2006 Issues

Banks In Real Estate Brokerage

Issue: In December 2005, the Office of the Comptroller of the Currency (OCC) announced it was authorizing national banks to invest in real estate projects involving the development of office buildings, hotels, residential condominiums, and windmill farms. OCC is the principal federal banking regulator for national banks. The OCC 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 OCC’s continued efforts to dramatically expand the real estate powers of national banks.

In early 2001 the Federal Reserve and the U.S. Treasury Department proposed rules to expand the powers of national bank conglomerates. The agencies proposed allowing national bank conglomerates to engage in real estate brokerage and management, reclassifying these activities as financial in nature. The CCIM Institute has strongly opposed these proposals and supports enactment of the Community Choice in Real Estate Act, H.R.111/S.98, which removes the powers of these agencies to regulate these real estate activities.

Position: We (the CCIM Institute) oppose changes or interpretations in present federal regulations, which would permit any bank or bank holding company or subsidiary to enter the field of real estate management and brokerage beyond properties owned by the institution.

In principal, we support the elimination of unnecessary or counter-productive government regulations. However, in the case of banks, bank holding companies or subsidiaries and thrift institutions, which hold a unique position in the business and financial world, we are opposed to changes or interpretations in the present federal regulations, which would permit their entry into certain activities.

Congress adopted the Gramm-Leach-Bliley Act in 1999, establishing a legal and regulatory framework for financial subsidiaries of banks and financial holding companies to engage in designated financial activities under the new law. The Act created a new entity, the financial holding company (FHC), that would compete in the financial services area by offering services that were prohibited to bank holding companies. By distinguishing the permissible activities of bank holding companies from financial holding companies, the Act also reaffirmed the longstanding national policy that separated banking from commerce because of the unique powers and advantages granted to banking institutions by their federal charters.

Currently the U.S. has a balanced marketplace for commerce, banking and financial services. Real estate brokerage and management firms do not engage in banking. Financial holding companies do not engage in commercial activities, such as real estate brokerage and management. Banking and commerce are separate. The arena of financial services allows competition from both financial holding companies and commercial firms. Both real estate companies and financial holding companies (banks) have diversified their business lines into financial services that have served as a buffer between commerce and banking activities. This was the intent of Congress throughout its deliberations on financial modernization.

The reality is that the entry of federally chartered banks or financial holding companies into the real estate brokerage business would tilt this balanced marketplace toward the FHCs. It would pit government-subsidized banking companies (putting taxpayer money at risk) against privately funded real estate enterprises. Furthermore, if FHCs are permitted to enter the real estate business, REALTORS® would be placed in the awkward position of having to go to banks which are subsidiaries of FHCs – their direct competitors – for loans and financial services.

We further urge the appropriate regulators to use their authority to restrain the expansion of real estate activity by state financial entities and their federal counterparts. We continue to support and encourage the omission of the following from any list of governmental or regulatory-approved financial institution real estate activities:

Practices of this nature will remove the "safe haven" character of the institutions and compromise their fiduciary position, having a traumatic effect on the business of third-party independent real estate management and commercial real estate brokerage by depriving this industry of its right to compete in the marketplace without undue influence by banking and/or financial service entities.

Opposing Views: OCC and the banks argue that the recent rulings are consistent with law, regulation, and precedent and that the investments are either necessary to accommodate the bank's business or, in the case of windmills, the functional equivalent of a loan. The banks also argue that the Federal Reserve/Treasury proposal allows financial institutions the opportunity to offer a fuller range of financial services that increase competition and benefit customers.

Status: The CCIM Institute, working with NAR, has raised its concerns about the OCC rulings with OCC Comptroller John Dugan, Chairman Ben Bernanke of the Federal Reserve Board, and Treasury Secretary John Snow. The CCIM Institute also sent letters to key members of Congress, urging them to communicate their objections directly to OCC, and suggesting that Congress hold OCC oversight hearings designed to rein in the inappropriate expansion of banks into real estate development.

As it has since 2002, Congress has enacted another one-year ban, effective through September 30, 2006, against the Treasury Department from issuing a final rule permitting national bank conglomerates to engage in real estate brokerage and management. The CCIM Institute continues to urge Congress to enact a permanent ban. H.R. 111/S. 98 was reintroduced in the 109th Congress by Representatives Calvert (R-CA) and Kanjorski (D-PA) and Senators Allard (R-CO), Clinton (D-NY) and Shelby (R-AL). H.R. 111 has 251 House cosponsors while S. 98 has 26 Senate cosponsors.

Tax Legislation

Issue: Congress has been charged with renewing the Bush tax cuts of 2001, which have a hefty price tag. Important issues in the plan include extension of the 15-year cost recover period for leasehold improvements, extension of the deduction for brownfield cleanup expenditures, extension of the 15% capital gains rate, and relief from the Alternative Minimum Tax (AMT).

On December 31, 2005, the deduction for brownfields cleanup expenses and the 15-year cost recovery period for leasehold improvements expired.

In addition, last year the President’s Advisory Panel on Tax Reform reported in November, and recommended a number of changes to the tax structure, including elimination of deductions for real estate.

Position: We support efforts to more accurately measure the depreciable life of buildings and conform amortization periods of tenant improvements more closely to the term of the lease. The current 39-year time frame does not accurately reflect the useful life of a building and its components.

We support depreciation reform for nonresidential and residential real estate that secures a significantly shorter cost recovery period for commercial real estate without adding complexity or artificially accelerating deductions.

We support legislation to decrease the length of depreciable lives for tenant improvements. We support legislative language that would allow the remainder of tenant improvement costs to be written off upon the expiration of a lease, not over the depreciable life of a structure.

We support legislative efforts to strengthen the depreciation and recapture provisions applicable to the sale of real property by rejecting or repealing discriminatory provisions which limit or disallow existing deductions and make subject to recapture only that portion of depreciation taken that exceeds straight line depreciation.

We also support legislation that would reduce the tax on depreciation recapture to the capital gains tax rate of 15%.

We support legislative proposals that allow commercial, industrial or investment real estate taxpayers to report capital gains in a manner most advantageous to the taxpayer.

Opposing Views: No opposing views of depreciation are identified, and Congress has reached consensus that current recovery periods are too long. But since this proposal would cost the federal government money, it will be debated against other tax cuts.

Status: The House and Senate have passed differing versions of a budget reconciliation tax bill. The Senate bill includes, among other provisions: a one-year extension of the 15-year cost recovery period for leasehold improvements; a one-year extension of the deduction for brownfields cleanup expenditures; and a one-year "patch" designed to provide relief from the Alternative Minimum Tax (AMT) for middle-income individuals. The Senate version does NOT include an extension of the 15% rate for capital gains and dividends, currently set to expire 12/31/08. The House version contains the leasehold provision, a 2-year extension of the brownfields deduction and an extension of the 15% capital gains tax rate. The House version does NOT include any AMT relief. 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.

The tax reform panel’s recommendations, released in November, 2005, have not been reviewed on Capitol Hill and are not likely to be in play in the near future. The centerpiece of the Panel's proposals is the conversion of the mortgage interest deduction to a 15% tax credit and a reduction of the $1 million cap on mortgages to the local FHA loan limit.

Additionally, the Panel recommends repealing the deduction for property taxes and eliminating mortgage interest deductions for second homes. To date, no Senator or House member has embraced the Panel's recommendations. In late February 2006, President Bush reiterated his support for retaining the mortgage interest deduction.

Small Business Health Plans

Issue: Many of America's 45 million uninsured citizens are self-employed or work for small employers that cannot afford to offer health insurance benefits. Small businesses are generally unable to achieve the efficiencies that allow large group rates comparable to those available through a union or large employer plan. A broad coalition of small business organizations has advanced proposals for a new market tool for small businesses. This new concept would permit associations to provide health insurance coverage to their members through small business health plans (SBHPs), also known as association health plans (AHPs). SBHPs would be subject to the same federally-prescribed rules (ERISA) and the same state regulations that govern large corporate and union health plans, making SBHPs exempt from complying with multiple state-mandated coverage requirements. This exemption would allow SBHPs to develop uniform plans regardless of where subscribers reside. Small businesses could band together, thus increasing their power to bargain with health insurance providers and lower overhead costs by as much as 30%.

Position: In general, we support efforts to allow bona fide associations to offer federally regulated health insurance coverage plans that are exempt from costly state-mandated coverage provisions.

Opposing Views: Insurers that currently dominate the small business and individual insurance markets oppose this legislation. Governors and state insurance commissioners oppose the proposed legislation which they believe would limit their ability to regulate SBHPs. Other observers charge that SBHP's will create a 'second-class' type of health insurance, "cherry pick" the best risks from the pool of individuals currently insured by individual policies, and leave the individual market with only the worst risks.

Status/Outlook: On July 26th, 2005, the House of Representatives passed the Small Business Health Fairness Act (H.R. 525) on a bipartisan vote of 263-165. On Wednesday, March 15, 2006, the Senate Health, Education, Labor and Pensions (HELP) Committee approved S.1955, the Health Insurance Marketplace Modernization and Affordability Act of 2006. Cosponsored by Senators Michael Enzi (R-WY), Ben Nelson (D-NE) and Conrad Burns (R-MT), the bill authorizes the creation of fully-insured small business health plans (SBHPs) by trade associations. The bill passed the Committee on a party-line vote of 11-9.

Some Democrats have threatened to filibuster the bill when it goes to the Committee floor, generally arguing the bill does not require associations to provide enough coverage for policy holders. The debate is expected on the floor of the Senate after the Easter recess. Assuming the bill passes, the Senate and House would need to conference to work out differences between the bills.

Private Property Rights

Issue: Current federal land use policy and environmental regulations restrict the use of private property. Property rights legislation introduced in past Congresses would have facilitated access to the federal courts in 5th Amendment "takings" cases.

In recent years, as efforts to protect the environment have escalated, the administrative and judicial procedures for obtaining a development permit or contesting an uncompensated taking through the court system have become increasingly burdensome. Currently, property owners are required to pursue all possible state-level court and administrative remedies before they can proceed to a federal court. This process is long and expensive, often taking many years to resolve.

Position: Governments shall not arbitrarily infringe on the basic right of the individual to acquire, possess and freely transfer real property, and shall protect private property rights as referred to in the 5th and l4th Amendments of the United States Constitution.
We support legislative implementation of the 5th Amendment's guarantee of compensation when property rights are taken. Every person should have the right to acquire real property with confidence and certainty that the use or value of such property will not be wholly or substantially eliminated by governmental action at any level without just compensation or the owner's express consent.
We recognize the need for all levels of government to be able to exercise legitimate police powers in the regulation of private property to protect the health, safety and general welfare of its citizens. However, when government actions or regulations are not founded within legitimate police powers, the government should be required to pay just compensation for the unlawful takings of the owners’ property rights and burden placed on the property owner.
In addition, The CCIM Institute supports legislation which will provide property owners expeditious access to administrative and judicial systems at all levels - local, state and federal - to pursue Fifth Amendment takings claims or relief from other property rights violations.

Opposing Views: Requiring government compensation for agency action could have a chilling effect on regulators and seriously weaken environmental protection. State and local government officials believe the legislation discussed below could usurp their Constitutionally- derived power. Required compensation could also have severe fiscal implications.

Status: Reps. Steve Chabot (R-OH) and Bart Gordon (D-TN) have introduced HR 4772, the “Private Property Rights Implementation Act of 2006”. This bill would ensure that property owners get their day in federal court to defend their 5th Amendment rights under the Constitution. Similar legislation has previously passed the House, but did not become law. The legislation would clear some of the procedural hurdles that restrict access to the federal courts, even when no state or local issue is in question. This will eliminate a property owner’s need to pursue an infinite cycle of appeals, and defines when a government agency’s decision on land use is final, so that a property owner can seek federal court review.

Natural Disaster Insurance

Issue: The intensity of large natural disasters in recent years has made the acquisition of adequate property insurance very difficult in some areas. Insurers are declining to write policies, canceling existing policies or increasing premiums on existing policies. Recently, Hurricanes Katrina and Rita have refocused attention on this issue. The viability of the insurance market is critical to real estate financing. Both commercial and multifamily properties should be covered in addition to homeowner’s insurance.

Position: The CCIM Institute urges all real estate brokers to be prepared for disasters and emergencies by developing emergency procedure manuals, emergency procedure management teams and by understanding how their property's location, design, use, and occupancy will affect emergency procedures. Real estate brokers should also establish cooperative relationships with the emergency management authorities in their communities. We urge all real estate professionals and their management staff to take part in continuing education of emergency procedure techniques. Devising and distributing tenant and resident emergency information is one way in which to prepare properties for emergencies. The CCIM Institute also encourages real estate brokers who have experienced a disaster to move quickly to prevent the immediate effects of the disaster from causing or allowing further damage. Real estate professionals should then return the property to its normal condition as soon as possible. Adequate insurance is essential to a property's recovery after a disaster. Real estate professionals should encourage owners to carry sufficient coverage. In addition to maintaining private insurance, real estate professionals should be aware of any governmental insurance, relief, or aid available to them after a disaster.

Opposing Views: Opponents argue that federal support of the insurance industry will result in a repeat of the savings and loan crisis, or that property owners in non-disaster-prone areas will subsidize those in disaster-prone areas.

Status: A number of bills have been introduced in Congress to create a federal insurance backstop for disasters. H.R. 4366, the "Homeowners Insurance Protection Act of 2005", by Rep. Brown-Waite (R-FL) and Rep. Shaw (D-FL), would establish a federal program administered by the U.S. Treasury Department to provide reinsurance coverage designed to improve the availability of property insurance. This bill would require states who wish to participate to create their own catastrophic reinsurance fund. Current language in the bill applies only to homeowners’ insurance and contents of multifamily units, although expanding it has been discussed. The CCIM Institute urges that this be expanded to include commercial and multifamily property insurance.

Equally of note, Rep. Mark Foley (R-FL) has introduced H.R. 2668, the "Policyholder Disaster Protection Act," which would allow insurance companies to create reserve funds from pre-tax dollars in order to pay claims arising from future major natural disasters. This could help to protect insurance companies from devastating claims (like the ones they will face with Katrina) and allow them to continue to provide insurance in devastated areas.