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August 10, 2012
Facing "Fiscal Cliff," Partisan Debate Continues
The debate in Washington is increasingly focused on the "fiscal cliff" facing the U.S. economy at the end of this year if no action is taken to address the significant tax increases and spending cuts that would result from the expiration of the Bush-era individual tax rates and the tax "extenders," and the implementation of the federal spending "sequester" agreed to as part of last year's debate on increasing the debt ceiling.
A common refrain from members of both sides of the aisle is that one element of a responsible solution to this challenge is comprehensive tax reform. While neither the Republicans nor the Democrats have unveiled detailed tax reform proposals, leaders from both parties continue to call for broad-based tax reform. Specifically, the "Ryan Budget" calls for a lower corporate tax rate of 25% and for the consolidation of the six current individual tax brackets into two brackets taxed at 10% and 25%. Similarly, on Feb. 22, the Administration released its "framework" for corporate tax reform, which presents a menu of options to reduce the corporate rate to 25%, without endorsing specific policies and not suggesting any changes to individual rates.
Given the current political climate, characterized by votes on partisan proposals that are not expected to become law, and the scarcity of legislative days between now and November, it is highly unlikely that Congress will enact significant tax legislation before the election. However, Congressional Committees have held several hearings related to tax reform, including a Senate Finance Committee hearing on Aug. 1 entitled, "Tax Reform: Examining the Taxation of Business Entities," during which significant attention was paid to the taxation of pass-through entities.
NAREIT will continue to strategically engage with policymakers from both political parties to ensure the priorities of the REIT industry are considered in this debate.
U.S. REIT Act Gains Support
The Update and Streamline REIT Act (U.S. REIT Act), introduced in May as H.R. 5746 by Reps. Pat Tiberi (R-OH) and Richard Neal (D-MA), has garnered considerable support in recent weeks from Members of Congress, the real estate industry, and most recently, the U.S. Chamber of Commerce.
The bill would make targeted but meaningful modifications to the REIT rules to allow the industry to operate more effectively and efficiently in the current marketplace. These modifications include providing REITs more flexibility in disposing of their assets; repealing the preferential dividend rule for publicly-offered REITs; refining and modernizing several of the REIT income and asset tests; codifying and expanding IRS guidance regarding timber and the REIT tests; helping REITs that own mortgages attract worldwide investments; and modifying a technical provision relating to a REIT's "earnings and profits" to prevent duplicative taxation of REIT shareholders.
To date, 29 of the 37 members of the House Ways and Means Committee are listed as co-sponsors of H.R. 5746, including 17 (out of 22) Republicans and 12 (out of 15) Democrats. NAREIT is also reaching out to key members of Congressional leadership and the House Financial Services Committee to brief them on the bill and to request they consider co-sponsoring it.
In addition to the strong Congressional support, 19 associations and groups representing the commercial and residential real estate sectors came together to voice support of the U.S. REIT Act in a letter to Reps. Tiberi and Neal. The National Association of Forest Owners, which represents private forest owners including timber REITs, also expressed its support for the bill in a letter to the bill's sponsors. Finally, in a blog post, the U.S. Chamber of Commerce expressed its strong support for passage of the U.S. REIT Act.
NAREIT anticipates that companion legislation will be introduced in the U.S. Senate sometime after Congress reconvenes from its August Recess and the political conventions.
Momentum Grows for Sales Tax Fairness Effort
Legislation to allow states to collect sales and use taxes on remote sales, including internet commerce, continues to receive consideration in both houses of Congress. On Jul. 24, the House Judiciary Committee held its second hearing on H.R. 3179, the Marketplace Equity Act, introduced by Reps. Steve Womack (R-AR) and Jackie Speier (D-CA), and now co-sponsored by 53 Members of Congress on both sides of the aisle.
Among those who spoke at the hearing was Tennessee Governor William Haslam (R) who expressed support for the bill on behalf of the National Governors Association. He indicated the bill was necessary to level the playing field between traditional brick-and-mortar and e-commerce retail businesses by allowing states to collect the approximately $23 billion that is due in uncollected state sales taxes. It remains to be seen whether the Judiciary Committee will report the bill to the full House of Representatives before the end of the year for final action.
In the meantime, a similar bill, S. 1832, the Marketplace Fairness Act, was the subject of a hearing before the Senate Commerce Committee on Aug. 1. This proposal, authored by Sens. Michael Enzi (R-WY), Lamar Alexander (R-TN), Richard Durbin (D-IL) and Tim Johnson (D-SD), has garnered 19 bipartisan co-sponsors. The Committee hearing was a positive development for this issue in the Senate, and comes on the heels of a recent effort by the bill's sponsors to offer S. 1832 as an amendment to a bill that was pending on the Senate floor earlier in July. That effort failed, but has laid the groundwork for the bill's sponsors to pursue this issue more aggressively this year, possibly in an expected "lame duck" session after the elections.
NAREIT will continue to work with the industry-wide coalition, led by the International Council of Shopping Centers, to monitor developments in the House and the Senate. It will continue to be an uphill battle to achieve passage in the 112th Congress, but the effort has certainly benefitted from these recent positive developments.
Bipartisan Bill Introduced in the Senate to Provide Clear Margin Exemption for Derivatives End-Users
During the legislative debate surrounding the enactment of the Dodd-Frank Act, and throughout on-going regulatory process implementing the law, NAREIT and its partners in Coalition for Derivatives End-Users have consistently argued that non-financial end-users using derivatives to manage risk should not be subjected to central clearing or margin requirements on their bilateral trades.
On July 10, 2012, the Commodities Future Trading Commission (CFTC) unanimously approved a final rule establishing an end-user exception to the clearing requirements for swaps. This rule, which is consistent with the Dodd-Frank Act, provides that non-financial end-users who are using swaps to hedge or mitigate commercial risk may elect to enter into these transactions bilaterally, rather than through a clearinghouse. NAREIT and the Coalition for Derivatives End-Users have urged the CFTC to implement an end-user exception consistent with the requirements of Dodd-Frank, and this is a positive result.
However, standing in stark contrast to the clear legislative history that shows Congress shared the view that end-users should not be required to post margin on non-cleared bilateral derivatives, the margin requirements proposed by U.S. banking regulators would force banks to impose margin requirements on their non-financial derivatives counterparties. NAREIT and other real estate trade organizations have met with the banking regulators to educate them on the particular challenges this rule would pose to real estate companies, and the Coalition for Derivatives End-Users continues to urge the banking regulators to provide a clear margin exemption for non-financial end-users in their final rule.
In March, the House of Representatives took a step to reaffirm Congressional intent on this issue by passing, by a strongly bipartisan vote of 370-24, a bill that would exempt non-financial end-users from margin requirements. And, after significant outreach by the Coalition for Derivatives, similar bipartisan legislation has been introduced in the Senate by Sens. Johanns (R-NE), Crapo (R-ID), Hagan (D-NC), Kohl (D-WI), Tester (D-MT) and Toomey (R-PA). The Coalition for Derivatives End-Users will continue to advocate for passage of this bill at the same time as it seeks a regulatory solution.
NAREIT Joins Letter to GSA Regarding Green Building Certification Review
The Energy Independence and Security Act of 2007 (EISA) required the Office of Federal High-Performance Green Buildings at the General Services Administration (GSA) to evaluate building rating systems to identify a certification system that is, "most likely to encourage a comprehensive and environmentally sound approach to certification of green buildings."
On Jul. 25, NAREIT joined with a coalition of other commercial and residential real estate advocates in sending a letter to the Acting Administrator of the GSA discouraging the selection of a single rating system and encouraging continued flexibility for building owners to participate in the rating system that is most relevant to their properties. The coalition expressed concern that the selection of a single one-size-fits-all rating system may not provide the best rating solution due to the variety of age, finances, size, market or submarket location, property type and tenant mix of buildings.
Instead, the coalition points to the suite of non-regulatory, voluntary systems currently in the marketplace that offer "exceptional guidance" to the commercial and residential real estate sectors, such as ASHRAE Standard 189.1 for the Design of High Performance Green Buildings, Green Globes, International Green Construction Code, Leadership in Energy and Environmental Design (LEED), Living Building Challenge and the National Green Building Standard (ICC 700). The coalition letter recommends that the GSA survey and study these systems before announcing any final decision.
National Real Estate Organizations Host Congressional Briefings on Capitol Hill and Plan Educational Events at the National Political Conventions
The National Real Estate Organizations (NREO), a working group of 19 commercial and residential real estate trade associations including NAREIT, has been actively working to educate key policymakers on real estate markets, as well as policy proposals that would enable further recovery.
In July, NREO hosted two Capitol Hill briefings on the current state of the U.S. real estate industry for Members of the House and Senate and their staffs. After welcoming remarks by Sen. Johnny Isakson (R-GA) and Sen. Ben Cardin (D-MD) in the Senate, and Rep. Michael Turner (R-OH) and Rep. Richard Neal (D-MA) in the House, the respective co-Chairs of the Senate and House Real Estate Caucuses, the briefings then were handed over to economists and other experts representing NREO groups. These experts provided detailed analyses of how the economic climate has impacted commercial and residential real estate and what factors are expected to influence current and future real estate market activities.
During the Senate briefing, Calvin Schnure, NAREIT Vice President of Research and Industry Information, focused his presentation on the market fundamentals of the various property sectors as well as the challenges posed by the wave of loan maturities working their way through the financial system. He indicated that passage of legislation reforming the Foreign Investment in Real Property Tax Act, or FIRPTA, would be one way to ease some of the current pressure on the real estate finance markets.
In a similar vein to these Congressional briefings, the NREO members are putting the finishing touches on educational events that they plan to host in Tampa during the Republican National Convention and in Charlotte at the Democratic National Convention. These panel discussions, entitled "A Strong Real Estate Market is Vital for a Robust Economic Recovery," will be attended by leading policymakers and real estate leaders. Stay tuned to NAREIT's NewsBrief for more information, including access to the live webcast of these events.
The Real Estate Industry is Focused on Preparedness and Response
In 2003, The Real Estate Roundtable, NAREIT and other national real estate organizations formed the Real Estate-Information Sharing and Analysis Center (RE-ISAC) to facilitate communication and collaboration between real estate owners and federal and local government authorities in order to better monitor, assess, prevent or respond to events that threaten real property, whether related to an act of terrorism, a natural disaster, or criminal activity.
This May, our industry undertook an effort to enhance the RE-ISAC by developing a communications network that would provide more timely and actionable threat information to help private security personnel, building managers, owners and investors more actively address the challenges of risk management. RE-ISAC began operation with a full-time director who manages a dynamic, 24/7 network for the sharing of threat-related information. The new RE-ISAC now is publishing a daily report of intelligence from both private and government sources, including the Department of Homeland Security, the FBI and the Federal Emergency Management Agency. Additionally, the organization will soon be launching REISAC.org, an updated website that will allow more immediate, streamlined reporting of threat-related data to federal officials.
If you or someone else in your company would like to be added to the distribution list for daily reports or would like to otherwise become more involved in the activities of the RE-ISAC, please contact Kirk Freeman, NAREIT's Vice President, Government Relations at kfreeman@nareit.com.
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