D-CA), stating: "Based on updated projections, there is a scenario in which we run out of cash in early September, before Congress reconvenes. As such, I request that Congress increase the debt ceiling before Congress leaves for summer recess." (CNBC, and Politico, July 12) The House of Representatives is scheduled to leave for a six-week recess on July 26 and the Senate one week later; both are set to return on Sept. 9.
- Pelosi and Mnuchin have been in discussions this week regarding the debt ceiling. She said yesterday that Congress should combine a debt ceiling raise with a budget deal that sets federal spending limits for two-years, and that she is "personally convinced that we should act on the (budget) caps and the debt ceiling … prior to recess." (Politico, July 12)
- Both Pelosi and Senate Majority Leader Mitch McConnell (R-KY) have expressed interest in combining an increase in the debt ceiling with a two-year budget deal. (The Hill, July 12) Congressional leaders are eager to avoid a series of automatic spending cuts known as "sequestration," which will take place without a new deal on budget caps.
- On July 9, McConnell said, "I don't think there's any chance we will allow the country to default. As to the timing, we're going to stay in close communication with the secretary of the Treasury about when that actually must be done, and we'll no doubt do it on a bipartisan basis." (Bloomberg, July 12)
- Aside from reaching agreements regarding the debt ceiling and budget caps, Congress must further come to a deal on federal agency appropriations for FY'20 – to avoid a government shutdown before current FY'19 dollars run out on September 30. Last December and January, the lack of a government spending deal led to a 35-day partial government shut down. (Roundtable Weekly, Feb. 1)
- According to a Treasury report released yesterday, this fiscal year's tax receipts to date have not offset higher federal spending – even though this month marks a historic 10-year record for U.S. economic expansion. (Wall Street Journal, July 11)
- The Treasury figures show the federal deficit grew to $747 billion over the past nine months, 23% more when compared to the same time period last year. The report also projects the deficit to exceed $1 trillion by Sept. 30, the end of the government's fiscal year. (Monthly Treasury Statement and Associated Press, July 11)
This week, the Bipartisan Policy Center (BPC) projected the nation's $22 trillion debt limit could be exceeded in the first half of September, based on new data and analysis. The BPC also reported that federal revenues for Fiscal Year 2019 have been sluggish, with overall revenue growth running at less than three percent. (BPC news release, July 8 and BPC Debt Limit Analysis).
Roundtable Proposes Modifications to Treasury’s Opportunity Zone Rules
The Real Estate Roundtable on July 1 submitted recommended clarifications for final Opportunity Zones tax regulations, which are expected from the Treasury Department before the end of 2019. ( Roundtable comment letter , July 1)
The Real Estate Roundtable on July 1 submitted recommended clarifications for final Opportunity Zones tax regulations.
- Treasury released its first set of proposed Opportunity Zone (OZ) rules in Oct. 2018, followed by expanded guidance in April 2019. The Treasury rulemaking has reduced investor uncertainty and encouraged capital formation, job creation and productive real estate investment in struggling, low-income communities. However, certain questions remain that warrant additional, clarifying guidance. (reference: 169-page Treasury regulations and IRS news release, April 17).
- This month's Roundtable 12-page comment letter to Treasury and the IRS encourages the government officials
to include 10 key clarifications in their final regulations. (The Roundtable submitted prior letters on OZ tax incentives in June 2018 and December 2018.)
The recommendations would:
- clarify that gross section 1231 gain (gain that relates to property used in a trade or business) is eligible for investment in an Opportunity Fund;
- further facilitate the use of "aggregator funds" for multi-asset Opportunity Funds;
- allow existing owners to retain a carried or profits interest when selling property to related Opportunity Fund;
- clarify that the working capital safe harbor applies during the construction of qualifying property;
- encourage investment in languishing Opportunity Zone properties by treating investment in vacant property favorably;
- promote ambitious and transformative projects by allowing assets to be aggregated together under the substantial improvement test;
- ensure that property that straddles inside and outside of an Opportunity Zone qualifies;
- treat property that will be demolished as "unimproved land" for Opportunity Zone purposes;
- confirm that investors qualify for the tax benefits when an Opportunity Zone business sells an asset after 10 years; and
- make certain additional clarifications related to Opportunity Zones and REITS.
Roundtable President and CEO Jeffrey DeBoer states in the letter, "Partnering with local leaders and entrepreneurs, real estate-focused opportunity funds will spur long-term, patient investment that drives productive economic activity. Real estate projects financed through opportunity funds will generate well-paying jobs, improved infrastructure, and a built environment that helps attract and retain new businesses and employers. Regulatory clarifications along the lines described above will help ensure that the Opportunity Zone incentives fulfill their ambitious objectives."
Cushman & Wakefield's new publication – " In the Opportunity Zone: Location. Timing. Capital " – reports that capital inflows into OZs could increase by $100 billion.
- Cushman & Wakefield's new publication – "In the Opportunity Zone: Location. Timing. Capital" – reports that capital inflows into OZs could increase by $100 billion. The company is tracking 138 large CRE funds targeting more than $44B in equity that intend to invest in multiple product types. The report also states Opportunity Zone prices are rising 14% for redevelopment projects and 20% for land sites. (Commercial Property Executive, July 8)
Additionally, Forbes and the Sorensen Impact Center at the University of Utah have launched a nation-wide competition to feature the top leaders, investors and entrepreneurs who are pioneering creative approaches to equitably revitalize distressed OZ communities throughout the nation. Applications and nominations for the Forbes OZ 20 close Aug. 31. (Forbes, July 11)
Commerce Dept. Issues Preliminary Determinations in Fabricated Structural Steel Trade Dispute
The U.S. Department of Commerce on July 8 found that government subsidies to Canadian exporters of fabricated structural steel (FSS) were not large enough to justify any new countervailing duties. In contrast, the agency found that unfair subsidies
provided by the other two implicated countries warrant new duties in the range of 13% (Mexico) to 36% (China). ( Commerce Dept. Fact Sheet ,
Fabrocated structural steel is a key material used in constructing the superstructure of major real estate and infrastructure projects, including high-rise developments, bridges, parking decks and ports.
- FSS is a key material used in constructing the superstructure of major real estate and infrastructure projects, including high-rise developments, bridges, parking decks and ports. (Roundtable Weekly, March 8)
- A countervailable subsidy is financial assistance from a foreign government that benefits the production of goods by foreign companies and is limited to specific enterprises or industries, or is contingent either upon export performance or upon the use of domestic goods over imported goods. Canada's FSS subsidies were determined to be at de minimis levels of less than 1 percent and therefore do not warrant tariffs. (GlobeNewsWire, July 9)
- As a result of its preliminary decision, Commerce will instruct U.S. Customs and Border Protection to collect cash deposits from importers of fabricated structural steel from China and Mexico. (The Straits Times, July 9)
- In 2018, FSS imports to the United States were valued at $897.5 million from China; $622.4 million from Mexico; and $722.5 million from Canada, according to the Commerce Dept.
- The Roundtable wrote to the U.S. International Trade Commission about the FSS issue in March and Commerce Secretary Wilbur Ross in June, urging a cautious approach to the investigation and emphasizing the potential economic harm that new tariffs could cause.
- Separately, the quasi-judicial FSS investigation will determine whether exporters in the three countries have engaged in unfair dumping, which could also lead to new duties. Dumping occurs when an exporter sells a product in the United States at a price that is below "normal value," such as the price at which the foreign producer sells the merchandise in its own domestic market.
Preliminary determinations on dumping are expected on September 5, and final determinations on the countervailing subsidies are expected on November 18.