April 26, 2012
Budget Process Continues, Tax Reform Remains Under Consideration
On Feb. 13, 2012, President Obama submitted to Congress his budget proposal for Fiscal Year 2013. Among other things, the Administration's budget included three specific proposals related to REITs. Specifically, it would 1) repeal the preferential dividend rule for publicly offered REITs; 2) reform energy efficient building incentives and do so in way to encourage participation by REITs; and 3) reform the Low Income Housing Tax Credit (LIHTC) program and make it "beneficial" to REITs. NAREIT issued a FirstBrief detailing these proposals.
As is generally the case, Congress did not simply accept the President's budget proposal. Instead, the Republican-controlled House, under the leadership of House Budget Committee Chairman Paul Ryan, approved its own budget plan on Mar. 29, that would cut spending more than was previously negotiated as part of last summer's debt ceiling agreement. While the Senate Budget Committee may develop a budget proposal, it is not expected that the Democratic leadership will bring it to the Senate floor for a vote.
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 tax brackets into two brackets 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.
Given the current political climate, it is not likely that Congress will enact significant tax legislation before the election. However, the debate over tax reform and regulatory changes is expected to be central to the upcoming national election campaign. 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.
FIRPTA Effort Continues to Build Momentum
NAREIT, along with The Real Estate Roundtable (RER), continues to educate Members of Congress on the need to achieve responsible reform of the Foreign Investment in Real Property Tax Act, or FIRPTA, during the 112th Congress. Due, in part, to meetings held during February's Washington Leadership Forum, eight members of the Ways and Means Committee have joined as co-sponsors of H.R. 2989, the Real Estate Investment and Jobs Act of 2011, bipartisan FIRPTA reform legislation sponsored in the House of Representatives by Reps. Brady (R-TX), Crowley (D-NY), Tiberi (R-OH) and Berkley (D-NV). The additional co-sponsors are Reps. Gerlach (R-PA), Jenkins (R-KS), Johnson (R-TX), Pascrell (D-NJ), Roskam (R-IL), Schock (R-IL), Stark (D-CA) and Thompson (D-CA).
In the U.S. Senate, companion legislation, S. 1616, sponsored by Sens. Menendez (D-NJ) and Enzi (R-WY), has also garnered additional bipartisan support. The Senate FIRPTA reform proposal now has a total of 24 co-sponsors, including over half of the members of the Senate Finance Committee. Most recently, Sens. Boozman (R-AR), Cornyn (R-TX), Gillibrand (D-NY), Graham (R-SC), and Warner (D-VA), have added their names to the bill.
Even as this legislation gains support, NAREIT, RER and leading lawmakers have been urging the Obama Administration to exercise its authority to execute one of the core objectives of the legislation, which is the reversal of a 2007 IRS notice that, for the first time, treated liquidating distributions of a REIT as a sale of real estate subject to FIRPTA, rather than being as a sale of stock, as most practitioners believed to be the case prior to 2007. On Apr. 18, NAREIT and RER CEOs will met with senior Treasury Department officials to ask for the withdrawal of Notice 2007-55.
NAREIT will continue to support both legislative and administrative efforts to achieve FIRPTA reform this year.
Sales Tax Fairness Proposals Continue to Attract Support
Bipartisan support on Capitol Hill continues to grow for the two measures introduced last fall to allow states to collect sales and use taxes on remote sales, including internet sales. In the Senate, 14 Senators have co-sponsored S. 1832, the Marketplace Fairness Act, introduced by Sens. Enzi (R-WY), Durbin (D-IL), Alexander (R-TN) and Johnson (D-SD). S. 1832 would apply to states that adopt a minimum set of tax simplification requirements, as well as "member states" under the Streamlined Sales and Use Tax Agreement (SSUTA). Additionally, the bill contains a "small seller" exemption for those sellers with less than $500,000 in remote sales annually. This legislation continues to be supported by a wide coalition, including NAREIT, the International Council of Shopping Centers, the National Governors Association, the National Conference of State Legislatures, the National Retail Federation, and the Retail Industry Leaders Association. Notably, online retailer Amazon also supports this legislation.
Sen. Enzi, the primary sponsor of the bill, is a member of the Senate Finance Committee, which has jurisdiction over this legislation. On Weds., Apr. 25, the Finance Committee held a hearing to study the implications of tax reform for state and local governments. During this hearing, several supporters of the Marketplace Fairness Act spoke strongly in favor of addressing the unfairness in current approach to sales and use tax collection. Sen. Enzi also continues to seek the support of additional co-sponsors in an effort to demonstrate strong support for the proposal to the Senate leadership in the hopes that the proposal could be brought before the full Senate for consideration.
Meanwhile, a similar proposal in the House, H.R. 3179, the Marketplace Equity Act, has secured a total of 40 bipartisan co-sponsors, 11 of whom have added their name since NAREIT's Washington Leadership Forum in February, during which REIT executives asked lawmakers to address the inequitable treatment of brick and mortar retailers and catalogue and online retailers.
NAREIT staff will continue to work with our partners to seek additional Congressional support for these bills.
Public Non-Listed REIT Council Responds to Re-issued FINRA Notice
On Mar. 7, the Financial Industry Regulatory Authority (FINRA) released Notice To Members (NTM) 12-14, the agency's revised proposal regarding proposed changes to NASD Rule 2340 (Customer Account Statements) with respect to how per share estimated values of unlisted Direct Participation Programs (DPPs) and non-listed REITs are reported on customer account statements.
NAREIT and its Public Non-Listed REIT Council had submitted a comment letter in response toFINRA's initial proposal, NTM 11-44, supporting FINRA's proposal to limit the period during which the net offering price may be set forth on a customer account statement to the initial offering period. The Council also supported FINRA's proposal to deduct certain organization and offering expenses (O&O expenses) as underwriting compensation, but opposed deducting certain other O&O expenses, characterized by FINRA as issuer expenses or due diligence expenses.
On Apr. 11, the PNLR Council submitted a response to the follow-on proposal that: 1) recommends that FINRA adopt an effective date no earlier than Jul. 1, 2014, in lieu of "grandfathering," to ensure fairness, minimize investor confusion and avoid market disruption; 2) requests that references to "appraisal," and "net asset value," be eliminated with regard to the determination of per share estimated values; 3) supports the use of "net offering price" on account statements, to the extent that the definition of that term is certain and not equated with "value;" and, 4) supports FINARA's decision to distinguish between NAV securities and non-NAV securities, but requested that the NAV proposal apply to any direct participation program that provides a periodic NAV.
NAREIT will continue to monitor developments at FINRA and the SEC as this process continues.
House Passes End-user Protection Bills with Wide Bipartisan Support
On Mar. 26, the House of Representatives passed two bills that would amend the derivatives reform provisions of the Dodd-Frank Act to provide targeted end-user protections. Specifically, the House passed by a vote of 370-24, H.R. 2682, the Business Risk Mitigation and Stabilization Act, which would ensure that the statute is consistent with the original Congressional intent that commercial end-users should not be subjected to margin requirements on the non-cleared swaps they use to manage business risk. This effort has long been a priority of the Coalition for Derivatives End-Users and could address a concern of real estate property companies that use derivatives to manage business risk. In particular, it could address the primary concern that NAREIT and other real estate groups discussed with the Federal banking regulators during a meeting on November 30, 2011.
The House also passed by a vote of 357-36, H.R. 2779, a bill that would exempt inter-affiliate swaps from being subjected to the same regulations as swaps between two unaffiliated counterparties. NAREIT joined with the Coalition for Derivatives End-Users in sending a letter urging the passage of these bills, as well as H.R. 2586, the Swap Execution Facility Clarification Act, which may be considered at a later date. Among other things, this third bill would ensure end-users are able to exercise their best business judgment when selecting swap counterparties.
Propelled by the momentum of such strong bipartisan support in the House, NAREIT and its partners in the Coalition are urging the Senate to similarly work across party lines to protect end-users.
JOBS Act Signed into Law
On Apr. 5, President Obama signed into law H.R. 3606, the Jump-start Our Business Start-ups (JOBs) Act, bipartisan legislation to reduce regulatory burdens for emerging companies that passed the Senate by a vote of 73-26 and the House of Representatives by a vote of 380-41.
The JOBs Act seeks to help start-up companies access the public markets by, among other things, allowing "emerging growth companies" to conduct initial public offerings of stock without being required to comply with certain Dodd-Frank and Sarbanes-Oxley financial disclosure and governance requirements; allowing for general solicitation of Regulation D offerings; raising the caps on assets and number of shareholders above which a private company must register with the SEC; raising the amount of capital that can be raised by Regulation A offerings; and by enabling internet crowdfunding.
NAREIT issued a Policy Report detailing the provisions of the new law and will monitor its implementation.
Process Set for Designation of Systemically Important Financial Institutions
On Apr. 3, Federal regulators released the final rule setting forth procedures for selecting the first nonbank "systemically important financial institutions," or SIFIs, that will be subject to regulation by the Financial Stability Oversight Council (FSOC), a regulatory body created by the Dodd-Frank Act. The final rule included only a few minor modifications from the proposed rule, notwithstanding a large volume of industry comments reflecting broad concerns by market participants. SIFI designation means considerable extra scrutiny for a financial company, which would then be directly regulated by the Federal Reserve, subject to enhanced capital requirements, and required to file a so-called "living will" to facilitate the wind-down in the event of their failure.
SIFI designation is a three stage process. In stage one, companies with more than $50 billion in assets and either $30 billion in credit default swaps, $3.5 billion in derivatives liability, $20 billion in total debt outstanding, 15-to-1 leverage ratio or a 10% ratio of short-term debt to assets will be identified. Firm's meeting these criteria would then be further examined by FSOC during stage 2, with additional analysis employing public information. Certain firms would then be identified as "stage 3" firms, would receive "notices of consideration" from FSOC and would be asked to supply additional non-public information for further analysis.
On Mar. 8, NAREIT joined with nine other organizations in a letter spearheaded by the U.S. Chamber of Commerce urging the FSOC to hold a public hearing prior to adopting a final rule on SIFI designation, warning that the possibility of designation could force companies to dramatically change their businesses. Nevertheless, the FSOC proceeded to issue its rule. NAREIT will continue to monitor developments in this process.