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October 19, 2011
Highlights
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FIRPTA Reform Proposals Introduced in House and Senate, Gain Bipartisan Support
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Real Estate Industry Opposes Amendment That Would End TRIA in 2013
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Coalition for Derivatives End-Users Meet with Lawmakers and Regulators, Urge Unambiguous End-User Exemption from Margin Requirements
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Policymakers Continue to Consider GSE Reform, Proposals to Allow More Borrowers to Refinance, and Regulation of Mortgage Investors
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As Deadline Approaches, Joint Select Committee on Deficit Reduction Works Mostly Behind Closed Doors
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Public Non-Listed REIT Council Convenes, Begins Work
FIRPTA Reform Proposals Introduced in House and Senate, Gain Bipartisan Support
On Sept. 21, Reps. Kevin Brady (R-TX) and Joe Crowley (D-NY), along with Patrick Tiberi (R-OH) and Shelley Berkley (D-NV), introduced H.R. 2989, the Real Estate Jobs and Investment Act of 2011. A day later, Sens. Bob Menendez (D-NJ) and Mike Enzi (R-WY) introduced a similar bill in the Senate, S. 1616, the Real Estate Investment and Jobs Act of 2011. Sens. Chuck Schumer (D-NY), Maria Cantwell (D-WA), Ben Cardin (D-MD), Bill Nelson (D-FL), Mike Crapo (R-ID) and Michael Bennet (D-CO) have also signed on as cosponsors of S. 1616.
Both bills 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. 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.
These proposals represent an important step toward the enactment of reforms to FIRPTA that would reduce barriers to foreign equity investments in U.S. commercial real estate. NAREIT and other real estate organizations have advocated for these reforms for several years, and we will encourage other lawmakers on the tax-writing committees to support these proposals.
Real Estate Industry Opposes Amendment That Would End TRIA in 2013
On Sept. 8, during Senate Banking Committee consideration of legislation reauthorizing the national flood insurance program, Sen. Roger Wicker (R-MS), a member of the Committee, proposed an amendment that would have terminated the Terrorism Risk Insurance Act (TRIA) in 2013, a year earlier than TRIA is scheduled to expire under its 2007 reauthorization.
NAREIT, a founding member of the Coalition to Insure Against Terrorism (CIAT), joined with 14 other trade associations, including The Real Estate Roundtable and the International Council of Shopping Centers, in sending a letter to Banking Committee Chairman Johnson (D-SD) and Ranking Member Shelby (R-AL) urging them to oppose the Wicker amendment. The letter states, "As we mark the tenth anniversary of the September 11, 2001 terrorist attacks on New York, Washington, D.C. and Pennsylvania, our nation continues to be faced with the threat of terrorism. The Terrorism Risk Insurance Act (TRIA) is an economic first responder in a terrorist attack… Maintaining a workable federal terrorism insurance backstop is vital for the nation's economy. Without adequate terrorism insurance coverage, our economy, our jobs and our well-being become more vulnerable to the designs of the terrorists who hope to destroy our economic strength."
In the face of opposition from industry and his colleagues, Sen. Wicker withdrew his amendment, stating that he anticipates revisiting the issue of terrorism insurance at a later date. CIAT will oppose any similar amendment offered in the future and is preparing to advocate for the continuation of TRIA as its expiration approaches.
Coalition for Derivatives End-Users Meet with Lawmakers and Regulators, Urge Unambiguous End-User Exemption from Margin Requirements
On Thurs., Oct. 6, the Coalition for Derivatives End-Users hosted a “fly-in” of treasurers and financial executives from companies that use derivatives to manage the commercial risks they face due to their exposure to variable interest rates, commodity prices, or currency exchange rates. In meetings with lawmakers and regulators, the Coalition urged policymakers to provide end-users with an unambiguous exemption from margin requirements on non-cleared derivatives.
While the statutory text and legislative history of the Dodd-Frank Act clearly provide such an exemption for end-users, the regulators, particularly the banking regulators, have proposed rules that could impose margin requirements on non-cleared trades entered into by entities that pose no systemic risk and which enter into derivatives to hedge commercial risk, not to speculate.
Of particular concern to real estate companies is that, not only could these proposed rules subject them to margin requirements on interest rate derivatives, but the rules would potentially end a common practice that allows the use of buildings and other physical assets to secure both a loan and a swap with the same property. By undermining the ability of real estate companies to lock in fixed rate payments on variable rate debt in this way, these rules could limit their ability to finance their properties on the terms and with the lender of their choosing.
In July, NAREIT and a number of other real estate trade associations submitted comments to the Federal Reserve and the other banking regulators raising a number of concerns with their proposed margin rules. We continue to engage with the regulators to further explain the unnecessary cost their rules could create for real estate companies during this time of ongoing economic weakness.
Policymakers Continue to Consider GSE Reform, Proposals to Allow More Borrowers to Refinance, and Regulation of Mortgage Investors
After returning from the August recess, both the Senate Banking Committee and the House Financial Services Committee have continued to hold regular hearings on the issues involved in reforming the domestic housing finance market, though comprehensive legislation is not expected to be debated in the near term. For the most part, these hearings have primarily focused on fundamental questions, such as whether or not the federal government should continue to provide a guarantee for certain mortgages. Most recently, Michael Farrell, Chairman, CEO and President of Annaly Capital Management, Inc., testified before the House subcommittee on International Monetary Policy and Trade during a hearing on Oct. 13 focused on the U.S. housing market in a global context.
Lawmakers and the Obama administration have also been discussing possible ways for the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac to assist more homeowners, including those who are currently underwater, to refinance at current low rates through programs like the Home Affordable Refinance Program (HARP). On Thurs. Oct. 6, Treasury Secretary Tim Geithner told the Senate Banking Committee that he expects FHFA to unveil a proposal to achieve this goal in the coming weeks. The details of this a proposal will be closely watched by investors that hold securities backed by the original mortgages.
Mortgage investors, including members of NAREIT’s Mortgage REIT Council that invest in commercial and residential real estate debt, are also monitoring and preparing comments on a Concept Release approved by the Securities and Exchange Commission on Aug. 31, that seeks 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). Many mortgage investors rely on an exemption provided in 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."
In the context of these three significant policy conversations, NAREIT will continue to educate policymakers about the important role REITs have played in bringing private capital to the real estate debt markets, and we will advocate that this role should only be strengthened.
As Deadline Approaches, Joint Select Committee on Deficit Reduction Works Mostly Behind Closed Doors
One of the central components of the compromise surrounding the increase of the Federal debt limit was the creation of a "Joint Select Committee on Deficit Reduction" (JSC) that has been tasked with identifying policies that would yield at least $1.2-1.5 trillion in deficit reduction over 10 years. Any legislative proposal that receives a majority of votes from the JSC prior to the Thanksgiving holiday will be reported to the House and Senate floors, where it would be considered without amendment before Dec. 23. If this effort does not succeed, government funding for discretionary programs and the military will be subjected to automatic cuts through a process known as “sequestration.”
The JSC, comprised of six members of the Senate and six members of the House, is evenly split between the two parties, and it is co-chaired by Sen. Patty Murray (D-WA) and Rep. Jeb Hensarling (R-TX). While the members of the JSC have reportedly held significant and wide-ranging conversations during which “all options” have been “on the table,” and they have held two public hearings, it remains unclear if they will meet the Nov. 23 deadline for reporting out a deficit reduction plan.
One of the most contentious issues facing the JSC is whether or not they will include elements of tax reform as part of their plan. Notably, the debt ceiling compromise law that created the JSC does not specifically require or prohibit the Committee from considering tax law changes. While the JSC’s second public hearing focused on revenue options for deficit reduction, and members of the Committee expressed interest in pursuing tax reform as part of their work, the public debate between the President and Congressional leaders from both parties indicates that significant changes to the tax code are unlikely to garner the votes necessary to pass in this context.
NAREIT will remain vigilant as this process unfolds.
Public Non-Listed REIT Council Convenes, Begins Work
On Sept. 22, NAREIT's Public Non-Listed REIT (PNLR) Council conducted its first formal meeting at the Four Seasons Hotel in Washington, D.C. The mission of the PNLR Council is to advise NAREIT's Executive Board on matters of interest and importance to PNLRs.
Among other issues, the PNLR Council is actively working to respond to a regulatory notice issued by the Financial Industry Regulatory Agency (FINRA) on Sept. 29, in which the Agency proposes amendments to NASD Rule 2340 related to the reporting of per share estimated values of non-listed REITs on customer account statements.
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