Volume XI, Number 3 - August 2006

Estate Tax Stalls in Senate

A compromise deal proposed by House Ways and Means Chairman Bill Thomas (R-CA) passed the house 269-156, but Senate Majority Leader Bill Frist (R-TN) has stated that there will be no floor vote due to lack of Republican support. Thomas’s bill (HR 3856) would retain stepped-up basis, provide a $5 million ($10 million per couple) exclusion (indexed for inflation), and taxes estates of up to $25 million at 15% and amounts over $25 million at 30%. Thomas has indicated that he is unwilling to negotiate the terms any further, and the President has indicated that he would sign off on this measure if it were to pass the Senate. Majority Leader Frist is pushing for an estate tax relief provision as part of a pension bill currently in conference.

SEC Weighs in on TICs, Opens Door for Referral Fees

The Securities and Exchange Commission (SEC) recently granted a no action request to a securities broker/deal firm that sells TIC securities and employs real estate professionals who are dually licensed as broker/deals and real estate brokers. In instances where the dually licensed real estate professional pays a fee to maintain a relationship with a real estate firm, the SEC agreed not to construe those relationships as indirect compensation from the broker/dealer or the dually-licensed person to the real estate firm for the sale of TIC securities. But they make it clear any compensation agreement between a dually licensed real estate professional and a real estate firm that does not have a securities license must be completely separate from any securities related work or transactions. Furthermore, the compensation agreement cannot fluctuate based on the dually licensed professional’s TIC securities income and must be similar to the compensation arrangements of other real estate brokers with the same firm.

In effect, the SEC has allowed the dually licenses real estate professionals to provide compensation to the real estate firm in the following instances: (1) a variable fee that reflected a percentage of the dually licensed professional’s non-securities real estate income, (2) a fixed monthly desk fee, and (3) a combination of the two. Most significantly, the SEC, in it’s letter, only prohibits referral fees to non-broker deals until “such referrals are permitted by the SEC.” NAR hopes that the SEC will consider their request to allow real estate professionals to receive compensation for real estate advisory services in connection with the sale of TIC securities. Read the SEC's no action letter.

Property Rights Bill Approved by House Judiciary Committee

The House Judiciary Committee recently passed The Private Property Rights Implementation Act of 2005 (H.R. 4772), sponsored by Rep. Steve Chabot (R-OH). This bill will help property owners whose Fifth Amendment property rights have been violated by making it easier for them to bypass the lengthy and expensive state court appeals process and get direct access to federal courts. The legislation will now go to the House floor. There is currently no companion bill in the Senate, although Senate Judiciary Committee Chair Arlen Spector (R-PA) has circulated a draft for review and input by stakeholders. Passage of this legislation is a high priority for the CCIM Institute and NAR.

Flood Insurance Program Reform Passes House

The House of Representatives recently passed the Flood Insurance Reform and Modernization Act (H.R. 4973), sponsored by Reps. Richard Baker (R-LA) and Barney Frank (D-MA), which reforms the National Flood Insurance Program (NFIP). The bill contains measures to both enhance its financial resources to meet the short-term objective of covering all legitimate claims from the 2005 hurricane season and the long-term goal of increasing accountability within the program. The bill directs the Federal Emergency Management Agency (FEMA) to update and modernize floodplain maps and increases coverage limits to $670,000 for non-residential property, and makes available optional coverage for losses resulting from any partial or total interruption of the insured's business caused by damage to, or loss of, commercial property.

NAR supported the legislation in general; however CCIM’s should be concerned about the phasing out of current premium subsidies on investment properties. The bill has been placed on the Senate Legislative Calendar.

Push For Extending Energy Efficiency Tax Deductions

Legislation has been filed in the House and Senate to extend tax incentives included in the Energy Policy Act of 2005, which the CCIM Institute supported. Commercial real estate professionals have benefited from the Energy Efficient Commercial Buildings Deduction, which is set to expire January 1, 2008. This provision allows a deduction for buildings that reduce annual energy consumption by 50 percent. The deduction equals the cost of energy efficient property installed during construction, with a maximum deduction of $1.80 per square foot. In addition, a partial deduction of 60 cents per square foot is provided for building subsystems. In early June, the IRS published an advance notice for commercial building owners on how to qualify for a tax deduction for making their buildings energy efficient. Get a copy of the notice (pdf).

Senator Snowe introduced S. 3628, which would increase the tax deduction to $2.25 per square foot for fully compliant buildings, and to 75 cents for partially compliant buildings. The bill would extend this tax deduction for four years. Similar legislation—H.R. 5809—has been introduced in the House. Senator Grassley, Chairman of the Finance Committee, supports the intent of the legislation.

The Senate Finance Committee was expected to mark up legislation containing energy tax incentives during the week of July 17; however, the Committee has delayed taking such action.

Leasehold Improvements and Brownfield Provisions Remain in Limbo

Several parts of the 2001 Bush Tax Cuts that are important to commercial real estate brokers expired at the end of 2005, and have yet to be renewed by Congress. The 15 year cost recovery period for leasehold improvements and the deductibility of brownfield cleanup expenditures were removed from the budget reconciliation bill this spring, and is expected to be attached to a pension bill currently in conference. However, three deadlines have passed with no resolution. NAR and the CCIM Institute will continue to monitor progress on this legislation.

CCIM Institute Pro-Active On Data Security Legislation

Congress is considering legislation providing for procedures to be followed by businesses when clients' sensitive personal information is stolen. Currently, over 30 states have varying laws in place. Congress wants a consistent standard signed into law preempting state laws. The CCIM Institute is concerned with federal legislation that would apply to commercial real estate professionals, requiring them to comply by notifying clients when data is breached.

In order to determine what CCIM’s are currently doing, and what they are willing to do, IREM conducted a survey to acquire real estate managers' points of view. Surveyed members were asked if they had been a victim of a virus or identity theft in the last year. In addition, they were asked what information they collect about tenants, for example date of birth or social security number. The survey closed on July 27, 2006, and the CCIM Institute Research Staff is currently analyzing the responses received.

A number of Congressional committees have been drafting data security legislation. Currently, four committees have held mark-ups and passed legislation regarding data security, including S. 1789, S. 1408, H.R. 3997, and H.R. 4127. Both the House and Senate have been engaging in discussions on compromise language; however, thus far no deal has been reached. Unless another significant security breach occurs, data security legislation seems unlikely to pass this year.

In cooperation with NAR, the CCIM Institute will monitor data security legislation and lobby on behalf of the interest of its members.

Terrorism Insurance Update: GAO Studies Nuclear Biological Chemical Radiological Insurance Issues

In response to a request from the House Financial Services Committee, the Government Accountability Office (GAO) is undertaking a study on the availability of Nuclear Biological Chemical and Radiological (NBCR) insurance. The GAO is looking for input from policyholders as well as insurers. The study is scheduled to be completed by the fall, and the findings will likely be used in the development of legislation creating a more permanent replacement for the Terrorism Risk Insurance Extension Act of 2005. The Act extended the federal insurance backstop program through 2007. The President's Working Group on Financial Markets has until September 30, 2006, to develop recommendations for a long-term solution that increases the participation of the private sector in terrorism insurance coverage.

CCIM’s are encouraged to contact Tom Heinemann, NAR Regulatory Representative, at (202) 383-1090 if they have NBCR coverage.

Senate Committee Approves Permanent Ban on Banks in Real Estate

On July 20, the Senate Appropriations Committee approved the Transportation-Treasury-Housing and Urban Development Appropriation bill with a provision prohibiting the Federal Reserve and Treasury Department from finalizing the rule allowing banks to engage in real estate brokerage. This is the third year that the Senate Appropriations Committee has supported the permanent ban provision. The full Senate is expected to consider the Transportation-Treasury-Housing and Urban Development Appropriation when they return from August recess. Earlier in June, the House approved a one-year provision prohibiting banks from engaging in real estate brokerage. Once the Senate passes their bill, NAR will urge conferees to keep the Senate [permanent ban] language in the final bill. Last year, House Leadership insisted on its removal during the final hours of the conference.

Eminent Domain – Reponses to Kelo Continues

On June 23, 2006 President Bush issued Executive Order No. 13406, which declares it to be the policy of the U.S. Government to take private property only “for public use, with just compensation, and for the purpose of benefiting the general public and not merely for the purpose of advancing the economic interest of private parties to be given ownership or use of the property taken.” View the entire order (pdf).

Since the Supreme Court handed down the Kelo decision, 24 states have enacted laws prohibiting the use of eminent domain for economic development purposes. View the full list of new state laws regarding eminent domain (pdf).

State Tax Revenues Continue to Increase

State revenues increased during 2005 due to increased economic activity resulting in a reduced need for raising taxes, according to a report by the National Conference of State Legislatures (NCSL). The report, released in April, stated total tax actions by all the states resulted in a net revenue gain of $3.4 billion, which was lower than the $4.1 billion tax increase seen in 2004. Major revenue change is credited to increased sales taxes and tobacco taxes and reductions in personal income taxes.

Tax and revenue changes were detailed by state, including predictions for the next two years. Some states passed tax credits for small businesses, cleaning or developing brownfields, historic preservation, and energy efficiency, as well as economic development incentives. Unfortunately, some states made changes providing for increased withholding rates on nonresidential real estate sales, raised estate taxes, and closed loopholes for LLCs.

Currently states appear not to be worried of any prolonged slowdown in tax revenue growth, according to the Rockefeller Institute of Government at SUNY. Most states have been reporting surpluses in their current fiscal years, and consequently many state budget proposals include increased spending and tax cuts.

Forced Access Update

Rhode Island
On July 3, 2006, House Bill 7752 (pdf) became effective without the Governor’s signature (The Legislature passed the bill on June 24, and the Governor did not act within 6 business days), and thus forced access requirements for cable television (CATV) in Rhode Island have been expanded to include telephone, telecommunications and information services. Under the new law, tenants “have the freedom and right to select the provider of cable television, telephone, telecommunications, or information service to their living unit, without any restraints, limitations or conditions imposed by a landlord.” And those service providers are entitled to “reasonable access” for maintenance of any equipment installed on the property. Owners are not allowed to collect compensation from tenants who’s selections necessitate this access, and compensation from the provider is left to arbitration in superior court.

Louisiana
On July 12, 2006, the Governor of Louisiana vetoed HB 699, which would change the cable video service franchise guidelines throughout the state. While the bill does not provide for mandatory access, it includes language in support of real estate management with regard to clarifying access to private property. Nothing contained in it could be construed to grant a cable or video service provider the right to construct facilities on private property without the consent of the property owner. If the applicant (i.e. cable company) desires to construct or place facilities on private property, the consent of the landowner is required.

The Governor’s main reason for vetoing the bill is concern that it could result in significant revenue loss to local governments. The Governor has encouraged proponents and opponents of the bill to work together on a model local ordinance that will create franchise opportunities for all companies.

The CCIM Institute will continue to monitor legislative proposals in the Louisiana House and Senate during the next legislative session.

New and Revised Briefing Papers Now Available Online

The Legislative Affairs Department has begun updating the Institute’s collection of briefing papers. These documents provide an in-dept look at the background and current status of issues important to commercial real estate brokers:

• The Civil Asset Forfeiture paper (pdf) contains an explanation of the rights of innocent owners whose property has been seized, as well as a reference chart for state laws relating to this important property rights issue.
• A new paper on The Use of Eminent Domain for Economic Purposes (pdf) contains information on this controversial topic, post-Kelo.
• The Commercial Lien Laws paper (pdf) has been updated to reflect recent developments on both the state and federal level.

To view the entire library of Briefing Papers, please go to: http://www.ccim.com/members/govaffairs/briefing_papers.html

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