Volume XI, Number 1 - March 2006

CCIM Institute 2006 Congressional Visit Program Outlined

This year, there will be two very special opportunities for you and your fellow Chapter members to meet with your U.S. Representatives and Senators and help give voice to our industry’s issues and concerns in Washington, DC.

On May 17th & 18th, 2006, the National Association of REALTORS® will be converging on Capitol Hill as part of their Midyear Legislative Meetings & Trade Expo. The CCIM Institute encourages your attendance at these meetings. Please contact your local board or state association to find out if they plan to include any commercial issues on their agenda and find out how to participate.

The CCIM Institute will also be working through the CCIM Institute state chapters to organize visits with federal lawmakers in their local district offices this year. Contact your chapter’s Congressional Visit Coordinator (a fellow CCIM) to find out if a meeting with your elected official(s) has been scheduled and inform them that you are planning to attend! The Coordinator is responsible for scheduling meetings with elected representatives and briefing participants on protocol and the issues. After meetings are scheduled, the Coordinator will contact the CCIM Legislative Liaison with meeting times and attendees. The Liaison will be managing a master list of attendees and meetings.

Please contact Vijay Yadlapati, CCIM Legislative Liaison, at (312) 329-6033 or vyadlapati@ccim.com if you have any questions.

Summary of Legislation to Assist the Gulf

In December the President signed the Gulf Opportunity Zone Act, which provides a number of helpful tax benefits for individuals and businesses in the Gulf region. The law authorizes Alabama, Louisiana and Mississippi to issue Gulf Opportunity Zone bonds as tax-exempt facility bonds or qualified mortgage bonds, and requires that 95 percent of the net proceeds of such bonds be used for the cost of qualified residential rental projects and the cost of acquisition, construction, reconstruction, and renovation of nonresidential real and public utility property in the GO Zone. The bill also increases amounts and allocations of the low-income housing tax credit for 2006-2008 in the GO Zone. Other beneficial real estate provisions include a 50% bonus depreciation allowance for GO Zone business property placed in service on or before December 31, 2007 (December 31, 2008, for nonresidential real and residential rental property), and exempts such increased depreciation allowance from the alternative minimum tax. It also increases or allows additional expensing allowances for: (1) GO Zone depreciable business property; (2) demolition and cleanup costs in the GO Zone; and (3) environmental remediation costs. The law also increases the tax credit for expenditures to rehabilitate buildings and historic structures in the GO Zone made prior to January 1, 2009.

In mid-February, the President sent a third disaster supplemental funding request for $19.8 billion. This includes $202m for HUD’s disaster voucher program; an additional $4.2b specifically for Louisiana to be allocated through the Community Development Block Grant Program (CDBG) program (they had previously been granted $6.2 b under this program); $9.4 billion for FEMA assistance; an additional $1.3b for Small Business Administration disaster loans (they had previously received $441m); and $1.5b for the Army Corps of Engineers to rebuilt levees. The previous supplemental also provided $1.6b for USDA’s Rural Housing Service.

OCC Enters Banks in Real Estate Debate

In December 2005, the Office of the Comptroller of the Currency (OCC) issued several opinions authorizing national banks to invest in real estate projects involving the development of office buildings, hotels, residential condominiums, and windmill farms. These actions represent a marked departure from what is permitted by the National Bank Act, the OCC’s regulations, and previous OCC rulings regarding the types of real estate activities in which national banks may engage. The new rulings represent the efforts to dramatically expand the real estate powers of national banks. The CCIM Institute has sent letters to the House and Senate Committee leaders asking them to hold hearings to review these rulings. CCIM members also received a call to action from NAR on this issue.

Terrorism Insurance Extended

Last December, after passage by both the House and Senate, the Terrorism Risk Insurance Extension Act of 2005 was signed into law by the President, ensuring that terrorism coverage would still be available and affordable to the commercial real estate industry. The original measure, passed in the wake of the 9/11 attacks and set to expire at the end of 2005, created a program by which the federal government would cover a certain percentage of insurance premiums attributed to a terrorist event. The CCIM Institute lobbied for bills extending the program during their Capitol Hill visits last spring. The final version of that legislation has extended the program through 2007.

Status of Tax Reform and Extenders

The House and Senate have passed their respective versions of a tax reconciliation bill that contains three provisions relating directly to real estate activities. On December 31, 2005, the deduction for brownfields cleanup expenses and the 15-year cost recovery period for leasehold improvements expired. Both versions of the bill would renew and extend these provisions for at least one year, and possibly through the end of 2007.
On January 1, 2009, the capital gains tax rate will revert from its current 15% level to the pre-2003 level of 20%. A crucial difference between the House and Senate bills is their treatment of this expiring provision. The House bill would extend the 15% rate through December 31, 2010. The Senate bill contains no comparable provision. While the House would be likely to pass and send to the President a bill that included the extension of the lower capital gains rate, the issue is very controversial in the Senate. These bills contain many other provisions (including a patch to limit the impact of the Alternative Minimum Tax (AMT)) that are also controversial. Discussions between the House and Senate have stalled due to the high cost of these provisions.

Small Business Health Plans Expected to Move Soon

Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Mike Enzi (R-WY) continues work in preparation for Committee consideration of his Health Insurance Marketplace Modernization and Affordability Act (S. 1955). Cosponsored by Senators Ben Nelson (D-NE) and Conrad Burns (R-MT), S. 1955 authorizes the creation of fully-insured small business health plans. In addition, the bill establishes a set of federal coverage mandates for small group insurance plans and a process for harmonizing the states' small group insurance regulations for both SBHPs and traditional small group insurance products. A number of informal meetings have been held with Senate staff and interested parties to develop agreement on specific provisions in the bill. Committee action is expected in the next several weeks.

Estate Tax Reform

Continuing to be debated on Capitol Hill is the repeal of the estate tax, also known as the “death tax”. In 2001, Congress passed a law to repeal the estate tax, phased in over 9 years, and being completely repealed in 2010. Under the phase-out the amount of exemption increases each year, and the rate of taxation reduces, until in 2010 there is no tax. However, a sunset was added to this law set for 2011. Meaning, estate taxes are reduced to zero from 2001-2010, and then brought back to the 2000 rate of 55%, with only $625,000 being exempt from tax. The House has repeatedly approved legislation to make the estate tax repeal permanent after 2010, but the Senate has not had the votes to pass such a proposal. Democrats generally oppose the repeal as a tax benefit to only the rich. This debate will continue to heat up as we get closer to 2010.

States Continue to Limit Eminent Domain Powers

In June 2005, the Supreme Court ruled in the case of Kelo et al v City of New London et al that economic development was a constitutionally acceptable reason for governments to exercise eminent domain. Reaction to this decision was swift and widespread in both Washington, D.C. and state capitols across the country. The U.S. House adopted a resolution deploring the Court’s ruling and voted to prohibit the expenditure of federal housing, transportation or treasury funds to enforce it. In Alabama, Delaware, South Dakota, Oregon and Texas laws were enacted to limit the use of eminent domain for purposes other than “public use.” And in Ohio, the legislature and Governor instituted a moratorium on the use of eminent domain by any entity in an unblighted area when the primary purpose is economic development that will ultimately result in ownership of the property by another private person until December 31, 2006.

Many state legislatures reconvened for the first time since the Kelo ruling in the last few months, and bills restricting or limiting eminent domain continue to be introduced. In fact, legislation has been introduced in every state EXCEPT North Carolina, where the legislature will not reconvene until later this spring, AND Arkansas and Montana, which do not have a regularly scheduled legislative session in 2006. To find out what specific measures are being considered in your state, check out the State Legislative Database on the CCIM Institute website.

Tennant-in-Common Guidelines Available

Tenant-in-Common (TIC) transactions remain an issue with complex and unclear regulations because they can either be structured as securities or real estate. The Securities and Exchange Commission (SEC) has the authority to set rules by which real estate professionals may handle securitized TIC dealings. Currently, SEC regulations and NASD rules prohibit broker dealers from providing compensation to real estate professionals when the TIC is considered a security.

In an effort to help real estate professionals who take part in the TIC marketplace avoid legal challenges and ensure proper compensation for deals, the National Association of REALTORS® has developed specific guidelines for all members. Read the publication on TICs .

Flood Insurance Update

Congress continues to debate an additional increase in borrowing authority in order to cover claims to the National Flood Insurance Program (NFIP) as a result of last year’s devastating hurricane season.

There has also been movement in both chambers to couple these temporary increases with permanent reform to ensure the program’s solvency during future disasters. The Senate Banking Committee has held a series of hearings to discuss updating maps, dealing with repetitive loss properties, and expanding the pool of participants in these programs. In the House, a bill was introduced that would direct the GAO to study expanding the mandatory purchase requirement to the 500-year floodplain, require FEMA to follow the changes implemented in the 2004 Flood Reform Act, increase maximum coverage limits, and include coverage for additional living expenses and business interruption. This bill, HR 4320, is supported by the National Association of REALTORS®.

While such legislation is still in the early stages, Congress, prompted by FEMA reports that the program continues to be in danger of not being able to pay all it’s obligations, is working to address the immediate needs of the program. The Senate was expected to agree to the House amendment of a bill that would further increase the borrowing authority to $20.8 billion, but it has run into opposition by Senators seeking leverage on an expansion of the Low Income Home Energy Assistance Program (LIHEAP). Resolving this impasse will likely be one of the top priorities of the Senate as it reconvenes this week.

Basel 1-A Proposed Rule Expected Soon

The Federal Deposit Insurance Corporation (FDIC) is currently drafting a set of rules, known as Basel 1-A, governing the way banks and thrifts calculate their minimum capital requirements in an effort to equalize requirements for smaller banks subject to Basel I with those to be proposed for larger institutions under Basel II. The CCIM Institute is concerned about the excessive risk weight assigned to commercial mortgages under both. In response to the FDIC’s advance notice of proposed rulemaking (ANPR), the National Association of REALTORS® submitted comments recommending, among other things, that regulators take into account equity committed by the investor and legally binding pre-sale and pre-lease commitments when considering development loans perceived as higher risk. A proposed rule is expected to be published by the FDIC for public comment soon. The CCIM Institute will continue to advocate for rules that will not reduce the availability of lending opportunities for commercial real estate.

Senate Approves USA PATRIOT ACT Renewal with NAR Supported Provisions

After several short term extensions over the last few months, Congress is poised to approve compromise legislation that will amend the anti-terrorism measure and make most of its provisions permanent. The bill, passed by a vote of 89-10 in Senate late last week, includes National Association of REALTOR® supported provisions that protects businesses whose confidential records are being sought under the Foreign Intelligence Surveillance Act. Specifically, law enforcement agencies would be required to link their subpoena request to an ongoing inquiry of suspicious activity, and would allow business owners to consult with legal counsel about the issuance of a National Security Letter by investigators regarding their records. Those measurers are included in one of the sections that will expire at the end of 2009. The new language will now move to the House, where it is expected to be approved sometime next week, then to the President, who has expressed his support for the bill.

Also, the Treasury department is expected to announce proposed rules and regulations regarding the financial aspect of the closing transaction. The CCIM Institute and the National Association of REALTORS® will continue to monitor developments and provide feedback at the appropriate time.

Junk Fax Protection Act Rules Proposed by FCC

The National Association of REALTORS® recently submitted comments to the Federal Communications Commission relating to the Junk Fax Protection Act. Signed into law last summer, the JFPA allows businesses to continue communicating by fax within established business relationships while maintaining the prohibition on unsolicited junk faxes. In it’s comments, NAR took issue with the creation of a minimum time limit for the duration of an existing relationship, recommended the FCC exempt small businesses from having to provide consumers with a no-cost mechanism for transmitting do-not-fax requests, and advocated an exemption from the opt-out notice requirement for tax-exempt professional and trade associations. A final rule is expected to be issued by April 5, 2006.

The CCIM Institute Opposes Forced Access Across Country

States have attempted telecomm reform since the signing of the Telecommunications Act of 1996—a major milestone in the continuing development of the US communications infrastructure. The FCC regulations regarding satellite dishes and inside wiring are very narrow. Consequently, state legislatures and public utility commissions have focused their reform efforts on defining real property rights-of-way pertaining to open access and competition for telecomm providers.

The CCIM Institute and the Real Access Alliance (RAA) contest any measure jeopardizing property owners’ rights. Currently RAA is fighting legislative and regulatory proposals related to inside wiring and cabling and forced access in such states as Mississippi and New York. RAA successfully fought efforts in Arizona, Florida, Massachusetts, Mississippi, New Mexico, and the Carolinas last year.

Due to telecom’s progress in Indiana (see below), similar proposals are expected to be introduced in other states. To find out if a related proposal has been introduced in your state, search the CCIM Institute State Legislative Database.

Tennessee Enacts Sweeping Ethics Reform Law

On February 15, the Governor of Tennessee signed SB 7001, the Comprehensive Governmental Ethics Reform Act of 2006, into law. The new law, which goes into effect October 1, 2006, creates an independent ethics commission, restricts lobbyists, and caps cash political contributions at $50.

The legislation was triggered after four legislators, one former legislator, and others were arrested on bribery charges last year. Two Tennessee State Senators that were indicted on those charges, and maintain they are innocent, voted for the bill.

Ethics reform has been a hot issue at the state and federal level in recent years. In the past few months, Florida and Georgia have passed lobbying reform.

Controversy Over Guns On Employers’ Premises

The National Rifle Association (NRA) successfully lobbied for the passage of legislation in Oklahoma allowing workers to keep firearms in locked vehicles on their employer’s property. Currently, the NRA is supporting similar legislation in states across the country.

The State of Oklahoma enacted a law penalizing employers with a $500 fine and up to a year in jail if they do not allow employees to keep firearms locked in their vehicles on the employer’s parking lot. In response, Conoco Phillips and several other employers filed a lawsuit against the state’s Governor and Attorney General to stop the law from taking effect. The lawsuit was filed in October 2004, the month before the law was scheduled to take effect. Pressure by NRA, including boycotts, has caused some employers to drop from the lawsuit; however, Conoco Phillips and five other employers remain committed. A verdict has not been reached in the case.

Similar legislation has been proposed in Florida, but with stronger penalties for employers who do not comply. This winter other states, including Wisconsin and Utah, have also considered allowing their citizens to keep firearms locked in their vehicles on employer’s property.

In 2005, Alaska and Minnesota enacted laws similar to the one passed in Oklahoma.

Condo Conversion Legislation

Apartment buildings are being converted into condos at an increased rate. As a result, legislation is being introduced in several states addressing the length of time existing tenants’ may stay in their rental units.

California SB 1676, recently introduced, requires that each tenant be given 180 (instead of 90) days' notice of the intention to sell the rental unit, and prohibits the owner from changing the terms of the tenancy or giving notice to terminate the tenancy during those 180 days.

Currently, in Maryland, a number of related bills have been introduced. HB 1259 provides that an apartment building owner who intends to convert all units to condos must notify all tenants at the same time, increases from 20% to 40% the percentage of units that the developer is required to set aside for designated households that qualify for extended leases, and requires a developer to reimburse all reasonable moving expenses for specified households. HB 1500 increases from 3 to 5 years the minimum period of an extended lease that a developer converting a rental to a condo is required to offer specified households.

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