December 8, 2009
Comprehensive Financial Services Regulatory Reform Proposal to be Debated on the House Floor This Week
In June 2009, the Obama Administration released its blueprint for financial services regulatory reform. Over the past several months, House Financial Services Committee Chairman Barney Frank (D-MA) has considered and passed legislation containing the key components of the Administration's proposal. This includes proposals that would create a Consumer Financial Protection Agency, impose new regulations on the over-the-counter (OTC) derivatives market, and provide new oversight over credit rating agencies, investment advisers and private pools of capital. It is anticipated that the House of Representatives will debate a comprehensive bill this week and vote on it by next week. To access information on this bill, click here.
In the Senate, the schedule for action is less clear. On November 10, 2009, Senate Banking Committee Chairman Chris Dodd (D-CT) introduced a comprehensive reform proposal, without bipartisan support. To read the proposal, click here. Since that time, bipartisan negotiations have resumed. While Dodd and Senate leaders have indicated an intention to finish consideration of this proposal in the Senate Banking Committee prior to the end of the year, this is unlikely given the other legislative priorities that are expected to dominate the remainder of the 2009 legislative session.
NAREIT will continue to monitor developments on regulatory reform and will continue to directly engage on issues of particular importance to REITs and the publicly traded real estate industry.
House Regulatory Reform Proposal May Limit the Ability of REITs to Hedge Risk
The Obama Administration and policymakers in Congress have undertaken a detailed review of over-the-counter (OTC) derivatives as part of the broader financial regulatory reform effort. NAREIT staff, with the guidance of the NAREIT Derivatives Reform Task Force, has been monitoring these efforts and studying the potential impact that various proposals would have on REITs and publicly traded commercial real estate companies. For additional information, click here.
NAREIT has joined with the U.S. Chamber of Commerce, the National Association of Manufacturers, The Real Estate Roundtable and other trade associations in forming the Coalition for Derivatives End-Users. The Coalition has undertaken extensive efforts to educate members of Congress and their staff on the importance of low-cost customizable derivatives products for businesses seeking to manage their exposure to variable interest rates, foreign currency, fluctuating commodity prices or other risks.
In October, both the House Financial Services Committee and the House Agriculture Committee passed proposals to regulate derivatives transactions. These proposals have been reconciled and will be voted on this week as part of a broader regulatory reform effort. NAREIT understands that, while the agreement between the two Committees represents a significant improvement over prior proposals that would have virtually eliminated the ability of end-users to use derivatives to hedge their risk, significant concerns remain. In particular, there continues to be uncertainty about which firms will be considered "major swap participants" and therefore automatically subjected to the most onerous regulations as well as cash margin and collateral requirements.
Amendments have been offered that would undermine the progress that end-users have made in the debate, including an amendment that would give regulators the authority to impose cash margin requirements on bilateral derivatives transactions used by end-users to hedge risk. If you would like to participate in an effort to defeat these amendments, or to improve the Senate proposal, please contact Kirk Freeman at email@example.com or 202-739-9415.
NAREIT staff will continue to work with the members of the NAREIT Derivatives Reform Task Force, the Coalition for Derivatives End-Users, and others to educate policymakers and advocate for the continued availability of these important risk management tools.
At Risk: Protection for Commercial Real Estate Owners During Tenant Bankruptcy
NAREIT was advised that some Democratic members of the House Judiciary Committee were considering seeking an amendment to the broader regulatory reform bill that would roll back section 365(d)(4) of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which currently provides needed clarity for a commercial real estate owner or operator whose tenant has filed for bankruptcy.
Prior to the enactment of section 365(d)(4), bankruptcy judges had the sole discretion to allow renters that filed for bankruptcy to leave their stores or offices closed for long periods of time, negatively impacting other renters in the facility, the landlord's access to credit, and the economy of the surrounding community. 365(d)(4) provided certainty for all parties by establishing a 210-day period for the debtor to assume or reject its lease. With agreement from the landlord, this period can be extended further as the situation requires.
This provision allows landlords to protect their other tenants from being negatively impacted by vacant storefronts or offices. Additionally, without the certainty provided by 365(d)(4), lenders may determine that extended vacancies increase the credit risk of the commercial properties and therefore further limit access to credit for commercial real estate owners and operators.
Last week, NAREIT sent out an alert to its retail and office corporate members asking them to reach out to their Representatives to oppose any such amendment. Fortunately, in the end no such amendment was submitted as part of the House's consideration of the financial regulatory reform bill. NAREIT will monitor developments on this issue and will oppose any amendment that would repeal section 365(d)(4).
Technical Fixes Needed for REITs to Benefit from Renewable Energy and Energy Efficiency Incentives – Legislation to be Introduced in House
With other legislative priorities dominating the Congressional schedule in December, debate on energy and climate change legislation is likely to slip into 2010. NAREIT has been engaged in an effort to allow REITs to benefit from a provision enacted in February 2009 as part of the "American Recovery and Reinvestment Act" (Pub. L. 111-5) (Recovery Act) that would provide grants in lieu of tax credits for investments in qualifying renewable energy projects (energy grants). Despite having been specifically designed to benefit taxpayers with insufficient tax liabilities to benefit from existing energy tax credits, this provision has been interpreted to benefit REITs only to the extent that taxable income is retained.
NAREIT continues to pursue a legislative solution that would allow REITs to benefit from the Recovery Act's energy grants, either as part of forthcoming energy or cap and trade legislation, or as part of any effort to extend provisions of the Recovery Act or other expiring tax provisions. We are optimistic that Representative Linda Sanchez (D-CA), a member of the House Ways and Means Committee, will soon introduce stand alone legislation to provide the necessary clarification. For additional information on this effort, click here.
In addition, NAREIT is engaging with the sponsors of S. 1637, a proposal which would: 1) double the deduction for energy efficient commercial buildings and expedite the process for obtaining the deduction; and, 2) expand the existing energy efficient home credit to apartments higher than three stories. Specifically, NAREIT is discussing two potential modifications with the bill's sponsors: 1) harmonizing the deduction for energy efficient buildings with the deduction taken for earnings and profits purposes to make this deduction useful to REITs; and, 2) allowing a residential REIT to convert the energy efficient home credit to a deduction. To read the text of S. 1637, click here.
Through these efforts, NAREIT is investigating possible legislative solutions that would improve the ability of REITs to access other energy and sustainability incentives that exist under current law or that may be enacted in the future.
Fed Clarifies TALF Policy to Benefit Public Companies
The Federal Reserve Board of New York (FRBNY) recently issued guidelines for the administration of its Term Asset-Backed Securities Loan Facility (TALF) program to clarify its foreign control strictures and ensure that publicly traded companies, including REITs, can participate in TALF.
Under the initial guidelines established by the FRBNY, the body with primary responsibility for administering the TALF program, an eligible participant may not be controlled by a foreign government, defined as a 25 percent ownership stake in the company, or in the case of an investment fund, a 25 percent ownership stake in the manager of the fund.
The new FRBNY guidance addresses NAREIT's concerns by stating that TALF administrators can use applicants' filings with the Securities and Exchange Commission (SEC) to assess whether they are controlled by a foreign government. To read the FRBNY's FAQ on the new guidance, click here.
NAREIT worked closely with Senator Charles Schumer (D-NY) and House Financial Services Committee Chairman Barney Frank (D-MA) to clarify the TALF policy. Senator Schumer played a particularly significant role in this effort, thus clearing the way for REITs to participate in the TALF program.
Carried Interest Proposal Used by the House as Offset for Annual Tax Extenders Package
As the year comes to a close, the House is expected to consider and pass a proposal to extend a number of tax provisions that under current law would expire on December 31, 2009. Provisions such as the research and development credit and the 15-year straight-line cost recovery period for qualified leasehold, restaurant and retail improvements are politically popular, but they also reduce federal revenues.
To offset against this lost revenue, House Democratic leadership will rely on a proposal introduced by Rep. Sander Levin (D-MI), which would recharacterize as ordinary income any "carried interest" income. A "carried interest" would include a partnership interest in the long-term capital gain from the sale of partnership property. To view the package of tax extenders, which includes Rep. Levin's proposal, click here.
A significant issue for REITs in the "carried interest" debate is its potential to jeopardize REIT status in one of two ways. First, if "carried interest" partnership income is recharacterized as ordinary income from the performance of services it could be considered as non-qualifying REIT income. Second, if a REIT-owned partnership is considered a "publicly traded partnership" (PTP) – because the partnership units can be converted into publicly traded REIT stock – and the partnership earns "carried interest," the partnership could be treated as a corporation. If this change causes a REIT to own more than 10% of a corporation, it would lose its REIT status.
Last year, NAREIT worked with Reps. Levin and Rangel to modify their bills to include language that addressed these concerns. Specifically, the modified proposals clarified that the REIT gross income and asset tests would be applied without regard to the recharacterization of partnership income as ordinary income and that the PTP rules would be applied so that REIT-owned partnerships would not face being taxed as corporations. This would have prevented both double taxation of a REIT's operating partnership income and loss of REIT status by the REIT partner.
The "carried interest" provision in the package of tax extenders is similar to the modified proposal Rep. Levin advocated in the last Congress, and NAREIT understands that it appropriately addresses the REIT qualification issue related to the a recharacterization of "carried interest" income.
While it is anticipated that the House will pass this proposal in the coming weeks, it appears unlikely that the Senate would approve "carried interest" legislation this year as part of an extenders bill. NAREIT will continue to monitor this issue as it develops.