December 20, 2011
Tax Reform Continues to be Discussed Despite the Failure of the Super Committee
The Joint Select Committee on Deficit Reduction (JSC), which was created by Congress as part of the August agreement to raise the statutory debt ceiling, failed to produce any final recommendations to reduce the federal deficit. As a result, funding for discretionary programs and the military will be subjected to automatic cuts through a process known as "sequestration" in 2013, unless Congress intervenes.
One of the most hotly debated questions before the JSC was whether or not to consider tax reform in the context of deficit reduction. While unresolved as part of the JSC process, the tax reform debate has taken a more prominent place in national political discourse and has prompted the release of policy studies by both the Congressional Research Service and the Joint Tax Committee.
NAREIT will remain vigilant as the national conversation about comprehensive tax reform continues.
Senate FIRPTA Reform Proposal Continues to Gain Bipartisan Support
At the end of September, Sens. Bob Menendez (D-NJ) and Mike Enzi (R-WY) introduced S. 1616, the Real Estate Investment and Jobs Act of 2011. Including its authors, the bill is cosponsored by a total of 21 senators, including over half of the Senate Finance Committee. Since the last PL Report, the following senators have co-sponsored S. 1616: John Barrasso (R-WY), Mark Begich (D-AK), Richard Burr (R-NC), Tom Carper (D-DE), Chris Coons (D-DE), Johnny Isakson (R-GA), John Kerry (D-MA), Pat Roberts (R-KS), Debbie Stabenow (D-MI), Jon Tester (D-MT), John Thune (R-SD), Roger Wicker (R-MS) and Ron Wyden (D-OR).
This proposal, and its companion bill, introduced in the House by Reps. Kevin Brady (R-TX) and Joe Crowley (D-NY) as H.R. 2989, would amend the Foreign Investment in Real Property Tax Act (FIRPTA) in two important ways. First, the current "portfolio investor" exception for sales of stock and capital gains dividends of listed REITs would be increased from 5 percent to 10 percent, and this would include investors of 10 percent or less in listed foreign entities entitled to pass-through treatment under applicable U.S. tax treaties (the Senate bill would extend this treatment to certain other non-U.S. investors). Second, the legislation would reverse a 2007 IRS notice, pursuant to which liquidating distributions of a REIT are currently taxed as a sale of real estate subject to FIRPTA, rather than being taxed as a sale of stock - as most tax practitioners believed to be the case prior to 2007.
NAREIT and other real estate organizations continue to advocate for these reforms and are working together to encourage additional lawmakers to support these proposals.
Bipartisan Sales Tax Fairness Proposals Gain Momentum in the Senate and House
On Nov. 9, a bipartisan group of ten senators, led by Sen. Mike Enzi (R-WY), along with Sens. Lamar Alexander (R-TN), Dick Durbin (D-IL) and Tim Johnson (D-SD), introduced the Marketplace Fairness Act, S. 1832. Unlike prior proposals to facilitate the collection of sales and use taxes on internet sales, the Marketplace Fairness Act would apply to states that had adopted a minimum set of simplification requirements, as well as "member states" under the Streamlined Sales and Use Tax Agreement (SSUTA). Additionally, unlike previous proposals, the bill contains a "small seller" exemption for those sellers with less than $500,000 in remote sales annually.
The Marketplace Fairness Act is supported by a wide coalition, including NAREIT, the broader real estate advocacy community, the National Governors Association, the National Conference of State Legislatures, the National Retail Federation, the International Council of Shopping Centers and the Retail Industry Leaders Association. Notably, online retailer Amazon.com also supports this legislation.
Support for sales and use tax parity between bricks and mortar and online retailers has been gaining momentum on Capitol Hill. In the House, H.R. 3179, the Marketplace Equity Act, a proposal similar to the Marketplace Fairness Act, was introduced by Rep. Steve Womack (R-AR) in October. It has since gained 25 co-sponsors, including 11 Republicans and 14 Democrats, and was the subject of a hearing before the House Judiciary Committee on Nov. 30.
Mortgage REIT Council Submits Comments on SEC Concept Release
On Nov. 7, NAREIT’s Mortgage REIT Council submitted a formal comment letter in response to a concept release issued on Aug. 31, in which the Securities and Exchange Commission (SEC) sought public comment on how companies engaged in the business of acquiring mortgages and mortgage-related instruments should be treated under the Investment Company Act of 1940 (the 1940 Act).
The Mortgage REIT Council submission highlighted that the importance of publicly traded mortgage REITs to the housing and real estate credit markets had increased in recent years, and will only grow as the housing market and the real estate economy continue to evolve. It explained how publicly traded mortgage REITs are currently extensively regulated, in a manner not dissimilar from issuers registered under the 1940 Act, and it emphasized that the exclusion provided by Section 3(c)(5)(C) of the 1940 Act for "persons primarily engaged in . . . purchasing or otherwise acquiring mortgages and other liens on and interests in real estate," is straight-forward and by its own terms very broad.
The Mortgage REIT Council proposed that, at a minimum, the status quo created by the various no-action letters issued to date should be maintained and affirmed by the SEC. Both the majority views and the minority views of the Council were presented to the SEC, as delineated in separate exhibits developed by the Residential Committee and the Commercial Committee. The majority view, crafted by the Residential Committee, supports a principles-based approach that would extend the existing framework of the exclusion in Section 3(c)(5)(C) through the development of an SEC interpretive release. The minority view, developed by the Commercial Committee, recommends adoption of a rule, rather than an interpretive release, to delineate the full breadth of what constitutes a “qualifying interest” under the exclusion.
NAREIT will continue to monitor developments related to this project at the SEC.
Public Non-Listed REIT Council Responds to FINRA Notice
On Nov. 11, NAREIT and the Public Non-Listed REIT (PNLR) Council submitted a formal comment letter to the Financial Industry Regulatory Authority (FINRA) 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.
In the submission, the PNLR Council supports FINRA’s proposal to limit the period during which a per share estimated amount based on the net offering price may be included on a customer account statement to the initial offering period. The Council also lent its support to FINRA’s proposed requirement to deduct certain organization and offering expenses (O&O expenses) characterized by FINRA as underwriting compensation.
However, the Council expressed its opposition to a proposed requirement to deduct certain other O&O expenses, characterized by FINRA as issuer expenses or due diligence expenses, which the Council contends are expenses intrinsically connected to the customer's investment in the REIT.
NAREIT and the PNLR Council look forward to working with FINRA as it ensures that it provides sound industry guidance and thoughtful investor protection.
Derivatives Update: NAREIT Leads Delegation to Present Property Sector Concerns to Banking Regulators as House Committee Passes Bill to Clarify End-User Exemption
On Nov. 30, NAREIT led a delegation that included a representative of Forest City Enterprises; staff from NMHC/NAA, ICSC, and CREFC; as well as representatives from other real estate companies and service providers, to meet with regulatory staff from the Federal Reserve Board and other banking regulators about their proposed rule governing margin on non-cleared derivatives.
The conversation was constructive and instructive. The delegation made a presentation to the regulatory staff describing how the proposed rule requiring cash margin payments on non-cleared end-user transactions would be particularly burdensome for property companies. While the meeting did not yield firm assurances that these specific concerns will be addressed, the dialogue was generally positive, and the regulatory staff was open to discussing possible solutions.
Also on Nov. 30, the House Financial Services Committee approved three targeted bills to address ongoing end-user concerns with the implementation of the derivatives title of the Dodd-Frank Act. Notably, one of these proposals, a bipartisan bill that would clarify that Congress did not intend for the banking regulators to have the authority to impose margin requirements on derivatives entered into by non-financial end-users to hedge business risks, passed without opposition. This proposal has long been a legislative priority of the Coalition for Derivatives End-Users, and Committee passage was an important step that could benefit many end-users. More information on the bills is available on the Committee's website.
NAREIT Urges Treasury to Repeal the Preferential Dividend Rule for All SEC-Registered REITs
To qualify for the dividends paid deduction and count towards the 90 percent distribution requirement, a REIT’s dividend must not be considered to be “preferential.” A dividend is preferential unless it is distributed pro rata to shareholders, with no preference to any share of stock compared with other shares of the same class, and with no preference to one class as compared with another except to the extent the class is entitled to a preference. Even inadvertent errors or immaterial “foot faults” can cause a dividend to be considered preferential, subjecting a REIT to draconian consequences.
NAREIT has long argued that the preferential dividend rule for REITs is redundant in light of current securities laws and it is unnecessary to prevent tax avoidance, particularly in the case of SEC-registered REITs. Following the enactment of legislation that repealed the preferential dividend rule for publicly offered mutual funds, the Obama Administration included in its fiscal year 2012 budget a proposal to repeal the rule for listed REITs.
On Dec. 7, NAREIT’s Executive Vice President & General Counsel, Tony Edwards, and Senior Tax Counsel, Dara Bernstein, as well as representatives from the CNL Financial Group and W.P. Carey & Co., met with Treasury Department officials to request that the White House propose in its fiscal year 2013 budget to repeal the preferential dividend rule for all REITs required to be registered under the 1934 Act. The Administration’s 2013 budget is expected to be released in February.
House Subcommittee Approves Proposal to Promote Private Securitization Market for Residential Mortgages
On Dec. 14, the Capital Markets and Government Sponsored Enterprises Subcommittee of the House Financial Services Committee considered and approved the Private Mortgage Market Investment Act, a proposal crafted by subcommittee Chairman Scott Garrett (R-NJ).
Chairman Garrett's proposal would authorize the FHFA to create a standardized private label securitization market that could serve as a basis for a “to-be-announced” (TBA) market. Additionally, Garrett’s proposal would exempt qualified MBS from SEC registration and oversight, while fully repealing the credit risk retention provisions included in the Dodd-Frank Act.
After a mark-up hearing, during which Republicans and Democrats engaged in a debate concerning the appropriate role for government in the housing finance markets, the proposal was approved by a vote of 18-15, mostly along party-lines. As with the 14 other targeted housing finance reform proposals that have been passed by this subcommittee, this proposal now awaits consideration by the full House Financial Services Committee.