Capital and Credit - Volcker Rule

The Fed and FCIC Vote to Simplify and Ease Volcker Rule

A proposal to simplify and ease the Volcker Rule, which restricts proprietary trading practices at banks and is enforced by five separate federal agencies, was unanimously approved this week by both the Federal Reserve and Federal Deposit Insurance Corp. (FDIC). (Roundtable Weekly, May 25)

The Fed's proposal is part of a broader regulatory rollback.  (“ The Volcker Rule’s Proposed Revision Could Add Liquidity To CMBS ” – GlobeSt, May 31)

  • The nearly 400-page proposal, known as Volcker 2.0, would seek to simplify regulatory requirements by giving banks new quantitative “bright-line rules” to provide more clarity on what activities are prohibited and permitted. The Fed proposal is part of a broader regulatory rollback, which includes the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) that included Roundtable-supported revisions to the Basel III High Volatility Commerical Real Estate (HVCRE) Rule
  • For CRE, the Volcker Rule has put a damper on secondary market trading of commercial mortgage backed securities (CMBS) by limiting the ability of banks to hold inventories of secondary market securities, thereby diminishing market liquidity.  In addition to restricting banks from buying certain securities for their own accounts (so-called proprietary trading), it also has prohibited them from investing in hedge or private-equity funds – including real estate.  (“ The Volcker Rule’s Proposed Revision Could Add Liquidity To CMBS ”  – GlobeSt , May 31)
  • Real Estate Roundtable President and CEO Jeffrey DeBoer commented on the Volker Rule proposal. “This positive action will benefit liquidity and the commercial mortgage backed securities market, potentially increasing investment in job-creating construction activities," DeBoer said.
  • One of the most significant changes in the Volcker 2.0 proposal would give banks more latitude by making it easier for them to show they are trading to help clients — a permitted activity known as market making  — rather than proprietary trading .
  • In a memorandum to the Fed's Board of Governors, Fed Vice Chairman for Supervision Randall Quarles details the changes in the proposal .
  • In a January 2012 comment letter  to the Federal Reserve and other financial regulatory agencies, the Roundtable raised concerns about the unintended consequences of the Volcker Rule that could "negatively impact liquidity and capital formation in commercial real estate."

The Fed and its regulatory partners are seeking public comment on its Volcker rule reform proposals. The Roundtable plans to work with its Real Estate Capital Policy Advisory Committee (RECPAC) to submit comments before a final rule is expected to be in effect by January 1, 2019.

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Trump Administration Imposes Tariffs on Imported Steel and Aluminum from European Union, Canada and Mexico

The Trump Administration today imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports from the European Union, Canada and Mexico, sparking rebukes from congressional Republicans and foreign policymakers, who have threatened retaliatory measures.

The Trump Administration imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports from the European Union, Canada and Mexico, sparking rebukes from congressional Republicans and foreign policymakers, who have threatened retaliatory measures.

  • When the steel and aluminum tariffs were initially proposed in March, an exemption was granted until June 1 for certain trade partners, including Canada, Mexico and the EU – yet negotiations about the Administration's domestic production concerns were not resolved by today's deadline. 
  • Roundtable President and CEO Jeffrey DeBoer noted the commercial real estate industry's concerns, stating "For every job in the steel production industry, there are more than 50 jobs in the US construction industry (140,000 vs. 7-10 million). New tariffs on construction materials like steel could have the unfortunate, unintended side effect of raising construction costs and reducing jobs in real estate development." (Roundtable Weekly, March 9) 
  • According to the U.S. Department of Commerce, the U.S. imported 34.6 million metric tons of steel last year, a 15% increase from 2016.  The International Trade Administration reports the largest supplier of steel to the U.S. is Canada, accounting for 77% – while Mexican steel accounts for about 9% of U.S. imports. USA Today reports that the majority of that metal is used in construction, auto manufacturing and appliances. (USA Today, May 31) 
  • House Ways and Means Chairman Kevin Brady (R-TX) today stated, "These tariffs are hitting the wrong target. When it comes to unfairly traded steel and aluminum, Mexico, Canada, and Europe are not the problem-China is. This action puts American workers and families at risk, whose jobs depend on fairly traded products from these important trading partners," Brady said. 
  • Sen. Mike Lee (R-UT) said he would introduce legislation next week to curtail the president's powers to impose tariffs for reasons of national security. (The Hill, June 1) 
  • "You don't treat allies the same way you treat opponents," Sen. Ben Sasse (R-NE) stated.  "Blanket protectionism is a big part of why we had a Great Depression. 'Make America Great Again' shouldn't mean 'Make America 1929 Again.'"  

In the Federal Reserve's latest "Beige Book" about economic conditions, positive growth is tempered by widespread concerns about trade tariffs. The report summary also notes that steel and aluminum prices rose, "sometimes dramatically" due to recent duties imposed by the Trump Administration. (Roundtable Weekly, March 9)  The Beige Book is one of the first official reports showing the economic impact of the new tariffs on domestic business. (Wall Street Journal, April 18)

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Economic Growth - Travel & Tourism - Tourism

Roundtable, Industry Coalition Voice Concerns That “Enhanced Vetting” Proposal Could Dampen Economy by Deterring International Visitors to U.S.

A multi-industry travel and tourism coalition that includes The Real Estate Roundtable submitted formal comments on May 29 urging the State Department to withdraw an "enhanced vetting" proposal for visitors traveling to the U.S. – a dramatic expansion of information collection that could further reduce the downward trend of in-bound tourism and its significant economic benefits.  The Roundtable is also part of the  VisitUS Coalition , which expressed concerns about the proposal in April.  [Roundtable Weekly, April 13, 2018.

A multi-industry travel and tourism coalition that includes The Real Estate Roundtable submitted  formal comments  on May 29 urging the State Department to withdraw an  "enhanced vetting" proposal  for visitors traveling to the U.S 

The business coalition concerns submitted this week addressed: 

  • The "highly competitive" global market to capture foreign travelers "is sensitive to new and evolving security protocols."  The comments also address the department's proposal to require all visitors seeking a U.S. visa – about 15 million applicants each year – to provide extensive information on social media use, history of international travel, and other matters.  Currently, only a much smaller subset of visa applicants identified as presenting a "threat profile" to national security must answer these questions. 
  • "New requirements that make it more challenging to obtain U.S. visas can affect the willingness and interest of international travelers to visit the United States rather than other countries," the coalition wrote.  "Safeguarding national security and growing the U.S. economy by encouraging international visitors are compatible, significant objectives. America can be both the most secure and the most visited country in the world."     
  • Noting that the U.S. has attracted 7.4 million fewer overseas travelers in 2016-2017 – with corollary declines in visitor spending at American hotels, resorts, stores and attraction properties – the coalition urged the State Department to re-think its "enhanced vetting" proposal.  
  • The comments also explained that the dip in the U.S. share of the global travel market hinders the Trump Administration's foreign trade goals.  "Money spent here by foreign travelers counts as an export for the United States; indeed, international travel is our country's largest export of services accounting for $245 billion in total travel exports, and the second largest of any economic sector," the coalition wrote.  

Roundtable Panel on Enhancing International Travel and Tourism

  • The Trump Administration also announced this week that it will begin limiting the length of validity for some visas issued to Chinese citizens, starting June 11.  (Bloomberg, May 29) 
  • To address policies that may encourage or discourage in-bound travel to the U.S.– as well as the impact of  the travel and tourism market on CRE – The Roundtable will host a panel discussion during its June 14 Annual Meeting. 

The American Hotel & Lodging Association and the U.S. Travel Association lead the multi-industry VisitUS coalition, which also includes the U.S. Chamber of Commerce and the American Resort Development Association.  (VisitU.S. Policy AgendaRoundtable Weekly, March 2)

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Tax Foundation Releases Report on 15-Year Qualified Improvement Property Drafting Error; Technical Corrections Bill Likely to Address QIP

A Tax Foundation report released this week urges policymaker to correct a technical drafting error regarding cost recovery for qualified improvement property (QIP) that was included in the tax overhaul legislation enacted last year.  The unintentional drafting mistake has resulted in a longer cost recovery period for qualified nonresidential interior improvements – a category that previously covered leasehold improvements, retail improvements, and new restaurant construction.  ("Correcting the Drafting Error Involving the Expensing of Qualified Improvement Property" –  The Tax Foundation, May 30)

Chart from "  Correcting the Drafting Error Involving the Expensing of Qualified Improvement Property  " – The Tax Foundation, May 30 – enlarge chart image

 Key Points of the Tax Foundation Report:

  • The Tax Cuts and Jobs Act (TCJA) stimulated investment by allowing businesses to immediately deduct the cost of certain assets and expenditures under a 100 percent bonus depreciation provision.  It also sought to consolidate the cost recovery period for nonresidential real estate improvements into a single, 15-year period for qualified improvements. 
  • However, due to an unintended drafting mistake, the law accidentally excluded the 15-year reference, and qualified improvements defaulted to a 39-year recovery period.  As a result, investments of this type face a higher tax burden than under prior law.
  • More restrictive cost recovery treatment for interior improvements to buildings will increase costs and discourage companies from making these types of investments.
  • Policymakers should work to ensure that cost recovery for qualified improvement property (QIP) does not remain worse off due to a technical drafting error, and that it is eligible for 100 percent bonus depreciation.

Legislative vs. Regulatory Correction:

Treasury Secretary
Steven Mnuchin

  • During a February hearing in the House, Rep. Jim Renacci (R-OH) explained to Treasury Secretary Steven Mnuchin that Ways and Means members are working to address the  tax reform drafting mistake that should have provided for a 15-year recovery cost-recovery period to qualified property improvements, instead of the 39 year period that was enacted. 
  • Mnuchin responded to Renacci: "I am aware of the error and it obviously was unintended. We are looking at whether there is anything we can do with regulations. I think it is likely that this is something that may need to be fixed in the bill. We look forward to working with you." (Ways and Means Committee  –  Mnuchin's testimony and hearing video ).
  • The Real Estate Roundtable and its industry partners are working actively with key lawmakers to advance a legislative technical correction or obtain formal, clarifying guidance from the Treasury Department.

Along with TCJA rulemaking and implementation, potential technical corrections that impact CRE will be a focus of discussion at The Roundtable's Annual Business Meeting and its Tax Policy Advisory Committee (TPAC) Meetings on June 14-15 in Washington, DC.

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