November 9, 2009
Congress Continues to Debate Energy Policy, Clarifications Needed to Benefit REITs
Earlier this year, the House of Representatives narrowly passed comprehensive energy and climate change legislation, H.R. 2454, the “American Clean Energy and Security Act of 2009.” To view the July 2009 Hill Snapshot which describes this legislation, CLICK HERE. Work on similar proposals is underway in the Senate where six committees have shared jurisdiction over climate change legislation.
In June 2009, Senator Bingaman (D-NM), Chairman of the Energy and Natural Resources Committee, passed out of his Committee a proposal that would promote energy conservation and the development of clean energy technology. For more information on this bill, CLICK HERE. Similarly, Senator Barbara Boxer (D-CA), Chairwoman of the Senate Environment and Public Works Committee, has worked with Senator John Kerry (D-MA), Chairman of the Senate Foreign Relations Committee, to introduce a proposal that would implement a cap and trade system while also investing in energy efficiency and renewable energy. For more information on this bill, CLICK HERE.
Similar to the House-passed bill, both the Bingaman and Boxer proposals would provide federal funding for state-based retrofitting grant programs intended to help building owners comply with ambitious new national energy standards. From the time that similar grants were proposed in the House, NAREIT has been pursuing a legislative clarification to ensure that any new grants for retrofitting commercial buildings are considered as qualified income under the REIT income tests and that the grants themselves would be considered qualifying REIT assets. For additional information on this effort, CLICK HERE.
NAREIT has also 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. This may include the introduction of a stand alone bill by members of the House Ways and Means Committee from states with significant solar power capacity or a Senate bill that contains several energy tax provisions. 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 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.
On October 30, 2009, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision announced a coordinated and updated policy that provides a template for lenders and bank examiners to address the workout of troubled commercial real estate loans.
In a statement announcing this policy, the regulators indicate that “prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions.” The regulators also state that financial institutions which, “implement prudent workout arrangements after performing comprehensive reviews of borrowers’ financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications.” Finally, the regulators provide assurances that performing loans renewed or restructured on reasonable modified terms to creditworthy borrowers, “will not be subject to adverse classification solely because the value of the underlying collateral declined.”
To illustrate the potential impact of this policy on commercial real estate loan workouts, the statement released by the Federal Reserve includes examples of how the policy would work. The policy statement reinforces existing guidance to examiners that they are “expected to take a balanced approach in assessing institutions’ risk-management practices for loan workout activities.” To read the statement from the financial regulators, CLICK HERE.
In June 2009, the Obama Administration released its blueprint for financial services regulatory reform, which outlines a plan to, “build a new foundation for financial regulation and supervision that is simpler and more effectively enforced, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.” To read the full proposal, CLICK HERE.
House Financial Services Committee Chairman Barney Frank (D-MA) continues to pursue an ambitious schedule to consider the various components of the Administration’s proposal. In October 2009, the Committee passed five components of the broader plan, including 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 the credit rating agencies, investment advisers and private pools of capital. To see the schedule of hearings and to access related materials, CLICK HERE.
In the Senate, where the focus has remained on health care reform, the schedule for action is currently less clear. Senate Banking Committee Chairman Chris Dodd (D-CT) had once expressed a strong interest in working with Ranking Member Richard Shelby (R-AL) to develop bipartisan legislation. However, it is now expected that Dodd will introduce a comprehensive reform proposal without Shelby’s support.
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.
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 continues 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 major dealers of OTC derivatives while exempting business end-users from the more onerous provisions. Under both proposals, major derivatives dealers would face new registration, record-keeping, and reporting rules; new capital standards; and new margin requirements. The proposals would also require many derivatives transactions to be cleared by a third-party clearinghouse or traded on a regulated exchange to provide enhanced transparency and reduce systemic risk. To read NAREIT’s October 23, 2009, Policy Report which discusses the two bills, CLICK HERE.
With action completed in both the House Financial Services and Agriculture Committees, the two proposals must now be reconciled as a single bill. It is currently believed that it will then be combined with the other components of regulatory reform before it is brought before to the House floor for a vote. This vote will likely occur after the Thanksgiving Congressional Recess. In the Senate, Banking Committee Chairman Christopher Dodd (D-CT) is expected to present his comprehensive regulatory reform proposal in the coming days, with hearings and debate to follow.
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.
On November 6, 2009, President Obama signed into law a bill to extend unemployment insurance benefits for jobless Americans. This law also provides a temporary extension of the $8,000 first-time home buyer tax credit and expands the net operating loss (NOL) carryback provision that was enacted in February 2009 as part of the “American Recovery and Reinvestment Act” (Pub. L. 111-5).
The bill, which was drafted by Senate Finance Committee Chairman Max Baucus (D-MT) expands the NOL provision to allow all U.S. companies to carry back for up to five years losses they incurred in either 2008 or 2009. These losses could offset up to 100 percent of income from the first four carryback years and up to 50 percent of income from the fifth year. The revenue lost by the home buyer credit and NOL provisions was offset by delaying the enactment of special rules that would allow U.S. corporations to reduce the interest expenses they allocate to foreign assets. To read the text of the new law, CLICK HERE.