In the Works in Washington
With an infrastructure bill finally signed into law, what does 2022 bring for commercial real estate-related legislation?
Last year, Congress finally and notably passed a robust, bipartisan infrastructure bill signed into law by President Joe Biden in November 2021. The $1 trillion Infrastructure Investment and Jobs Act, which includes approximately $500 billion in new spending, will infuse the largest new investment in decades into our nation's deteriorating transportation infrastructure system. Funds will be distributed to state and local governments to repair crumbling bridges; modernize ports, airports, and transit systems; replace lead pipes; and enhance broadband access in underserved areas. Some fiscal highlights include:
- $110 billion in additional investment for roads and bridges.
- $39 billion to modernize public transit systems.
- $17 billion to modernize the nation's ports and $25 billion to repair and upgrade the country's airports.
- $66 billion for railroads, which represents the largest investment in rail since the creation of Amtrak in 1971.
- $65 billion to upgrade the nation's power infrastructure.
- $55 billion in clean water upgrades and lead pipe replacement.
Over the past several years, CCIM Institute and the National Association of REALTORS® have advocated for an infrastructure bill. With the enactment, Congress is likely to tackle these other issues impacting commercial real estate this year.
Build Back Better Act
Another major piece of legislation on deck is a $1.75 trillion domestic spending bill. While the infrastructure act primarily invests in transportation, broadband, energy, and water systems, the Build Back Better Act invests in the country's social infrastructure and the environment, with childcare and paid leave funding, health care-related benefits, and funding for sustainability and climate risk investments. The bill expands the low-income housing tax credit and provides clean energy tax credits.
The U.S. House of Representatives passed the bill on Nov. 19, 2021. While different versions of this legislative package have been proposed, the current bill does not impact 1031 like-kind exchanges, change the tax treatment of carried interest, alter Section 199A's 20 percent pass-through deduction, or raise the capital gains rate. The bill does include a 1 percent tax on corporate stock buybacks along with a corporate alternative minimum tax. By mid-January, momentum on the bill had stalled, with the package failing to receive sufficient support to pass in its current form, but it is still considered a top priority for the Biden administration.
National Flood Insurance Program
The National Flood Insurance Program (NFIP) must be periodically reauthorized by Congress in order to continue writing flood insurance, with the current deadline of Feb. 18. Over 22,500 communities representing five million homes and businesses nationwide participate in the NFIP. The NFIP has had 18 short-term extensions since 2017. CCIM Institute and NAR have been and will continue to educate members of Congress about the importance of a long-term reauthorization of the NFIP for the continued stability of real estate markets. While remaining a top priority for many members of Congress, flood insurance is competing with many other pressing items.
“Historically, Congress has not acted on a long-term NFIP reauthorization measure until there are super majorities of support in both houses of Congress,” says Austin Perez, senior policy representative with NAR. “I think we need to keep pressing Congress to extend the program while coastal and inland members continue to work out their differences over a wide range of issues, including phasing out subsidized rates.”
Some coastal state members of Congress recently reintroduced a long-term reauthorization bill in both the U.S. House and Senate, effectively putting down a marker for issues they would like to discuss moving forward.
Over the past several years, CCIM Institute and the National Association of REALTORS® have advocated for an infrastructure bill. With the enactment, Congress is likely to tackle other issues impacting commercial real estate this year.
While Congress continues to consider a long-term reauthorization bill, the Federal Emergency Management Agency recently updated its rating system for the NFIP to more accurately assess an individual property's flood risk. Called Risk Rating 2.0, the new system's methodology considers more flood risk variables and allows prices to capture risk more accurately. Risk Rating 2.0 pricing is based on individual properties instead of rating zones. FEMA kicked off implementing the new system for new policies and existing policies eligible for renewal last October, with all remaining policies renewing after April 1, subject to the new system. While many policies will see increases, other could see decreases. The old rating system had been in place for over 40 years, with policies on less-expensive properties sometimes subsidizing higher-priced ones. Risk Rating 2.0 should provide better equity and transparency in premium pricing. As David Maurstad, senior executive of the NFIP at FEMA, indicated during an NFIP Senate hearing, “Risk Rating 2.0 fixes the inequity of policyholders with lower-value homes subsidizing policyholders with higher-value homes.”
When these new premium amounts become available for policy renewals this spring, an increase in some premiums could spur a sense of urgency in a long-term reauthorization bill. As Perez noted, “NFIP affordability continues to be a focal point of discussion in Congress; now that Risk Rating 2.0 reveals the true cost of insuring certain properties in the NFIP, perhaps members of Congress will be able to come together around an affordability pilot program that addresses many differences.”
Additionally, with the continued changing of our climate, large flood events are becoming both more frequent and severe. According to the National Oceanic and Atmospheric Administration, as of October 2021, the U.S. experienced 18 weather disasters exceeding $1 billion in losses in 2021. The United States annually averaged 7.1 such disaster events annually between 1980-2000. In contrast, between 2016-2020, the country averaged 16.2 such events annually. As Maurstad noted in his statement submitted for the NFIP Senate hearing, “The historic 2020 hurricane season started earlier than ever, saw the most storms in the shortest amount of time in history, and finished with a record-breaking 30 named storms. Every mile from Texas to Maine was under a storm surge.” These intensified climate risks make flood insurance even more critical to many property owners.
Private flood insurance is also on the rise. Regulations issued in 2019 have further encouraged the private flood insurance market as they require regulated lending institutions to accept private flood insurance policies that meet certain criteria. While NFIP coverage is limited to a maximum of $500,000 for building-only coverage per commercial property, extra coverage can be added to the program. NAR and CCIM Institute will continue advocating for a long-term reauthorization bill with sensible reforms both to protect property owners and to help ensure the long-term solvency of the National Flood Insurance Program.
Pandemic Risk Frameworks
Congress has been working since the start of the pandemic on how to address the immense financial losses sustained by many businesses. The Senate Banking Subcommittee on Securities, Insurance, and Investment discussed possible legislative frameworks to address future pandemic risk at a hearing this summer. During his opening statement, Senator Robert Menendez, D-N.J., noted that, “the National Association of Insurance Commissioners found that of the eight million businesses with commercial insurance policies that included business interruption coverage, 83 percent also included a clause excluding claims from viral contamination, disease, or pandemic. Unsurprisingly, 82 percent of claims have been closed without payment.” Instead of business interruption coverage, most businesses had to rely on relief provided by the federal government such as the Paycheck Protection Program and the expanded Small Business Administration Economic Impact Disaster Loan program.
Congress faces many urgent issues as the world continues to address and recover from the pandemic. Hopefully, members of Congress will compromise on points of contention and come together in a bipartisan spirit to tackle the diverse policy challenges facing our country.
Congress is considering different frameworks to address the issue of pandemic-induced business interruption losses, because pandemic loss is too big to privately insure. During the Senate hearing, Evan Greenberg, CEO and chairman of Chubb, noted that “pandemics, unlike other catastrophes such as earthquakes, hurricanes, and floods, are not limited to a specific geography or time period and can affect entire economies and most of the population at the same time. This results in losses so great that the event is uninsurable for business interruption coverage by the insurance sector alone.” Congress is considering frameworks for a pandemic risk insurance program, which would create a pandemic federal reinsurance backstop like the current one for major acts of terrorism. This framework is one of many legislative approaches being discussed. In November, Representative Carolyn Maloney, D-N.Y., reintroduced the Pandemic Risk Insurance Act, which would create such a pandemic federal reinsurance backstop. The Senate is likely to introduce its own version of the bill in the upcoming months. Congress will likely continue to consider the various approaches proposed to enhance access to affordable business interruption coverage during future pandemics.
Cannabis Banking Legislation
Cannabis, for either recreational or medicinal use, is currently legal in most states. For businesses operating lawfully in those states, accessing financial services proves challenging because cannabis continues to remain an illegal substance at the federal level. Last year, the U.S. House passed the Secure and Fair Enforcement (SAFE) Banking Act, and it is now awaiting consideration in the Senate. The House has passed the legislation five times since 2019, and it has bipartisan support in both chambers of Congress.
The legislation would remove the barrier to accessing financial services by providing a safe harbor to banks, insurance companies, and other financial institutions that serve cannabis businesses operating lawfully in states where marijuana is legal. As Representative David Joyce, R-Ohio, co-chair of the Congressional Cannabis Caucus explained in a House floor speech last April, “Cannabis companies are not afforded the same access to financial services as every other legal business in our country.” The lawfully operating cannabis industry is growing exponentially, and passage of the SAFE Banking Act would improve access to capital and banking services to these businesses.
Despite strong bipartisan support, the bill faces opposition without broader cannabis criminal justice reform. Several senators have expressed their preference for including the SAFE Banking Act's provisions as part of a larger cannabis reform bill. As Senator Cory Booker, D-N.J., explained when asked about the passage of the SAFE Banking Act without inclusion in a larger reform bill, “To me, it wouldn't be a win. It would be a setback for expunging the records of all the people who are waiting for some kind of justice.” Other lawmakers have also expressed preference to include the bill with a cannabis reform effort.
Congress faces many urgent issues as the world continues to wrestle with the pandemic. Hopefully, members of Congress will compromise on points of contention and come together in a bipartisan spirit to tackle the diverse policy challenges facing our country.