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December 22, 2010
HIGHLIGHTS
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NEW DATE: WASHINGTON LEADERSHIP FORUM 2011 – REIT CEOS TO “HIKE THE HILL”
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FIRPTA REFORM EFFORT MAINTAINS MOMENTUM
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OBAMA-GOP TAX DEAL ADOPTED, TIMBER REIT EXTENSION AND REIT FIXES TO RENEWABLE ENERGY PROGRAM NOT INCLUDED
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NAREIT OPPOSES PER SE INCLUSION OF MORTGAGE REITS UNDER PROPOSED SHORT-TERM BORROWING DISCLOSURE REGULATION
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CFTC AND SEC PROPOSE DERIVATIVES RULES, UNCERTAINTY REMAINS FOR END-USERS
The 2011 Washington Leadership Forum (WLF) is scheduled for March 1 and 2 in Washington, D.C., and all NAREIT member CEOs are invited to participate.
WLF provides an annual forum for REIT executives to meet with key lawmakers and Administration officials to discuss the latest developments in our industry and NAREIT’s legislative agenda for 2011. Next year, the agenda will continue to be focused on measures that encourage and enhance the REIT approach to real estate investment at a time of lingering economic weakness.
As an example, NAREIT will continue to seek modification of the Foreign Investment in Real Property Tax Act (FIRPTA) to facilitate greater non-U.S. equity investment in U.S. real estate. In addition, NAREIT intends to pursue a legislative proposal that will modernize and improve the existing REIT rules and help REITs deliver new management and operational efficiencies across a broad range of areas – ranging from eliminating rules that can limit REIT property sales to clarifying REIT income and asset tests to allow broader flexibility in conducting a REIT’s real estate business activities.
2011’s WLF will be a tremendous opportunity for REIT executives to reach out to policymakers and discuss the critical issues impacting the industry. We ask you to encourage your CEO to attend this year’s WLF to help promote your company and the industry within the halls of Congress. To review the proceedings of last year’s WLF, CLICK HERE.
NAREIT and its partners continue to pursue reforms to the Foreign Investment in Real Property Tax Act (FIRPTA) that would allow for an additional source of equity investment in commercial real estate at a time when the industry must refinance more than $1 trillion of debt over the next several years.
On December 1, 2010, reflecting the concerns that they heard from NAREIT and other interested organizations, Finance Committee members Sen. Robert Menendez (D-NJ) and Sen. Orin Hatch (R-UT) spearheaded a letter to Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA) requesting that they consider reforms to FIRPTA as soon as possible. In the letter, which was cosigned by more than half of their colleagues on the Finance Committee from both sides of the aisle, Menendez and Hatch argue that, “Efficient and meaningful reform of the FIRPTA rules would encourage greater foreign equity investment in U.S. real estate, thereby helping to restart the credit markets and free up capital to create and save jobs and opportunities across the nation.” To view the letter, CLICK HERE.
The House of Representatives had already acted. On July 30, 2010, the House passed H.R. 5901, the “Real Estate Jobs and Investment Act” by a vote of 402-11. Introduced by Rep. Joseph Crowley (D-NY), this would increase the current "portfolio investor" rule for sales of stock and capital gains dividends of listed REITs from 5 percent to 10 percent. To view the legislative text of H.R. 5901, CLICK HERE. To view the floor debate on this measure, CLICK HERE.
While Congress is not expected to complete action on FIRPTA Reform in the last days of the 111th Congress, NAREIT will seek to build on the momentum that has grown for this effort, and will continue to advocate for the enactment of meaningful reform in the 112th Congress.
The recently passed compromise tax legislation negotiated by the Obama Administration and Senate Republicans extends the tax rates set in 2001 and 2003 under President Bush, provides a more generous estate tax regime compared to what had been scheduled to apply in 2011, and extends a number of expiring tax incentives. However, despite the efforts of a number of REIT supporters in the House and Senate, the final bill did not extend the Timber REIT provisions that were enacted as part of the TREE Act in 2008, nor does it provide a technical fix that is needed to allow REITs to participate in a grant program for investments in renewable energy technologies, like solar panels.
Political pressures lead to a circumstance where even reasonable changes were viewed as a “poison pills” to the pre-negotiated agreement. While they were ultimately unsuccessful, NAREIT appreciates the efforts of Senators Blanche Lincoln (D-AR) and Maria Cantwell (D-WA) who introduced amendments to extend the Timber REIT provisions of the TREE Act, Sen. Ben Cardin (D-MD) who introduced an amendment to provide a REIT fix to the renewable energy grants, and Rep. Earl Blumenauer (D-OR) for organizing 82 of his colleagues in calling on House leaders to include in the final package a bill he authored to improve the energy grants program and extend it to REITs. To view the Lincoln amendment, CLICK HERE. To view the Cantwell amendment, CLICK HERE. To view the Cardin amendment, CLICK HERE. To view the Blumenauer letter, CLICK HERE.
On Sept. 17, 2010, the Securities and Exchange Commission issued a proposed rule that would provide greater transparency for short-term borrowing arrangements utilized by public companies. In announcing these proposed rules the SEC stated that, by requiring all companies to provide enhanced information to investors related to both the type of short-term borrowing they engage in and to what extent, “The proposed rules are designed to provide investors a better understanding of a company's actual funding needs and financing activities.” To read the proposed rule and additional information provided by the SEC, CLICK HERE.
Under the proposed rules, “financial companies” would be subject to stricter reporting requirements. The rule defines “financial companies” as a company that is, “Engaged to a significant extent in the business of lending, deposit-taking, insurance underwriting or providing investment advice.” Further, it suggested the per se inclusion for a variety of entities as financial companies, most notably, mortgage real estate investment trusts.
On Nov. 29, NAREIT submitted comments to the SEC strongly urging the Commission to remove any per se inclusion of REITs in the definition of “financial company.” The comments noted that, unlike financial institutions, REITs are generally not involved "in the business of lending, deposit-taking, insurance underwriting or providing investment advice," nor do they engage in the types of business activities that expose them to the same liquidity risks as banks.
By removing the per se inclusion of REITs in the definition of “financial entities,” NAREIT argues that the SEC would appropriately subject REITs to the same enhanced disclosure requirements as all other registrants. And, just as with registrants from other industries, only REITs that “engage to a significant extent” in one of the covered business activities would be subjected to the additional requirements for “financial entities.” To read NAREIT’s comment letter, CLICK HERE.
As required by the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (Pub. L. No. 111-203) regulators at the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), in consultation with the Board of Governors of the Federal Reserve, are undertaking an ambitious effort to implement rules 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, 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.
For example, NAREIT responded to a Joint Advance Notice of Proposed Rulemaking issued by the CFTC and SEC in August in which the agencies sought public input on the definition of several key terms in the Dodd-Frank Act. The definition of these terms will determine which entities will be entitled to claim exemptions from central clearing requirements, as provided by Congress. NAREIT submitted two comment letters in response to this notice. To read the Coalition for Derivatives End-Users letter, CLICK HERE. To read a real estate industry letter, CLICK HERE. NAREIT also joined with the Coalition in submitting comments in response to a request from the U.S. Treasury Department seeking input as to whether it should exercise its authority to exempt foreign exchange derivatives from regulation as swaps. To view this letter, CLICK HERE.
On Dec. 1, by a vote of 3-2, the CFTC agreed to issue a proposed rule establishing key definitions like “major swap participant” and “eligible contract participant.” On Dec. 3 the SEC voted unanimously to join in the proposal. To read the proposed rule, CLICK HERE. This proposed rule addresses a number of NAREIT’s primary concerns with these definitions, including the way it proposes to treat of positions taken to manage interest rate risk on debt. However, other issues remain unresolved. For example, there remains a question as to whether certain smaller special purpose entities will be able to participate in the over-the-counter swaps market as eligible contract participants. There are also questions as to the leverage ratio above which certain financial entities – which may include mortgage REITs – will be held to tighter standards when determining if they are to be subjected to greater regulation as major swap participants.
This proposed rule, as well as other rules related to the process by which end-users will be enabled to claim an exemption from Dodd-Frank’s central clearing requirement, will be open for comment through February, 2011. NAREIT will work with its Task Force, the Coalition, and other real estate organizations to provide input and comments on these proposed rules. If your company would like to participate in this effort, please contact Kirk Freeman, NAREIT’s Senior Director, Government Relations at kfreeman@nareit.com.
However, any gains made in the ongoing regulatory process may be short-lived. Through conversations with regulators, it has become clear to the Coalition that the CFTC and SEC believe that they may have the ability to impose margin on bilateral transactions involving end-users and potentially even on pre-existing contracts – despite the very public and formal expressions of legislative intent by the authors of Dodd-Frank to the contrary. To read the legislative history, CLICK HERE. To read the legal arguments the Coalition has presented to the regulators on end-user margin and on retroactivity, CLICK HERE and CLICK HERE.
To provide absolute clarity on these issues, a legislative fix may be necessary. A group of Republican Senators has already attempted to provide the required correction by introducing an amendment that would have made the legislative text of Dodd-Frank entirely consistent with the stated intent of the law’s authors. To view a letter of support for this amendment provided by the Coalition, CLICK HERE. While this amendment is not expected to be enacted in the short term, the Coalition will work with its Congressional allies to pursue this technical fix in the 112th Congress.
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