PL Report (October 2009)
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October 2009
Regulatory Reform Picks Up Steam in the House, Senate Remains Focused on Health CareIn 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." Legislation to Regulate Over-the-Counter Derivatives Moves ForwardAs part of the broader regulatory reform effort, the Obama Administration and policymakers in Congress undertook a detailed review of over-the-counter (OTC) derivatives. 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, publicly traded commercial real estate companies, and other industries. NAREIT Pursues Changes in Renewable Energy Grants and Building Retrofitting IncentivesEarlier this year, the House of Representatives 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 Bulletin discussing the legislation, CLICK HERE. The so called "Cap and Trade" bill narrowly passed the House in June and was sent to the Senate, which has yet to address the issue because of more pressing matters, such as health care reform. Treasury Guidance a Victory for Supporters of CMBS WorkoutsOn September 15th, 2009, the U.S. Internal Revenue Service published guidance that it will temporarily ease the very restrictive tax rules that apply to modifications of commercial real estate loans that are held by real estate mortgage investment conduits (REMICs). Given the significant commercial real estate loan maturities on the horizon, and the lack of liquidity in the current market this guidance will provide that lenders and mortgage servicers with the flexibility they need to restructure and modify loans before a default occurs. NAREIT Seeks Additional Oversight of Leveraged and Inverse Exchange-Traded FundsLike traditional exchange-traded funds (ETFs), leveraged and inverse ETFs also represent an interest in a portfolio of securities that track an index or benchmark, but by using derivatives products to create synthetic leverage, they promise to deliver multiples of the daily performance of that portfolio. NAREIT believes this particular sub-set of ETFs deserves additional attention from regulators and policymakers due to questions of suitability, market distortion and regulatory avoidance. Net Operating Loss (NOL) Carryback Provision Attached to Bill to Extend Unemployment BenefitsOn 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). |
NAREIT® does not intend this publication to be a solicitation related to any particular company, nor does it intend to provide investment, legal or tax advice. Investors should consult with their own investment, legal or tax advisers regarding the appropriateness of investing in any of the securities or investment strategies discussed in this publication. Nothing herein should be construed to be an endorsement by NAREIT of any specific company or products or as an offer to sell or a solicitation to buy any security or other financial instrument or to participate in any trading strategy. NAREIT expressly disclaims any liability for the accuracy, timeliness or completeness of data in this publication. Unless otherwise indicated, all data are derived from, and apply only to, publicly traded securities. All values are unaudited and subject to revision. Any investment returns or performance data (past, hypothetical, or otherwise) are not necessarily indicative of future returns or performance. © Copyright 2010 National Association of Real Estate Investment Trusts®. NAREIT® is the exclusive registered trademark of the National Association of Real Estate Investment Trusts. |
Policy Report (October 23, 2009)
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October 23, 2009
House Committees Pass Proposals to Regulate Over-the-Counter Derivatives ProductsHighlightsExecutive SummaryIn the wake of the financial crisis, the Obama Administration and Democratic leaders in Congress are pursuing financial regulatory reforms intended to enhance transparency and accountability while restoring stability to capital markets. One focal point of this comprehensive effort is the creation of new regulation and oversight of over-the-counter (OTC) derivative transactions. Potential Impact on Real Estate CompaniesMany REITs and other businesses rely upon low-cost, customized OTC derivative products - such as interest rate swaps, interest rate caps, forward starting swaps, and foreign exchange forward contracts - to mitigate risk and to manage the cost of development and operational activities. For example, many REITs have significant exposure to variable rate debt. Rather than carrying the interest rate risk inherent to this debt a REIT may choose to use derivatives products to lock in fixed interest rate payments while maintaining the flexibility and other benefits offered by variable rate debt. Exemptions Provided for End-UsersIn order to address concerns about systemic risk posed by OTC derivatives, the proposals passed by both the House Financial Services Committee and the House Agriculture Committee aggressively regulate the 85 to 90 percent of all derivative contracts that are transacted between major market participants. Among other things, these proposals would force exchange trading or central clearing and impose cash margin requirements for derivatives transacted between dealers or other entities which maintain derivatives positions significant enough to pose risk to the broader financial system. OutlookWith action completed in both the House Financial Services and Agriculture Committees, the two proposals must now be reconciled as a single bill before it will be brought before the entire House for a vote. This vote may occur as early as November. In the Senate, where attention has been focused on health care reform, the schedule for action is less clear. ContactFor further information, please contact Kirk Freeman at kfreeman@nareit.com or Robert Dibblee at rdibblee@nareit.com. |
SFO Report (October 29, 2009)
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October 29, 2009
Highlights
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PL Report (November 9, 2009)
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November 9, 2009
Congress Continues to Debate Energy Policy, Clarifications Needed to Benefit REITsEarlier 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. Financial Regulators Update Policy Encouraging Commercial Real Estate Loan WorkoutsOn 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. Financial Services Regulatory Reform Continues to Move through the House While the Senate Prepares to Begin WorkIn 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. Two House Committees Pass Derivatives Reform ProposalsThe 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. Net Operating Loss (NOL) Carryback Provision Attached to Bill to Extend Unemployment BenefitsOn 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). |
Policy Report (November 10, 2009)
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November 10, 2009
FASB/IASB Tentative ConclusionsHighlights
FASB/IASB Reach Tentative Decisions on Global Convergence ProjectsAt their joint meeting on October 26-28, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (collectively the Boards) agreed on a number of positions that will be included in exposure drafts to be issued over the next six months on:
FASB/IASB Confirm Right-of-Use Approach for LesseesAt the October 2009 joint meeting, the Boards reaffirmed their previous conclusion that lessees, including real estate tenants, would recognize at lease inception a liability for all rents to be paid during the lease term and a "right-of-use" asset. The asset would be depreciated over the term of the lease and the lessees' rent payments would be allocated between interest expense and payments on the liability recognized at lease inception. This accounting could have a materially negative impact on the earnings of lessees/tenants.
NAREIT is asking members to provide additional issues that the real estate industry may encounter as a result of the Boards' proposed lessee model. The Boards will consider this input as they develop a new converged global standard for the accounting of leases that is expected to be issued in 2011. The exposure draft is expected to be issued in the second half of 2010.
FASB/IASB Favor the Performance Obligation Approach for New Accounting by LessorsAlthough the Boards' staff provided several approaches in applying a "right-of-use" model to account for leases by lessors, the Boards primarily debated two approaches: the derecognition and performance obligation approaches. On a real estate company's statement of financial position, the derecognition approach would replace investment property with: 1) a lease receivable; and, 2) the lessor's interest in the leased asset's residual value, as if the lessor has transferred a portion of the rights to a leased asset to the lessee for the lease term. On the statement of comprehensive income, the majority of the rental payment would be recognized as revenue at inception of the lease contract, as if the transfer of rights represents a sale of the leased asset. Additionally, the remaining portion of the rental payments would be recognized as interest income on the lease receivable. FASB/IASB Agree on Definition of a Discontinued OperationOn October 26, 2009, the Boards tentatively concluded that the converged definition of a discontinued operation should mirror the current definition under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, which is as follows:
The FASB and IASB staff will evaluate the possibility of adopting the definition of a discontinued operation in accordance with IFRS 5 and will develop a proposal for related disclosures. If finalized, this conclusion would generally eliminate the need to report sales of individual investment properties as discontinued operations - an objective of NAREIT's recent initiative and REESA's comment letter submitted to the FASB in January 2009 (click HERE to read the letter). A final standard is expected to be issued before the end of 2009 and would be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2009. It appears that early application would be permitted and, therefore, the new standard may be available for 2009 reporting.
FASB/IASB Make Significant Changes to Financial Statement Presentation ProposalIn October 2008, the Boards released a preliminary views document (PVD) on financial statement presentation that would dramatically alter the format and content of the financial statements reported under U.S. GAAP and IFRS. Under the Boards' proposal, each financial statement would be categorized into the following major sections: business, financing, taxes and discontinued operations. An additional category for equity would be included in the statements of financial position and cash flows. For more background information on the financial statement presentation proposal, please refer to the December 2008 Financial Standards Update by clicking HERE.
FASB/IASB Focus on Contract Segments to Allocate RevenueIn December 2008, the Boards issued a PVD on revenue recognition in contracts with customers. The Boards' proposed a contract-based revenue recognition model that would allocate the transaction price to each performance obligation in the contract. Once the company satisfies a performance obligation, revenue would be recognized according to the allocation. For more information on the proposal, refer to NAREIT's July 2009 Financial Standards Update by clicking HERE. To read REESA's letter in response to the Boards' proposal, click HERE. ContactFor further information, please contact George Yungmann at gyungmann@nareit.com or Sally Glenn at sglenn@nareit.com. |
PL Report (December 8, 2009)
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December 8, 2009
Comprehensive Financial Services Regulatory Reform Proposal to be Debated on the House Floor This WeekIn 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. House Regulatory Reform Proposal May Limit the Ability of REITs to Hedge RiskThe 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. At Risk: Protection for Commercial Real Estate Owners During Tenant BankruptcyNAREIT 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. Technical Fixes Needed for REITs to Benefit from Renewable Energy and Energy Efficiency Incentives – Legislation to be Introduced in HouseWith 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. Fed Clarifies TALF Policy to Benefit Public CompaniesThe 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. Carried Interest Proposal Used by the House as Offset for Annual Tax Extenders PackageAs 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. |
SFO Report (December 8, 2009)
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December 8, 2009
Highlights
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SFO Report (December 23, 2009)
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December 23, 2009
Highlights
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PL Report (January 12, 2010)
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January 12, 2010
Washington Leadership Forum 2010 – REIT CEOs Head to Capitol HillThe 2010 Washington Leadership Forum (WLF) is scheduled for February 23 and 24 in Washington, D.C., and all NAREIT member CEOs are invited to participate. In Congress and on the Campaign Trail, 2010 Promises to be a Busy YearCongress returns to Washington, D.C., in January poised to continue work on health care reform, financial regulatory reform, and economic recovery proposals. It is anticipated that Congress will take steps to address the estate tax and other tax cuts that were enacted under President Bush, but which are scheduled to expire at the end of 2010. In the wake of recent events, it is also likely that the Congress will turn renewed attention to homeland security and national defense policy. Bill to Allow REITs to Benefit from Recovery Act Energy Grants Introduced, Gains SupportNAREIT continues to seek a legislative fix that would enable REITs to benefit from energy grants enacted last February as part of the “American Recovery and Reinvestment Act” (Pub. L. No. 111-5). These grants, which are made in lieu of tax credits for investments in qualifying renewable energy projects, were specifically designed to benefit taxpayers with insufficient tax liabilities to benefit from existing energy tax credits. However, this provision has been interpreted to benefit a REIT only to the extent that it retains taxable income. Financial Regulatory Reform – including Derivatives Reform – Passes HouseOn December 11, 2009, the House of Representatives passed a comprehensive financial regulatory reform proposal 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. NAREIT Submits Comments to Treasury about the Obama Administration’s Entity Classification Legislative ProposalsMany REITs that invest in non-U.S. real estate do so through wholly-owned foreign limited liability entities that are permitted under current rules to “check the box” (CTB) to be disregarded entities for tax purposes. This structure allows the REIT to achieve immediate flow-through of the foreign income to its shareholders and to comply with the REIT income and asset tests. |
SFO Report (January 29, 2010)
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January 29, 2010
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PL Report (February 12, 2010)
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February 12, 2010
Washington Leadership Forum 2010 – REIT CEOs "Hike the Hill"All NAREIT member CEOs are invited to participate in the 2010 Washington Leadership Forum (WLF), scheduled for Feb. 23 and 24. WLF brings REIT executives from across the country together to meet with key policymakers in Congress and the Administration to discuss the latest developments in our industry and NAREIT's legislative agenda for the upcoming year. If you have not done so already, please encourage your CEO to attend WLF to help promote your company and the industry within the halls of Congress. Bill Introduced to Enable Additional Foreign Equity Investments in U.S. Real EstateWith ongoing difficulties in commercial real estate debt markets, there is growing concern that traditional loans and commercial mortgage-backed securitization may not fully address the refinancing needed for the approximately $400 billion of commercial real estate debt matures in each of 2010 and 2011. And, with declines in property values and more stringent lender requirements, new loans may not fully cover maturing debt. Congress Considers Measures Allowing REITs to Benefit from Renewable Energy and Energy Efficiency IncentivesNAREIT continues to pursue legislation to enable REITs to fully benefit from a variety of federal tax incentives for investments in renewable energy and energy efficiency. Senate Banking Committee Expected to Act Soon on Financial Regulatory ReformThe Senate Banking Committee is expected to formally consider a comprehensive package of financial regulatory reform proposals in the coming weeks. Among other things, this effort will attempt to address systemic risk, increase consumer protections, 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. "Check-the-Box" Change for Non-U.S. Subsidiaries Not Included in Obama Administration's Budget ProposalNAREIT is pleased to report that the Obama Administration's Fiscal Year 2011 budget proposal, released on Feb.1, 2010, does not contain a change to "check-the-box" (CTB) rules that currently allow companies to disregard for tax purposes their wholly-owned non-U.S. corporate subsidiaries. This is a departure from the Obama Administration's first budget submission for Fiscal Year 2010, which would have ended the application of the Clinton Administration CTB regulations for most wholly-owned foreign subsidiaries. Obama Budget Plan Again Proposes Changes to TRIAThe Obama Administration has again proposed revisions to the Terrorism Risk Insurance Act, or TRIA (Pub. L. 107-297) that would decrease the potential federal share of compensation that would result from an act of terrorism. Specifically, the Administration has proposed eliminating TRIA coverage for acts of domestic terrorism. It also proposes unspecified increases in 2011 and 2013 to the insurer deductible, the insurer's co-payment, and the $100 million event trigger amount for Federal payments. Additionally, the proposal recommends a reduction to post-event recoupment payments to 100%, and allowing insurers additional time to remit their surcharges to Treasury. To view the proposal as contained in the Obama Administration's Fiscal Year 2011 Budget proposal, CLICK HERE. |
PL Report (March 2010)
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March 2010
REIT CEOs Meet Policymakers on Capitol Hill - WLF 2010 RecapThe 2010 Washington Leadership Forum (WLF) was held on Feb. 23 and 24 in Washington, D.C., with 30 REIT CEOs participating in this year’s activities. WLF provides an opportunity for REIT executives to meet with key policymakers in Congress and the Administration to discuss the latest developments in the industry and NAREIT’s legislative agenda for the upcoming year. This year, WLF participants attended a record number of 40 congressional meetings, including 28 in the House and 12 in the Senate. FIRPTA Reform Effort Picks Up MomentumWith ongoing difficulties in commercial real estate debt markets, there is growing concern that traditional loans and commercial mortgage-backed securitization may not fully address the refinancing needed for the approximately $400 billion of commercial real estate debt matures in each of 2010 and 2011. And, with declines in property values and more stringent lender requirements, new loans may not fully cover maturing debt. Bill Allowing REITs to Benefit from Energy Incentives Gains SupportNAREIT continues to pursue legislation in the 111th Congress to enable REITs to fully benefit from a variety of federal tax incentives for investments in renewable energy and energy efficiency. This subject was one of the primary issues discussed in congressional meetings at this year’s WLF. Derivatives Reform Remains on Senate AgendaAgainst the backdrop of ongoing bipartisan negotiations on the details of a comprehensive financial regulatory reform proposal, 2010 WLF participants discussed with lawmakers the ways in which real estate companies use derivatives products to manage business risk. Gavel Changes Hands at the Ways and Means CommitteeFacing ongoing investigations into allegations of ethical misconduct, Rep. Charlie Rangel (D-NY) announced he was temporarily leaving his post as Chairman of the House Ways and Means Committee on Mar. 3. Political observers watched an inside-the-beltway drama unfold as Democratic Leadership and Ways and Means Democrats determined the path forward for the powerful Committee, which has jurisdiction over tax and trade policy, as well as Medicare and Social Security. |
Capitol Report (April 1, 2010)
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Spring 2010
WLF Special EditionNAREIT held its 2010 Washington Leadership Forum (WLF) in Washington, D.C. on Feb. 23 and Feb. 24. WLF is the annual opportunity for NAREIT members to meet with key policymakers in Congress and the Administration to discuss the industry’s legislative agenda for the year and other key issues important to the industry. During WLF, NAREIT also held leadership meetings with its Executive Committee and Board of Governors. February 23 - NAREIT Board of Governors Meeting, REITPAC Reception and NAREIT Board of Governors Dinner
![]() Rosie Rios, Treasurer of the United States, speaks to NAREIT’s Board of Governors on the efforts of the Treasury Department to restore financial stability in the wake of the 2008 crisis. ![]() Laurence Meyer, a former member of the Federal Reserve Board of Governors and the current Vice Chairman of Macroeconomic Advisors, addresses NAREIT’s Board of Governors on the gradual unwinding of the Federal Reserve’s emergency measures and comprehensive financial regulatory reform now being considered by Congress. ![]() Representative Richard Neal (D-MA) speaks to NAREIT members at a reception held in his honor. ![]() NAREIT President and CEO Steve Wechsler, right, presents Walter Rakowich, CEO, Prologis, with the REITPAC Leadership Award and the REITPAC Teamwork Award. Prologis was recognized for contributing the largest amount of funds and from the greatest number of individuals to REITPAC during 2009. This was the fourth year in a row that Prologis has received both awards. ![]() Peggy Noonan, Wall Street Journal columnist, and former White House assistant to President Ronald Reagan, speaks at the Board of Governors Dinner.
February 25 - Breakfast Briefing
![]() Senator Richard Durbin (D-IL), Senate Majority Whip and the second ranking Democrat in the United States Senate, addresses WLF attendees at breakfast prior to their beginning a full day of Capitol Hill meetings.
Capitol Hill Visits with Members of the 111th Congress
![]() House Majority Leader Steny Hoyer (D-MD), third from right, stands with (from left to right) Joe Downey, Senior Vice President, Willis; NAREIT Treasurer Ed Walter, President and CEO, Host Hotels and Resorts, Inc.; Doug Donatelli, Chairman and CEO, First Potomac Realty Trust; NAREIT Second Vice Chair Don Wood, President and CEO, Federal Realty Investment Trust; and Steve Wechsler, NAREIT President and CEO. ![]() House Minority Leader John Boehner (R-OH), second from right, stands with (from left to right) Steve Wechsler, Brad Butcher, Managing Director, Raymond James; Denny Oklak, Chairman and CEO, Duke Realty Corporation; and Sam Zell, Chairman, Equity Group Investments. ![]() Senator Blanche Lincoln (D-AR), Senate Agriculture Chairman, is pictured with (from left to right), Don Wood, Edward Walter, and Mark Zalatoris, President and CEO of Inland Real Estate Corporation. ![]() Senator Richard Shelby (R-AL), right, Ranking Member, Senate Banking Committee, is briefed by (from left to right) Mark Zalatoris, Thomas Lowder, President and CEO, Colonial Properties Trust; Edward Fritsch, President and CEO, Highwoods Properties, Inc.; and Howard Nelson, Director, Government Relations, Colonial Properties Trust. ![]() Representative Christopher Van Hollen (D-MD), Assistant to the Speaker and a Member of the House Ways & Means Committee, third from right, meets in the U.S. Capitol with (from left to right) Joe Downey, Ed Walter, Sam Zell, Steve Wechsler, Don Wood, and Doug Donatelli. ![]() Senator Olympia Snowe (R-ME), second from right, is pictured with (from left to right) John Robertson, Managing Director & Portfolio Manager, RREEF America LLC; Brad Molotsky, Executive Vice President and General Counsel, Brandywine Realty Trust; and Mark Zalatoris. ![]() Senator Ben Cardin (D-MD), second from right, is pictured with (from left to right) Joe Downey, Doug Donatelli, Don Wood, and Ed Walter.
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PL Report (April 2010)
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April 2010
Regulatory Reform Expected on the Senate Floor before May – Derivatives End-User Fly-In ScheduledOn Monday, March 22, the Senate Banking Committee met to consider the Restoring American Financial Stability Act of 2010, its 1,336 page comprehensive financial regulatory reform proposal. After only twenty minutes of debate, comprised almost entirely by opening statements by Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL), the Committee approved the proposal for consideration by the entire Senate by a party-line vote of 13-10. To read the comprehensive proposal, CLICK HERE. NAREIT Opposes Effort to Expand State Regulation of Securities Offerings in Senate Financial Regulatory Reform BillA provision contained in the comprehensive financial regulatory reform legislation referred to above would permit states to impose their own set of regulations on private securities offerings utilized by many U.S. companies, including listed and publicly-registered, non-traded REITs. House Ways and Means Committee to Review Energy Tax IncentivesOn April 14, the House Ways and Means Committee is scheduled to hold a hearing on “Energy Tax Incentives and the Green Job Economy.” NAREIT will submit written testimony to this hearing, requesting that appropriate attention be paid to REITs as Congress considers energy tax incentives. Lawmakers, Obama Administration and Industry Representatives Consider the Future of Housing Finance and the Government-sponsored Enterprises (GSE)On March 23, the House Financial Services Committee held a hearing titled, "Housing Finance-What Should the New System Be Able to Do?" During this hearing, members of the Committee heard from Treasury Secretary Timothy Geithner, as well as industry representatives and affordable housing advocates, on possible reforms to the Government-sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. |
PL Report (May 2010)
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May 2010
HIGHLIGHTS
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SFO Report (May 14, 2010)
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May 14, 2010
Highlights of this Issue
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PL Report (June 2010)
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June 2010
HIGHLIGHTS
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Policy Report (July 22, 2010)
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July 22, 2010
Derivatives Reform Signed into Law as Part of Dodd-Frank LegislationHighlights
Executive SummaryOn Wednesday, July 21, 2010, President Obama signed into law the final conference report of H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Senate passed this bill by a vote of 60 to 39 on July 15, and the House passed the same legislation on June 30 by a vote of 237 to 192. CLICK HERE to read the final legislative text. Concerns that Lead to ActionREITs and publicly-traded real estate companies, like other so-called "end-users" of derivatives, often rely upon low-cost, customized contracts – such as interest rate swaps and foreign exchange forwards – to hedge business risk and to manage the cost of their investment, development and operational activities. Analysis of the New LawWhile NAREIT and the Coalition for Derivatives End-Users were successful in focusing much of the debate on derivatives reform around the impact of various proposals on end-users, and key policymakers in both parties made significant efforts to address end-user concerns, the results for end-users are mixed and depend on how regulators define key terms during the rulemaking process. Regulation and Definition of MSPs and Swap DealersUnder the new law, Major Swap Participants (MSPs) and Swap Dealers will be subjected to the most aggressive and onerous requirements. For their swaps that are not otherwise exempted, this will include: mandatory clearing for swaps that are accepted for clearing, mandatory exchange trading for swaps that are accepted for exchange trading, and mandatory bilateral margin payments on non-cleared swaps with other MSPs or dealers. On non-cleared swaps with exempt entities, MSPs or dealers may be required to post margin if the swap becomes a liability for them. Key Terms Must Still Be DefinedThe derivatives reform title of the Dodd-Frank Wall Street Reform and Consumer Protection Act gives regulators the ability to define key terms. The final definition of these terms could have a dramatic impact on the way the new law impacts NAREIT members and other end-users of derivatives. Reporting Requirements for All DerivativesThe new law requires that all derivatives transactions must be reported to a central trade repository. For trades that are cleared or traded on an exchange, swap dealers or major swap participants will be required to report price and volume information on a real-time basis. For swaps that are not cleared, the dealer will be responsible for reporting, however the information will not include the identity, the business transactions or the market positions of the end-user, and reporting for large trades will be delayed to limit any impact on liquidity and to maintain pricing efficiency. CLICK HERE to read the legislative language related to "Reporting and Recordkeeping." Regulation and Definition of Financial Entities and Prohibited AffiliatesNAREIT and the Coalition for Derivatives End-Users consistently argued that requirements on certain derivatives should depend on the purpose of the derivative (i.e., risk management vs. speculation) rather than on the nature of the entity pursuing the derivative (i.e., commercial vs. financial). Unfortunately, the Administration and other key policymakers were insistent in their desire to include stronger requirements for all "financial entities" – even smaller financial entities that use derivatives primarily to manage risk. Clearing and Exchange Trading RequirementsUnder the law, barring a specific regulatory exemption, all swaps will be required to be centrally cleared unless: 1) one of the counterparties is not an MSP, dealer, financial entity or prohibited affiliate, and 2) no clearinghouse is able to accept it for clearing. Similarly, barring a specific regulatory exemption, all cleared swaps will be required to be traded on an exchange or executed on a trading platform ("swap execution facility" or "SEF"), unless no exchange or SEF is able to accept it for trading. Capital Requirements on Non-Cleared TransactionsAt the beginning of the debate on derivatives reform, many policymakers expressed a desire to impose significantly, and seemingly arbitrarily, higher capital requirements on banks and non-bank swap dealers that were party to non-cleared derivatives. While it may be appropriate for regulators to use risk-based capital guidelines to establish capital requirements for financial institutions to protect against losses on their derivatives transactions, NAREIT and the Coalition for Derivatives End-Users consistently advocated that capital requirements for non-cleared trades should be based on actual risk of loss, rather than as an inducement to clear or exchange trade these contracts. Margin Requirements on Non-Cleared TransactionsUnder the new law, regulators will be required to impose margin requirements on any non-cleared swap entered into by two entities that are classified as MSPs or dealers. Ever since the closing moments of the initial Conference Committee meetings in the early morning hours of June 25, 2010, when an explicit prohibition against any margin requirements on end-user transactions was removed from the final bill, there has been significant debate about the legal authority provided for regulators to impose margin on non-cleared swaps in which one of the counterparties is not an MSP or dealer. Questions Remain About RetroactivityAnother issue that NAREIT, the Coalition for Derivatives End-Users and many other advocates have repeatedly raised is whether or not the new law – particularly its clearing and margin requirements – can be retroactively applied to existing contracts. ConclusionWhile the derivatives reform title in the Dodd-Frank Wall Street Reform and Consumer Protection Act does not achieve the complete balance advocated by NAREIT and the Coalition for Derivatives End-Users, it represents a definite improvement over initial reform proposals. And, depending on the outcome of the rulemaking process, while end-users of derivatives products might well face increased costs, many of them will not be subjected to the most direct and burdensome requirements that are intended to contain systemic risk in the derivatives market. ContactFor further information, please contact Kirk Freeman at kfreeman@nareit.com. |
NAREIT® does not intend this publication to be a solicitation related to any particular company, nor does it intend to provide investment, legal or tax advice. Investors should consult with their own investment, legal or tax advisers regarding the appropriateness of investing in any of the securities or investment strategies discussed in this publication. Nothing herein should be construed to be an endorsement by NAREIT of any specific company or products or as an offer to sell or a solicitation to buy any security or other financial instrument or to participate in any trading strategy. NAREIT expressly disclaims any liability for the accuracy, timeliness or completeness of data in this publication. Unless otherwise indicated, all data are derived from, and apply only to, publicly traded securities. All values are unaudited and subject to revision. Any investment returns or performance data (past, hypothetical, or otherwise) are not necessarily indicative of future returns or performance. © Copyright 2010 National Association of Real Estate Investment Trusts®. NAREIT® is the exclusive registered trademark of the National Association of Real Estate Investment Trusts. |
SFO Report (July 28, 2010)
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July 28, 2010
Highlights of this Issue
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PL Report (August 2010)
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August 2010
HIGHLIGHTS
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