October 24, 2012
The Path from the Fiscal Cliff to Comprehensive Tax Reform Remains Unclear
After a brief visit to Capitol Hill at the beginning of September, lawmakers have returned home to hit the campaign trail. Left behind in Washington is the so-called "fiscal cliff" facing the U.S. economy at the end of this year if no action is taken to address the significant tax increases and spending cuts that would result from the expiration of the Bush-era individual tax rates and the tax extenders, and the implementation of the federal spending sequester agreed to as part of last year's debate on increasing the debt ceiling.
While neither the Republicans nor the Democrats have unveiled detailed tax reform proposals, Members of Congress and candidates from both parties continue to call for broad-based tax reform as part of the solution to this significant challenge. Whether or not this talk will result in truly comprehensive tax reform depends, in large part, on whether or not the results of the November elections are interpreted by lawmakers as a mandate from the American people for action and compromise. Otherwise, the agreement on the high concept of the need for reform could well fall apart as it becomes clear to these elected officials that this effort will require choices that create winners and losers.
As this process unfolds, NAREIT will continue to strategically engage with policymakers from both political parties to ensure the priorities of the REIT industry are considered when this debate is joined in earnest.
NAREIT's Presence at the Political Conventions
NAREIT staff met policymakers and represented the REIT industry at numerous events at the National Republican Convention in Tampa, FL, and the National Democratic Convention in Charlotte, NC. In addition, the National Real Estate Organizations (NREO), a working group of 19 commercial and residential real estate trade associations including NAREIT, hosted educational sessions to highlight for attending lawmakers the importance of the real estate industry.
At each convention, panel discussions entitled, "A Strong Real Estate Market is Vital for a Robust Economic Recovery," were moderated by The Real Estate Roundtable's Jeff DeBoer. In Tampa, Mr. DeBoer was joined by Senator Johnny Isakson (R-GA) and Rep. Mike Turner (R-OH). In Charlotte, he was joined by Sen. Ben Cardin (D-MD), Sen. Mark Begich (D-AK) and Rep. Joe Crowley (D-NY). Both events successfully cut through the political theater of the conventions to focus on the challenges facing the real estate economy, and to discuss potential solutions to these challenges.
House Subcommittee Holds Hearing on Terrorism Risk Insurance
On the anniversary of the 9/11 terrorist attacks, the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity (the Subcommittee) held a hearing on the future of the Terrorism Risk Insurance Act (TRIA), which is scheduled to expire at the end of 2014. Entitled "TRIA at Ten Years: The Future of the Terror Risk Insurance Program," the hearing's witness list consisted of experts from academia, think tanks, insurance companies, and the policyholder community to discuss the future of TRIA.
The Coalition to Insure Against Terrorism (CIAT), of which NAREIT is a founding member, was represented at the hearing by Rolf Lundberg, senior vice president for congressional and public affairs at the U.S. Chamber of Commerce. Mr. Lundberg spoke on the coalition's behalf and encouraged Congress to reauthorize TRIA when it expires in two years.
"While private insurance capacity apparently has grown slightly in the past decade, these years have also taught us that a continuing federal role in this unique risk remains vital. The terrorism peril is simply too intrinsically linked to government policy and intelligence to be solely handled by the private sector alone," Lundberg said.
Several members of the Subcommittee suggested it is time for the federal government to completely withdraw from this area and let the private market be totally responsible for insuring against any terrorist incident in the future. At the same time, other members of the panel recognized that TRIA is too critical to maintaining a strong U.S. economy in the face of potential terrorist attacks and should be extended after a thorough review of the program's policies.
No further congressional action is planned at this time. However, it is anticipated that Congress will continue examining TRIA in early 2013 in order to meet the program's expiration deadline in 2014. NAREIT anticipates that CIAT will be a major player in these discussions to ensure that the ongoing needs of the policyholder community regarding potential terrorist acts is appropriately represented.
Sales Tax Fairness Advocates Hope for Action in the "Lame Duck"
The authors of legislation to allow states to collect sales and use taxes on remote sales, including internet commerce, are laying the groundwork for potential action on their proposals in the "lame duck" session after the election.
Sens. Michael Enzi (R-WY), Dick Durbin (D-IL) and Lamar Alexander (R-TN) and Reps. Steve Womack (R-AR), Jackie Speier (D-CA), and Peter Welch (D-VT) continue to negotiate the final language of a bill that they believe will address lingering concerns with their introduced legislation. Additionally, these leaders have enlisted the support of the business community, including bricks-and-mortar retailers and their landlords, in an effort to further educate and secure support from lawmakers that have previously not taken a position on S. 1832, the Marketplace Fairness Act, in the Senate or H.R. 3179, the Marketplace Equity Act, in the House.
While the outcome is not guaranteed, NAREIT will continue to work with its partners in an industry-wide coalition, including the International Council of Shopping Centers, in an effort achieve sufficient support for this effort to allow for the consideration and passage of sales tax fairness legislation before the end of the year. NAREIT also is urging the U.S. Chamber of Commerce to support the sales tax fairness legislation.
NAREIT Sought and Received CFTC Interpretation Clarifying Equity REITs are not Considered Commodity Pools Under the Dodd-Frank Act
As has been discussed at length in previous PL Reports, the Dodd-Frank Act gave the Commodity Futures Trading Commission (CFTC) significant new authority to regulate the previously lightly-regulated derivatives market. Among other provisions, Dodd-Frank amended the CFTC's long-standing definition of the term "commodity pool" to now include "any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests, including any
[interest rate or other] swap" (emphasis added).
When considered in the context of previous CFTC staff positions and the presence words "investment trust" in the term "Real Estate Investment Trust," the new definition of a commodity pool could appear to apply to REITs, although there is no evidence that this result was intended, or appropriate. If a REIT was determined to be a commodity pool, its operators would be subjected to new registration requirements and other regulations, and the REIT would be automatically denied the ability to claim the end-user exemption from central clearing requirements for its hedging transactions, whether or not the REIT is otherwise considered to be a non-financial end-user.
On Sept. 4, NAREIT submitted a request to the Commodity Futures Trading Commission (CFTC) for an Interpretative Letter that would be generally applicable concluding that Equity REITs are not commodity pools. On Oct. 11, NAREIT received an interpretive letter from the CFTC agreeing with this position.
Bipartisan Bill Introduced to Expand Tax Incentives for Energy Efficient Commercial Buildings, and to Make them Meaningful for REITs
On Sept. 20, Sens. Olympia Snowe (R-ME), Jeff Bingaman (D-NM) Benjamin Cardin (D-MD), and Dianne Feinstein (D-CA) introduced S. 3591, the Commercial Building Modernization Act, a bill to encourage energy efficiency in the commercial property sector.
The bill would improve and expand the existing 179D deduction and establish a proposed 179F deduction in order to further incentivize the construction of new energy efficient buildings and the retrofitting of existing buildings to yield significant energy savings. Among other important changes from existing law, this proposal would allow energy efficiency improvements to be measured based on the reduction in energy usage of an existing building, rather than only based on improvements over the existing building codes. Additionally, retail shopping center owners would be entitled to claim the deduction based on improvements to an area of 50,000 square feet or more that has its own utility meter (rather than based on an improvement of the energy usage of the entire shopping center).
Of particular interest to NAREIT and its members, the bill seeks to make these deductions relevant to REITs in two ways. First, it creates a framework to allow REITs, non-profits, and other property owners to allocate all or part of these new deductions to third parties, such as lenders, tenants, architects, or contractors. Second, the bill would allow "non-captive REITs" to reduce their earnings and profits by the same amount they deduct from taxable income for these energy efficient expenditures, thereby eliminating the double taxation of REIT shareholders that can result from the mismatch in the calculation of taxable income and earnings in profits under current law.
Given Congress' existing budgetary priorities and the upcoming elections, it is not expected that Congress will vote on this bill this year. Nevertheless, it will serve as a useful starting point for subsequent consideration of these issues in the future.
Additional Members of Congress Cosponsor the U.S. REIT Act
Prior to Congress adjourning in anticipation of November's elections, the Update and Streamline REIT Act (U.S. REIT Act), introduced in May as H.R. 5746 by Reps. Pat Tiberi (R-OH) and Richard Neal (D-MA), continued to receive support in the House of Representatives. Four additional Members of Congress added their names to the bill as co-sponsors, bringing the total number of House co-sponsors to 36.
In particular, House Ways and Means members Reps. Diane Black (R-TN) and Xavier Becerra (D-CA) co-sponsored the bill. To date, 31 of the 37 bipartisan members of the House Ways and Means Committee are listed as co-sponsors of H.R. 5746, including 18 Republicans and 13 Democrats. Also recently co-sponsoring the bill were Reps. Gary Miller (R-CA), a member of the House Financial Services Committee, and Linda Sanchez (D-CA), a strong supporter of the industry and a former member of the House Ways & Means Committee.
The bill would make targeted but meaningful modifications to the REIT rules to allow the industry to operate more effectively and efficiently in the current marketplace. These modifications include providing REITs more flexibility in disposing of their assets; repealing the preferential dividend rule for publicly-offered REITs; refining and modernizing several of the REIT income and asset tests; codifying and expanding IRS guidance regarding timber and the REIT tests; helping REITs that own mortgages attract worldwide investments; and modifying a technical provision relating to a REIT's "earnings and profits" to prevent duplicative taxation of REIT shareholders.
Your Participation Enhances NAREIT's Political Outreach Efforts
In addition to our work on Capitol Hill, NAREIT's policy and politics staff continuously seeks opportunities to introduce lawmakers to NAREIT members who live or do business in their home states or Congressional Districts. Such contacts are an invaluable component of our efforts to advocate for the interests of REITs and publicly traded real estate companies, by providing real world, localized examples of the businesses that will be benefited by the policies NAREIT supports.
Over the past two years, NAREIT has facilitated 50 interactions with lawmakers, including property tours, one-on-one meetings, grand openings, and groundbreaking ceremonies. With major issues such as the possibility of comprehensive tax reform on the horizon, it will be more important than ever for us to work together to forge relationships between NAREIT members and lawmakers. While we will continue to reach out to you if an opportunity presents itself, we hope you will also contact to Robert Dibblee at firstname.lastname@example.org, Kirk Freeman at email@example.com or Kate Smith at firstname.lastname@example.org as your company develops or acquires properties, or if you are contacted by Federal lawmakers seeking your input or support. We look forward to partnering with you.