News Type: Roundtable Weekly

Roundtable Urges Treasury to Clarify Tax Consequences of Transition Away from LIBOR as Reference Rate

Posted on by Trey Jackson

The Real Estate Roundtable yesterday asked the U.S. Treasury Department and IRS to reduce the risk of market disruption by clarifying the tax treatment of financial contracts that replace the expiring London Inter-bank Offered Rate (LIBOR) with a substitute reference rate.  Over $200 trillion of LIBOR contracts are outstanding, including roughly $1.3 trillion of commercial real estate debt. (Roundtable LIBOR letter, June 6)

The Real Estate Roundtable yesterday asked the U.S. Treasury Department and IRS to reduce the risk of market disruption by clarifying the tax treatment of financial contracts that replace the expiring London Inter-bank Offered Rate (LIBOR) with a substitute reference rate. (Roundtable LIBOR letter, June 6). 
  • The United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced in 2017 that it is phasing out the global borrowing index by the end of 2021.  LIBOR will need to be replaced in both new agreements and innumerable existing legacy contracts.
  • Several factors may necessitate or accelerate parties’ adoption of alternative reference rates on existing contracts well before the end of 2021.  To facilitate the transition, the Federal Reserve Bank of New York in 2018 began publishing an alternative U.S. benchmark to work alongside LIBOR – the Secured Overnight Financing Rate (SOFR).  (See: A User’s Guide to SOFR  and SOFR: A Year in Review)
  • However, several issues may be contributing to the reluctance of market participants to use SOFR, including the absence of necessary internal infrastructure to support its accounting and trading, and the lack of tax guidance. 
  • Roundtable President and CEO Jeffrey DeBoer noted in the comment letter, “If the terms of a debt instrument are significantly modified, for Federal income tax purposes there is a deemed exchange of the old debt for a new (modified) debt instrument.”  Without relief, this deemed exchange could trigger the recognition of taxable gain or loss for the lender, or debt discharge income for the borrower.
  • “Moreover, the tax consequences of the deemed exchange can arise without generating actual cash to pay any ensuing tax liability,” wrote DeBoer. 

    Randal Quarles – the Fed’s vice chairman in charge of financial regulation – reiterated the urgency of moving forward on the transition to SOFR. 

  • The Roundtable’s June 6 comments recommend that a safe-harbor rule confirm that a replacement index or formula identified by regulators, broad industry groups, or similar objective sources-or by the parties themselves in good faith-is not considered an alteration or modification of the original instrument.  The Roundtable letter states, “Instead, the replacement should be treated for Federal tax purposes as a continuation of the instrument’s original terms.”
  • This week, Randal Quarles – the Fed’s vice chairman in charge of financial regulation – reiterated the urgency of moving forward on the transition to SOFR:  “I believe that the ARRC has chosen the most viable path forward and that most will benefit from following it, but regardless of how you choose to transition, beginning that transition now would be consistent with prudent risk management and the duty that you owe to your shareholders and clients …. With only two and a half years of further guaranteed stability for LIBOR, the transition should begin happening in earnest.”  (Bloomberg, June 3)
  • The Wall Street Journal reported last July that companies were adopting SOFR sparingly –  despite regulators urging banks and traders to stop launching new Libor-based contracts ahead of the 2021 deadline. (WSJ, July 12 and Roundtable Weekly, July 13, 2018) 

The Roundtable letter was developed by a task force that included Tax Policy Advisory Committee (TPAC) Chairman Frank Creamer Jr., TPAC member Don Susswein, and chair of the Real Estate Capital Policy Advisory Committee (RECPAC) Working Group on LIBOR, Joseph Philip Forte.  On June 11, at The Roundtable’s Annual Meeting in Washington DC, Joseph Forte will lead a RECPAC discussion on real estate’s concerns with the LIBOR transition. 

President Trump Requests Democrats Pass USMCA Before Infrastructure Bill; House Ways and Means Member Introduces Gas-Tax Infrastructure Bill

Posted on by Trey Jackson

On the eve of a May 22 White House meeting to discuss a national infrastructure improvement package, President Trump sent a letter to Democratic congressional leaders requesting they first approve his trade deal with Canada and Mexico before taking up infrastructure legislation. (Bloomberg, May 21)

Legislation introduced May 22 by Rep. Earl Blumenauer (D-OR) would gradually increase gasoline and diesel taxes to invest in the nation’s infrastructure.  Blumenauer is a member of the tax-writing House Ways and Means Committee.

  • “Before we get to infrastructure, it is my strong view that Congress should first pass the important and popular [United States-Mexico-Canada Agreement (USMCA)] trade deal,” Trump wrote. “Once Congress has passed USMCA, we should turn our attention to a bipartisan infrastructure package,” he added.
  • Democrats and Trump agreed during a meeting last month to pursue a $2 trillion infrastructure package and meet again this week to discuss funding.  (Roundtable Weekly, May 3).  Trump cancelled the May 22 White House meeting and the talks failed to move forward.
  • In the House, legislation introduced May 22 by Rep. Earl Blumenauer (D-OR) would gradually increase gasoline and diesel taxes to invest in the nation’s infrastructure.  Blumenauer is a member of the tax-writing House Ways and Means Committee.
  • The Rebuild America Act would raise the fuels’ tax by five cents a year over five years, index it to inflation, and aim to replace it with a more stable source of funding within 10 years. (Blumenauer press release, May 22) 
  • The Roundtable on April 29 submitted infrastructure policy recommendations to House Committee on Transportation and Infrastructure Chairman Peter DeFazio (D-OR) and Ranking Member Sam Graves (R-MO).  As part of a suite of infrastructure recommendations, The Roundtable also proposed a gas “user fee” increase that aligns with Blumenauer’s bill.  (Roundtable Weekly, May 3)

House Ways and Means Committee Chairman Richard Neal (D-MA) is scheduled to discuss tax policy with Roundtable members on June 11 during the organization’s Annual Meeting in Washington, DC. 

 

2018 Ushers In Sweeping Tax Code Changes and a Loaded Congressional Agenda Under Threat of Jan. 19 Government Shutdown

Posted on by Trey Jackson

With sweeping tax code changes enacted last month now in effect, both chambers of Congress are returning to a packed legislative to-do list and looming policy deadlines – including the expiration of the latest round of government funding on Jan. 19. 

  With sweeping tax code changes enacted last month now in effect, both chambers of Congress are returning to a packed legislative to-do list and looming policy deadlines.

As businesses and individuals adjust to the new tax law’s various provisions, it is expected that the IRS will issue guidance on the largest change to the tax code in 31 years – including the 20 percent deduction for qualified business income; limitation on deductibility of business interest and losses; and deprecation and expensing of assets. The Roundtable will participate throughout 2018 in the regulatory and rulemaking process as technical questions and detailed tax guidance affecting commercial real estate are addressed by policymakers in Washington. (Roundtable Weekly, Dec. 22) 

This week, congressional leaders and Trump Administration officials met to discuss the need for a government spending measure to avoid a shutdown when the current “Continuing Resolution” (CR) expires Jan. 19.  Policymakers will seek to link other issues to a funding deal, such as overhauling the nation’s immigration system; funding for a border wall; and the status of  “Dreamers” – undocumented immigrants brought to the country as children. 

Other pressing policy issues needs that may be wrapped into the spending debate include disaster relief, electronic surveillance laws and the Children’s Health Insurance Program. Senate Minority Leader Chuck Schumer (D-NY) said on the Senate floor last month, “We can’t leave any of those issues behind.” (BNA, Jan. 3) 

The budget also affects issues of importance to CRE such as the National Flood Insurance and  EB-5 foreign investment programs. 

Since only eight scheduled legislative days are available for Congress and the Administration to agree on a new spending measure before the Jan. 19 expiration, another short-term CR may be passed to keep the government open – or a shutdown will result.    

This week also saw two new Democrats join the Senate, narrowing the Republican majority to 51-49.  After Sens. Doug Jones (D-AL) and Tina Smith (D-MN) were sworn in yesterday, the ability of Senate Majority Leader Mitch McConnell (R-KY) to attract 60 votes to pass most legislation in the Senate will become a greater challenge. 

In the House, Republican Speaker Paul Ryan (WI) has a 239-193 majority, yet pushback from certain Republican coalitions may necessitate Democratic votes to pass legislative initiatives.

Rep. Mark Meadows (R-NC), the chairman of the conservative House Freedom Caucus, recently told Bloomberg, “People are not going to come back singing the Sound of Music together. January is going to be contentious.”  (Bloomberg Government, Jan..2) 

The upcoming Roundtable State of the Industry Meetings will take place just days before President Trump’s first State of the Nation address on Jan. 30, when he may emphasize his infrastructure initiative.

Additionally, House Transportation and Infrastructure Committee Chairman Bill Shuster (R-PA) announced this week that he will not seek re-election, but emphasized he will be dedicated to passing an infrastructure bill this year.  Shuster, who addressed the Roundtable last spring (see Roundtable Weekly, April 7, 2017) said upon announcing his retirement, “About a week or so ago I had a private meeting with the president at the White House. Now when I say private meeting, it was the president and I in the Oval Office with his senior advisers and some of my senior people, and we talked about the infrastructure bill. He’s very excited. He seems to be ready to go, as we are, and so I think we’re going to have a good working relationship as we move forward.” (Washington Examiner, Jan. 2.) 

President Trump met yesterday with governors and local government leaders about nationwide infrastructure improvements.  Trump also will meet with Republican congressional leaders this weekend to discuss making infrastructure a top legislative priority this year. According to USA Today, the Administration will issue a new proposal later this month that would shift infrastructure project responsibilities to states and private investors by leveraging 200 billion dollars in federal funding to leverage 1 trillion in improvements. (USA Today, Jan. 5) 

Details of the new tax overhaul law, along with the budget outlook, immigration, infrastructure and other policy topics will be discussed in detail during The Roundtable’s State of the Industry and Policy Advisory Committee meetings on Jan. 24-25 in Washington. The meetings will take place just days before President Trump’s first State of the Nation address on Jan. 30, when he may emphasize his infrastructure initiative. 

Roundtable Member Joe Stettinius – Cushman & Wakefield’s CEO of Americas

Posted on by Trey Jackson

The Real Estate Roundtable is saddened by the recent passing of real estate industry veteran Joe Stettinius.  An active Roundtable member, he was most recently named executive vice chairman of strategic investments for the Americas at Cushman & Wakefield.

Joe Stettinius – Cushman & Wakefield’s CEO of Americas

Since the mid-1980s, Joe worked in every aspect of commercial real estate – from financing to development to research and leasing.  In 2010, he helped launched Cassidy Turley from a network of brokerages affiliated with Colliers International and his former employer, Cassidy & Pinkard. 

He played a key role in two significant mergers – Cassidy Turley’s merger with DTZ in January 2015, followed by DTZ’s merger with Cushman & Wakefield, which created a 43,000-employee global giant. (Biz Journals and BizNow, Feb. 2)

Cushman & Wakefield issued a statement that included, “Joe was committed to his friends and colleagues, helping them transform into the best version of themselves.  He will be remembered for his dedication to diversity – building a culture where all could succeed.” (Cushman & Wakefield, Feb. 2)

Commercial Real Estate Executives Positive Despite Cautious 2019 Outlook

Posted on by Trey Jackson

Commercial real estate industry leaders continue to acknowledge positive conditions in the economy and current real estate markets, while expressing some caution about 2019, according to The Real Estate Roundtable’s Q1 2018 Economic Sentiment Index released yesterday. 

Participants in the Q1 survey responded they are feeling comfortable about the stability of the real estate market in 2018, but many expressed concerns about what the market may look like in 2019.

— Full Report — 

 “As our Q1 Index shows, commercial real estate executives continue to anticipate strong near term asset values and capital availability,” said Roundtable President and CEO Jeffrey DeBoer. “Strong, growing commercial real estate markets go hand in hand with overall positive economic growth.  Moreover,  healthy commercial real estate markets directly benefit local communities by providing significant revenue to support local budgets and services,” DeBoer added.

The report’s Topline Findings include:

  • While the Q1 index came in at 54, there is a noticeable gap between the scores for current conditions (57) and future conditions (51). Responders are feeling comfortable about the stability of the real estate market in 2018, but many expressed concerns about what the market may look like in 2019.

  • With asset values nearing perceived peaks in gateway cities, the real estate community has demonstrated discipline many feel was absent in the previous cycle. Debt and equity sources of capital are making thoughtful, risk-weighted decisions.

  • Asset values continue to increase in secondary and tertiary markets as investors chase yield. In gateway and coastal cities, many responders feel that markets are nearing peak values.

  • For high quality investments in primary markets, responders feel there are many sources of debt and equity capital. Many responders suggested alternative lending platforms are providing increased competition.

President Trump Signs Budget Deal That Extends Government Funding Until March 23, Lifts Debt Ceiling for One Year and Sets Two-Year Budget Agreement

Posted on by Trey Jackson

During a week of thousand-point gyrations in the stock market and last-minute congressional votes to keep the government open, President Trump this morning signed a budget deal into law that ended a nine-hour government shutdown.  [Bipartisan Budget Act  legislation (H.R. 1892)]

The budget deal and spending measure – which passed the Senate today just before 2:00 AM, followed by a narrow approval vote in the House about 5:30 AM – includes:

The Congress passed the budget deal and spending measure early on the morning of Feb. 9, hours after the government technically shut down.

  • Another short-term Continuing Resolution funding the government through March 23;

  • An increase in the debt ceiling that is expected to last one year, addressing the matter until well after the mid-term elections;

  • An agreement to increase budget caps – and significantly increase spending – by $320 billion over the next two years, split between defense and non-defense domestic spending;

  • Disaster relief funding and renewal of a slew of expired tax provisions.  (The bill does not address the controversial DACA issue – the status of immigrants brought to the U.S. as children.)

Although the measure includes a clean, one-year retroactive extension of the Section 179D tax deduction for energy efficient buildings through 2017, it does not include any technical corrections to the landmark tax overhaul enacted in December. Those corrections are expected later this year in separate legislation.

Next, President Trump is scheduled to submit the Administration’s 2019 budget proposal as House and Senate appropriators begin work on 12 bills that may fund the government beyond March 23 – until the remainder of FY2018 through September 30.

The Senate Finance Committee released its Summary of the Tax Extenders Agreement explaining the extension of several temporary tax provisions.  The Joint Committee on Taxation issued JCX-4-18, estimating that the tax provisions in the Bipartisan Budget Act of 2018will cost about 17.4 billion dollars over the next decade. 

Other real estate-related tax provisions in the bill extend tax credits for energy-saving improvements to homes, continue the income exclusion when home mortgage debt is forgiven, and extend the individual deduction for home mortgage insurance. 

The National Flood Insurance and EB-5 programs are also extended through March 23, 2018.  This is the 12th short-term, status quo extension of EB-5 since Sept 2015.

Next, President Trump is scheduled to submit the Administration’s 2019 budget proposal on Monday as House and Senate appropriators begin work on 12 bills that may fund the government beyond March 23 – until the remainder of FY2018 through September 30.

House Passes ADA Reform Bill to Counter “Drive-By” Lawsuits

Posted on by Trey Jackson

The House of Representatives on Wednesday passed legislation (H.R. 620) to reform the American With Disabilities Act (ADA) to curb unscrupulous lawsuits alleging minor and easily correctable impediments to building access.  

The House of Representatives on Feb. 14 passed legislation (  H.R. 620  ) to reform the American With Disabilities Act (ADA) to curb unscrupulous lawsuits alleging minor and easily correctable impediments to building access.

Approved by a 225-192 vote, The ADA Education and Reform Act (H.R. 620), attracted 12 Democratic votes to address the rise in so-called “drive-by” lawsuits where disabled individuals never actually seek access to properties that are allegedly ADA non-compliant.  A 60 Minutes  segment in 2017 reported on lawyers filing ADA complaints simply after driving by a business or reviewing properties online via Google Earth.  Many business owners subjected to such “drive-by” ADA claims have found it less costly to settle complaints and avoid the litigation process. (International Council of Shopping Centers, ADA Lawsuit Reform) 

Under H.R. 620, individuals intent on suing hotels, restaurants or other businesses over an ADA violation must first give the business 60 days to address specific complaints, detailed in an initial written notice, about physical barriers that prevent access or otherwise discriminate against disabled customers. Before a law suit can be filed, another 60 days must be allowed for the business to make “substantial progress” toward remedying the problem. (Washington Post and BNA, Feb. 15) 

House Judiciary Committee Chairman Bob Goodlatte (R-VA) noted, “All this bill does is require those unscrupulous trial lawyers to do what ethical lawyers already do: give fair notice of a violation before thousands of dollars in attorneys’ fees are racked up against a small business, diverting money from accessibility where it belongs,” Goodlatte said.  (The Hill, Feb. 15, 2018) 

Tom McGee, president and CEO of the International Council of Shopping Centers (ICSC), applauded policymakers for “ensuring that the landmark [ADA] continues to protect disabled people from discrimination in their everyday life – from employment to accessing public places.  The retail real estate industry is fully committed to the collective goals of more accessibility and ensuring fair compliance with this important law,” he said.  (Roundtable Weekly, Sept 8, 2017) 

ICSC and other real estate groups intend to pursue a strategy to pass ADA litigation reform in the Senate in the coming months.

Omnibus Spending Bill Delayed as Government Funding Deadline Looms

Posted on by Trey Jackson

Lawmakers struggling over policy and program disagreements related to a $1.2 trillion “omnibus” spending bill have pushed a congressional vote to next week – closer to March 23, when current funding expires.

Lawmakers struggling over policy and program disagreements related to a $1.2 trillion “omnibus” spending bill have pushed a congressional vote to next week – closer to March 23, when current funding expires.

After President Trump signed a budget deal in February that ended a nine-hour government shutdown, a fifth Continuing Resolution is in place that funds the government through next Friday.  House and Senate appropriators have since been working on an all-encompassing omnibus, which would fund government programs through September 30, when the FY2018 budget period ends.  (Roundtable Weekly, Feb. 9)

Of importance to commercial real estate, the National Flood Insurance and EB-5 programs are funded through March 23.  EB-5 is operating under its 12th, short-term, status quo extension since Sept 2015.

Disputes over funding for various programs will delay release of the omnibus spending package text until Sunday night or Monday morning.  That timeline would likely result in a House vote on March 21, leaving only two days for the Senate to vote before current funding expires.  (BNA, March 15)

Senate Majority Whip John Cornyn (R-TX) yesterday noted several programs that he does not expect to be included in the omnibus, including a bill that addresses the future of young undocumented immigrants covered by the Deferred Action on Childhood Arrivals program (DACA).  Cornyn also said a border security plan, including funding for a wall on the Mexican border, is also unlikely to be included in any funding legislation. (BNA, March 15) 

When asked if a sixth continuing resolution would be necessary to avoid a government shutdown beyond March 23, Rep. Mario Diaz-Balart (R-FL.), chairman of the House Appropriations Transportation-HUD Subcommittee, responded, “Oh God, please tell me no. I don’t think so. Maybe I’m just an optimist, but no, I really don’t think so.”  (BNA, March 15)

An omnibus spending package could be the last major bill passed by Congress before the 2018 midterm elections.

The government’s FY2018 budget and its effect on programs affecting commercial real estate will be a focus of The Roundtable’s April 25 Spring Meeting in Washington, DC.

Senate Passes Dodd-Frank Reform Legislation With Roundtable-Backed HVCRE Provision; Bill Faces Headwinds in House

Posted on by Trey Jackson

The Senate on Wednesday passed (67-31) bipartisan Dodd-Frank reform legislation (S. 2155) that includes a Roundtable-supported measure to reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule, which would clarify specific requirements for acquisition, development, or construction (ADC) loans.

   The  Senate bill , crafted by Banking Committee Chairman Mike Crapo, represents the most significant change to financial regulatory law since 2010.

The HVCRE measure included in the Economic Growth, Regulatory Relief, and Consumer Protection Act originated in the U.S. House of Representatives as the Clarifying Commercial Real Estate Loans bill (H.R. 2148) – introduced by House Financial Services Committee members Rep. Robert Pittenger (R-NC) and Rep. David Scott (D-GA).  An identical measure in the Senate – S. 2405 – co-sponsored by Senators Tom Cotton (R-AR) and Doug Jones (D-AL), was taken up in February by the Senate Banking Committee. 

With S. 2405 included in the larger Senate bill, crucial clarifications to the HVCRE Rule now move forward to the House.  The current, overly broad Rule would be modified by providing bank lenders with more specific requirements for acquisition, development, or construction (ADC) loans. These reforms to HVCRE loan definitions would provide greater assurances for performing loan portfolios with low risk, bolster credit capacity and preserve economically responsible commercial real estate lending. (Roundtable Weekly, Jan. 12). 

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 specific reforms. (Roundtable letter, March 2) 

The Senate bill, crafted by Banking Committee Chairman Mike Crapo, represents the most significant change to financial regulatory law since 2010.  It raises the amount at which banks are considered “too big to fail” – from the current $50 billion threshold to $250 billion – while providing additional relief for community banks and credit unions. 

The Roundtable and twelve other real estate organizations recently sent a  comment letter urging that the HVCRE measure (S. 2405) be included in the broader Dodd-Frank reform package (S. 2155).

The bill also exempts banks with assets valued at less than $10 billion from the “Volcker Rule,” which prohibits banking agencies from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds. Certain banks are also exempted from specified capital and leverage ratios, with federal banking agencies directed to develop new requirements. 

Onward to the House 

The Senate legislation faces significant challenges next week in the House, which passed the Financial CHOICE Act (H.R. 10) in June with more far-reaching revisions to Dodd-Frank. 

House Financial Services Committee Chairman Jeb Hensarling (R-TX) has identified approximately 30 additional House bills he would like to see attached to the Senate deal, which could jeopardize the support of Senate moderates.  (Bloomberg, March 15) 

Hensarling yesterday said that House Speaker Paul Ryan (R-WI) promised that no action will be taken on the Senate’s Dodd-Frank rollback until members from both chambers meet to negotiate.  “It is a little presumptuous or naïve that the House would not expect to enter into a negotiation with the Senate,” Hensarling said. “Some seem to be under the impression that we are going to vote on their bill.”  (BNA, March 15) 

According to a White House statement immediately following passage of the Senate bill, “The President looks forward to discussing any further revisions the House is interested in making, with the goal of bipartisan, pro-growth Dodd-Frank relief reaching his desk as soon as possible.” 

Negotiations between House members, and between the two chambers, will begin in earnest next week, prior to the two-week Easter recess scheduled for the end of the month.

Fed Raises Interest Rates, Signals More Hikes, Boosts Economic Forecasts

Posted on by Trey Jackson

In the Federal Reserve’s first major decision under new Chairman Jerome Powell, the central bank on Wednesday raised the federal funds rate 25 basis points (to a range of 1.5 percent to 1.75 percent) and boosted its U.S. economic growth forecast for 2018 and 2019.  (Federal Reserve Statement and Projections, March 21).

Federal Reserve Chairman Jerome Powell held his first news conference since becoming Chairman, echoing the Federal Open Market Committee’s views on a strengthened economic outlook in recent months.

During a week when the Trump Administration slapped $50 billion in trade tariffs on China, followed by a 724 point plunge in the Dow Jones Index, the Fed also voted unanimously to approve a 25-basis-point increase in the primary credit rate to 2.25 percent, affecting what commercial banks and other depository institutions pay on loans from regional Federal Reserve Banks.

The Fed is expected to lift the rate two or three more times this year, and three times next year, citing a strengthening labor market and moderately rising economic activity, partnered with a consistent low unemployment rate, as reasons for further hikes. (Reuters and Federal Reserve Statement, March 21).

Chairman Powell held his first news conference since becoming Fed Chairman, echoing the Federal Open Market Committee’s views on a strengthened economic outlook in recent months, “Fiscal policy has become more simulative, ongoing job gains are boosting incomes and confidence, foreign growth is on a firm trajectory, and overall financial conditions remain accommodative.” (The Washington Post, March 21)

Fed officials significantly changed their economic forecast from their previous projection done before the Tax Cuts Jobs and Act passed in December, with GDP for 2018 originally at 2.5 percent increased to 2.7 percent, and increased the 2019 expectation from 2.1 percent to 2.4 percent.  (The Washington Post, March 21).

“The job market remains strong, the economy continues to expand, and inflation appears to be moving toward the FOMC’s 2 percent longer running goal,” said Powell. (Bloomberg, March 21)

The Federal Reserve will hold their next meeting in early May.