Debt Ceiling Compromise Passed Days Before National Default Deadline
Bipartisan Legislation Reintroduced to Allow Greater REIT Equity Investments in Distressed Retail Tenants
Roundtable Weekly
June 2, 2023
Debt Ceiling Compromise Passed Days Before National Default Deadline
Capitol side view

Congress passed compromise legislation this week to suspend the debt ceiling for two years and restrain government spending, sending it to President Biden for his signature and calming world financial markets days before a US government default. (CQ and Wall Street Journal, June 2)

After the Debt Ceiling

  • The House on Wednesday night passed the Fiscal Responsibility Act (H.R. 3746)—forged by President Joe Biden, House Speaker Kevin McCarthy (R-CA), and their negotiation teams—to suspend the nation’s $31.4 trillion debt limit until Jan. 1, 2025 and cut spending by at least $1.5 trillion. The Senate approved the bill last night by a bipartisan vote of 63-36. (Congressional Budget Office, May 30 and Associated Press, May 26)

  • "No one gets everything they want in a negotiation, but make no mistake: this bipartisan agreement is a big win for our economy and the American people," President Biden stated last night. "I look forward to signing this bill into law as soon as possible..." (White House statement, June 1)

  • House policymakers have signaled they may follow the debt ceiling crisis with a legislative tax proposal that could include significant measures affecting commercial real estate. (Roundtable Weekly, May 26)

  • Congressional action on such measures would come at a time when the office sector faces difficult conditions, including asset price discovery and tighter liquidity. (Wall Street Journal, May 30 Financial Times, May 29 | GlobeSt, May 26) 

Economic Conditions & CRE

Ross Perot, Jr. on Bloomberg TV
  • Real Estate Roundtable Chair John Fish (Chairman and CEO, SUFFOLK) explained the economic conditions facing CRE and the office market, along with other pressures such as remote work and a shortage of labor, in a May 26 Boston Globe interview. “We’re in a very precarious situation,” Fish said.

  • Roundtable Board Member Ross Perot, Jr., above, (Chairman, The Perot Companies and Hillwood) discussed the financing challenges faced by some CRE sectors in an interview with Bloomberg TV on Wednesday. “If the industry can’t get a construction loan, real estate will have a recession,” Perot said. “The key to commercial real estate today will be banking.”

  • The Federal Reserve’s “Beige Book” issued this week also reported on the nation’s current overall economic activity, noting, “Commercial construction and real estate activity decreased overall, with the office segment continuing to be a weak spot.” (GlobeSt, May 31)

  • Additionally, Trepp’s CMBS Delinquency Report issued this week showed the nation’s overall CMBS delinquency rate hit a 14-month high, topping 4% for the first time since 2018. Although May’s delinquency rate jumped to 3.62%, up 53 basis points for the month, the all-time high registered 10.34% in July 2012 and the COVID-19 high reached 10.32% in June 2020.

  • Federal Reserve monetary policies, congressional fiscal policy, potential tax measures, and other issues impacting CRE will be discussed during The Real Estate Roundtable’s Annual Meeting on June 13-14 in Washington, DC.

The Roundtable meeting includes policy advisory committee meetings—open to all members—that will feature prominent policymakers, including Senate Banking Committee Member Bill Hagerty (R-TN); House Ways and Means Committee Chairman Jason Smith (R-MO); David Crane, the US-DOE’s Director of the Office of Clean Energy Demonstrations; and Alejandra Nunez, US-EPA Assistant Administrator overseeing climate policy.

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Bipartisan Legislation Reintroduced to Allow Greater REIT Equity Investments in Distressed Retail Tenants
Retail tenant distress

Bipartisan legislation reintroduced this week by House Ways and Means Committee Members Darin LaHood (R- IL) and Brad Schneider (D-IL) would allow real estate investment trusts (REITs) to make greater equity investments in retail tenants that have yet to recover from the pandemic’s economic impact. 

Support for Retail Tenant Assistance

  • The Retail Revitalization Act (H.R. 3749) is aimed at unlocking capital for productive investment and helping prevent further large-scale job losses and bankruptcies in the retail sector and its supply chain. (Congressional Record, May 30)

  • As of May 5, ten major retailers had filed for bankruptcy protection in 2023. The number of retail failures, which includes Bed Bath & Beyond, David’s Bridal, and Party City, is already twice the level of 2022. More bankruptcies are anticipated. (Forbes, May 5 and Forbes, May 15)
  • Real Estate Roundtable President Jeffrey DeBoer stated, “The Retail Revitalization Act would reform an outdated section of our tax code that currently prevents the commercial real estate industry from stepping forward and deploying its own capital to solve significant economic challenges. Retail bankruptcies have negative consequences for employees, surrounding businesses, and local communities. This bipartisan legislation to allow REITs to invest more heavily in their tenants is exactly the type of cost-effective, commonsense measure that everyone can and should support. The bill will save jobs, increase local tax revenue, and create a stronger foundation for future economic growth.”

Amending REIT Rules

REITs - graphic
  • The LaHood-Schneider legislation—strongly supported by The Real Estate Roundtable—would modify tax provisions limiting REITs’ ability to invest equity capital in their retail tenants. The bill would amend existing “related-party rent” rules by:

    • increasing the capacity of a REIT to own the equity of a distressed tenant from 10% to 50% and from 10% to 30% for all other tenants;

    • changing the ownership attribution rules used to determine what is considered related party rent under current REIT rules to the general ownership attribution rules used elsewhere in the tax code, and;

    • changing the limitation on space that a REIT can lease to its taxable REIT subsidiary.

Tax Policymakers

  • House Ways and Means Committee Chairman Jason Smith (R-MO)Tax proposals such as H.R. 3749 and others will be discussed during TPAC, held in conjunction with The Roundtable’s all-member Annual Meeting on June 13-14 in Washington, DC. TPAC speakers will include:

    • House Ways and Means Committee Chairman Jason Smith (R-MO), above

    • House Ways and Means Committee Member Brad Schneider (D-IL)

    • Joint Committee on Taxation Chief of Staff Thomas Barthold

    • Senior staff from Senate Finance Committee and House Ways and Means Committee

TPAC will also feature a panel session on “Post-Pandemic Real Estate Challenges and Tax Policy: Debt Workouts / Tax Incentives for Property Repurposing, Community Revitalization, and Housing.” All Roundtable members are encouraged to attend.

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