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February 18, 2011
Highlights
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2011 Washington Leadership Forum Approaches – It is Time to “Hike the Hill”
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In State of the Union, President Obama Calls for Corporate Tax Reform
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In Formal Budget Request, President Obama Calls for Tax Changes for REITs
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NAREIT Seeks Legislation to Update and Streamline REITs
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New Members Named to Senate Finance, Banking Committees
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Administration Releases Plan for Housing Finance Reform, Path to Agreement Remains Uncertain
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Dodd-Frank Implementation Well Underway, NAREIT Remains Engaged on Derivatives Rulemakings
REIT CEOs are making plans to attend the 2011 Washington Leadership Forum (WLF) scheduled for Mar. 1 and 2 in Washington, D.C. All Member CEOs are invited to attend. In addition to a day full of meetings on Capitol Hill, CEOs will hear from featured speakers including Chris Wallace, host of Fox News Sunday, House Majority Leader Eric Cantor, and Rep. Dave Camp, Chairman of the House Ways and Means Committee.
As previously noted, WLF provides an annual forum for REIT executives to meet with key lawmakers and Administration officials to discuss the latest developments in the REIT and publicly traded real estate industry and NAREIT’s legislative agenda for 2011. Among other things, this year’s WLF participants will urge policymakers to reform the Foreign Investment in Real Property Tax Act (FIRPTA) to facilitate greater non-U.S. equity investment in U.S. real estate and to support a legislative proposal that will modernize and improve the REIT rules. For more detail on the REIT rules proposal, see the section below titled, “NAREIT Seeks Legislation to Update and Streamline REITs.”
2011’s WLF will be a tremendous opportunity for REIT executives to reach out to policymakers and discuss the critical issues impacting the industry. Please encourage your CEO to attend this year’s WLF to help promote your company and the industry within the halls of Congress. Contact Beth Aiken at baiken@nareit.com to RSVP and request a registration form.
On Jan. 25, 2011, President Obama delivered a State of the Union Address before a joint session of Congress. In his speech, the President attempted to speak to “the middle” of the political spectrum by focusing on themes of job creation, economic growth, and budget discipline to address long-term federal budget deficit and the national debt.
In addition to headline-grabbing passages declaring that our nation faces another “Sputnik moment” and that redoubled efforts must be made to “win the future,” the President also issued a challenge to Congress to undertake a bipartisan effort to reform the tax code. Specifically, the Obama said, “I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years – without adding to our deficit.” To read the transcript of the entire speech, CLICK HERE.
While it was notable that many lawmakers made a public display of sitting next to colleagues from the other political party, it remains to be seen if this visual display of bi-partisanship will translate into real cooperation – especially on such a significant and divisive issue as corporate tax reform.
No matter how seriously the tax-writing Committees and the Administration pursue a review of the current tax system, NAREIT will continue educate policymakers about both the macroeconomic value – and the shareholder benefits – of the REIT approach to real estate investment.
On Mon., Feb. 14, President Obama transmitted his formal Fiscal Year 2012 Budget request to the Congress. Included in the documents are two tax changes that are relevant to NAREITs policy agenda. To read NAREIT’s FirstBrief on this issue, CLICK HERE.
First, in what appears to be a response to discussions between NAREIT and Treasury officials, the Administration proposes some relief from current preferential dividend rules that can cause the loss of the dividends paid deduction – or even the loss of REIT status – if a REIT makes an inadvertent error in distributing dividends. However, the Administration proposes repeal of the preferential dividend rule only for publicly traded REITs, while also granting authority for the Treasury Department "to provide for cures of inadvertent violations of the preferential dividend rule" for non-listed REITs. To view the proposal in the Administration’s Budget documents, CLICK HERE.
NAREIT has consistently called for the repeal of the preferential dividend rule for all “publicly offered” REITs that are required to register with the SEC, consistent with the rule enacted for regulated investment companies in 2010. To read NAREIT’s Oct. 28, 2010, letter to the Treasury calling for this change, CLICK HERE. While NAREIT views the Administration’s proposal as an important first step to address the concerns our members have identified with this rule, we will continue to advocate that relief should be provided to all SEC-registered REITs.
Second, the Administration proposes to "replace the existing deduction for energy efficient commercial building property expenditures with a tax credit and also allow taxpayers to take an alternative credit for placing in service" more energy efficient properties. The Treasury Department's General Explanations of the Administration's Fiscal Year 2012 Revenue Proposals (also known as the “Green Book”) further describes the proposal and states that "special rules would be provided that would allow the credit to benefit a REIT or its shareholders." The Budget proposal provides a little more detail on President Obama's "Better Buildings Initiative" released Feb. 3. To access more information regarding NAREIT's efforts to modify certain energy tax incentives to encourage REITs to invest more in energy efficiency and renewable energy, CLICK HERE.
NAREIT is pleased and encouraged that the Administration’s Budget includes both of these initiatives, and plans to work with the Administration and Congress as they continue to develop these proposals in the coming months.
In the 112th Congress, NAREIT will pursue legislation to modernize and improve the existing REIT rules and help REITs deliver new management and operational efficiencies across a broad range of areas. The package of improvements sought by NAREIT was developed over the past two years with significant input and guidance from our members. If enacted, the proposal will update the REIT rules to allow the industry to remain competitive and it will streamline the rules to remove uncertainties in existing law that unnecessarily limit flexibility in REIT business activities. For that reason, NAREIT will encourage lawmakers to name the proposal the “Update and Streamline REIT Act (US REIT Act).”
Among other things, the US REIT Act would amend the REIT rules by 1) modifying the REIT dealer sales “safe harbor” so that a REIT can sell up to 20% of its properties annually (up from the 10% limit today), and utilize a taxable REIT subsidiary to market its property; 2) improving the current "REIT Savings" rules in connection with inadvertent REIT test violations by allowing payment of an increased monetary penalty in lieu of REIT disqualification; 3) repealing the current preferential dividend rule for all SEC-registered REITs; and 4) clarifying and modernizing the REIT income and asset tests.
Rep. Pat Tiberi (R-OH), a senior member of the House Ways and Means Committee and supporter of the REIT industry, has agreed to introduce the proposal in the House of Representatives. NAREIT is continuing to discuss the proposal with additional members of the Ways and Means Committee, as well as the Senate Finance Committee, and is hopeful that the proposal will be introduced in the near future with bipartisan support.
The 112th Congress was sworn in on Jan. 5, 2011. As reported in the last PL Report, the Republican controlled House of Representatives elected its leaders and formalized committee assignments for most of its members in mid-December. To read the last PL Report, CLICK HERE. In the Senate, committee assignments were not completed until the final days of January.
Of particular interest to NAREIT’s membership, the Senate Finance Committee, the principal tax policy committee in the Senate, has undergone a change in its Republican leadership and it has welcomed three new members. Sen. Max Baucus (D-MT) remains the Chairman of the Committee; but, consistent with Senate Republican rules, Sen. Orrin Hatch (R-UT) has replaced Sen. Charles Grassley (R-IA) as the Ranking Member. Sen. Ben Cardin (D-MD) was appointed to fill the vacancy left by Sen. Blanche Lincoln (D-AR), who lost her bid for reelection this past November. Sen. Cardin has long been a champion for the REIT industry, dating back to his service on the House Ways and Means Committee. Reflecting the narrower party ratio in the Senate, the Republicans also added two new members to the committee: Sen. Tom Coburn (R-OK) and Sen. John Thune (R-SD).
On the Banking Committee, Sen. Tim Johnson (D-SD) has replaced former Sen. Chris Dodd (D-CT) as the new Chairman, while Sen. Richard Shelby (R-AL) remains the Ranking Member. The Committee also welcomed five new members: Sen. Kay Hagan (D-NC), Rep. Roger Wicker (R-MS), and newly-elected Senators Pat Toomey (R-PA), Mark Kirk (R-IL), and Jerry Moran (R-KS).
On Friday, February 11, the Department of the Treasury and the Department of Housing and Urban Development (HUD) released a report to Congress entitled, "Reforming America's Housing Finance Market." In the press announcement, HUD Secretary Shaun Donovan describes the report as the Obama Administration's plan to, "[F]ix the fundamental flaws in the mortgage market and better target the government's support for affordable homeownership and rental housing." To view NAREIT’s FirstBrief on this announcement, CLICK HERE.
The report, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, lays out the Administration's objectives for near-term changes to the housing finance system, as well as three options for long-term reform. This release may be viewed as a beginning stage in a more formal policymaking process. However, the current political environment in Congress is not the most conducive for significant or meaningful action on this issue, nor is the report likely to bridge the significant ideological differences between the parties.
In the House, where Republicans have the majority and therefore control the agenda, the Financial Services Committee has planned several hearings focused GSE reform, and housing finance more broadly. On Feb. 9, Rep. Scott Garrett (R-NJ), Chairman of the Subcommittee on Capital Markets, held a hearing titled, “GSE Reform: Immediate Steps to Protect Taxpayers and End the Bailout.” To view the record of the hearing, CLICK HERE. To read a speech Garrett made to the American Securitization Forum on this issue, CLICK HERE. And, on Wed., Feb. 16, Rep. Judy Biggert (R-KS), Chairman of the Insurance, Housing, and Community Development Subcommittee convened a hearing titled “Are There Government Barriers to the Housing Market Recovery?” Biggert invited Michael Farrell, Chairman, President and CEO of Annaly Capital Management, and Chair of the Residential Subcommittee of NAREIT's Mortgage REIT Council, to testify. To view the record of the hearing, CLICK HERE, or to read Farrell’s remarks, CLICK HERE.
In the Senate, where the Democrats retain the majority, the path is less clear. This is due, in part, to the slow pace by which the Committees were formally “organized.” For example, despite being sworn in on Jan. 5, 2011, the members of the Banking Committee and its leadership were not formalized until Jan. 27. However, the delay did not bring with it any surprises. As expected, Sen. Tim Johnson (D-SD) was named Chairman of the Committee, taking up the position that was vacated by Sen. Chris Dodd (D-CT) who retired at the end of last Congress. The Banking Committee is not expected to turn its attention to GSE reform for several weeks.
As the battle lines continue to be drawn, NAREIT will remain engaged on multiple fronts. We will advocate on behalf of our mortgage REIT members, who have a proven track record of providing liquidity for the housing finance market. We will also partner with other real estate industry organizations to ensure that lawmakers understand the role that the GSEs have played in the multi-family sector.
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 from 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.
On Dec. 1, by a vote of 3-2, the CFTC agreed to issue a proposed rule establishing key definitions such as “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 – a category believed to include mortgage REITs – will be held to tighter standards when determining if they are to be subjected to greater regulation as major swap participants.
NAREIT continues to work with its Task Force, the Mortgage REIT Council, the Coalition, and other real estate organizations to provide input and comments on this proposed rule that remains open for comment through Feb. 22, 2011. If your company would like to participate in this effort, please contact Kirk Freeman, NAREIT’s Senior Director, Government Relations at kfreeman@nareit.com.
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