Market forecast
Legislation
2014 Legislative Outlook
Can commercial real estate afford another year of gridlock?
By Adriann Murawski |
Peering
over a fiscal cliff is not a comforting way to begin a new year. On January 2,
2013, Congress somehow managed to negotiate a deal on the American Taxpayer
Relief Act that prevented financial collapse. Nearly 10 months later, similar
fiscal threats created unease among investors, global markets, and U.S.
businesses and families when the federal government shut down. The figurative
fiscal cliff was nearly forgotten until national parks closed. As people were
denied access to the nation’s natural wonders, the warfare in Washington, D.C.,
set a new tone of political frustration.
Commercial
real estate professionals recognize the importance of negotiation skills in
closing a deal, and many must have cringed watching some of the tactics U.S.
lawmakers employed last year. So it is no surprise that the past 12 months did
not bring a close to many of the important pieces of legislation pertinent to
the commercial real estate industry. Most of CCIM Institute’s legislative and
regulatory priorities remain open, including the 2013 Capitol Hill Visit
issues. The short review below discusses where these issues are and where they
need to go in the coming year.
Tax Policy
CCIMs
have perpetually voiced the importance of keeping carried interest under
capital gains tax treatment. The idea of switching carried interest to ordinary
income is counterproductive when considering all the elements for real estate
investments. If carried interest were to be taxed as ordinary income, investors
in business partnerships would lose an important incentive for taking risks
just when they need it most — during business startup and expansion periods.
However,
some politicians view carried interest as a loophole that could save the
federal government more than $17 billion over a 10-year period, a debatable and
possibly inaccurate estimate. For their part, CCIMs must continue the carried
interest dialogue with lawmakers, making clear the message that real estate
investments are critical funding sources for economic drivers, particularly for
small businesses, which often take years of growth and may or may not result in
a return.
Murmurs
on Capitol Hill suggest a complete overhaul of the federal tax code. Rep. David
Camp, R-Mich., chairman of the U.S. House Ways and Means Committee, is not
seeking re-election and aspires to leave a legacy as the federal tax bipartisan
negotiator. However, failed negotiations in 2013 and an upcoming election this
year might substantially delay Camp’s vision. Major changes to the tax code may
actually come to fruition following the 2016 presidential election, but any
type of tax code structure created this year could be used as the framework for
the future.
Additional
tax policy priorities for commercial real estate include 1031 like-kind
exchanges, leasehold improvements, estate tax, depreciation, Foreign Investment
in Real Property Tax Act or FIRPTA, and the 179D energy efficiency deduction
for commercial buildings.
Online Sales Tax
The U.S.
Senate approved the Marketplace Fairness Act, which would grant states the
ability to level the playing field between brick-and-mortar and online
retailers. However, the House of Representatives has done little to ensure
final passage of the bill. Advocacy on Internet sales tax fairness will
continue into this year. While each state will determine its own online sales
tax policy, federal law is needed to clarify the blurry lines between states
with and without an online sales tax.
EPA Lead Paint
Another
issue is an Environmental Protection Agency lead paint proposed rule for
commercial and public buildings. In June 2013, the EPA held a public hearing on
proposed rules on renovation, repair, and painting projects. Rules that apply
to residential housing have begun to seep into EPA’s vision for other
properties following legal issues with environmental groups claiming the EPA
has not fully protected public health. If finalized, the requirements for
commercial or public building renovations would unnecessarily increase
projects’ cost and completion time, despite the lack of facts linking lead
paint to health risks in commercial and public buildings. The EPA will
determine final rules by 2016.
FASB Lease Accounting
The
Financial Accounting Standards Board’s lease accounting proposal has not been
finalized. Although FASB made some revisions from the original proposal in
2009, businesses would still be required to capture lease terms of property on
a balance sheet. Within the 2013 proposal, the lessor would recognize income
over the lease term on a straight-line basis. The lessee would recognize the
lease liability and would amortize the right-of-use asset on a straight-line
basis over the lease term. The proposed changes may increase lending costs and
debt covenant breaches and inaccurately characterize an organization’s financial
stability.
FASB’s
proposed rules were never justified by economic impact studies. Nonetheless
after hundreds of negative comments and years of push back, FASB continues to
target lease accounting as a way to increase transparency and accountability
among U.S. businesses. FASB has said it will release a final rule in 2014 with
implementation by 2017.
Regulation
The
sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
brought about Basel III rules, which were finalized in July 2013. The changes
will have an impact on commercial real estate by increasing the risk-weight of
high volatility commercial real estate exposure loans for acquisition,
development, and construction projects. In other words, commercial real estate
loans that pose the greatest risks will have different requirements.
Ultimately, banks will be required to hold more capital against credit lending.
Multifamily loans are considered as less risky, so there are fewer requirements
for those projects.
While
not a favorable outcome, ultimately the final rules were less drastic than the
original Basel III proposed rules. In addition, community banks will have more
time for implementation compared to larger banks, which must implement Basel
III rules this year.
The
Dodd-Frank Act also generated credit risk retention rules. Originally proposed
in 2011, risk retention was reintroduced in 2013 as a way for borrowers to have
more “skin in the game.” Federal agencies claim that low-risk commercial loans
will not be subject to risk retention requirements. In contrast, the commercial
real estate industry is very much concerned with how the proposed changes would
alter the dynamics of the commercial mortgage-backed securities market and may
unnecessarily burden a viable funding source. Although implementation is
possible for 2014, final rules may take years to complete.
Local Agendas
While federal
policy dominates the legislative discussion, often local issues have greater
effects on commercial real estate in the area.
Smart
Growth. Local governments around the country
are promoting smart growth policies, which they hope will restore vibrancy to
town centers and central business districts. Homeownership, job creation,
business growth, community improvement, quality of life, and health and safety
are all intimately connected. For example, residents who have easy access to a
centralized marketplace help to create jobs, which ultimately produces a stable
workforce and base for homeownership. Smart growth also fosters commercial
development such as transit-oriented residential and mixed use projects. Smart
growth policies are the future. By understanding local trends, CCIMs can build
new relationships and/or partnerships.
Commercial
Lien Laws. Considering the time and expertise
needed to close a deal, commercial lien laws protect the effort CCIMs put into
projects. In 2013, two states passed commercial lien laws, making 31 states
with some form of broker lien laws. Twenty-three states or jurisdictions do not
have specific laws to prevent costly and lengthy legal battles. CCIM chapters
in the 23 states without lien laws are called to act by building a grass-roots
lobby and making passage of commercial broker lien laws a priority.
Nationally,
the greatest legislative concern for 2014 is over federal taxes. While the
commercial real estate market has shown steady improvement, changing tax
policies and regulatory proposals over the banking industry pose great risk to
recovery. With the election in November, re-election prospects have taken
priority over finalizing policy, possibly resulting in continued deadlock over
many of these issues.
Regardless,
government policies and private markets must work in tandem for economic
growth. CCIMs and other members of the commercial real estate industry need to
clearly communicate their issues to lawmakers. Discussions today are almost
certain to lay the groundwork for laws of tomorrow, whether in 2014 or
subsequent years.
Adriann
Murawski is CCIM Institute’s former senior
manager of government affairs.