Draft Legislation to Reauthorize TRIA 10 Years Circulated by House Financial Services Committee
Treasury Issues Final Regulations Modifying Rules for Allocating Real Estate Debt Among Partners
Treasury Unveils Proposed Regulations to Resolve Tax Questions Related to LIBOR Cessation
California’s Governor Signs Rent Control Law Amid Growing List of Jurisdictions Seeking to Address Housing Affordability
Roundtable Weekly
October 11, 2019
Draft Legislation to Reauthorize TRIA 10 Years Circulated by House Financial Services Committee
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A draft bill to reauthorize the Terrorism Risk Insurance Act (TRIA) for 10 years is expected to be the focus of next week’s House Financial Services Committee hearing “Protecting America: The Reauthorization of the Terrorism Risk Insurance Program.”

committee memo distributed this week notes that Committee Chairwoman Maxine Waters (D-CA) will introduce the draft reauthorization bill

The Oct. 16 hearing will be webcast live here.

  • According to background provided by the Financial Services Committee memorandum, following the September 11, 2001 terrorist attacks, “Analysts warned that the disappearance of affordable terrorism risk coverage would negatively affect the larger U.S. economy due to the importance of commercial insurance in a variety of business transactions.”  
  • In response, Congress passed the Terrorism Risk Insurance Act of 2002 (TRIA), which established the first federal backstop for terrorism risk insurance. Specifically, TRIA established the Terrorism Risk Insurance Program (TRIP) within the Department of Treasury to provide federal reinsurance in the event of catastrophic losses.
  • TRIA was extended in 2005, 2007 and again in 2015 – following a 12-day lapse when Congress failed to complete their work on reauthorization at the end of 2014.
  • With TRIA currently set to expire at the end of 2020, a long-term, clean reauthorization is a top priority for The Real Estate Roundtable.  TRIA was a key topic of discussion last week during meetings of The Roundtable’s Homeland Security Task Force and Real Estate Capital Policy Advisory Committee in New York City. 
  • During an October 1 podcast episode of “Through The Noise,” Roundtable President and CEO Jeffrey DeBoer noted, “Businesses and facilities of all types need to see the terrorism risk insurance program extended. This need applies to hospitals, all commercial real estate buildings, educational facilities, sports facilities, NASCAR and theme parks, and really any place where commercial facilities host large numbers of people."
  • The Roundtable and nearly 350 companies and organizations urged Congress on Sept. 17 to swiftly pass a long-term TRIA reauthorization. (Roundtable Weekly, Sept. 20)
  • A 2018 Treasury Department report noted that 78 percent of all TRIA-eligible policies included terrorism risk insurance coverage. Treasury data also showed that the take-up rate for terrorism risk insurance did not vary significantly by region (74 percent in the Northeast, 82 percent in the Midwest, 76 percent in the South, and 82 percent in the West). 
  • Treasury concluded that TRIP has been effective in making terrorism risk insurance available and affordable in the insurance marketplace.  (Treasury, Report on the Effectiveness of the Terrorism Risk Insurance Program, June 2018)
  • Additionally, Financial Services Committee Member Carolyn Maloney (D-NY) hosted an Oct. 8 roundtable discussion on TRIA reauthorization in New York City with Reps. Nydia Velazquez (D-NY), Gregory Meeks (D-NY) and industry stakeholders.
  • Rep. Maloney stated, “The magnitude and importance of the Terrorism Risk Insurance Act cannot be overstated. TRIA provides critical government backup to private insurers in the event of a terrorist attack and is especially vital to the economy of New York City. This morning I hosted a roundtable meeting alongside my colleagues in Congress and industry stakeholders to discuss how TRIA is working now, whether there should be any changes made to this legislation before reauthorization, and when Congress needs to act.”

She added, “What we learned today is that all the stakeholders agree that Congress should pass a clean, long-term reauthorization of this critically important legislation — without delay. The Terrorism Risk Insurance Act is one of the most important issues before Congress and it must be renewed with no disruption to coverage and no lapse in renewal.”  (Rep. Maloney news release, Oct. 8 and Twitter photo)

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Treasury Issues Final Regulations Modifying Rules for Allocating Real Estate Debt Among Partners

Final regulations released by the Treasury Department last Friday and effective October 9 provide new tax guidance on the allocation of liabilities between partners in a real estate partnership.  The new rules bring to a conclusion a regulatory project that started over six years ago.

  • How real estate debt and other liabilities are allocated among partners when property is contributed to a partnership carry important tax consequences.  Allocation rules can determine whether built-in gain is recognized or deferred at the time of the contribution.  The rules also affect whether a partner obtains sufficient tax basis to deduct future losses.  Generally, a partner receives full basis for partnership debt if the debt is recourse and the partner is obligated to pay off the loan in the event the partnership defaults.
  • The new regulations will likely complicate taxpayers’ ability to achieve a preferred allocation of real estate liabilities (and deductions) through the use of liability guarantees such as “bottom guarantees,” capital account deficit restoration obligations, and other payment or reimbursement arrangements. 
  • A bottom guarantee is a guarantee of the last dollars of a liability.  The lender may pursue the guarantor only if the lender is unable to collect at least the guaranteed amount of the loan from the borrower.  The final rules will largely restrict the use of bottom guarantees.  Treasury expressed concerns that bottom guarantees lack a non-tax commercial purpose, are “structured to insulate the obligor from having to pay,” and do not represent a real economic risk of loss.
  • On four separate occasions, The Roundtable submitted comments on the partnership liability regulatory project, which began in 2013. Additionally, a working group from The Roundtable’s Tax Policy Advisory Committee (TPAC) previously met with Treasury and IRS officials.  The Roundtable had concerns that changes would disrupt longstanding partnership tax rules and increase the tax liability of previously untaxed real estate reorganization transactions.  [Roundtable Comment Letters: March 13, 2013 and April 7, 2017  and August 7, 2017 
  • Input from The Roundtable, TPAC members and other stakeholders contributed to several revisions to the proposed rules over the last five years.  The rules published in the Federal Register on October 9 finalize temporary regulations under section 752 that were released in 2016 and scheduled to expire this month.  Those 2016 regulations were revised versions of the rules initially proposed in 2014.  The October 9 rules also finalize proposed regulations issued in June 2018 that walked back 2016 proposed regulations with respect to the allocation of debt in “disguised sales” transactions under section 707. 
  • The preamble to the final rules notes that Treasury continues to consider the appropriate treatment of “exculpatory liabilities” that are recourse to an entity under state law, but where no partner bears the economic risk of loss.

The final regulations provide critical transition relief.  The rules generally apply to liabilities incurred or assumed by a partnership, and to payment obligations imposed or undertaken with respect to a partnership liability, on or after October 9, 2019.  The new restrictions do not apply if the liability was incurred or assumed by a partnership, or the payment obligation was imposed or undertaken, pursuant to a written binding contract in effect prior to October 9.

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Treasury Unveils Proposed Regulations to Resolve Tax Questions Related to LIBOR Cessation

The Treasury Department on Monday released proposed regulations to clarify the tax consequences of replacing the expiring London Inter-bank Offered Rate (LIBOR) in existing financial contracts, including real estate loans. The proposed rules largely align with Roundtable recommendations submitted over the summer. (Roundtable LIBOR letter, June 6 and Roundtable Weekly, June 7)

  • LIBOR is used as a reference rate in an estimated $200 trillion of financial contracts, including $1.3 trillion of commercial real estate loans.  In response to concerns regarding manipulation of LIBOR, UK financial authorities are phasing it out; LIBOR is expected to cease operation as working interest rate index by 2021. 
  • The replacement of LIBOR in existing agreements presents important tax questions.  “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," wrote Roundtable President and CEO Jeffrey DeBoer in the organization’s June 6 comment letter
  • 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," continued DeBoer.  
  • As The Roundtable had recommended, the Treasury’s proposed regulations give borrowers and lenders the flexibility they need to replace LIBOR with virtually any other index that reflects objective changes in the cost of borrowing money – such as a broad index of Treasury or corporate borrowing rates – in addition to a list of rates suggested by various regulators. 
  • Don Susswein (RSM), a member of the Roundtable’s Tax Policy Advisory Committee (TPAC) and one of the architects of The Roundtable’s comments, noted, “The key to the flexibility is a reasonable safeguard to ensure that the parties are acting in good faith primarily to preserve their original deal—not modifying it to compensate for changed circumstances.”
  • As a safeguard to prevent potential abuse, the proposed regulations require that the fair market value of the modified instrument be “substantially equivalent” to its value before modification.  
  • Another key TPAC member, Joe Forte (Sullivan & Worcester) said, “It is clear that the hesitation of many market participants to transition from LIBOR to SOFR has been uncertainty concerning the tax and accounting treatment of the rate modification. Following on FASB’s Exposure draft on reference rate reform last month, the new Treasury/IRS guidance addressing the tax consequences of rate modification of cash contracts and derivatives has proposed two safe harbors similar to those The Roundtable proposed.”
  • “The Treasury and IRS deserve high marks for proposing a sound, rational framework early in the LIBOR transition to address with these challenging issues and remove tax uncertainty,” said DeBoer.  

Comments on the proposed rules are due by November 25, 2019.  Taxpayers may rely immediately on the proposed rules when evaluating the tax consequences of an alteration of the terms of a loan or other contract, provided the taxpayer consistently applies the rules. 

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California’s Governor Signs Rent Control Law Amid Growing List of Jurisdictions Seeking to Address Housing Affordability

California Governor Gavin Newsom (D) on October 9 signed into law a statewide rent cap of 5 percent plus inflation, along with enhanced tenant eviction protections.  California is now the third state in the nation – amid a growing list of other jurisdictions – to enact rent control laws in an attempt to address housing affordability problems.  (LA Times and Gov. Newsom website, Oct. 9 and Roundtable Weekly, June 21)

  • California’s law (AB 1482) is set to expire in 10 years – unlike New York, which permanently increased New York City rent control measures in June, while allowing other areas in the state to implement the policy.  In Oregon, a permanent statewide rent cap of 7 percent plus inflation was enacted in March. (Axios, Oct. 9 and NMHC interactive national map)
  • In a state of nearly 40 million people, California’s rent control measure could affect an estimated 8 million residents of rental homes and apartments. (Realtor Magazine, Sept. 12).  The 5% rent increase cap would not apply to housing built within the last 15 years or to single-family homes that are not corporate-owned.  (LA Times, Oct 8 and Curbed Los Angeles, Oct 10)
  • Gov. Newsom signed 18 other bills this week to address California’s housing affordability crisis, including measures to encourage construction of accessory dwelling units (ADUs), which encompass the renovation of existing garages into affordable housing. (KABC-TV, Oct. 10 and Newsom website, Oct. 9)
  • An interactive national map by the National Multi Housing Council (NMHC) details the trend in how various state capitals are attempting to address affordable housing through rent control measures. 
  • The rent control movement is partially influenced by a loose network of local activist groups that continue to organize successful efforts in some of the nation’s largest cities and states, according to an Oct. 3 article in The Real Deal.
  • "Although they are well-intended, we know from decades of experience that rent control regulations distort markets, create shortages, and depress business investments.  They often harm the communities they seek to help," said Jeffrey D. DeBoer, President and CEO of The Real Estate Roundtable. "Policy makers should avoid rent control measures and rather seek solutions that grow America's residential stock, to enable our communities to provide safe and decent housing for low-income families and the teachers and first-responders in our workforce."
  • Housing affordability has emerged as a policy focus in this presidential campaign cycle.  The housing and real estate-related campaign platforms of the 12 candidates who will participate in the Oct. 15 Democratic primary are profiled by Bisnow this week.  (“Here's Where All The Democratic Presidential Candidates Stand On Housing,” Oct. 8)

In June, the White House established a Council on Eliminating Regulatory Barriers to Affordable Housing, chaired by Housing and Urban Development (HUD) Secretary Ben Carson. (White House Executive Order, June 25).  The council includes members from across eight federal agencies who will analyze how federal, state, and local regulations impact the costs of developing affordable housing and the economy.  It will also recommend ways to reduce regulatory burdens at all levels of government that hinder affordable housing development. (White House Fact Sheet, June 25)

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