Roundtable Weekly - May 18, 2018

Capital and Credit - HVCRE

House Expected to Vote May 22 on Dodd-Frank Reform Bill That Include HVCRE Revisions

The House of Representatives is expected next week to pass a bipartisan package of revisions to the Dodd-Frank Act of 2010 and send it to President Trump for his signature. The House bill (S. 2155), which passed the Senate (67-31) in March, includes significant Roundtable-supported clarifications to the Basel III High Volatility Commercial Real Estate (HVCRE) Rule – a top industry priority that will benefit CRE acquisition, development and construction (ADC) lending and promote economic growth.

The House is expected to vote on S. 2155 – the Economic Growth, Regulatory Relief, and Consumer Protection Act – as early as Tuesday, May 22 – separate financial deregulation legislation championed by House Financial Services Chairman Jeb Hensarling (R-TX) is expected to soon follow.

What it Means for CRE 
 
The HVCRE measure contains important clarifications and reforms to the Basel III High Volatility Commercial Real Estate (HVCRE) Rule, which has created needless confusion and increased borrowing costs in the industry. 

  • Under the new measure, commercial borrowers will be able to satisfy the 15% equity requirement through the appreciated value of contributed land/property – versus the cost basis under the current rule. The measure also clarifies that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don't trigger the HVCRE capital penalty. (Roundtable WeeklyMay 4 and May 11)
  • The Roundtable and twelve other real estate organizations on March 2, 2018 sent a comment letter detailing the industry’s policy positions and urging inclusion of the HVCRE measure within the broader Dodd-Frank reform package (S. 2155).

HVCRE reform has been a top policy priority of The Real Estate Roundtable and its industry coalition partners, who have submitted numerous policy comment letters to policymakers since 2015. The Roundtable's HVCRE Working Group has also played a key role in advancing these welcome reforms.

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CFIUS Reforms

Senate and House Committees to Mark Up Bills Addressing Foreign Investment Risk Review on May 22; Includes Language Affecting Urban Real Estate

Legislation that would reform the process for reviewing foreign investment risk introduced by Senator John Cornyn (R-TX) in the Senate and Congressman Robert Pittenger (R-NC) in the House – including a purchase or lease of domestic properties in close proximity to sensitive U.S. facilities by a foreign party – will be marked up May 22 by both the Senate Banking Committee and the House Financial Services Committee.

The Senate Banking Committee will mark up S. 2098 – the  Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA)  – on Tuesday, May 22.  The revised real estate provision appears on page nine of the committee’s amended  legislative discussion draft .   

  • The legislation (S. 2098) is intended to modernize and strengthen the process by which the Committee on Foreign Investment in the United States (CFIUS) reviews acquisitions, mergers, and other foreign investments in the United States for national security risks.
  • The Senate Banking Committee will mark up S. 2098 – the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA) – on Tuesday, May 22.  The revised real estate provision appears on page nine of the committee’s amended legislative discussion draft.  
  • The original Senate legislative draft raised concerns about the implications for real estate investment in urban areas that may be in close proximity to "sensitive U.S. military installations or other U.S. government facilities".  As a result of industry discussions with Senate and Treasury staff, the new draft Manager's Amendment includes the addition of a definition that would exempt real estate in 'urbanized areas' – as defined by the U.S. Census Bureau – from the criteria of a "covered" transaction.  The Census Bureau identifies two types of urban areas: (1) Urbanized Areas (UAs) of 50,000 or more people; and (2) Urban Clusters (UCs) of at least 2,500 and less than 50,000 people).
  • The Hill reports that the House Financial Services Committee will also mark up a CFIUS bill next week.  (The Hill, May 16, House Panel Will Consider Bill to Boost Foreign Investment Review Powers Next Week)
  • According to Bloomberg Law, The House committee will take up a modified bill from the original (H.R. 4311) on May 22. “I think that we'll hopefully have a bill that's broadly supported on both sides of the aisle,” Hensarling said. “We'll see what happens on Tuesday.” (Bloomberg Law, May 17, Foreign Investment Bill to Get Votes in House, Senate Panels, subscription only)

“The revised bill, according to drafts reviewed by The Wall Street Journal, would have the government vet domestic and overseas transactions through separate processes. The proposed legislation spells out CFIUS’s authority to vet the purchase or lease of real estate near sensitive U.S. facilities, and its right to review any deal structured to evade its jurisdiction such as transactions that use shell companies to obfuscate the would-be buyer’s ownership.  Both the Senate Banking Committee and the House Financial Services Committee … now plan to mark up the bill’s text as soon as next week after reaching the compromise.”  (The Wall Street Journal, May 17, Legislation to Curb Chinese Deals Moves Through Congress)

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Tax Policy - Tax Reform - Tax Reform Implementation - Tax Reform Technical Corrections

Ways & Means Launches Hearings on Impact of Tax Reforms; Top Treasury Official Outlines Timeline for Implementation Guidance

The House Ways and Means Committee this week held the first in a series of hearings on how the Tax Cuts and Jobs Act (TCJA) is affecting job creation and the economy five months after its enactment.

House Ways and Means Chairman Kevin Brady (R-TX) in his  opening statement offered a list of favorable economic statistics and projections that he said are attributable to the new law

Treasury Assistant Secretary Sketches Timetable for Regulations Implementing Tax Reform 
Certain provisions of the TCJA of interest to commercial real estate could be addressed in upcoming IRS guidance or in a congressional technical corrections bill.

  • Acting IRS Commissioner David Kautter on May 12 said that Treasury and the IRS hope to complete proposed regulations on section 199A passthrough deduction by mid- to late-July. (Tax Notes, May 15, “Kautter Talks Timelines for TCJA Guidance Projects” and Roundtable Weekly, May 4).
  • Kautter added that the target date for a notice of proposed rulemaking on section 163(j) business interest deduction limitation is late summer or early fall. (Roundtable Weekly, April 6).)
  • Natalie Tucker, legislation tax accountant at the Joint Committee on Taxation, recently  said that the cost-recovery period for qualified improvement property rises to the level of consideration for a “technical correction.”  While Congress was formulating the TCJA, a new category—qualified improvement property—wasn't assigned a cost-recovery period, and fell to the 39-year period by default, rather than the intended 15-year period.  That was not the intent of Congress and therefore qualifies for inclusion in a technical corrections bill, according to Tucker.  (Bloomberg Law, May 11, “Agreement Reached on Three ‘True’ Technical Corrections”)

Along with TCJA rulemaking and implementation, the legislation's impact on CRE will be a focus of discussion at The Roundtable's Annual Business Meeting and Policy Advisory Committee Meetings on June 14-15 in Washington, DC.

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