Market forecast

Legislative Outlook

These Issues May Affect the Way You Do Business.

As 1998 drew to a close, Congress had yet to achieve much of the legislation at its table. This 1999 legislative and regulatory preview reflects the commercial real estate industry’s concerns and focuses on issues that have the greatest relevance in day-to-day business. However, any predictions of possible action are subject to the whims of congressional debate as well as the aftermath of November’s elections.

Taxation
Capital Gains/Depreciation Recapture. Although the Taxpayer Relief Act of 1997 lowered the capital gains rate, a reduction in depreciation recapture was not included in the 1998 budget surplus bill. Continuing capital gains reduction as well as depreciation recapture reduction may be issues in tax-cut discussions this year. The current 25 percent depreciation recapture rate is higher than the capital gains rate of 20 percent. Commercial real estate lobbying groups want to lower the depreciation recapture rate to equal the capital gains rate.

Tenant Improvement Costs. The commercial real estate industry supports the amortization of tenant improvements over 10 years, as opposed to the current 39-year schedule. A bill this past session would have decreased the time frame for tenant improvement write-offs to 10 years, but industry groups failed to get this provision added into last year’s budget bill. Industry proponents will seek a similar bill this session.

Flat Tax. Given the complex structure of our current tax system and the added attention focused on Internal Revenue Service complications, the flat tax once again may move to the forefront of tax simplification discussions and legislation may be introduced. A flat tax could be a disincentive for real estate investment by limiting or repealing some traditional real estate-related tax deductions.

Passive Loss. Commercial real estate practitioners want further improvements to the passive loss rules, including provisions that would treat rental-activity passive loss on an equal basis with other real estate activities. The current passive loss tax regulation, which went into effect January 1, 1994, allows individuals whose primary business is real estate to deduct rental property losses from income. The regulations state that a taxpayer that materially participates in rental activity does not necessarily have to interpret this rental activity as passive. Thus, losses on this activity could be used to offset nonpassive income.

The problem lies with the final IRS interpretation of the legislation. The regulations released in February 1995 were unfavorable to the real estate industry, still treating rental activity differently than other real estate activity. Final passive loss rules released in December 1995 were an improvement over the earlier rules, but continued to distinguish between rental activity and other real estate activity.

Property Rights
Takings. A "taking" is defined by property owners as an unfair usurping of property by the government for public use. Congress introduced several bills last session that would have given property owners additional rights, but none passed. However, the following states have passed laws and/or executive orders in the last few years allowing private-property owners additional rights in determining takings: Arizona, California, Colorado, Delaware, Florida, Idaho, Indiana, Kansas, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Dakota, Tennessee, Texas, Utah, and Virginia.

Industry lobbyists continue to monitor state legislation and work toward federal legislation that supports the rights of property owners in the takings debate. The Senate failed to pass a bill that would have given property owners greater access to the federal court system in Fifth Amendment takings cases rather than being forced to first pursue relief in local and state courts. This legislation likely will be introduced again.

Business
Electricity Deregulation. The House of Representatives and the Senate both introduced legislation concerning the transition to deregulation and increased competition in the electrical industry. Washington sources say that Congress may take up the issue of national deregulation legislation in 1999. It may focus on the difficulties that arise when 50 states implement deregulation, each in a different way and on a different timetable. But it is unlikely to pass any restructuring legislation that pre-empts states that already have implemented a deregulated electricity market or those moving in that direction.

Commercial Lien Laws. Many states have enacted or are working on a commercial real estate broker’s commission lien law. These laws allow commercial brokers to place a lien against property if the buyer/seller or lessee/lessor fails to pay the agreed-upon commission. Litigation to recover fees often consumes the entire fee the broker is trying to recover. These laws also solve the problem of brokers going into a closing and receiving a fee lower than previously agreed upon.

To date, 13 states have adopted commercial lien laws: Connecticut, Florida, Georgia, Illinois, Louisiana, Maine, Maryland, Missouri, Ohio, Pennsylvania, Virginia, Washington, and Wyoming. States currently working on commercial lien legislation are Alabama, New Hampshire, North Carolina, and Tennessee. Commercial lien legislation failed in California, Indiana, Nevada, and Texas.

Dual Agency. Dual agency — when one real estate broker represents both the purchaser and the seller through an express agreement — also saw a lot of state action in 1998. Several states passed dual-agency legislation and others further specified their current statutes. These laws and regulations (as well as the penalties for failure to disclose) vary greatly from state to state.

Forty-five states currently have some type of dual-agency law or regulation. States without this legislation are Arkansas, Delaware, Illinois, Oklahoma, and Rhode Island.

Telecommunications. The Telecommunications Act of 1996 addresses emerging national issues such as universal-service guarantees to all individuals, deregulation of local telephone and cable television service to promote competition, reforms to regulations that inhibit Internet access, and greater access to advanced technologies such as satellite communications.

To the commercial real estate industry, the act’s two most important issues concern satellite dish placement, which creates property rights concerns, and telecommunications-provider access to inside wiring. When attempting to guarantee universal access to advanced telecommunications products and services, Congress — and now the Federal Communications Commission — must consider the potential problems caused by regulations that prevent building owners and managers from controlling access to private rights-of-way and to the outside of their buildings.

Individual states now are passing their own legislation and regulations related to telecommunications reform. However, because the FCC orders related to satellite dishes and inside wiring are fairly specific, state laws and regulations generally have not focused on these topics.

Financial Services Modernization. The merger of Citibank and Travelers Group, forming Citigroup, breathed new life into the financial services modernization bill, but it wasn’t enough to get the legislation passed. The original bill contained a provision to abolish the federal thrift charter; however, this language was eliminated in the substitute. The bill would have created a mix of banking and commerce that had the potential to threaten the safety and soundness of the mortgage finance system, as well as create unfair competition in the real estate industry. Similar legislation probably will be introduced in the 106th Congress. The tendency toward mergers of large corporations ensures that this issue will remain in the forefront.

Bankruptcy. The Senate failed to consider the Consumer Bankruptcy Reform Act of 1998 in October. The bill contained three provisions of interest to commercial brokers: elimination of caps on single-asset bankruptcy, protection for shopping-center owners when tenants declare bankruptcy, and provisions on automatic-stay in the rental housing market.

The first provision of the bankruptcy code subjects properties with values of less than $4 million to an automatic stay — creditors could not foreclose on a property in a bankruptcy proceeding for 90 days. The second issue protects shopping-center owners when their tenants file for Chapter 11 bankruptcy. The last issue deals with automatic-stay provisions in the rental-housing market. The legislation would eliminate a loophole in current law that allows a tenant to delay eviction for failure to pay by declaring bankruptcy.

Moving Ahead
Although it is not easy to predict what the 106th Congress will bring, it is almost guaranteed that we will continue to see a move toward taxation and regulatory reform. It is important that the industry continues to work on issues that affect the way in which commercial real estate practitioners do business.

Kristin Harrelson

Kristin Harrelson is legislative analyst of the Commercial Investment Real Estate Institute. Contact her at (312) 329-6033 or kharrels@irem.org.For the latest information on legislation affecting commercial real estate, see the Commercial Investment Real Estate Institute’s Legislative Bulletin in the Legislative News Library on CIREI’s Web site (http://www.ccim.com/).

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