Roundtable Weekly - June 21, 2019
New York Overhauls Rent Regulations as Affordable Housing Shortage Attracts National Attention
Major changes to New York City's rent regulations passed in Albany last week have drawn attention to a nationwide resurgence of rent control laws considered by cities and states across the nation. ( Wall Street Journal , June 14).
By keeping more New York City apartments permanently in the regulated system, the new law will diminish the number of available market-rate units, drive-up market-rate rents, and perpetuate an imbalance in affordable housing supply and demand.
- The law signed by Governor Andrew Cuomo on June 14 directly impacts about 40 percent of New York City's apartment stock and expands rent stabilization to counties across the state. The law generally freezes "stabilized" NYC apartments from ever moving to market rental rates. (New York Times ,June 12 and June 17).
- By keeping more apartments permanently in the regulated system, the new law will diminish the number of available market-rate units, drive-up market-rate rents, and perpetuate an imbalance in affordable housing supply and demand. Affluent Manhattan residents in stabilized apartments who enjoy a rental windfall will stay in place, while lower-income residents in outer boroughs will likely bear higher rent burdens. (Wall Street Journal, June 12)
- The New York law also dis-incentivizes owners from modernizing aging housing with new roofs, boilers, security systems, and other improvements. By capping annual rent increases that an owner can charge for major building-wide capital investments, one critic has warned that the law could lead to a "shabbification of rental housing." (Citylab, June 13).
- Real Estate Board of New York (REBNY) President John Banks stated, "The harmful impact of this legislation will be profound for New York City's economic future … This legislation will keep rent lower for some, but also significantly diminish housing quality and lead to less tax revenue to pay for vital government services." (REBNY statement, June 18)
Affordable Housing: A National Issue
New York's action is part of a growing trend of jurisdictions purporting to address skyrocketing housing costs though rent regulations. Meanwhile, candidates on the 2020 campaign trail are offering plans to address the nation's "affordable housing crisis." ( NPR, June 18)
- An interactive national map provided by the National Multifamily Housing Council (NMHC) details the movement of state capitals eying rent control measures.
An interactive national map provided by the National Multifamily Housing Council (NMHC) details the movement of state capitals eying rent control measures.
- A real estate industry coalition recently opposed a rent control measure under consideration in California. In a letter to Sacramento lawmakers, the coalition explained that increasing housing supplies with new construction built by public-private partnerships will "help bring the price point down," and that it is "more effective to tie assistance to a renter rather than a rental unit." (NMHC, June 17)
- Proposals in Congress that aim to expand and incentivize the construction of affordable housing would be more effective in addressing the nation's housing challenges (compared to government-mandated rental price-fixing). Recently proposed measures would expand the low-income housing tax credit program (e.g., S. 1703, H.R. 3077), and create a similar tax credit geared to moderate-income, workforce housing (S. 3365, 115th Cong.).
- Housing and Urban Development Secretary Ben Carson has offered a strategy to boost affordable housing by encouraging localities to ease their own building restrictions. Carson's proposal has gained support of House Financial Services Committee Chair Maxine Waters (D-CA). It would provide federal monetary incentives for local governments to ease land-use and zoning regulatory barriers that can feed into "NIMBY-opposition" against affordable housing and drive-up development and construction costs. (Politico, June 14)
"Although they are well-intended, we know from decades of experience that rent control regulations distort markets, create shortages, and depress business investments. They often harm the communities they seek to help," said Jeffrey D. DeBoer, President and CEO of The Real Estate Roundtable. "Policy makers should avoid rent control measures and rather seek solutions that grow America's residential stock, to enable our communities to provide safe and decent housing for low-income families and the teachers and first-responders in our workforce."
Senate Banking Committee Holds TRIA Hearing; Coalition to Insure Against Terrorism Urges Long-Term Reauthorization
A hearing on The Reauthorization of the Terrorism Risk Insurance Program before the Senate Banking Committee was held on June 18 as the Coalition to Insure Against Terrorism (CIAT)—including The Real Estate Roundtable—submitted comments urging Congress to pass a long-term reauthorization of the Terrorism Risk Insurance Act (TRIA).
CIAT's comment letter to Chairman Mike Crapo (R-ID), above, and Ranking Member Sherrod Brown (D-OH) urges prompt congressional action for a long-term reauthorization of this critical program.
- CIAT's comment letter to Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) urges prompt congressional action for a long-term reauthorization of this critical program. The letter states, "At almost no cost to the taxpayer, the Program has been the key factor in ensuring that the private insurance market has remained intact and continues to meet the needs of commercial policyholders during the on-going threat of a future terrorist attack – all while minimizing federal taxpayer exposure."
- Senate Banking Committee Chairman Michael Crapo (R-ID) discussed reauthorization of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) at The Roundtable's Spring Meeting in April. (Roundtable Weekly, April 12). The Committee's Ranking Member, Sen. Sherrod Brown (D-MA), acknowledged the need to extend TRIA before its expiration at The Roundtable's Annual Meeting on June 11 in Washington. (Roundtable Weekly, June 14)
- Testifying before the committee, Marsh's property terrorism placement and advisory leader Tarique Nageer noted that the expiration of TRIPRA without a replacement could create capacity shortfalls, especially for firms with "significant workers' compensation accumulations.
- Nageer stated, "We are already seeing an impact on policies that extend beyond 2020, with some insurers either seemingly unwilling to offer terrorism coverage beyond the expiration of TRIPRA or seeking to increase prices to cover the additional risk
to their portfolios. Without a decision to reauthorize or extend TRIPRA, we expect to see more sunset provisions in policies and higher costs as we get closer to December 31, 2020." (Nageer's testimony,
- Chairman Crapo stated that he anticipates additional "balanced reforms" to TRIA that "reduce taxpayer exposure" without substantially increasing costs or decreasing take-up rates. His focus was on what changes are necessary based on data, not whether the program is needed. Only two Republicans attended the hearing, whereas the Democrats in attendance voiced unified support of TRIA. (Senate Banking Committee hearing video, statements and testimony)
- Chairman Crapo and Sen. Brown agreed that it was important that reauthorization take place sooner rather than later to ensure a lapse in coverage does not happen again. Sen. Menendez (D-NJ) noted during the hearing that a lapse in 2014 created uncertainty, resulted in sunset clauses on policies, and increased costs on long-term construction deals. A similar situation could begin as early as January 1, 2020.
- Additional hearings on TRIA are expected that would include policyholder and insurer witnesses and could address issues such as the length of another reauthorization and the scope of TRIA regarding cyber, nuclear, biological, chemical, and radiological risks.
- A summary by theInsurance Journal about the Marsh report, "What Might Happen If Conress Fails to Renew Terrorism Reinsurance Program"
- Congressional Research Service (CRS) report on TRIA
- Edward Zonenberg, Senior Financial Analyst with AM Best discusses mitigation planning in the event of a possible lapse or shutdown of TRIA
Real Estate Provisions Included in Tax Extenders Legislation Approved by House Ways and Means Committee
The House Ways and Means Committee yesterday passed legislation to extend a host of expired and expiring tax credits through 2020 by a vote of 25-17. Among the bills advanced to the House floor for consideration is the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (H.R. 3301), which includes a deduction for energy efficient commercial buildings (Section 179D). (House Ways and Means, Markup of Tax Legislation).
The House Ways and Means Committee yesterday passed legislation to extend a host of expired and expiring tax credits through 2020, including several afecting real estate.
- Committee Chairman Richard Neal (D-MA) said in his opening statement that extenders would provide "needed certainty for businesses making use of tax provisions that expired in 2017 and 2018, as well as some set to expire this year."
- In addition to the Section 179D tax deduction, H.R. 3301 and its Amendment in the Nature of a Substitute contain other provisions affecting real estate:
• Credit for construction of new energy efficient homes (sec. 45L)
• Credit for energy efficient improvements to principal residences (sec. 25C)
• Exclusion of mortgage debt forgiveness (sec. 108(a)(1)(E))
• Deductibility of mortgage insurance premiums (sec. 163(h)(3)(E))
• New markets tax credit (sec. 45D)
• Empowerment zone tax incentives (sec. 1391-97 )
In conjunction with the markup, the Joint Committee on Taxation (JCT) issued a report on the estimated revenue effects of H.R. 3301, concluding the extenders bill portion would cost $42.5 billion, which includes $9.3 billion in tax relief for disaster areas. (JCT technical description)
Ways and Means Chairman Neal indicated he plans to hold a Committee vote on a technical corrections bill later in the year.
- The Democrats' bill would accelerate expiration of the increase in the estate tax exemption that was included in the Tax Cuts and Jobs Act (TCJA). TCJA doubled the estate tax exemption from $5.7 million to $11.4 million (indexed for inflation). Under current law, the temporary increase expires at the end of 2025. In order to pay for the tax extender legislation, the bill accelerates expiration of the estate tax exemption increase to the end of 2022.
- Several Republicans expressed concerns over continuing to pass tax "extenders" legislation without looking for long-term solutions to reform, make permanent, or repeal the various provisions. Chairman Richard Neal (D-MA) said he is willing to consider any suggested reforms at a later stage. (BGov, June 20)
- In response to an unsuccessful Republican amendment that would have made a number of technical corrections to TCJA, including a much-needed reduction in the cost recovery period for qualified improvement property, Chairman Neal indicated he plans to hold a Committee vote on a technical corrections bill later in the year.
The Democratic extender bill is widely viewed as an initial negotiating position for talks with Senate Republicans. Additional changes may be made as the bill goes to the House floor. In the Senate, Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) in May announced the formation of several bipartisan taskforces to examine and help permanently resolve the fate of more than 30 expired and expiring tax provisions. (Senate Finance Committee Announcement , May 16 and Roundtable Weekly , May 17)