Grinding to a Halt?

Can congressional leaders pass meaningful legislation amid impeachment and election tension?

By Elizabeth Vincent |

Last year proved to be one of legislative gridlock. In 2019, Congress enacted only 105 laws. While the 116th Congress, running from Jan. 3, 2019, to Jan. 3, 2020, is only halfway through its term, in comparison, the previous Congress passed 443 laws and the 114th Congress enacted 329.

Gridlock is not expected to improve with the political acrimony involved in President Donald Trump’s impeachment, his planned upcoming trial in the Senate, and the 2020 presidential election. While 2019 opened with hope for a comprehensive infrastructure package and for long-term reauthorization and reform of the National Flood Insurance Program, neither of these legislative items moved forward. Flood insurance continues to receive short-term extensions — there have been 15 since September 2017, with the latest extension through September 30, 2020 — and movement on an infrastructure package now seems unlikely, with continued contention over a border wall derailing bipartisan movement on the issue.  

While legislative activity was minimal this year, the U.S. Department of the Treasury did issue several regulations effectuating the 2017 tax reform law that positively impacted commercial real estate, primarily the second round of proposed opportunity zone rules released in April. The Internal Revenue Service also issued key guidance on the Section 199A deduction for pass-through businesses, which clarified a safe harbor to help real estate owners determine if they qualify for the 20 percent deduction for qualified business income. The guidance eases the requirements for owners of mixed-use real estate to qualify for the deduction. “Treasury and the IRS have really done some great work in issuing guidance that helps owners of commercial property,” says Evan Liddiard, CPA, director of federal tax policy for the National Association of REALTORS®. The opportunity zone rules have gone a long way toward giving interested investors what they need to get started with OZs. And the final regulations on Section 199A could scarcely have been better for real estate professionals and owners of rental property.”  

One end-of-year legislative highlight for commercial real estate was that as part of the last-minute spending bill signed into law by President Trump, the Terrorism Risk Insurance Act was reauthorized for seven years. This risk insurance program provides a federal backstop for terrorism risk insurance. Provided by the Treasury Department, this federal reinsurance helped stabilize the insurance market.  

This “clean” and bipartisan-supported reauthorization makes no significant changes to the program, except for mandating a study on the emerging threat of cyberterrorism.  

Here are some of the key legislative issues impacting commercial real estate that will likely receive attention in the second half of the 116th Congress.  

Tax Reform Implementation

Several issues remain outstanding in the implementation of the technical details of tax reform. In the haste of passing such a comprehensive piece of legislation in a short timeframe, Congress inadvertently lengthened a 39-year cost recovery period to qualified improvement property instead of the immediate write-off that was intended. This error translates to higher after-tax costs for modernizing or renovating the interiors of many types of commercial buildings. Congress introduced technical correction legislation in 2019, but it failed to move forward due to disagreements over other possible changes to the tax reform law. In addition, real estate investors had to wait until December 19, 2019, for the Treasury Department to issue its final regulations on the opportunity zone tax incentive program. While Treasury had indicated that the two sets of released proposed rules could be used to make investment decisions, the lack of final rules until late in the year contributed to some uncertainty related to the program.  

National Flood Insurance Program

While the real estate industry enjoyed a few weeks of optimism this summer that a long-term reauthorization bill might see real movement, flood insurance reform and reauthorization continued to get kicked down the road with four additional short-term extensions in 2019. The five-year reauthorization bill that the House Financial Services Committee passed in June requires utilizing modernized flood-mapping technology to improve map accuracy, provides pre-disaster mitigation funding, and removes some of the hurdles to the private insurance market. At press time, the program was included in the spending bill signed by President Trump on December 20 and extended through September 30, 2020. Despite this pattern of short-term extensions, flood insurance reform and reauthorization have bipartisan support, and CCIM Institute will continue advocating in collaboration with NAR for such a reauthorization in 2020.  

Sustainability Incentives

CCIM Institute has been advocating for the reinstatement and extension of the Section 179D deduction for energy efficient commercial buildings for the past several years through coalition work, the institute’s in-district advocacy efforts, and in collaboration with NAR. The deduction encourages the construction and rehabilitation of new and existing buildings to state-of-the-art efficiency levels and allows the property owner to decide the method of energy reduction. As part of the end-of-year appropriations bill to fund the government through fiscal year 2020, Section 179D was retroactively extended from Jan. 1, 2018, through 2020. This clean extension does not include any changes to the deduction, and CCIM Institute will continue advocating for a longer-term extension and strengthening of this tax tool.

In November, a draft green energy tax package was introduced by Democrats in the House that would extend Section 179D through 2024 and would also makes changes to increase the deduction. The package includes a multitude of sustainability incentives, with several tax credits for utilizing renewable energy resources. While this tax package is unlikely to pass in its proposed form, a multiyear extension of Section 179D would allow for the longer-term planning that property owners need to take full advantage of the deduction.

To encourage sustainability in development, CCIM Institute is pushing for the reinstatement of the Section 179D deduction for energy efficient commercial buildings.

Inclusion of the deduction in the end-of-year funding bill signals that House Democrats may be interested in taking up a longer-term extension and possible reform to Section 179D in 2020. “The Green Act adds to a series of proposals that collectively serve as a strong foundation for considering a long-term extension of and some potential reforms to Section 179D, reinforcing strong interest from Congress on Section 179D’s importance in the energy efficiency and sustainability conversation,” says Karishma Shah Page, a Partner at K & L Gates LLP and manager of the Coalition for Energy Efficient Jobs and Investment. “We look forward to participating in discussions next year to comprehensively review potential reforms to strengthen and enhance the Section 179D deduction.”

Earlier this year, the Senate Finance Committee’s task force examining a variety of temporary tax provisions, often referred to as the “tax extenders,” found the 179D deduction to be an effective method for both addressing the climate and the economy. The task force’s “Report of the Cost Recovery Temporary Tax Policy Task Force,” released in July 2019, noted that, “The Section 179D deduction is a proven tool to drive economic development by leveraging billions of dollars in private capital to incentivize energy-efficient building enhancements. Section 179D positively impacts a broad set of industries — including real estate, manufacturing, architecture, contracting, engineering, building service, financing, labor, and government — and has the support of environmental and energy efficiency advocates.” A longer-term reauthorization would allow commercial real estate owners to better plan for and utilize this significant incentive.

Both the House and Senate also introduced the Energy Savings and Industrial Competitiveness Act in 2019 — dubbed the Portman-Shaheen Act after the legislation’s originating sponsors, Senators Rob Portmann, R-Ohio, and Jeanne Shaheen, D-N.H. This bipartisan legislation establishes a wide range of voluntary energy efficiency incentives for real estate, manufacturing, and other related economic sectors, including a commercial building energy efficiency financing initiative. The bill also provides an avenue for real estate practitioners to give the Department of Energy feedback on building code proposals and would consider the onus on small businesses in such proposals. While this legislation has been introduced in some variation in the past five Congresses, the climate change conversation has reached a new urgency in 2019, which may spur movement on bipartisan sustainability-related legislation in 2020. Portman noted that “This bill is a win-win, creating new jobs and protecting our environment — all without a single new tax or mandate.”  

Cannabis Banking Legislation

In September, the House passed the bipartisan Secure and Fair Enforcement Banking Act, which provides a safe harbor to banks that serve cannabis businesses in states where marijuana is legal. In these states, access to capital is a significant constraint for cannabis-related businesses and real estate owners who could accommodate them. During a break-out session at the CCIM Global Conference in October, panelist Wendy Berger, founder of WBS Equities, emphasized the challenge of accessing traditional capital for cannabis-related businesses and real estate investors and noted that passage of the SAFE Banking Act would be a positive step in increasing financing opportunities. The SAFE Banking Act removes the barriers to traditional banking services for the cannabis business industry and provides a safe harbor for insurance providers who serve cannabis businesses. While the SAFE Banking Act may face an uphill battle in the Senate, where Senate Banking Committee Chairman Mike Crapo has expressed some concern with the bill in its current form, he has indicated he is open to amendments. Supporters of the legislation remain cautiously optimistic that the legislation has a path to move forward.

There are many variables that will impact legislative movement in 2020. Modernizing the country’s transportation and energy infrastructure, reforming and reauthorizing flood insurance, and implementing critical sustainability measures are essential to a thriving real estate sector and a healthy planet. It is imperative that Congress can rise above the polarizing rhetoric to compromise and reach consensus on these many critical issues.