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June 27, 2011
Highlights
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House Lawmakers Call on the Treasury Department and the IRS to Reverse IRS Notice 2007-55
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NAREIT Meets with FDIC on Proposed Credit Risk Retention Regulation that Would Discriminate Against Loans to REITs
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Rules Continue to Be Developed for the Regulation of Derivatives Markets
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Debate Over Housing Finance Reform Continues
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House Financial Services Committee Passes Proposal to Encourage U.S. Market for Covered Bonds, NAREIT Joins Letter of Support
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NAREIT and Its Members Continue to Seek Bipartisan Cosponsors for the Main Street Fairness Act
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Report Details Job-Creation Impact of Obama Administration's "Better Building Initiative"
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NAREIT Joins with Broad Group of Industry Organizations Encouraging Congress to Raise the Federal Debt Limit
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New Members Join Congressional Tax-Writing Committees
On Friday, June 24, 26 members of the House Ways and Means Committee sent a letter to the Treasury Department and the Internal Revenue Service, urging them to withdraw IRS Notice 2007-55 with respect to the treatment of liquidating distributions of a real estate investment trust (REIT). Without this action, such distributions will continue to be taxed as a sale of real estate subject to the Foreign Investment in Real Property Tax Act (FIRPTA), rather than being taxed as a sale of stock – as they were treated prior to this 2007 notice.
In the letter, spearheaded by Reps. Joseph Crowley (D-NY) and Kevin Brady (R-TX), the lawmakers write, “Withdrawal of this notice and reinstatement of prior law should provide greater parity and certainty to investors as well as encourage greater direct foreign investment in the U.S. commercial real estate market at a time when our nation needs this private investment.” Further, they say, “[T]he IRS’ position has caused considerable consternation in the foreign investor community and has severely constrained continued foreign investment in U.S. real estate.” To view the letter, CLICK HERE.
Additionally, on Thursday, June 23, the Ways and Means Subcommittee on Select Revenue Measures, Chaired by Rep. Pat Tiberi (R-OH), held a hearing on, “Tax Reform and Foreign Investment in the United States.” Jeffrey DeBoer, President and CEO of The Real Estate Roundtable was invited to testify. In his testimony and during the questions from lawmakers that followed, DeBoer called for the reversal of this notice, as well as increasing the small shareholder exception for foreign investors in publicly traded REITs from 5% to 10%. To view more information about this hearing, CLICK HERE.
On June 15, NAREIT staff, including President and CEO, Steve Wechsler, and Executive Vice President and General Counsel, Tony Edwards, met with FDIC attorneys to discuss a multi-agency joint proposed rulemaking on credit risk retention for the securitizers of asset backed securities (ABS) that was mandated by the Dodd-Frank Act.
Specifically, NAREIT sought an explanation of the blanket and discriminatory exclusion of all loans to REITs from the proposals definition of “commercial real estate loans.” The regulation proposes reduced risk retention requirements for loans backed by “qualified commercial real estate loans,” and the explicit exclusion of loans to REITs would provide a disincentive for securitizers that seek to qualify for reduced risk retention requirements to include these loans in their ABS. This, in turn, could increase borrowing costs and reduce the availability of credit for REITs. To read the proposed regulation, CLICK HERE.
While no explanation of or rationale for the provision was provided during this meeting, the FDIC staff listened to NAREIT’s concerns and agreed to help determine the genesis of this item in the rule. NAREIT will continue to meet with additional regulators to urge them to remove the blanket exclusion of loans to REITs. Additionally, NAREIT will be filing formal comments to the agencies prior to the recently-extended Aug. 1 deadline.
NAREIT, under the guidance of its Derivatives Reform Task Force and in coordination with the Coalition for Derivatives End-Users, continues to support efforts to create transparency in the over-the-counter derivatives market, to reduce the risk posed by major participants in swap markets, and to provide for the continued ability of "end-users" to utilize low-cost bilateral derivatives agreements to manage their business risks.
On Apr. 12, the CFTC and the bank regulators proposed regulations establishing margin requirements on uncleared swap transactions. To read a Coalition for Derivatives End-Users analysis of these proposals, CLICK HERE. Of particular concern is the fact that the bank regulators proposed to impose margin requirements on end-users who are not required to centrally clear their derivatives transactions. Additionally, these rules would not allow physical assets or other illiquid assets to satisfy margin requirements.
This stands in stark contrast to the clear Congressional intent that these requirements should not be imposed on any end-users of non-cleared derivatives. To view the Congressional Record transcript of a colloquy between Chairmen Frank and Peterson, in which Chairman Frank states, "we have given the regulators no authority to impose margin requirements on anyone who is not a swap dealer or a major swap participant," CLICK HERE.
On Monday, June 20, Senate Agriculture Committee Chairman Debbie Stabenow (D-MI) and House Agriculture Committee Chairman Frank Lucas (R-OK) wrote to the banking regulators to once again emphasize the Congressional intent on this matter. They write, “Congress was explicit in providing exemptions from mandatory clearing, exchange trading and margin for end-users hedging commercial risks. We are concerned that recent rule proposals may undermine these exemptions…Further, despite a statutory directive to permit the use of non-cash collateral, the…proposal is overly restrictive…and does not provide sufficient clarity that use of other forms of noncash collateral is permitted.” To view this letter, CLICK HERE.
The Coalition for Derivatives End-Users is preparing extensive comments on the proposed rulemaking on margin and will continue to urge regulators to protect end-users from these costly requirements. Additionally, NAREIT is spearheading a letter to the regulators, to be co-signed by a number of other real estate trade associations, urging them to adhere to Congressional intent regarding non-cash collateral.
NAREIT has also recently joined the Coalition for Derivatives End-Users on three other comment letters. To view the Coalition’s comments to the Treasury Department supporting the decision to exempt foreign exchange derivatives from the Dodd-Frank Act’s reforms, CLICK HERE. To view the Coalition’s comments to the CFTC expressing concerns about logistical challenges associated with the timing and data requirements for the reporting of pre-enactment and transition swaps, CLICK HERE. To read the Coalition’s submission on a proposed interpretive order that could limit an end-user's ability to choose its counterparties, CLICK HERE.
Policymakers in Congress and the Obama Administration continue to stake out positions in the debate over the future of housing finance and the reform of the Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac.
On May 25, the Subcommittee on Capital Markets and Government Sponsored Enterprises of the House Financial Services, under the leadership of Chairman Scott Garrett (R-NJ), held a hearing to study seven targeted proposals that would, among other things: prevent the Treasury from lowering the dividend payments Fannie and Freddie are currently paying; subject the two enterprises to the Freedom of Information Act; set a cap on the amount of federal money to be used for the bailout of the GSEs; and prohibit taxpayer funding of legal fees for employees of Fannie and Freddie. For a record of this hearing, CLICK HERE. As reported in the May PL Report, the Subcommittee has also considered and approved eight other targeted proposals. For more information on those bills, CLICK HERE.
Also on May 25, the Subcommittee on Insurance, Housing and Community Development held a hearing entitled, “Legislative Proposals to Determine the Future Role of FHA, RHS and GNMA in the Single-and Multi-Family Mortgage Markets.” During this hearing, the focus was on a draft bill that would, among other things, require 5 percent down payments for all Federal Housing Administration loans and provide the Department of Housing and Urban Development the authority to disqualify poor quality lenders. For a record of this hearing, CLICK HERE. This proposal, and all of the proposals considered by Rep. Garrett’s subcommittee, must first be voted out of the full Committee before they are brought to the floor of the House of Representatives.
As the Republican leadership of the House Financial Services Committee remains focused on these targeted reforms, some Committee members have begun to develop more comprehensive proposals. On May 13, 2011, Reps. John Campbell (R-CA) and Gary Peters (D-MI), both members of the GSE Subcommittee, introduced a bipartisan proposal that would replace Fannie and Freddie with several private companies that would issue mortgage-backed securities explicitly guaranteed by the federal government. For more information on this proposal, CLICK HERE. This bill, and any other rumored bipartisan bills will likely face opposition from the Republican Committee leadership, and therefore the sponsors are expected to have a difficult task ahead if they intent to advance their proposals.
The Senate Banking Committee continues to move more methodically in its approach to housing finance reform. Over the course of two hearings entitled, "Public Proposals for the Future of the Housing Finance System [Part I and Part II],” the Committee has heard testimony from a number of economists, think tanks, and other interested parties. The panel of witnesses for the May 26 hearing included Mark Parrell, Executive Vice President and Chief Financial Officer of Equity Residential, who provided testimony on behalf of the National Multi-Housing Council and National Apartment Association. For a record of this hearing, CLICK HERE. NAREIT anticipates that the Banking Committee will convene several more hearings similar to these two prior to considering legislation.
As this process continues, NAREIT will continue to advocate on behalf of our mortgage REIT members, who have a proven track record of providing liquidity for the housing finance market. We will also partner with other real estate industry organizations to ensure that lawmakers understand the role that the GSEs have played in the multifamily and senior housing sectors. For up-to-date information about activity on Capitol Hill related to housing finance reform, CLICK HERE.
On June 22, the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises passed H.R. 940. Introduced by Rep. Scott Garrett (R-NJ) and Rep. Carolyn Maloney (D-NY), this proposal would facilitate a U.S. covered bonds market. Covered bonds are securities issued by banks and backed by pools of loans, which would remain on the issuer's balance sheet. This allows banks to borrow against the value of the underlying asset pool, and to use this capital to extend additional loans. It also protects bond investors by ensuring interest payments, and by giving them recourse to the underlying assets in the case of a bank default.
In advance of the Committee vote, NAREIT joined with several other real estate trade associations in signing a letter of support for this bill. “A covered bonds market would provide an additional source of liquidity and capital to fund many types of bank loans, including residential and commercial real estate loans,” the groups write. To view this letter,CLICK HERE.
NAREIT understands that Senate Majority Whip Dick Durbin (D-IL) intends to introduce the Main Street Fairness Act in the coming month. NAREIT supports this proposal because it would ensure that online retailers will be subjected to the same tax requirements as traditional bricks and mortar retailers by allowing states that conform to the Streamlined Sales and Use Tax system to collect the taxes on remote sales. Not only will this level the playing field for retailers, it will allow state governments to address unprecedented budget shortfalls by collecting taxes that they are already legally owed – all at little to no cost to the federal government.
For this proposal to become law in the current political environment it will need strong bipartisan support. For that reason, NAREIT and some of its members have stepped up their efforts to educate Senators on both sides of the aisle about the need for this legislation. For example, David Simon, Chairman and CEO of the Simon Property Group, recently met with Sens. Coburn (R-OK), Corker (R-TN), Coats (R-IN) and Isakson (R-GA) to urge them to support the Main Street Fairness Act. In his meetings he delivered letters of support from NAREIT. To view one of these letters,CLICK HERE.
On June 14, the Political Economy Research Institute (PERI) released an analysis of the Better Buildings Initiative (BBI), an Obama Administration proposal to achieve greater energy efficiency in commercial buildings. The report, conducted with the support of The Real Estate Roundtable, the U.S. Green Building Council and the Natural Resources Defense Council, concludes that over 114,000 jobs will be created through the BBI’s various provisions.
According to the Institute, the BBI’s proposed revision of the existing Section 179D tax deduction for energy efficient buildings will create the most jobs. PERI’s analysis concludes that revising and enhancing this deduction would result in 77,000 jobs being created in the areas of engineering and performing building retrofits; manufacturing new efficient equipment and materials; and operating and servicing the retrofitted buildings. These findings should bolster the Administration as it pursues full implementation of specific components of the BBI, including a request to Congress to replace the current Section 179D tax deduction with a credit to encourage retrofits.
NAREIT has submitted formal recommendations to the Administration on ways in which the BBI, and specifically the proposed retrofitting tax credit, could be implemented to be more useful to REITs. NAREIT's submission contains potential alternatives for improving the cost-effectiveness of retrofitting activities, including 1) the ability to assign and/or transfer the credit to third parties (including tenants and service providers); 2) indefinite carry forward of the credit to offset any potential REIT-level tax liability (including, but not limited to, tax on retained net capital gains); and, 3) the conversion of the credit to an economically equivalent deduction modeled after existing section 179D, provided that existing E&P rules are revised so that REIT shareholders could realize the benefit of the increased deductions from the REIT's taxable income. NAREIT hopes the Administration will implement the proposal in a manner that provides the greatest variety of alternatives in order to encourage REITs to invest in retrofitting activities.
NAREIT will continue to work with the Administration to achieve a BBI proposal that is best suited for REITs. To view the PERI’s report, CLICK HERE. To view NAREIT's earlier submission to the Treasury Department, CLICK HERE.
On May 11, NAREIT joined with 60 other industry groups on a letter initiated by The U.S. Chamber of Commerce, calling on Congress to raise the statutory debt limit.
The letter, sent to Senate Majority Leader Harry Reid (D-NV), Senate Minority Leader Mitch McConnell (R-KY), Speaker of the House John Boehner (R-OH) and House Minority Leader Nancy Pelosi (D-CA), calls raising the debt limit "critical" to maintaining global confidence in the creditworthiness of the United States. "We strongly agree that the failure to increase the statutory debt limit in a timely fashion could have a significant and long-lasting negative impact on the U.S. economy," the letter says.
To view the letter, CLICK HERE.
The two tax-writing committees in Congress – the House Ways and Means Committee and the Senate Finance Committee – have added new members to fill vacancies that opened due to the departure of several lawmakers.
In the Senate, Sen. Richard Burr (R-NC), the senior senator from North Carolina, has been appointed to fill the Finance Committee seat vacated when former Sen. John Ensign (R-NV) resigned from the Senate in early May. Sen. Burr was reelected last November to his second term in the United States Senate. Rep. Dean Heller (R-NV), a member of the House Ways and Means Committee since 2008, was selected to replace Senator Ensign and serve out the remainder of Ensign’s Senate term through 2012.
Senator Heller’s move across the Hill created a vacancy on the Ways and Means Committee that has recently been filled by Rep. Tom Reed (R-NY), a Republican who represents portions of the “Southern Tier” of New York State. Mr. Reed was elected to the House last November, and is one of only three freshmen currently serving on this premier committee. In addition, Rep. Kenny Marchant (R-TX) was selected in April to fill the vacant Ways and Means seat created in February by the resignation of former Rep. Chris Lee (R-NY).
While NAREIT staff has interacted with each of these Members of Congress before, we look forward to working closely with them as new members of the key congressional committees dealing with tax policy, and educating them on the specific issues of concern to REITs and the publicly traded real estate industry.
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