Roundtable Weekly – Page 100 – The Real Estate Roundtable

116th CONGRESSIONAL COMMITTEES

Posted on January 18, 2019October 27, 2023 by Trey Jackson

Partial Government Shutdown Continues Over Border Wall Disagreement

Posted on January 11, 2019October 27, 2023 by Trey Jackson

Unless an agreement with Congress is reached soon, President Trump this week indicated he is considering declaring a national emergency in order to fund the construction of a border wall on the southern border. A national emergency declaration would face significant legislative and legal opposition, yet it could create a path to end the partial government shutdown that tomorrow will become the longest in U.S history, exceeding the 21-day shutdown of 1995-96. (New York Times, Jan. 9 / NBC News, Jan. 10 / Politico, Jan. 10

Federal Reserve Chairman Jerome Powell said this week that if the current situation is prolonged, it would start to noticeably affect the economy. “If we have an extended shutdown, I do think that would show up in the data pretty clear.” Powell added that the full economic impact of closed government agencies is difficult to track because data usually provided by the Commerce Department is not currently available, due to the shutdown. (Economic Club of Washington video interview at 13:30, Jan. 10)
Nine of the 15 Cabinet-level departments remain unfunded, including Agriculture, Homeland Security, State, Transportation, Interior and Justice. 800,000 federal workers won’t receive paychecks due today. (AP, Jan. 11). Historically, federal workers ultimately do receive back pay for government shutdowns.
According to S&P Global Ratings Chief U.S. Economist Beth Ann Bovino, “We estimated that this shutdown could shave approximately $1.2 billion off real GDP in the quarter for each week that part of the government is closed.” (CNBC, Jan. 11) White House Council of Economic Kevin Hassett last week offered a similar assessment, estimating economic output would decrease by about 0.1 percent every two weeks. (Bloomberg, Jan. 3)
President Trump this week cancelled a planned Jan. 21 trip to the annual World Economic Forum in Davos, Switzerland after recently saying he may keep the government closed for “months or even years.” (Time, Jan. 10 and AP, Jan. 4)

Federal Reserve Chairman Jerome Powell said that if the current situation is prolonged, it would start to noticeably affect the economy. “If we ave an extended shutdown, I do think that would show up in the data pretty clear.” (Economic Club of Washington video interview at 13:30, Jan. 10, 2019)

Despite the shutdown, The IRS announced this week that the 2018 tax filing season will begin on Jan. 28. Last year, the IRS issued nearly $300 billion in tax refunds to 102 million taxpayers between January and May, with an average refund of more than $2,700. Any major disruption in tax refunds could dampen economic growth. A detailed IRS contingency plan for handling the tax filing season and enforcement and taxpayer assistance is expected soon. (IRS, Jan. 7 and TIME, Jan. 9)
Additionally, until the shutdown ends, the EB-5 Immigrant Investor Regional Center Program and federal cleanups at Superfund sites around the nation are suspended.
The National Association of Realtors yesterday reported that the partial shutdown is starting to cause transactional delays related to federal housing, mortgage, and other programs of interest to the real estate industry (NAR, Jan. 10).
“All the fluctuations that’s going on puts a pause on companies deciding what long-term investments to make,” NAR chief economist Lawrence Yun said. “Do they actively purchase a commercial property knowing there could be further disruption in the future? They could be more hesitant or go on a more [smaller] scale.” (Commercial Observer, Jan. 2)
Negotiations over the border wall impasse broke down this week when President Trump ended a meeting with Democratic leaders. Trump tweeted that the meeting had been a “total waste of time” and reported that when House Speaker Nancy Pelosi (D-CA) told him that Democrats wouldn’t approve border-wall funding, “I said bye-bye, nothing else works!” (Wall Street Journal, Jan. 10)

The effects of the government shutdown and prospects for policymaking in the new Congress will be topics for discussion during The Roundtable’s Jan. 29-30 State of the Industry Meeting in Washington, DC.

Tax Technical Corrections Draft Bill Released by Outgoing House Ways and Means Chair; New Chair Plans Hearings on Tax Overhaul’s Impact

Posted on January 4, 2019October 27, 2023 by Trey Jackson

Outgoing House Ways and Means Chairman Kevin Brady (R-TX) released a draft bill on Jan. 2 that includes tax technical corrections to previously enacted legislation, including the Tax Cuts and Jobs Act (TCJA) overhaul.

Rep. Brady stated, “We are releasing this discussion draft of technical corrections with respect to the TCJA and other tax legislation to inform stakeholders and provide the American people an opportunity to submit feedback on the draft provisions. I look forward to gaining valuable feedback from the public and working with my colleagues in the House and Senate on both sides of the aisle as we continue to provide clarity and certainty for job creators across the country seeking to invest in their workers and our communities.”

The path forward for a technical corrections bill in the 116th Congress will be set by the new Ways and Means Chairman – Rep. Richard Neal (D-MA).

The 90-page text of the discussion draft bill is complemented by a Joint Committee on Taxation explanation of the legislation. The bill includes several provisions important to real estate:

Clarification that the recovery period for qualified improvement property is 15 years, or 20 years under the alternative depreciation system (ADS);
Clarification that REIT dividends received indirectly by a mutual fund shareholder qualify for the 20% pass-through deduction;
Clarification that the Opportunity Zone tax deferral benefit only extends to capital gains – a position that was also incorporated in Treasury’s October proposed regulations.
Numerous other clarifications in the Brady draft relate to business interest (§ 163(j)), the pass-through deduction (§ 199A), and the limitation on active losses (§ 461(l).

The path forward for a technical corrections bill in the 116th Congress will be set by the new Ways and Means Chairman – Rep. Richard Neal (D-MA) .

There is strong bipartisan support for certain technical corrections, such as the 15-year recovery period for qualified improvement property, which could help spur action on a larger tax package.

However, the current draft does not clarify that a business electing out of the new interest limitation is subject to a 30-year ADS recovery period for residential rental property placed in service before 2018. The issue could be addressed in future versions of the legislation.

Prospects for enactment of technical changes is uncertain, although Ways and Means Chairman Neal stated this week that hearings on tax legislation may be held in early 2019 on the TJCA’s impact and alternative proposals. Neal also suggested that he will seek agreement with Ranking Member Brady on legislation addressing healthcare, infrastructure and retirement savings. (Wall Street Journal and Tax Notes, Jan. 4)

The Roundtable’s Tax Policy Advisory Committee (TPAC) will review these proposals, which will be a focus during TPAC’s Jan. 30 meeting, held in conjunction with The Roundtable’s State of the Industry Meeting in Washington, DC.

Roundtable Comment Letter Recommends Additional Guidance from Treasury and IRS to Accelerate Capital Investment in Opportunity Zones

Posted on December 21, 2018November 4, 2024 by Trey Jackson

This week the Real Estate Roundtable provided formal comments regarding opportunity zones to the Treasury Department and the IRS. The letter encourages Treasury to clarify a number of tax issues that would remove uncertainty for potential investors and opportunity fund managers. This is the second Roundtable comment letter on opportunity zones, following Treasury’s publication of proposed regulations in October. ( Roundtable Weekly, Oct. 19)

This week the Real Estate Roundtable provided formal comments regarding opportunity zones to the Treasury Department and the IRS.

The October proposed rules provided a strong foundation for opportunity fund formation and investment. Building on the rules, the Roundtable letter prioritizes five areas where additional guidance from Treasury would accelerate the pooling of capital and job creation in opportunity zones. The letter recommends that Treasury:

Remove barriers to the formation of multi-asset opportunity funds through flexible exit rules;
Clarify the circumstances in which land and previously vacant buildings constitute qualified opportunity zone business property;
Allow appropriate refinancing of opportunity fund assets and avoid overly restrictive debt-distribution rules;
Encourage continued investment in opportunity zones with flexible gain reinvestment, roll-over, and holding period rules at the investor, fund, and business level; and
Provide additional protections in the working capital safe harbor and the substantial improvement rules for taxpayers making a good faith effort to comply with opportunity zone requirements.

“Real estate development and redevelopment is a key component of any region’s economic strength and growth, wrote Roundtable President and CEO Jeffrey D. DeBoer. “The Roundtable foresees opportunity fund investors and fund managers actively partnering with local leaders and entrepreneurs on projects that both drive economic activity and respond to the needs of communities. Additional guidance along the lines described above will help ensure that the opportunity zone incentives fulfill their ambitious objectives.”

The Treasury Department could issue a second set of proposed regulations on opportunity zones as soon as January, according to Treasury Assistant Secretary David Kautter (Roundtable Weekly, Dec. 14).

The underlying legislation directs Treasury to report to Congress on opportunity zones’ effectiveness. The Roundtable letter encourages Treasury to consider, as part of its reporting, the aggregate impact of opportunity zone investments on the overall health and wellbeing of targeted communities, including the impact on the local tax base, surrounding infrastructure, and their ability to attract and retain employers.

The Roundtable comments are the product of an active Tax Policy Advisory Committee (TPAC) Opportunity Zone Working Group that includes leading real estate developers, owners, investors, lenders, industry organizations, and outside advisors. The TPAC working group will continue to work closely with government officials to help ensure the program fulfills its ambitious objective of stimulating economic development and job creation in low-income communities.

White House Executive Order Aims to Stimulate Opportunity Zone Investment by Channeling Federal Resources; Additional OZ Regulations Expected in January

Posted on December 14, 2018November 4, 2024 by Trey Jackson

President Trump on Dec. 12 signed an Executive Order that seeks to facilitate long-term equity investment in new Opportunity Zones and other low-income communities. The order formally established the White House Opportunity and Revitalization Council. (White House statement and PBS Video, Dec. 12)

President Trump on Dec. 12 signed an Executive Order that seeks to facilitate long-term equity investment in new Opportunity Zones and other low-income communities. (White House statement and PBS Video)

Congress created Opportunity Zones in the 2017 Tax Cuts and Jobs Act to encourage long-term, capital investment in economically struggling, low-income communities. Opportunity Funds that invest in tangible business property, such as real estate, located in a qualifying zone are eligible for tax benefits that are tied to the investment holding period. The capital gain on an Opportunity Fund investment is excluded from tax altogether if the asset is held for 10 years or more.

In June 2018, the Treasury Department designated 8,761 communities in all 50 States, the District of Columbia, and five Territories as Opportunity Zones. (IRS Notice 2018-48 and Roundtable Weekly, June 22)

The new Council will lead joint efforts across executive departments and agencies to implement reforms that streamline existing regulations, optimize the use of federal resources, and align the requirements for public and private investment programs in economically distressed communities. The Council will also present the President with a number of reports identifying and recommending ways to encourage investment in these areas. (White House statement, Dec. 12). The White House signing was live streamed and included comments from Sen. Tim Scott (R-SC), the original author and sponsor of Opportunity Zone legislation. (New York Times, Jan. 29, 2018)

The Council-chaired by Secretary of Housing and Urban Development Ben Carson-will be comprised of officials from 13 Federal agencies and include Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross.

Second Round of Opportunity Zone Regulations Expected in January

The Treasury Department released its first round of Proposed Regulations governing the Opportunity Zone program in October. An Oct. 26 GlobeSt.com interview with Real Estate Roundtable President & CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick focused on the initial regulatory guidance and its implications for the real estate industry.

The next round of Opportunity Zone regulations may be released in January, according to Treasury Assistant Secretary for Tax Policy David Kautter, above. (Tax Notes, Dec. 14).

The next round of Opportunity Zone regulations may be released in January, according to Treasury Assistant Secretary for Tax Policy David Kautter. (Tax Notes, Dec. 14)

The day after the White House Executive Order signing, Kautter told reporters that it would be “about January before we come out with additional guidance.” Kauter noted, “The first set of regulations was designed to provide rules for getting funds up and operating, and the second set of rules is more about the operational aspects of the funds themselves.”

According to the New York Times, an anonymous administration official said Tuesday that the coming regulations would include reporting requirements for investments in Opportunity Zones to evaluate the program‘s impact. (New York Times, Dec. 12)

The Roundtable’s Tax Policy Advisory Committee (TPAC) recently convened a panel on Opportunity Zones that included the tax counsel for Senator Tim Scott (R-SC). TPAC’s Opportunity Zone Working Group is developing additional comments on how the industry can help the program fulfill its ambitious objective of stimulating economic development and job creation in low-income communities. (Roundtable Comment Letter, June 28 and Roundtable Weekly, July 20)

ECONOMIC GROWTH – TRAVEL & TOURISM

Posted on December 7, 2018October 27, 2023 by Trey Jackson

Treasury Proposes Detailed Rules for New Restrictions on Deducting Business Interest

Posted on December 1, 2018October 27, 2023 by Trey Jackson

On Tuesday, the Treasury Department released proposed regulations governing the new limitation on the deductibility of business interest expense, including the exception for real estate businesses.

Under the Tax Cuts and Jobs Act (TCJA), businesses generally can no longer deduct their interest expense to the extent it exceeds 30 percent of their annual earnings before interest, tax, depreciation and amortization (EBITDA). Business interest deductibility was a key issue in Real Estate Roundtable President & CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before consideration of the tax bill. (Roundtable Statement for the Record, Sept. 19, 2017)
DeBoer testified that the proposal could have severe unintended consequences. Noting that the cost of debt is a necessary expense that must be accounted for when measuring income, he testified that our capital markets are the envy of the world and that responsible, appropriate leverage helps entrepreneurs and contributes to economic growth and job creation. (Roundtable Weekly, Sept. 29 and testimony video clips)
The final bill included a critical exception from the interest limit for an electing real property trade or business. An electing real property trade or business is defined broadly to cover: any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

In February, the Roundtable submitted comments to Treasury with recommendations for how the real estate exception should work in the case of tiered business structures, and in the case of businesses that involve both real estate and non-real estate activities. (Roundtable Weekly, Feb. 23, 2018)

Business interest deductibility was a key issue in Real Estate Roundtable President & CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before consideration of the tax bill. (Roundtable Statement for the Record, Sept. 19, 2017 and video clips ).

The proposed regulations are largely favorable. Most importantly, the regulations clarify that partner-level borrowing qualifies for the real estate exception. Thus, at the election of the taxpayer, the real estate exception can extend to debt that is incurred by a partner to acquire an interest in a partnership that is engaged in a real property trade or business. In addition, the regulations confirm the broad definition of a real property trade or business. The regulations also clarify that capitalized interest, which commonly arises during the development of real estate, is not subject to the interest limit.
With respect to taxpayers engaged in both real estate and non-real estate activities, the proposed regulations generally would allocate and apportion debt based on the relative amount of the taxpayer’s adjusted basis in assets used in those activities. However, taxpayers would directly trace and allocate qualified nonrecourse indebtedness to the asset securing the loan (with no apportionment). This latter rule should result in the allocation of a larger share of debt to assets qualifying for the real estate exception.
Some concerns remain. Notably, the attribution rule that allows partners to qualify for the real estate exception based on partnership-level activities does not extend broadly to all upper-tier borrowing for investment in lower-tier real estate businesses. Thus, except in limited circumstances, debt incurred by a taxpayer to invest in a corporation (or REIT) that is engaged in a real property trade or business is not eligible for the real estate exception.

The Roundtable’s Tax Policy Advisory Committee is continuing to review the 439-page regulatory package to understand its full implications for the financing of U.S. real estate. Comments on the proposed regulations will be due 60 days after their publication in the Federal Register.

Roundtable Comments Support Proposed Implementation Rule for High Volatility Commercial Real Estate Loans

Posted on November 30, 2018October 27, 2023 by Trey Jackson

The Real Estate Roundtable’s support for a federal proposal that would implement modified capital rules for High Volatility Commercial Real Estate (HVCRE) loan exposures is detailed in a Nov. 26 comment letter to three banking agencies. The Agencies — tasked with developing a rule consistent with Section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) to clarify the capital treatment of HVCRE Acquisition, Development, or Construction (ADC) loans — invited comments on their Notice of Proposed Rulemaking. (Roundtable Weekly, May 25)

The Roundtable’s comment letter to the Office of the Comptroller of the Currency; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation states the current implementation proposal “more realistically aligns the requirements for HVCRE loans on commercial real estate projects with the actual periods of development or construction risk.” The letter also notes that when the final proposal is implemented, it “will aid economic growth and job creation, while maintaining adequate capital levels to manage the risks associated with ADC lending.” (Roundtable Comment Letter, Nov. 26)
The changes to the capital rules address key deficiencies in the agencies’ prior regulations governing the criteria for HVCRE or HVADC loans by providing the following modifications and clarifications:

The 15% equity requirement would be revised to expressly include contributed land/property at the appreciated land value as determined by a FIRREA appraisal and bank review (versus the cost basis under the current rule).
Clarifies that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don’t trigger the capital penalty.
A new exemption would be added to the HVCRE rule covering acquisition/refinancing loans for performing income producing properties.
Allows borrowers to use internally generated capital in the project and, once the development/construction risk period has passed, outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).
All ADC loans made prior to January 2015 would be grandfathered and do not have to satisfy current HVCRE exemption criteria.
Banks would able to withdraw HVCRE status prior to the end of an ADC loan’s term.

Roundtable President and CEO Jeffrey DeBoer also suggests in the letter that periodic industry forums be held on the implementation of the capital rules. “This feedback would allow the Agencies to appropriately address any possible unintended economic consequences resulting from the regulation by supervisory personnel or by the institutions they supervise that might threaten the soundness of the banking system or the stability of the real estate lending market,” DeBoer added.
The Roundtable’s letter is supported by The American College of Real Estate Lawyers (ACREL) and The American College of Mortgage Attorneys (ACMA). (Joint Letter of Support, Nov. 27)

The Agencies’ HVCRE proposal was one of the issues discussed at this week’s meeting of The Roundtable’s Real Estate Capital Advisory Committee (RECPAC). Since 2015, The Roundtable’s HVCRE Working Group and industry coalition partners have played a key role in advancing specific reforms to the HVCRE Rule. (Roundtable HVCRE Comment Letter, March 2).

Roundtable Submits Recommendations to Improve ENERGY STAR Scoring Models; EPA Seeks Additional Feedback from Building Owners

Posted on November 26, 2018October 27, 2023 by Trey Jackson

The Real Estate Roundtable on Nov. 26 sent recommendations to the U.S. Environmental Protection Agency (EPA) to improve the agency’s ENERGY STAR scoring methods, which rate a building’s energy efficiency performance. (Roundtable Letter and Recommendations)

Nearly 35,000 buildings and plants – representing more than 5 billion square feet of commercial space – have earned EPA’s ENERGY STAR. Pension funds and other institutional investors frequently rely on the label as a market signal for well-managed assets with smaller carbon footprints. Business tenants also seek to locate in ENERGY STAR-certified buildings to lower their utility expenses.

Last August, EPA announced the first updates to its ENERGY STAR scoring models in over a decade. Initial analyses by The Roundtable’s Sustainability Policy Advisory Committee (SPAC) and other stakeholders indicated that EPA’s new models produced arbitrary scoring results. Offices over 500,000 square feet in size, and buildings located in colder climates requiring more heating throughout the year, appear to have sustained the most significant ENERGY STAR score declines.

EPA thereafter suspended certifications for office, warehouse and other property types and opened a “study period” in September to assess its scoring models. (Roundtable Weekly, Sept. 14)

Roundtable President and CEO Jeffrey DeBoer in October told the Wall Street Journal, “Revisions to ENERGY STAR are much needed and very important. However, to be truly effective the data sources and projections relied upon in the revision must be transparent and reflect industry leading practices.” (Wall Street Journal, Oct. 9)

The Roundtable’s Nov. 26 summary and recommended changes to EPA’s scoring methods seek to ensure a level-playing field for the ENERGY STAR label – so that buildings of all sizes located in varying climate zones across the country are rated fairly.

EPA has requested additional data from owners and managers to test its methods on specific buildings and portfolios. Stakeholders interested in working with the agency to assess how particular properties have fared since new ENERGY STAR scores were released last August should consult EPA’s website, “How to Respond to Data Requests in Portfolio Manager.”

EPA plans to wrap-up its review period and resume issuing ENERGY STAR building labels by next spring.

Virginia Plans to Advance Internet Sales Tax Legislation as Opponents Aim to Roll Back Supreme Court’s Wayfair Decision

Posted on November 9, 2018October 27, 2023 by Trey Jackson

The Supreme Court’s recent South Dakota v. Wayfair decision allowing States to collect tax owed on remote internet sales purchases could generate an estimated $250 million in annual revenue for the state of Virginia, which is aiming to start its online sales tax program this summer.

The Real Estate Roundtable and seven other national trade organizations wrote to congressional leaders on Sept. 17, 2018 opposing any legislation that reverses or limits the Supreme Court’s June 22 decision in South Dakota v. Wayfair, which allows States to collect tax owed on remote internet sales purchases.

Many states are seeking to expand their tax authority over online sales in the wake of the Supreme Court’s June 21 South Dakota v. Wayfair decision. The 5-4 Wayfair ruling strongly suggests that South Dakota’s law requiring remote sellers to collect sales tax on more than $100,000 of in-state sales or 200 transactions complies with constitutional law.
Virginia Finance Secretary Aubrey L. Layne Jr. recently told Bloomberg Tax that a state bill in next year’s Virginia legislative session would align with principles supported in the high court’s Wayfair decision. Layne said details of the bill may be unveiled in December and added, “My guess is it probably won’t be effective until July.” (BNA, Oct. 30)
Despite the Wayfair ruling, a bipartisan quartet of House members led by Rep. Jim Sensenbrenner (R-WI) introduced legislation on Sept. 13 that would prohibit states from requiring remote sellers with less than $10 million in national annual sales from collecting and remitting sales and use taxes – pending a compact approved by Congress. In addition to Sensenbrenner’s Online Sales Simplicity and Small Business Relief Act of 2018 (H.R. 6824), other bills in Congress would go even further in reversing the Wayfair decision. (Tax Notes, Nov. 7)
Opponents of the decision are asking Congress to include restrictions on States in an end-of-year bill. (Bloomberg, Oct. 24). However, legislation to roll back Wayfair is unlikely. Any major legislation must be negotiated by leaders of both parties, who have limited time during a Lame Duck session. Congressional negotiators are expected instead to focus on a handful of “must pass” bills.
The Real Estate Roundtable and seven other national trade organizations wrote to congressional leaders on Sept. 17 opposing legislation that reverses or limits Wayfair. (Wayfair Comment Letter, Sept. 17)

The business coalition letter explains that for more than a decade, industry groups “have undertaken significant efforts to establish economic parity between online and brick-and-mortar sellers that would better reflect the changing dynamics of today’s omnichannel marketplace. For Congress to insert themselves post-ruling only creates additional uncertainty and further complicates the implementation process, while undermining the level playing field created by the Wayfair decision.” (Roundtable Weekly, Sept. 21)

The eight organizations conclude the letter by offering to work with Congress on any problems that may arise from state implementation of remote internet sales tax collection allowed by Wayfair. (Roundtable Weekly, June 22)