The latest threat of a government shutdown eased this week after President Biden signed two continuing resolutions, funding some agencies until Jan. 19 and others until Feb. 2, giving Congress a chance to pass full-year appropriations bills in early 2024, and leaving the Biden administration’s $106 billion supplemental foreign aid request unresolved. (AP, Nov. 17 |Wall Street Journal | Washington Post | NBC News, Nov. 15)
Window Narrowing for Other Policy Priorities
Congress’ focus on the funding measures leave policymakers looking for a potential legislative vehicle that could support a separate, expensive tax package. Conversations among tax policy writers are ongoing, according to Ways and Means Ranking Member Richard Neal (D-MA). (BGov, Nov. 16)
Senate Finance Committee Chair Ron Wyden (D-OR) and House Ways and Means Committee Chairman Jason Smith (R-MO) are discussing a package in the $90-100 billion range that would include measures on business interest deductibility and bonus depreciation, as well as an increase in the child tax credit for low-income families. (Roundtable Weekly, June 16)
On the regulatory front, Roundtable Senior Vice President Ryan McCormick was quoted this week in Tax Notes on the Inflation Reduction Act’s (IRA) rules affecting clean energy credits—and the need to ensure incentives extend equitably to “mixed partnerships” that include both taxable and tax-exempt investors.
“Tax-exempt investors in mixed real estate partnerships include pension funds, educational endowments, private foundations, and public charities,” said McCormick, noting that these entities have invested over $900 billion in commercial real estate.
The Tax Notes article also addressed problems posed by IRA prevailing wage and apprenticeship rules that were the focus of an Oct. 30 Roundtable comment letter. The letter quantified the large compliance costs and recommended allowing contractors to self-certify their compliance with the wage and apprenticeship requirements. (Roundtable Weekly, Nov. 3)
The Roundtable’s Tax and Sustainability Policy Advisory Committees will remain engaged with policymakers as the IRA rules affecting CRE are finalized and implemented. These issues will be discussed during The Roundtable’s State of the Industry Meeting on January 23-24, 2024 in Washington.
The Real Estate Roundtable joined a coalition of 17 national trade associations in a Nov. 14 letter to the Federal Reserve, urging regulators to repropose a sweeping set of proposed rules—known as the “Basel III Endgame”—that would increase capital requirements for the nation’s largest banks. Meanwhile, the nation’s top federal banking regulators testified this week before congressional committees, where they faced stiff bipartisan opposition to the proposal. (U.S. Chamber of Commerce-led coalition letter, Nov. 14 and Axios, Nov. 16)
In July, the regulators jointly approved the 1,100-page proposed Basel III rulemaking, which aims to guard against potential risk by increasing capital requirements for banks with at least $100 billion in assets. The proposal could have a significant impact on available credit capacity for commercial real estate transactions, as well as undermine liquidity and economic growth. (Roundtable Weekly, Nov. 10 and CQ, Nov. 15)
Sen. Chris Van Hollen (D-MD) stated that higher capital standards could impede investment in clean energy while Sen. Bob Menendez (D-NJ) emphasized that higher capital requirements pose a risk for mortgage loans to low-income and minority buyers. (Axios, Nov. 14)
Before the hearings, Senate Banking Committee Ranking Member Tim Scott (R-SC) led 38 of his colleagues in a Nov. 13 letter to the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) to withdraw the Basel III Endgame proposal.
House Financial Services Committee Chairman Patrick McHenry (R-NC) and Subcommittee on Financial Institutions and Monetary Policy Chairman Andy Barr (R-KY) also sent letters to the regulators on Nov. 14, claiming the Basel III regulations would put the nation’s financial system at a competitive disadvantage.
More Feedback for Basel III
During the hearings, the Fed’s Vice Chair for Supervision Michael Barr defended the proposals, yet responded that regulators are “quite open to comment, and we want to improve the rule before we get to a final rule.”
On Oct. 20, the Federal Reserve, FDIC, and OCC announced an extension of the comment period on the Basel capital proposal from Nov. 30, 2023 to Jan. 16, 2024. The agencies also launched a quantitative impact study to clarify the estimated effects of the proposal, with the data collection deadline also due Jan. 16.
Since the deadline for stakeholder comments is the same day as the impact study’s final data collection deadline, there is broad concern that the regulators’ failed to provide industry participants with an opportunity to assess and comment on any of the Agencies’ collected data. (Roundtable Weekly, Oct. 27)
The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) discussed the capital requirements proposal during its Nov. 8 meeting in New York. RECPAC welcomes Roundtable membership input as it works on a Basel III comment letter due in January. (Contact Roundtable Senior Vice President Chip Rodgers)
The Real Estate Roundtable and a coalition of major business groups sent a letter to all members of Congress last week in support of a joint resolution that would nullify a final rule of the National Labor Relations Board (NLRB). The NLRB “joint employer” rule—scheduled to go into effect on Dec. 26—would render employers vulnerable to claims by “indirect” workers who are not immediate hires. The policy has significant implications that could subject parent-level hotel and restaurant companies, other franchise-model businesses, and companies that hire contractors and subs to expansive joint employer liability. (Coalition letter, Nov. 9 and AP, Nov. 13)
The NLRB rule overturns Trump-era policy and returns to an Obama-era position that makes employers liable to workers they do not directly hire or manage. It also holds joint employers liable for workplace issues they do not control, which range from collective bargaining to workplace safety conditions.
The Obama-era version—in place from 2015 to 2017—cost small business franchise operators $33 billion per year, according to the International Franchise Association (IFA). It resulted in 376,000 lost job opportunities and led to 93% more lawsuits against these businesses.
The Roundtable joined the coalition letter led by IFA and the U.S. Chamber of Commerce. Other real estate group signatories include the American Hotel and Lodging Association (AH&LA), the National Association of Home Builders, the National Multifamily Housing Council, and national general contracting organizations.
The measure could pass the House but is not expected to advance in the Democratically-controlled Senate.
The U.S. Chamber and other business organizations who are signatories on the coalition letter sent last week also filed a lawsuit challenging the joint employer rule on Nov. 9. Unions groups will likely seek to intervene to defend the NRLB rule. (U.S. Chamber case updates)
The Roundtable signed onto a letter yesterday with approximately 70 business groups that urges Congress to pass a one-year delay in implementing burdensome “beneficial ownership” reporting requirements. (Coalition letter and PoliticoPro, Nov. 16)
The new regulations—scheduled to take effect on Jan. 1, 2024 under the Corporate Transparency Act (CTA)—would be implemented by Treasury’s Financial Crimes Enforcement Network (FinCEN).
The CTA requires the submission of regular reports to the federal government identifying the beneficial owners of businesses and other legal entities. The new law defines the targeted entities as those having 20 or fewer employees and under $5 million in revenue, which would impact nearly every small business in the nation.
The CTA includes civil and criminal penalties of up to $10,000 and two years of jail time for failing to comply.
The scope of the data collection is expansive. Covered entities will be required to provide the personal information of owners, board members, senior employees, attorneys, and more, then monitor the information and report all changes. FinCEN expects to receive more than 32 million separate reports in 2024, with an additional five to six million filings each year thereafter.
The coalition letter states, “A year’s delay will provide FinCEN and the business community with more time to educate owners of their new obligations. It will also give Congress and FinCEN time to review the new rules to ensure they are successful.”
AICPA & Updated FAQs
This week’s letter also notes that the American Institute of Certified Public Accountants (AICPA) recently requested a one-year delay from FinCEN. (AICPA coalition letter, Oct. 30)
AICPA noted in its letter that FinCEN significantly underestimated the cost burdens associated with the new reporting regime, relied on vague and arbitrary standards in laying out the criminal and civil penalties under the statute, and implemented filing deadlines for newly-formed entities that in some cases are impossible to meet.
On Oct. 13, The Real Estate Roundtable and a coalition of eight other national real estate groups urged Treasury Secretary Janet Yellen to delay implementation of the new beneficial ownership rule. (Roundtable Weekly, Oct. 20 and Industry coalition letter)
Yesterday, FinCEN issued updates to its beneficial ownership “frequently asked questions.” The FAQs include new information about the reporting process, reporting companies, beneficial owners, company applicants, reporting requirements, initial reports, and reporting company exemptions. It also includes new resources related to beneficial owners, initial reports, FinCEN identifiers, and third-party service providers. (.pdf version of the FAQs)
Congress needs to pass a continuing resolution (CR) by next Saturday, Nov. 18 to avoid a partial government shutdown if appropriations bills are not enacted for the fiscal year that began Oct. 1. (CQ and The Hill, Nov. 9)
CR vs Shutdown
New House Speaker Mike Johnson (R-LA) may introduce a funding bill early next week, giving only days for Congress to agree on a CR or risk a partial government shutdown. House Republican leaders have signaled they still may pursue a “laddered” approach—with several spending bills to last until December and the remainder in January. By contrast, The Senate is considering a short-term CR to fund the government until mid-December. (Punchbowl News, Nov. 9)
Another major consideration is a White House $106 billion supplemental request that includes aid for Ukraine and Israel. Republicans have voiced opposition to the package unless President Biden includes policy changes on border security.
Today, Biden commented today that he was “open to discussions about the border” on the tarmac before boarding Air Force One.
The administration has also requested another $56 billion for domestic policies that include childcare, broadband subsidies, and disaster relief. (Roll Call, Nov. 7)
Real Estate Roundtable Chairman Emeritus Bill Rudin, above, (Co-Chairman and CEO, Rudin Management Co.) this week discussed challenges facing CRE on CNBC’s Squawk on the Street, including a massive wave of loans that need to be refinanced over the next few years and the need for property conversions.
Rudin emphasized that each CRE sector, and region, is different, noting that multifamily properties and high-quality commercial buildings may be doing well while certain office assets face significant challenges. The Roundtable’s Q4 Sentiment Index released last week reflects these conditions, which include higher financing costs, increased illiquidity, and uncertain post-pandemic user demand. (Roundtable Weekly, Nov. 3 and GlobeSt, Nov. 7)
Roundtable President and CEO Jeffrey DeBoer said, “Various CRE markets and asset classes need more time to adapt to the new preferences of clients; more flexibility to restructure their asset financing; and patience while adjusting to the evolving valuation landscape. In addition to conversion activities, The Roundtable continues to urge the federal government to return to the workplace and support measures to assist loan modifications and increase liquidity available to all asset classes and their owners. We also remain opposed to regulatory proposals that impede capital formation.” (Roundtable news release, Nov. 3)
This week, policymakers addressed proposed regulations to increase capital requirements for the nation’s largest banks, known as the “Basel III Endgame,” which could have a significant impact on available credit capacity for commercial real estate transactions, as well as undermine liquidity and economic growth.
The House Financial Services Subcommittee on Financial Institutions and Monetary Policy, chaired by Rep. Andy Barr (R-KY), held a Nov. 7 hearing focused on an array of federal financial regulations, including the Basel III proposal.
Chairman Barr stated that U.S. financial regulators have increasingly ceded portions of their authority to international and domestic intergovernmental organizations, which has decreased transparency in development of U.S. regulatory frameworks and reduced regulators’ accountability. (Barr’s opening remarks, Nov. 7 and Committee memo, Nov. 2)
House Financial Services Committee Chairman Patrick McHenry (R-NC) and Subcommittee Chairman Barr recently requested the Government Accountability Office (GAO) to examine the role U.S. federal banking agencies played in developing the recent international Basel proposal. (McHenry-Barr Letter, Oct 20)
The Senate Banking Committee announced that top U.S. financial regulators will testify on Nov. 14 about their sweeping plan to increase bank capital requirements.
Views from the Regulators
Federal banking regulators announced last month an extension of the comment period on the Basel capital proposal from Nov. 30, 2023 to Jan. 16, 2024. Additionally, the agencies announced a quantitative impact study to clarify the estimated effects of the proposal, with data collection due the same date as the comments—Jan. 16. (Fed news releases, Oct 20)
While the quantitative impact study is a positive development, the timing of the study fails to provide industry participants with the opportunity to assess its results or comment on the collected data before the Jan. 16 deadline. Regulators often grant the public ample time (120 days) to analyze and comment on such an impact study after it is released. (Roundtable Weekly, Oct. 27)
This week, Fed Governor Michelle Bowman criticized the scope of the Basel proposal in two speeches. On Nov. 7 and today, Governor Bowman stated, “While the capital proposal reflects elements of the agreed upon Basel standards, it is not a mere implementation of the Basel standards. In this proposal, the calibration—with a large increase in capital requirements for U.S. firms—far exceeds the Basel standards mandate. There has been growing support for improving the proposal’s quantitative, analytical foundations, including the need for and impact of capital increases of this scale.”
The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) met in New York City yesterday to discuss the Basel proposal, other federal policies impacting capital and credit issues, and market conditions. RECPAC has established a working group on Basel III to develop comments, due by Nov. 30, on the Basel III Endgame proposal.
One of the commissioners from the Securities and Exchange Commission (SEC) and two U.S. Senators suggested this week that further analysis may be needed for a highly anticipated SEC rule on climate reporting, which includes a proposal for sweeping disclosures on Scope 3 GHG emissions. (Bloomberg Law, Nov. 7 | SEC headquarters in Washington, DC, above)
Given that the SEC has received more than 16,000 stakeholder comments on the proposal, Republican SEC Commissioner Mark Uyeda said, “Before the Commission adopts any final rule that significantly deviates from the proposal, it should seriously consider re-proposing the rule with revised rule text and an updated economic analysis.” (Ayuda’s comments, Nov. 7 and The Hill, April 6)
SEC Chair Chair Gary Gensler indicated in March that the agency’s climate-related reporting rule may be scaled back. (CNBC, March 7 and Roundtable Weekly, March 10)
Senators Support Additional Feedback
Sens. Bill Hagerty (R-TN) and Joe Manchin (D-WV) also expressed support this week for obtaining additional feedback about the SEC’s proposed rule. Sen. Manchin chairs the Senate Energy and Natural Resources Committee and Sen. Hagerty serves on the Senate Banking Committee. (Hagerty-Manchin letter and PoliticoPro, Nov. 9)
The lawmakers wrote to SEC Chairman Gary Gensler about recent California state laws that require companies to disclose their emissions, which beat the SEC to the punch on releasing final climate reporting rules. (Roundtable Weekly, Sept. 22 and The Real Estate Roundtable’s summary of the California legislation.)
The Senators’ letter states, “The interconnectedness of the California requirements and the SEC’s proposal is undeniable: thousands of businesses would end up being subject to both the California requirements and the SEC’s rule, if finalized. However, key differences between the two raise significant compliance questions that the SEC should thoroughly review.”
Roundtable Comments on Scope 3
Scope 3 refers to indirect emissions that are part of an organization’s value chain but not owned or controlled by the reporting company. The 2022 SEC proposal would require corporate issuers of securities to estimate and report Scope 3 emissions “if material” in 10-Ks and other filings. (SEC News Release, March 22, 2022)
Roundtable comments submitted in June 2022 emphasized that the SEC’s proposed directive, which would mandate that companies report on Scope 3 emissions “only if material,” is a “back-door mandate” that should be dropped. The comment letter added, “No registrant should be effectively required to report on indirect emissions beyond its organizational or operational boundaries.” (Roundtable Weekly, June 10, 2022),
The Roundtable’s Sustainability Policy Advisory Committee (SPAC) plans to respond to any further developments on the SEC’s proposed climate disclosure rule or other climate-related regulatory proposals affecting CRE.
The Real Estate Roundtable urged the Securities and Exchange Commission (SEC) this week to exempt real estate from a proposed Safeguarding Advisory Client Rule that could severely limit advisory clients’ ability to invest by fundamentally changing the ownership and transfer rights of real estate. The proposed rule currently includes a conditional exception for real estate assets, which would impose a new layer of unclear and unnecessary oversight—and inject significant confusion into well-established transaction protections, rules, and procedures governing real estate transactions. (Roundtable letter, Oct. 30 and SEC Proposed Rule)
The “Proposing Release”
The Oct. 30 letter from Real Estate Roundtable President and CEO Jeffrey DeBoer reiterated current legal protections that promote the safe-keeping of real estate assets held in advisory accounts or funds. DeBoer urged the SEC “… in the strongest possible terms to exclude real estate from the scope of any final [Safeguarding] rule,” citing the ample set of existing protections that prevent real estate assets from fraudulent transfer.
The letter also emphasized that the SEC has not coherently explained how the Proposed Safeguarding Rule would apply to real estate.
Current law (the “Custody Rule”) under the Investment Advisers Act of 1940 requires an investment adviser to maintain clients’ funds and securities with a qualified custodian. The new proposed SEC rule would expand this requirement to maintain all advisory client assets with a qualified custodian.
Since it is not possible to maintain real estate and certain other physical investments with a qualified custodian, the proposal includes a conditional exception that includes the following language:
“In the real estate context, a deed or similar indicia of ownership that could be used to transfer beneficial ownership of a property would not qualify for the exception, but the physical buildings or land would qualify.”
The Roundtable’s letter challenges this “Proposing Release” asconfusing, impractical, and unworkable for holding and transferring real estate deeds. It also conflicts with current state and country chain of custody legal requirements that govern real estate transactions.
The letter also notes the SEC could chose to make the conditional exemption available to real property, because a physical asset cannot be maintained with a qualified custodian. Additionally, the requirement to maintain custody of deeds with a qualified custodian—compared to recording the interest with a governmental authority—serves no regulatory purpose.
Existing Layers of Safeguards
Other existing safeguards come into play. State laws currently require signature verifications, notarizations, and accompanying IDs that provide significant hurdles to an attempted fraudulent transfer.
Modern real estate transactions in the United States also require buyers and lenders to obtain title insurance, which involves a title insurance company to engage in substantial due diligence of the chain of ownership. Real estate lawyers representing the buyer and/or seller represent yet another intermediary, since they are often involved in these asset transactions to provide yet another source of gatekeeper protections.
The Roundtable letter states the SEC must explain how it would be possible to maintain title or deed with a qualified custodian since the “Proposed Rule would fundamentally change the ownership and transfer rights of real estate.” The letter states the SEC should avoid any final rule that would limit clients’ access to, or unduly burden, investment in the real estate asset class.
The Proposing Release also contains no evaluation of any risk of loss for real estate assets—it only asserts such risk as a theoretical matter.
The Roundtable and a diverse group of 25 trade associationspreviously wrote to SEC Chair Gary Gensler to oppose the Safeguarding Advisory Client Rule proposal and explain the negative impacts it would have on investors, market participants, and the financial markets. This week’s letter from The Roundtable focused exclusively on the proposal’s impact on real estate assets. (Roundtable Weekly, Sept. 15)
The Real Estate Roundtable submitted comments this week encouraging the Treasury Department to provide a compliance “safe harbor” to streamline labor-related requirements necessary to seek “bonus” tax incentives for clean energy building projects under the Inflation Reduction Act(IRA). (Roundtable comment letter, Oct. 30)
Prevailing Wage and Apprenticeship Compliance Burdens
The Roundtable letter notes that the IRA’s objective to support retrofits and slash carbon emissions in the built environment will be undermined if the costs of labor compliance far exceed the incentives offered by Congress.
The comments explain that wage and apprenticeship compliance burdens would dis-incentivize businesses and taxpayers’ to pursue the IRA’s clean energy bonuses, thereby rendering the bonus credits program illusory in many cases.
The letter also emphasizes that a regulatory solution to ease the IRA’s paperwork burdens would spur more clean energy projects in buildings—and encourages Treasury/IRS to conduct its own thorough cost-benefit accounting of Prevailing Wage/Registered Apprenticeship (PW/RA) Requirements before issuing a final rule.
Contractor Compliance Certifications Sought
The “safe harbor” recommendation by The Roundtable would allow building owners/developers to rely on written certifications provided by their General Contractors (GCs), or any other subcontractors (subs), would confirm and fulfill all PW/RA labor requirements.
This streamlined approach would reduce the compliance burden and retain the fervor that IRA tax incentives could generate under the IRA. Real estate owners and developers are not the direct employers of electricians, plumbers, HVAC technicians, solar technicians, EV charging installers, or any others that construct or retrofit buildings. GCs and subs directly employ manual laborers.
The Roundtable also recommends regulators develop “Recordkeeping Requirements” for PW/RA compliance that reflect the reality of how laborers, mechanics, and apprentices are employed on real estate projects, who is hired by whom, and how hours worked are tracked.
Other targeted tax reforms that will help scale real estate’s transformation toward zero emissions are recommended in The Roundtable letter. These include expanding Section 48 of the Code to building electrification technologies; allowing private owner transfers to unrelated third parties under Sections 45L and 179D; and repealing a Section 179D rule that reduces a property’s basis by the amount of the claimed deduction. (Roundtable comment letter, Oct. 30)