Build Back Better Act Negotiations in โ€œCooling Offโ€ Period as Congress Prioritizes Pressing Issues
Final IRS Regulations Reduce Tax Risks When Replacing LIBOR With Alternative Benchmarks
Real Estate Roundtable and Other Stakeholders Urge Congress to Extend Expiring Opportunity Zone Tax Incentive Deadlines
Roundtable Weekly
January 7, 2022
Build Back Better Act Negotiations in โ€œCooling Offโ€ Period as Congress Prioritizes Pressing Issues
Build Back Better phone on map

Democrats this week signaled that negotiations over the Build Back Better (BBB) Act are in a “cooling off” period as Congress turns its immediate focus to pressing policy issues such as voting rights legislation and filibuster rules reform. (The Hill, Jan. 5) 

BBB’s Climate Provisions 

  • Congress will face several other deadlines in the New Year, including a possible push later this month by Senate Democrats for a vote on the Build Back Better (BBB) Act, the need to extend funding for federal government operations beyond February 18, and the looming November mid-term elections. (Bloomberg and Roll Call, Jan. 3)

  • Discussion on how to revive the multitrillion BBB Act followed Sen. Joe Manchin’s (D-WV) Dec. 19 statement on Fox News that he opposed the package. Manchin is a key vote in the 50-50 Senate to pass the BBB Act under reconciliation rules, which require a majority vote for passage.

  • Manchin, who chairs the Senate Energy Committee, last month offered the White House a $1.75 trillion proposal that included funding for climate initiatives supported by The Roundtable. (Wall Street Journal, Jan. 4)

  • Sen. Manchin affirmed on Tuesday that he shares the views of the Democratic caucus on the climate portions of the BBB package. “The climate thing is one that we probably could come to an agreement much easier than anything else,” Manchin said. (E&E News, Jan. 4)

  • Sen. Manchin wants to restructure other aspects of the BBB bill, possibly paring down the cost of its healthcare, childcare and housing initiatives. (Wall Street Journal, Jan. 5)

  • If the Senate ultimately passes the BBB Act in a manner that changes the House-approved version (H.R. 5376), the bill would need to go back to the House for another vote before it reaches President Biden’s desk. (Roundtable Weekly, Nov. 19) 

Roundtable Support for Clean Energy Tax Provisions 

Houston at night
  • The BBB Act includes $550 billion for measures to fight climate change, which include a suite of Roundtable-supported clean energy tax credits and incentives amounting to $300 billion.   
  • The Roundtable sent a letter to Congressional tax writers on Nov. 16, 2021 detailing five recommendations that aim to improve green energy tax provisions affecting real estate. The Roundtable letter urged further changes to the BBB Act that would advance objectives aimed at slashing GHG emissions and making rapid progress toward a “net zero” economy by mid-century. (Roundtable letter, Nov. 16)

  • The letter’s recommendations would increase and scale deployment of low- and zero-carbon technology in the nation’s commercial and multifamily building infrastructure.

  • The need to address funding to keep the government is also pressing upon Congress. Current funding is authorized under a “Continuing Resolution” through Feb. 18, 2022. Congress has not yet reached agreement on full-year funding for fiscal 2022, which began Oct. 1, 2021. 

The Roundtable will discuss its policy agenda for the new year during its Jan. 25-26 State of the Industry meeting (virtual), along with potential changes to the BBB Act, and how the mid-term elections in November may impact the congressional agenda. 

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Final IRS Regulations Reduce Tax Risks When Replacing LIBOR With Alternative Benchmarks
LIBOR graphic

The IRS on Dec. 30 issued final regulations clarifying how parties can replace the London Interbank Offered Rate (LIBOR) as a reference rate in mortgages and other financial contracts without triggering negative tax consequences. The Real Estate Roundtable offered extensive input and comments during the Treasury Department’s LIBOR regulatory review. 

LIBOR Transition, Roundtable Comments & Tax Guidance 

  • LIBOR is currently used in outstanding financial contracts worth an estimated $223 trillion, including commercial real estate debt, mortgages, student loans and derivatives. (Roundtable Weekly, July 30)

  • Financial regulators are phasing out LIBOR in its current form following serious cases of manipulation.

  • The anticipated replacement of LIBOR in existing financial contracts poses a potential tax problem – avoiding a deemed taxable “exchange” of the contract if the replacement index is viewed as “significantly modifying” the interest rate or yield of the existing contract.

  • In June 2019, Roundtable President and CEO Jeffrey DeBoer wrote to Treasury officials and emphasized, “… addressing the tax issues associated with the transition away from LIBOR is critical to the stability of financial markets, the real estate industry, and the overall economy.” (Roundtable LIBOR letter, June 6, 2019)
  • The Roundtable letter offered a suggested framework for tax guidance that would clarify when a replacement rate is not considered a significant modification. The IRS issued favorable proposed rules shortly thereafter, in October 2019.

  • The final IRS regulations provide bright-line rules for determining when replacement of LIBOR with an alternative rate in a contract qualifies as a “covered modification,” which is not treated as a taxable exchange of property under the tax code. (Federal Register, Guidance on the Transition From Interbank Offered Rates to Other Reference Rates; ABA Banking Journal, Jan. 3)

  • The final tax rules generally are effective for contract modifications made on or after March 7, 2022.
  • The Roundtable’s initial recommendations were developed with the assistance of an industry 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.  

Tough Legacy Contracts 

Libor transition to SOFR image

  • Another significant LIBOR issue is a safe harbor for market participants seeking to transition to a replacement benchmark for debt instruments, such as the Secured Overnight Financing Rate (SOFR). Some difficult LIBOR-based contracts – referred to as “tough legacy” – have insufficient fallback language or include provisions that cannot be amended. (Roundtable Weekly, Dec. 10, 2021)

  • Legislation passed by the House of Representatives on Dec. 8, 2021 would protect trillions in “tough legacy” contracts that use LIBOR as a reference rate for financial transactions. The bill (H.R. 4616) provides a safe harbor for market participants and includes a federal preemption.

  • The House bill also provides that when LIBOR reaches its final replacement date on June 30, 2023, all contracts with no adequate fallback provisions for an alternative benchmark substitute will be replaced with SOFR.
  • The Roundtable and 17 national trade groups previously submitted letters this year on April 14 and July 27 to House Financial Services Committee policymakers in support of legislation to address “tough legacy” contracts during the transition away from LIBOR.
  • The Roundtable and a broad coalition of industry groups have long-supported measures to ensure that the transition away from the LIBOR reference rate does not cause market disruptions or diminish credit capacity. (Industry Coalition letter, Dec. 7, 2021 and BloombergDec. 8, 2021) 

LIBOR transition issues will be discussed during The Roundtable’s Jan. 25-26 virtual State of the Industry Business Meeting and at scheduled TPAC and RECPAC meetings. 

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Real Estate Roundtable and Other Stakeholders Urge Congress to Extend Expiring Opportunity Zone Tax Incentive Deadlines
IRS OZ image Congress should extend expiring tax incentives that promote investment and jobs in Opportunity Zones (OZs) as soon as possible, according to a letter to Congressional leaders from a diverse coalition of 22 organizations that includes The Real Estate Roundtable. (Dec. 21, 2021 coalition letter)  OZ Tax Incentives Expiration 
  • Established in the Tax Cuts and Jobs Act of 2017, OZs mobilize capital for new businesses and economic activities in targeted, low-income areas. A significant share of OZ investment has gone towards productive real estate projects that create new, sustainable sources of local tax revenue and increase the supply of affordable and senior housing.
  • Taxpayers that invest existing capital gains in a qualified opportunity fund are potentially eligible for tax benefits on both the prior gain and any gains that relate to the opportunity fund’s investments. However, the deadline for OZ investments to qualify for a partial capital gains exclusion with respect to gains that are deferred and rolled into an opportunity fund expired on December 31, 2021. 
  • Specifically, in order for an investor to qualify for a 10 percent step-up in the basis of a prior investment, the gain must be held in an opportunity fund for five years before it is recognized and tax. Under the OZ law, gains rolled into an opportunity fund are recognized at the end of 2026. Therefore, unless the gain was invested in an opportunity fund by then end of 2021, it will be taxed prior to meeting the five-year requirement.
  • The coalition letter urges Congressional leaders to extend the 10 percent step-up deadline through the end of 2023 and the deferred gain recognition date until the end of 2028
OZ Impact  OZ image construction
  • The coalition letter noted that the White House Council of Economic Advisors in 2020 estimated Opportunity Funds had raised $75 billion in private capital in the first two years following the incentives’ enactment. The Council also estimated this capital could lift one million people out of poverty and decrease poverty in OZs by 11 percent.  (The Impact of Opportunity Zones: An Initial Assessment, Aug. 2020)
  • More recently, the U.S. Government Accountability Office estimated that 6,000 opportunity funds with more than 18,000 partners or shareholders invested $29 billion in OZs in 2019. (GAO: Opportunity Zones: Data on Investment Activity
OZ Program Improvements 
  • The coalition also supports congressional improvements to OZ tax incentives, such as enhanced information reporting, data collection, transparency, and lowering the substantial improvement threshold to cover a broader range of real estate rehabilitation and redevelopment projects.
  • Congressional tax-writing committees have not taken up bipartisan legislative proposals to improve the OZ program. 
The Roundtable’s Tax Policy Advisory Committee (TPAC) will discuss the OZ tax incentives and other real estate-related tax policies during their next meeting on Jan. 26 in conjunction with The Roundtable’s State of the Industry business meeting.   #  #  #