Legislative Outlook 2018
Will the two parties reach consensus on infrastructure?
During 2017, the country's steady economic growth has supported an environment conducive to keeping the commercial real estate industry humming along.
For now, the Internal Revenue Code Section 1031 exchange is safe and will not be repealed, according to Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors in Washington, D.C. This is welcome news for commercial real estate professionals, since many of them depend on these like-kind property exchanges for a significant portion of their livelihoods.
In 2018, tax reform, infrastructure spending, refinement of the American Disabilities Act, and banking rules remain top of mind for legislation that may benefit the commercial real estate industry.
The U.S. Congress did pass tax reform legislation, affecting carried interest and pass-through income.
The final tax bill allows for carried interest to be taxed as capital gains at 23.8 percent only for investments held for three years. Otherwise, carried interest will be taxed as ordinary income at rates as high as 39.6 percent.
The pass-through income was changed to a 20-percent deduction for nonpersonal service businesses. As of Jan. 2, 2018, NAR policy advisers need clarification about whether commercial real estate would be considered a personal service business. One exception to the Tax Act is an income exemption if a commercial real estate professional files tax returns for under $157,500 for single or $316,000 for couples. In the worst case scenario, pass-through income will remain status quo, according to Erin Stackley, senior policy representative for commercial issues at NAR in Washington, D.C.
“The Tax Act of 2017 is a mixed bag for commercial real estate professionals,” Stackley says. “Generally, it is positive, with gains in carried interest. We believe real estate brokers may be considered part of personal services industry, but we need further guidance from the Internal Revenue Service.”
After tax reform, infrastructure spending is the next high priority. If $1 trillion were invested in our crumbling infrastructure over the next 10 years, the U.S. economy would benefit and so would all sectors of commercial real estate.
The challenge, however, is how the U.S. will pay for it. Generally, Democrats believe tax payers should pay for it. On the other side, President Donald Trump is pushing for a blend of public/private partnerships. He has proposed incentives to encourage private companies to invest in U.S. infrastructure.
This is a big divide to bridge between the two parties. However, no solid plans have been developed yet.
But the potential for consensus is promising. Elected officials from both parties don't want to return to their constituents without any tangible gains in 2018. Infrastructure is a potential win for both sides and could cleanse the partisan rancor.
The other challenge for infrastructure spending is defining its focus over the next decade. Currently, providing mass transportation is a top priority within cities and suburbs.
However, future priorities include considerations for security of the U.S. electrical grid and building the technology and infrastructure for driverless vehicles and drones. Highways, parking lots, and garages could be repurposed if driverless vehicles take off during the next 10 to 20 years as many experts anticipate.
In 2016, the U.S. Department of Transportation initiated a 10-year, $3.9 billion investment to accelerate the development and adoption of safe vehicle automation through real-world pilot projects. Google, Uber, Apple, Tesla, and all the auto manufacturers are racing to develop self-driving vehicles.
For drones, traffic lanes may need to be devised to protect them from crashing into each other. If Republicans and Democrats can find a middle ground on investing dollars from the federal budget on infrastructure, plenty of discussions will focus on how much to allocate for fixing existing roads, bridges, and mass transit compared to paving the way for building and securing future technology.
Reform for the ADA
Reforming the American Disabilities Act may be in the hopper for 2018. The ADA requires commercial properties to be accessible for disabled citizens, which include providing ramps, elevators, and specific heights for sinks.
As the ADA is written, if a commercial property is not in full compliance, such as no wheelchair access, the owner can be sued for noncompliance. While the ADA was a milestone in humanitarian legislation, unfortunately a cottage industry of drive-by lawsuits has sprung up in its wake, according to Stackley.
In some states, swarms of attorneys have entered businesses like locusts wielding rulers and finding minor issues with slight variations in the height of a shelf or sink.
The attorneys will send demand letters to owners often for slight infractions that could be fixed in a few minutes. These businesses are not bad actors and are not intentionally committing violations.
In circumstances like this, the lawsuits are counterproductive. Owners usually can fix the ADA infractions quickly and easily. The lawsuits gum up the real issues of accessibility and potentially work against the ADA, Stackley says.
The issue comes down to tort reform. It's a civil rights issue for commercial real estate businesses that have been dinged for small infractions. Owners should be given an opportunity to fix the minor violations before they become a lawsuit for the ADA.
Currently, a bill in the U.S. House of Representatives has passed that asks the plaintiff to provide a reasonable notice to the property owner. For example, the ramp is not steep enough, an aisle not quite wide enough, or a shelf is not low enough.
Owners would have time to fix the issue before a lawsuit can be filed. By allowing owners time to fix these issues, the businesses do not have to have a lawyer on staff to file and respond to ADA noncompliance requests.
The U.S. Senate is working on companion legislation and NAR expects to see a reform bill in 2018. “This Congress is the best opportunity we have seen in a long time,” Stackley says. “We are not sure of the timeline, but we have seen positive momentum on this bill and expect it to carry through to early 2018.”
While Dodd-Frank has been discussed informally by President Trump, its laws and regulations may be fine-tuned in 2018. Dodd-Frank regulations were intended to rein in the larger banks, but the regulations were written in ways that unintentionally target smaller lenders.
Community and small banks cannot afford to hire a bevy of lawyers. Often one officer has to devote time to ensure Dodd-Frank compliance. It takes away from the limited resources of small lenders and hampers their goal of providing loans to the communities they serve.
During 2018, NAR expects refinement of the Dodd-Frank regulations to be less stringent for community and smaller banks. The weight of these regulations is affecting their ability to help their communities with commercial real estate development projects.
While NAR expects legislation favorable to commercial real estate during 2018, nothing is certain or absolute. Many commercial real estate professionals hope President Trump's knowledge of the industry will help them emerge relatively unscathed.