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October 7, 2010
HIGHLIGHTS
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LAME DUCK ON THE HORIZON
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ENERGY INCENTIVES STILL UP FOR DEBATE
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NAREIT URGES CAUTION AS LEGISLATORS CONSIDER FEDERAL BACKING FOR RETROFIT FINANCING
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HOUSE FINANCIAL SERVICES COMMITTEE HEARING CONSIDERS FUTURE OF FANNIE AND FREDDIE; ANNALY’s FARRELL TESTIFIES
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DERIVATIVES RULEMAKING UNDERWAY
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CONGRESS RECOGNIZES 50TH ANNIVERSARY OF REITS
On Sept. 30, Congress adjourned until after the Nov. 2 elections. With the upcoming elections adding to an already tense and partisan atmosphere in the Capitol, there has been little room for agreement on bills that many classify as “must-pass” legislation. For example, Congress has yet to address the expiring personal income tax rates, find a compromise on the estate tax, or extend a number of popular tax incentives, commonly referred to as the “extenders package.” Congress must also turn its attention to the annual appropriations process and the annual defense authorization bill.
Congressional leaders have expressed their intent to address these and other issues in a so-called “lame duck” session after the election. Additional items may include energy policy, immigration reform, or action on proposals put forward by the National Commission on Fiscal Responsibility and Reform.
The list is long, and the time for action will be short. Congress is expected to return for one week prior to and at least one week after Thanksgiving. In addition to this ambitious legislative agenda, the Democratic and Republican caucuses will also use this time for leadership elections and other organization and preparation activities for the 112th Congress, which will begin in January. Additionally, a potentially large shift in the partisan composition of Congress calls into serious question how much this Congress will realistically be able to address in a post election session.
Due to the uncertain nature of lawmaking in lame duck sessions, NAREIT will remain vigilant to capitalize on any opportunities or to address any legislative problems that may arise.
NAREIT remains engaged in the constantly evolving Congressional debate on energy policy, particularly with regard to federal tax incentives for certain energy investments. Specifically, NAREIT has advocated for targeted and technical improvements to ensure that REITs can fully participate in efforts to provide credits, grants or deductions to help offset the cost of investments in renewable energy and energy efficient construction or retrofitting. To read NAREIT's testimony on energy-related tax issues applicable to REITs, CLICK HERE.
In an attempt to restart the debate in the Senate, where efforts to pass an energy bill stalled prior to adjournment for the November elections, Sens. Jeff Bingaman (D-NM) and Olympia Snowe (R-ME) introduced a broad energy proposal on Sept. 29. The Senators have expressed their hope that this proposal will be considered during the lame duck session.
Among other things, the new Bingaman-Snowe proposal would improve existing tax incentives for energy efficient commercial buildings contained in current tax code section 179D. Of particular interest to REITs, the bill would allow for the deduction of qualifying expenses in the first year for both taxable income and for purposes of calculating a REIT's dividend. Without this conformity, shareholders would not appropriately benefit from the deductions, and a REIT claiming the deduction could later have issues in meeting its dividend distribution requirement. To read the legislative text of S. 3935, CLICK HERE. NAREIT greatly appreciates the leadership of Bingaman and Snowe in their efforts to make these energy tax incentives more accessible to REITs and their investors.
NAREIT will continue to advocate for these and other improvements should the House Ways and Means Committee return its attention to its July 2010 “discussion draft” of the “Domestic Manufacturing and Energy Jobs Act of 2010.” To read the summary of this proposal, CLICK HERE , and to read the draft bill text, CLICK HERE.
Recognizing the high cost of energy efficient retrofitting, policymakers are increasingly looking for innovative ways to promote financing for these efforts, without providing a direct, and potentially costly, government subsidy. To encourage private financing, some policymakers have suggested providing a federal loan guarantee. On the state level, programs have been established to provide financing that can be repaid through property tax financing.
In both cases, significant questions have been raised regarding the priority these loans receive compared to the first mortgage. For example, several proposals have been introduced in the Senate that would extend an existing Department of Energy loan guarantee to loans used for building retrofits. Because this program requires that debt obligations backed by federal guarantees must not be subordinate to other financing, loans guaranteed through this program could undermine fundamental understandings of priority in mortgage finance.
While NAREIT supports efforts to provide innovative solutions to the high cost of retrofitting, we have significant concerns about any program that would create uncertainty in real estate markets. To that end, NAREIT joined with the American Land Title Association and The Real Estate Roundtable in sending a letter to the leaders of the Senate Energy and Natural Resources Committee to raise these concerns. The group writes, “[W]hile any loan guarantee product specifically for building retrofits might be a significant agent to spur retrofits, it must safeguard traditional lien priorities and avoid unnecessary risks to the mortgage investment community.” To read the letter, CLICK HERE.
On Sept. 29, Michael Farrell, Chairman, President and CEO of Annaly Capital Management Inc., testified on behalf of NAREIT’s Mortgage REIT Council at a hearing held before the House Committee on Financial Services on “The Future of Housing Finance-A Review of Proposals to Address Market Structure and Transition.”
In his testimony, Farrell encouraged the Committee to maintain three core elements of the current housing finance system: securitization; the government guarantee; and the "to-be-announced" market that is currently facilitated by Fannie Mae and Freddie Mac. He also called for the elimination of the portfolio investment activities of the Government Sponsored Enterprises (GSEs).
"I believe that the market will adapt to whatever changes occur to these items in a new housing finance system. However, the market will adapt to the new structure by repricing it," Farrell said in his testimony. "If the new system has significantly different risk, uncertainty and friction than the housing finance system we have now, the consequences may be that our housing finance system is smaller with lower housing values and less flexibility and reduced mobility for borrowers." To read or watch Farrell’s testimony, CLICK HERE.
House Financial Services Committee Chairman Barney Frank (D-MA) was originally expected to release proposed legislation to reform the GSEs in the coming weeks. However, that timeframe appears to have slipped at least until after the upcoming election. Additionally, the Obama Administration is expected to put forward its proposal for housing reform in early 2011.
NAREIT will continue to participate in the ongoing conversation related to housing finance reform on behalf of both its multifamily and its mortgage REIT members.
On July 21, President Obama signed the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (Pub. L. No. 111-203) into law. Attention is now focused on the regulators that must now implement rules to enforce the law's requirements, including those that will govern the derivatives market.
NAREIT, under the guidance of its Derivatives Reform Task Force, and in coordination with the Coalition for Derivatives End-Users, has advocated both for the creation of new transparency in the over-the-counter derivatives market and for clear protections for “end-users” that utilize derivatives to manage business risks. To read NAREIT's Policy Report summarizing the derivatives provisions of the new law and the challenges that remain during the rulemaking process, CLICK HERE.
NAREIT has participated in several Coalition meetings with the relevant regulators at the Commodity Futures Trading Commission (CFTC), the Securities Exchange Commission (SEC) and the Federal Reserve to discuss the forthcoming rules. Additionally, NAREIT responded to a Joint Advance Notice of Proposed Rulemaking issued by the CFTC and SEC in August in which they sought public input on the definition of several key terms in the Dodd-Frank Act. These definitions will have implications for the application of the end-user protections provided by Congress. NAREIT submitted two comment letters in response to this notice. To read the NAREIT-supported Coalition for Derivatives End-Users letter, CLICK HERE. To read a real estate industry letter supported by NAREIT, CLICK HERE.
In the coming months, the CFTC and SEC are expected to issue rules to establish these definitions and to set forth regulations related to the clearing, margining and exchange trading of derivatives contracts. NAREIT and the Coalition for Derivatives End-Users will continue to monitor and constructively engage in this process.
On Sept. 14, 1960, President Dwight D. Eisenhower signed into law the legislation that enabled the creation of the first REITs. This year, on Sept. 14, several Senators commemorated the 50th anniversary of the original REIT law by including statements in the Congressional Record. The following day, by a unanimous voice vote, the House passed a resolution recognizing the anniversary of the industry, and the positive impact REITs have had on the U.S. economy. Several Members of the House took to the floor to express their support of this resolution.
To read the Senate statements and the House resolution, and to read or watch the debate in the House, visit the special “50 Years of REITs” page on REIT.com by CLICKING HERE.
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