Legislative Agenda Brings Opportunity
CCIM Institute advocates on critical commercial real estate issues.
Last year brought several favorable legislative changes for commercial real estate that will carry into 2019, yet there is still cause for concern.
The Economic Growth, Regulatory Relief, and Consumer Protection Act enacted last May provides regulatory relief to small and midsize banks, and includes important clarification on which loans are defined as high volatility commercial real estate acquisition, development, and construction and assigned a heightened risk weight.
In addition to the Dodd-Frank regulatory rollback, the Supreme Court's Wayfair v. South Dakota Inc. decision brought tax parity to online and brick-and-mortar purchases, which will bring added revenue to state and local governments and potentially incent the development of more brick-and-mortar retail locations.
“If you focus narrowly on the commercial real estate industry, tax reform's preservation of the Section 1031 exchange, tax credits for historic properties and low-income housing, along with the carried interest provision, were great for our business,” says Bill Adams, CCIM, president of Adams Commercial Real Estate in Atlanta and immediate past chair of CCIM Institute's Government Affairs Committee. “Section 199A, the 20 percent pass-through provision, is a huge win for both real estate practitioners and investors,” Adams says. In addition, the opportunity zone program, implemented with the passage of tax reform, has created a new investment vehicle that should spur development in designated economically distressed communities.
Despite these positive developments in 2018, there is reason for concern on the horizon. In October, the Treasury Department revealed that the deficit for fiscal year 2018 was $779 billion, which is a $113 billion increase from 2017. This swelling of the national debt could have long-term negative consequences for the economy and its continued growth.
The 116th Congress begins its first session on Jan. 3, 2019. The following key legislative and regulatory issues impacting commercial real estate are likely to receive attention.
Tax Reform Implementation
Tax reform brought two significant developments to the commercial real estate landscape in the form of the opportunity zone program and the Section 199A deduction. The opportunity zone program encourages investment in economically disadvantaged communities throughout the U.S. by providing tax incentives on such investments. In 2018, the Treasury Department certified more than 8,700 communities as designated opportunity zones. Investments in designated zones must occur through an opportunity fund. In a Treasury statement, Secretary Steven Mnuchin indicated that the program could spur nearly $100 billion in capital investment in these designated communities. The Treasury Department released proposed regulations in October; additional rules were expected by the end of 2018, with final rules established by spring 2019.
The opportunity zone program provides an innovative incentive. “In my real estate career, I have seen a variety of federal programs designed to help impoverished areas, including urban renewal, model cities, and empowerment zones. None of these programs were very successful. In my opinion, the opportunity zone program has the best chance to improve the quality of life for residents of low-income communities, while at the same time providing attractive real estate opportunities for investors in these neighborhoods,” Adams says.
The Section 199A deduction for owners of pass-through entities and the self-employed provides a 20 percent deduction for certain business-related income. Some personal service businesses do not qualify for the deduction if the owner's taxable income exceeds $207,500 (single) or $415,000 (joint), but real estate professionals can qualify for the deduction even above these limits. Proposed regulations issued in August clarified some of the complicated requirements of this deduction. One question still unanswered is if owners of rental real estate will have to determine whether their activity can be considered a trade or business. In September, the National Association of REALTORS® sent a letter to the Treasury Department and the Internal Revenue Service urging that all rental income from real estate be considered qualified trade or business income in the final rules, which were anticipated to be released by the end of 2018.
President Trump's 2019 budget projects that a $200 billion federal investment over the next 10 years could leverage an estimated $800 billion to $1.5 trillion in state, local, and private financing. Fortunately, infrastructure investment generally has bipartisan support. In a post-midterm election statement, House Democratic Leader Nancy Pelosi said she viewed building America's infrastructure as a priority and an issue on which legislators may be willing to come together. Rep. Peter DeFazio, a democrat from Oregon, is likely to be the new chairman of the Transportation and Infrastructure Committee, and he supports a major infrastructure plan. The challenge in passing a large infrastructure package, however, will be in the details of what is included, along with the method of financing. DeFazio has expressed disapproval of financing that overly relies on the private sector, yet in an interview immediately after the election, he was optimistic about moving an infrastructure package forward, “I am hopeful we can move a bill out of the House by early summer,” DeFazio says.
To remain economically competitive with our global peers, America's infrastructure needs continued investment. Part of the challenge will be balancing the need to modernize existing infrastructure systems while also investing in systems that will support emerging technologies, such as smart city initiatives, which use data and technologies to ease congestion and improve energy efficiencies. CCIM members advocated for increased infrastructure investment in 2018 during Congressional in-district meetings, and movement on an infrastructure package would be a notable win for commercial real estate.
National Flood Insurance Program
Reform and long-term reauthorization of the National Flood Insurance Program was kicked down the road in 2018 with several short-term extensions. The severity of hurricanes Florence and Michael demonstrated the devastating impact that flooding can have on communities. The NFIP was extended through May 31, 2019. While a reform bill was passed in the U.S. House of Representatives in November 2017, it failed to make progress in the Senate. CCIM Institute has urged Congress to enact a long-term solution and will continue to do so in 2019.
Section 179D Deduction
CCIM Institute continues to advocate for the Section 179D deduction for energy efficient commercial buildings to be made permanent. This deduction encourages the construction and rehabilitation of new and existing commercial buildings to state-of-the-art efficiency levels. The deduction has been a temporary part of the tax law since 2005, but has expired and been reinstated five times, most recently expiring on Dec. 31, 2017. Passing an extension of the deduction through 2019 as part of a tax extenders package could be a realistic goal for 2019. CCIM Institute has been advocating for support of the deduction with the Coalition for Energy Efficient Jobs and Investment, along with a coalition of groups supporting a package of tax extenders, to get such an extension of the deduction passed. The deduction has bipartisan support and is beneficial for the environment, while also creating jobs and contributing to the national gross domestic product.
CCIM Institute's focus will remain on these issues critical to commercial real estate. Compromise will inevitably be necessary to move several of these issues forward, especially with a divided Congress.
For complete information on CCIM Institute's ongoing public policy efforts, visit www.ccim.com/public-policy/.