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March 3, 2014
Message from the President
 In the midst of NAREIT's 2014 Washington Leadership Forum on Capitol Hill last week, Rep. Dave Camp (R-MI), chairman of the House Committee on Ways and Means, released his comprehensive discussion draft on tax reform consisting of 720 pages of technical explanations and 1,000 pages of statutory language. His draft plan, as described in a 200-page summary, would lower tax rates. To do so, it proposes to end most tax credits and end or curtail a number of deductions.
For REITs and real estate investment, the Camp draft brings with it a mix of good and bad news.
Clearly, Camp recognizes the important role that REITs play in the real estate economy and for investors and savers from all walks of life. Consequently, his draft plan continues longstanding tax policy support for REIT-based real estate investment. The discussion draft indicates in its summary that it strives to make REITs “more attractive,” in part by including some elements of the NAREIT-backed U.S. REIT Act.
However, some of the proposed changes to the REIT and real estate investment rules in the discussion draft are at odds with this goal and are, therefore, unwelcome. Several of these changes would unduly and inappropriately restrict or constrain REIT-based real estate investment and real estate investment more generally. All of the REIT and real estate investment provisions are described in the article below.
Leading lawmakers in Congress do not expect comprehensive tax reform, let alone the Camp draft, to move through Congress in its current form or in the current year.
In the words of House Speaker John Boehner (R-OH), the Camp draft is meant to be “just the beginning of the conversation” on tax reform. NAREIT looks forward to energetically engaging in that conversation in the coming months and years to ensure that REIT-based real estate investment continues to successfully fulfill the mission Congress created for it more than 50 years ago.
Steven A. Wechsler
President and CEO
NAREIT Launches Redesigned REIT.com
The cornerstone of NAREIT's communications with its members as well as with the rest of the world is its website, REIT.com. Because the Web is a fast-evolving medium, NAREIT routinely evaluates its website. Consequently, last year NAREIT instituted a project to refashion REIT.com so that it will be more useful to visitors whether coming to conduct business with NAREIT or to learn more about what’s going on with REITs. This week NAREIT debuts the newly designed and organized REIT.com.
To better assist visitors, NAREIT updated REIT.com's main landing page and reorganized REIT.com into three portals devoted to news about REIT-based real estate investment, information about REITs for investors and NAREIT member business.
Take a look now! We hope you like it.
(Contact: Mitch Irzinski at mirzinski@nareit.com)
Camp Releases Tax Reform Discussion Draft
Pictured: House Ways and Means Committee Chairman Dave Camp (R-MI).
In the midst of NAREIT's 2014 Washington Leadership Forum on Capitol Hill last week, Rep. Dave Camp (R-MI), chairman of the House Committee on Ways and Means, released his comprehensive discussion draft on tax reform consisting of 720 pages of technical explanations and 1,000 pages of statutory language. Release of the discussion draft follows after almost three years of hearings, meetings and highly targeted discussion drafts driven by Camp.
Camp's draft plan, as described in a 200-page section-by-section summary, would lower the corporate tax rate to 25 percent from 35 percent. It would also lower the maximum individual rate to 25 percent from 39.6 percent, but with the addition of a 10 percent surtax on joint filers with income above $450,000, amounting to a top 35 percent tax rate for such taxpayers. According to the discussion draft, most income from dividends and capital gains would be subject to ordinary income tax rates and receive an 40 percent exclusion in calculation, meaning a top rate of 21 percent.
To achieve these lower rates on a revenue-neutral basis, the discussion draft would "broaden the tax base" by ending most corporate and individual income tax credits and by ending or curtailing a large number of individual and business-related deductions from income.
Camp recognizes the important role that REITs play in the real estate economy and for investors and savers from all walks of life. Consequently, his discussion draft continues longstanding tax policy support for REIT-based real estate investment. It also indicates that it strives to make REITs “more attractive."
However, the Camp discussion draft contains a number of proposed changes to the REIT rules and related provisions, as well as to rules important to real estate investment generally, some of which appear to be at odds with this desire and are unwelcome. Several of these changes would unduly and inappropriately restrict or constrain REIT-based real estate investment.
In considering Camp's discussion draft, it is important to keep in mind that it is a discussion draft, rather than a bill introduced in Congress, and it appears unlikely to move forward in any significant manner this year. It is also notable that Congressional leaders have not embraced the draft and have indicated it is exceedingly unlikely that Congress will address tax reform this year.
Here’s a short summary of the provisions in the Camp discussion draft that are most relevant to REITs and real estate investment.
REIT Rules
1. Definition of REIT-eligible Real Estate Would Be Limited
Camp's discussion draft would require real estate other than land under the REIT asset test to have a depreciable class life of at least 27.5 years. Under this test, telecommunication towers and billboards, among other types of property, would not be considered real estate under the REIT rules. In addition, the discussion draft would exclude timber as qualifying real estate under the REIT rules.
2. Taxable REIT Subsidiary (TRS) Limit Would Be Reduced
Camp's discussion draft would reduce the amount of gross assets that a REIT could hold as stock in taxable REIT subsidiaries from 25 percent to 20 percent.
3. Tax-free Spin-offs Would Be No Longer Available to REITs
Under the Camp discussion draft, the tax-free spin-off rules would not apply when a non-REIT C corporation distributes the stock of a REIT (including a non-REIT corporation that elects REIT status within 10 years following the spin-off) to its shareholders or when a REIT distributes the stock of either a REIT or a non-REIT corporation (including a taxable REIT subsidiary) to its shareholders. Accordingly, both the distributing corporation and its shareholders would be subject to tax.
4. Cash Distributions of Pre-REIT C Corporation Earnings and Profits Would Be Mandatory
A non-REIT corporation electing REIT status must distribute the earnings and profits earned in the years before it is a REIT to its shareholders before the end of its first year as a REIT. A similar rule applies when a non-REIT corporation becomes part of a REIT in a tax-free transaction such as a merger. The discussion draft would require these "purging" distributions to be made in cash rather than a mix of cash and REIT stock.
5. Built-in Gain Would Be Immediately Recognized Upon Conversion to REIT or Upon Acquisition by a REIT
Under current law, if a non-REIT corporation elects REIT status, the gain stemming from the excess of value of the corporation's assets over its tax basis (the built-in gain) is not triggered unless the REIT sells those assets in a taxable transaction within 10 years of the REIT election. Similar rules apply when a non-REIT corporation transfers assets to a REIT when the REIT adopts the transferor's tax basis in the assets (such as a tax-free merger, but not including a like-kind exchange). The Camp discussion draft would require any such Built-in Gain to be immediately recognized by the REIT.
6. Percentage Rents and Interest Limited if not Sufficiently Diversified From Tenants
Under the current REIT income test, qualifying real estate rents do not include amounts based on the income or profits of a tenant (other than rents based on a fixed percentage of receipts or sales). Camp's discussion draft would tighten this rule by excluding as qualifying rent under the REIT rules any fixed-percentage rents received by the REIT from any C corporation if more than 25 percent of all the fixed-percentage rents or interest payments received by the REIT in a taxable year are received from a single C corporation (other than from a taxable REIT subsidiary).
7. Several Provisions of the Update and Streamline REIT Act (U.S. REIT Act) Would be Included
The Camp discussion draft incorporates many of the provisions that were in the NAREIT-backed H.R. 5746 that was introduced in the previous Congress. These provisions include repealing the preferential dividend rules for SEC-registered REITs; treating ancillary personal property leased with real estate (e.g., kitchen appliances in an apartment) to be considered real estate under the REIT asset tests; and making it easier for a REIT to acquire distressed debt instruments without violating the REIT income tests.
Real Estate Investment Proposals
1. Like-Kind Exchanges Would End
Similar to the staff discussion draft issued by Baucus last year, Camp's discussion draft would eliminate Section 1031 of the tax code and thereby end all tax deferral associated with like-kind real property exchanges.
2. Depreciation/Cost Recovery Lives Would be Extended
Camp's discussion draft would extend the depreciation periods for all real estate to 40 years, thereby increasing the period for residential real estate from 27.5 years to 40 years and for non-residential real estate from 39 years to 40 years. In addition, the discussion draft would permanently end the special 15-year depreciation period for leasehold improvements.
3. Real Estate Would No Longer Qualify as an Asset for Publicly Traded Partnerships
Camp's discussion draft would end the use of real estate as a qualifying asset for publicly traded partnerships, meaning that such partnerships would be taxed as corporations.
4. Depreciation Recapture Would be Taxed as Ordinary Income
Camp's discussion draft would eliminate the special 25 percent depreciation recapture tax rate and, instead, tax all depreciation recapture as ordinary income.
5. Energy Efficient Commercial Building Deduction Ended Permanently
Camp's discussion draft would end permanently the Section 179D deduction.
6. State and Local Taxes
Camp's discussion draft would repeal the deduction of state and local taxes (including property taxes) for individuals, but it would not change the deduction of such taxes if they are incurred in a trade or business.
Financial Instrument Rules
In its financial instrument provisions, the Camp discussion draft adopts many of NAREIT's prior suggestions in connection with an earlier targeted discussion draft to manage the potential for "phantom income" applicable to equity and mortgage REITs due to the use of derivatives.
International Tax Rules
NAREIT commented on REIT-related aspects of the earlier targeted discussion draft on international taxation. The Camp discussion draft addresses some of the NAREIT-identified issues.
Effective Dates
Unlike the discussion draft issued by the now-departed Senate Finance Committee Chairman Max Baucus, the cost recovery proposed changes in the Camp discussion draft generally would not apply to investments made before 2016. However, some of the proposed changes, which target non-REIT corporations converting or merging into REITs, would apply to transactions consummated or taxable years beginning after the day the draft was released (Feb. 26, 2014).
Conclusion
NAREIT will organize a variety of member task forces to review the discussion draft to ensure our industry follows up appropriately with Camp, his staff and other members of Congress, especially with respect to the specific proposals that are unnecessarily restrictive and contrary to support for competitive, healthy and vibrant REIT-based real estate investment. As the dialogue on tax reform moves forward in the years ahead, NAREIT looks forward to working closely with all members of the REIT community to ensure policymakers fully understand the important role REITs serve in the economy and for savers and investors from all walks of life.
(Contact: Tony Edwards at tedwards@nareit.com)
REIT Leaders on the Hill
The Washington Leadership Forum has long been a core component of NAREIT’s political outreach program. The Leadership Forum provides an excellent opportunity for leaders of NAREIT's own community to meet with leaders and key policymakers in Congress, among whose ranks are a number of longtime supporters of the REIT approach to real estate investment.
NAREIT members discussed key policies crucial to the REIT industry with legislators during the Forum, which was held on Feb. 25-26. This year, 46 attendees held more than 50 meetings with members of Congress.
From left to right: Dan Wagner, vice president of government relations with The Inland Group of Real Estate Companies Inc.; Michael Glimcher, chairman and CEO, Glimcher Realty Trust (NYSE: GRT); Speaker of the House John Boehner (R-OH); Randy Churchey, president and CEO, EdR (NYSE: EDR).
From left to right: H. Eric Bolton Jr., chairman and CEO, MAA (NYSE: MAA); Churchey; Sen. Bob Corker (R-TN); Glimcher; Ross Smotrich, managing director, Barclays Capital.
From left to right: Mark Zalatoris, president and CEO, Inland Real Estate Corp.; Rep. Bob Goodlatte (R-VA); David Henry, vice chairman, president and CEO, Kimco Realty Corp. (NYSE: KIM).
From left to right: Glimcher; Rep. Michael Grimm (R-N.Y.); Edward Coppola, president, Macerich (NYSE: MAC); Tyler Morse, CEO, MCR Development.
House Majority Whip Kevin McCarthy (R-CA) addresses attendees at the 2014 forum.
The ranking Democrat on the House Committee on Ways and Means, Rep. Sandy Levin (D-MI), standing, meets with a group of REIT executives.
From left to right: Bolton; Ron Havner, NAREIT’s 2014 chair and the chairman, president and CEO of Public Storage (NYSE: PSA); House Ways and Means Committee Chairman Dave Camp (R-MI); Ken Kies, managing director, Federal Policy Group, LLC; Joseph D. Russell, Jr., president and CEO, PS Business Parks, Inc. (NYSE: PSB).
(Contact: Tony Edwards at tedwards@nareit.com)
Enzi Receives Small Investor Empowerment Award
From left to right: Ron Havner, NAREIT’s 2014 chair and the chairman, president and CEO of Public Storage, presents Sen. Mike Enzi (R-WY) with the 2014 NAREIT Small Investor Empowerment Award.
Sen. Mike Enzi (R-WY) was named the recipient of the 2014 NAREIT Small Investor Empowerment Award at the 2014 Washington Leadership Forum.
In recent years, Enzi has introduced legislation to reform the Foreign Investment in Real Property Tax Act (FIRPTA) to encourage greater equity investment in U.S. real estate from investors outside of the country and the Marketplace Fairness Act, which passed the Senate in 2013.
The Small Investor Empowerment Award was established on behalf of those people who invest in, are employed by, or derive other benefits from REITs and publicly traded real estate companies. The award recognizes public servants who have demonstrated exceptional commitment to the ideals of free enterprise, economic growth, personal freedom and unlimited opportunity for all Americans.
(Contact: Tony Edwards at tedwards@nareit.com)
REIT.com Video: Ronald Havner, NAREIT Chair
 Ronald Havner, NAREIT’s 2014 chair and the chairman, president and CEO of Glendale, Calif.-based self-storage REIT Public Storage, joined REIT.com for a CEO Spotlight video interview at the St. Regis Hotel in Washington, D.C. during NAREIT’s 2014 Washington Leadership Forum.
Havner offered a broad assessment of the current state of the listed REIT market.
“I think we’re doing pretty good this year so far,” he said. “Most companies have reported earnings, and they seem to be on or ahead of target.”
Havner was asked about the key message that NAREIT members are hoping to deliver to policymakers.
“People forget that 20 years ago, this was a $10 billion industry; today, it’s a trillion-dollar industry. That was a big buffer for the financial services industry during the downturn,” he said. “All you have to do is look at Europe and see the difference between their banking system and our banking system. REITs had a big part in that. REITs are good for America. They create jobs. They invest in buildings and projects that support our communities.”
(Contact: Matt Bechard at mbechard@nareit.com)
Investor Outreach Team Holds More Than 30 Meetings in February
NAREIT's Investor Outreach team conducted 33 meetings in February with many of the largest and most influential investment organizations within the institutional investment marketplace. Collectively, these entities represent more than $4 trillion in assets under management or advisement.
The 33 meetings were with organizations across all targeted investment cohorts, including: eight with prominent domestic pension and retirement plan sponsors representing close to $400 billion in assets; two with investment consultants with assets under advisement of $748 billion; and 10 with investment managers representing close to $3 trillion in assets under management and sponsors of global and domestic products for the institutional and retail investor market. Another 13 meetings were held with other organizations and associations active in investment management and the retirement industry.
A focus for many of the meetings continues to be research that NAREIT sponsored with Wilshire Associates on the role of U.S. REITs and global listed real estate securities within target-date funds. These are the most rapidly growing investment products in most 401(k) accounts and other tax-advantaged savings plans within the $5.4 trillion defined contribution (DC) market. During the month, the Investor Outreach team met with six organizations that offer target-date funds, including one of the three largest target-date fund providers in terms of assets under management.
Eight of the top 10 fastest growing target-date fund managers -- Allianz Global Investors Solutions, American Century, BlackRock, JP Morgan, Lincoln National, Manning & Napier, MFS and PIMCO -- feature meaningful listed REIT allocations in their offerings.
(Contact: Kurt Walten at kwalten@nareit.com)
NAREIT, REESA Submit Comments on Hong Kong REIT Laws
NAREIT wrote Hong Kong’s Securities and Futures Commission last week regarding potential amendments to the country’s REIT laws.
NAREIT suggested that Hong Kong consider a series of changes to the proposed amendments. Among them, NAREIT suggested that Hong Kong REITs have the option to be internally, rather than externally, managed. NAREIT also suggested to authorities that they “clarify that investments in stock exchange-listed REITs (at least with respect to REITs listed in Hong Kong) be considered ‘real estate assets’ that Hong Kong REITs could own without any limitation.”
NAREIT also joined its partners in the Real Estate Equity Securitization Alliance (REESA) in sending a separate comment letter to the Hong Kong government regarding the proposals.
“REESA believes that investors, in making their investment decisions, are the persons and institutions best positioned to decide the level of risk appropriate to their particular circumstances,” the letter stated. “As a result, we are supportive of any changes that would allow the markets and investors to freely choose the level of risk and protection they deem appropriate. REESA therefore believes that the highest possible level of flexibility in respect of property development investments, related activities and other Relevant Investments should be introduced for Hong Kong REITs.”
In addition to NAREIT, REESA members include the Real Property Association of Canada (REALpac) the Association for Real Estate Securitization in Japan (ARES), the Asia Pacific Real Estate Association (APREA), the British Property Federation (BPF), the European Public Real Estate Association (EPRA) and the Property Council of Australia (PCA).
(Contact: Dara Bernstein at dbernstein@nareit.com)
REITs in the Community
Feb. 24, 2014: Rep. Tom Reed (R- NY), right, a member of the House Ways and Means Committee, met with Kimco Realty Corp. (NYSE: KIM) Vice Chairman, President & CEO David Henry, left, in New York City. Henry briefed Reed on Kimco’s latest activities in New York and across the country. In addition, the two discussed several pending policy issues that are important to the publicly traded real estate industry, such as passage of the Marketplace Fairness Act, extending the Terrorism Risk Insurance Act and tax reform.
(Contact: Jessica Davis at jdavis@nareit.com)
Register Today for REITWise
Register today to attend REITWise 2014®: NAREIT's Law, Accounting & Finance Conference® being held April 2-4 in Boca Raton, Fla. More than 38 sessions, events and networking opportunities will provide attendees with information on the latest REIT law, accounting, tax and finance practices. Join approximately 1,000 colleagues to receive the most relevant information on legislation, guidelines, recommendations and opinions surrounding law, finance, tax and accounting for REITs.
Attendees earn up to 19.5 CPE or 17.75 CLE credits to help meet their mandatory educational requirements.
(Contact: Katelyn Rowland at krowland@nareit.com)
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