Roundtable Weekly Newsletter by The Real Estate Roundtable

  • ECONOMIC & TAX POLICY
    Amid Signs of Stalling Economic Recovery, Senate Democrats Seek “Millionaires’ Surtax” to Pay for Obama’s Jobs Bill; White House Chief of Staff Bill Daley, Sen. Ben Nelson, Economist Alan Blinder, Public Buildings Commissioner Bob Peck to Meet With Roundtable CEOs Next Week
  • CAPITAL & CREDIT
    RER, NAR Submit Amici Curiae Brief to U.S. Appeals Court in Condo-Hotel Case
  • FINANCIAL SERVICES REGULATION
    Coalition for Derivatives End Users Hosts “Fly-In” Meetings to Urge Robust “End-User” Exemption in Forthcoming Margin/Cash Collateral Regs    

ECONOMIC & TAX POLICY

Amid Signs of Stalling Economic Recovery, Senate Democrats Seek “Millionaires’ Surtax” to Pay for Obama’s Jobs Bill; White House Chief of Staff Bill Daley, Sen. Ben Nelson, Economist Alan Blinder, Public Buildings Commissioner Bob Peck to Meet With Roundtable CEOs Next Week  

Amid renewed signs of economic weakening — and Fed Chairman Bernanke’s assertion on Tuesday that the economic recovery “is close to faltering” — the jobs bill proposed by President Obama is reportedly getting push-back from Senate Democrats who disagree with Obama on how to offset the cost of the package. The president’s proposed “pay-fors” include a cap on itemized deductions for higher-income individuals and families, eliminating oil and gas industry tax breaks, and a proposed tax hike on partnership “carried interest” — which would disproportionately affect commercial real estate. As CQ Today reported Oct. 4, several Democrats have proposed “swapping out the revenue-raising measures in the jobs package” with the “millionaires’ surtax” floated by Senate Majority Leader Harry Reid (D-NV).  (Bloomberg, Oct. 6)

Money graphic green - crop 

The Fed is prepared to take further steps to encourage investment, citing risks posed by anemic job growth, depressed consumer and business confidence and financial instability in Europe. 

Reflecting increased uncertainty over the economic climate and business environment, the Business Roundtable’s latest quarterly economic outlook survey found more CEOs expecting to cut jobs in the next six months, along with a decline in expectations regarding anticipated sales and capital expenditures (Washington Business Journal, Sept. 30).

Although the economy added more private-sector jobs than expected in September (137,000) and August (according to day’s Labor Department report) — and although GDP grew faster than estimated in the 2nd quarter (according to the Commerce Department) — the unemployment rate remains stuck at 9.1% (The Wall Street Journal, Oct. 7).

Bernanke last week characterized the jobs situation as a “national crisis” (The Washington Post, Sept. 30), noting that roughly 45 percent of today’s unemployed have been out of work for at least six months — a level previously unseen in the six decades since World War II (Forbes, Oct. 4). 

This week, during testimony before Congress’ Joint Economic Committee, Bernanke said the Fed is prepared to take further steps to keep the economic recovery on track — citing risks posed by anemic job growth, depressed consumer and business confidence, and financial instability in Europe (Forbes, Oct. 4). He also urged lawmakers not to cut government spending too deeply in the near term, as the “super committee” struggles to reach bipartisan agreement on $1.2-1.5 trillion in federal budget savings over the coming decade (Reuters, Oct. 5).

Separately, two Wall Street Journal articles (Oct. 5, Sept. 21) discussed signs of renewed softening in commercial real estate markets, which had begun to bounce back, particularly in urban “gateway” markets.

CRE construction up 

The Roundtable continues to press for tax policy changes that would allow more foreign equity investment in the U.S.  

With an estimated $1.4 trillion in commercial real estate loans scheduled to mature over the next few years — and many of these loans not expected to qualify for refinancing without significant equity infusions — The Roundtable continues to press for tax policy changes that would allow more foreign equity investment in U.S. commercial real estate.

As Roundtable President and CEO Jeffrey DeBoer explained at the RealShare conference in Dallas on Tuesday (and in Real Estate BisNow yesterday), enacting legislation to reform the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) remains a top Roundtable policy priority. Before the IRS expanded FIRPTA’s reach with a 2007 ruling, DeBoer said, no taxes applied when foreign investors sold their U.S. properties. “That income is now treated as a capital gain.” 

FIRPTA reform bills introduced in the House (H.R. 2989) and Senate recently (S. 1616) would “open an enormous capital trail to investment in public REITs,” DeBoer told BisNow, adding, “Lots of capital wants to be here, and we need to lower taxes to make it easier for people.”  

World Economy 

Barriers to Investment: the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) and the Foreign Account Tax Compliance Act (FATCA)

Another emerging policy threat are pending regulations to implement the Foreign Account Tax Compliance Act (FATCA) — enacted last year as part of President Obama’s so-called HIRE Act (“Hiring Incentives for Restoring Employment Act”). Although FATCA is aimed at improving U.S. tax-collection efforts (by detecting U.S. citizens who invest in foreign funds and preventing them from hiding their identities behind foreign corporations, trusts, foundations, and other types of foreign entities), these provisions “potentially will have a far-reaching effect on both U.S. payors and the foreign recipients of covered amounts,” according to the web site of law firm Sutherland Asbill & Brennan LLP.

If FATCA goes into effect in 2013, said DeBoer, it would add an extra layer of compliance costs for foreign firms, making them more inclined to invest outside the United States. 

At the Fall 2011 Roundtable Meeting on Tuesday, Oct. 11, Roundtable members will have an opportunity to discuss these issues with White House Chief of Staff William M. Daley, economist and former Fed Vice Chairman Alan Blinder, Sen. Ben Nelson (D-NE), and other policymaker guests. Also joining us to discuss infrastructure and energy efficiency investment in the public building stock will be U.S. Public Buildings Commissioner Robert Peck. 

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CAPITAL & CREDIT

RER, NAR Submit Amici Curiae Brief to U.S. Appeals Court in Condo-Hotel Case  

The Roundtable and National Association of Realtors (NAR) on Wednesday filed an amici curiaebrief with the U.S. Ninth Circuit Court of Appeals in a case that — while seemingly narrow in its focus — could resurrect the long-settled question of whether condo-hotels should be considered securities under federal and/or state law. In March of this year, a U.S. district court dismissed a case (Salameh et al. v. Tarsadia Hotels, et al.) in which the plaintiffs argued that condo-hotel units in the Hard Rock Hotel San Diego constituted securities; the court found that the complaint did not sufficiently allege facts to support its claims.

 2011_10_05_IMAGE_Salameh_Amicus 

The Real Estate Roundtable and the National Association of Realtors (NAR) on Wednesday filed an amici curiae brief with the U.S. Ninth Circuit Court of Appeals regarding Salameh et al. v. Tarsadia Hotels, et al .

The Oct. 5 Roundtable-NAR brief urges the Court not to make determinations with potentially far-reaching ramifications for the condo-hotel market, stating, “A broader ruling could disrupt and undermine the legal framework on which condominium-hotels have been marketed, sold and operated for decades; expose developers and real estate agents, among others, to unforeseen and unwarranted liability; and create general uncertainty throughout the condominium-hotel industry.”

According to the law firm Manatt, Phelps, & Phillips, LLP, the case arose in December 2009, when purchasers of condo hotel units in the Hard Rock Hotel — seeking to rescind their purchases of the condo units — filed an action against the developers, brokers and certain lenders to the project.

“The Salameh case is just one of several lawsuits filed by condominium hotel buyers since the financial crisis of 2008 and the accompanying downturn in commercial and residential real estate,” the firm states on its web site. But the district court’s dismissal “is significant because it affirms the importance, in the context of the securities laws, of clearly and distinctly separating the condominium sales program from any optional rental program. The case provides guidance to developers of condominium hotels on how to structure their sales and marketing programs to comply with applicable securities laws.”

Citing the Supreme Court’s 1946 ruling in Securities & Exchange Commission v. W.J. Howey Co., SEC guidance issued in 1973 (Release No. 33-5347) clarifying the application of the “Howey test” to the offer and sale of condominiums, and subsequent “no-action” letters by the SEC, the Roundtable-NAR brief asserts that “the condo-hotel industry has come to rely on the Release and the SEC’s guidance under its No-Action Letters. This reliance is partially due to the relative lack of case law specifically analyzing common use developments under Howey.

As the Oct. 5 brief warned, “Disrupting the Release and SEC No-Action Letter guidance could create substantial uncertainty in the industry, making it virtually impossible for market participants — developers, brokers, buyers — to know whether a particular condo-hotel represents an interest in real estate or a security.”

The amici brief also raises concern over an SEC amicus brief that “appears to represent a major shift in policy position. Although the validity of the SEC’s position is not before this Court, we strongly urge this Court not to exacerbate matters by unnecessarily criticizing the Release’s validity or the SEC’s prior, consistent interpretations. Such commentary would ripple through the industry and potentially upend the foundations underlying the entire condo-hotel industry.” 

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FINANCIAL SERVICES REGULATION

Coalition for Derivatives End Users Hosts “Fly-In” Meetings to Urge Robust “End-User” Exemption in Forthcoming Margin/Cash Collateral Regs  

Business executives concerned about potential new derivatives regulations under the 2010 Dodd-Frank Act met with lawmakers on Capitol Hill yesterday to urge a robust end-user exemption from government-mandated margin requirements. The “fly-in” was organized by the Coalition for Derivatives End-Users, whose diverse membership includes the U.S. Chamber of Commerce and representatives of many industries (including The Real Estate Roundtable). 

Derivatives Screens crop 

The Coalition for Derivatives End-Users is urging an end-user exemption from government-mandated margin requirements. 

Derivatives end-users are commercial entities (including real estate firms) that rely on derivatives products to protect themselves from everyday business risks, such as interest rate spikes. This allows them to better manage development and operational costs as well as their balance sheets. Although the Dodd-Frank statute includes strict capital and margin requirements for custom derivatives contracts, it gives regulators final say over which entities must meet the new requirements.

Without a robust exemption, the coalition said in an Oct. 6 statement, “end-users would be required to take on more risk by hedging less, or to divert limited working capital away from more productive uses such as expanding plants and equipment, reducing leverage, investing in research and development, and most importantly, creating jobs. We urge those implementing these changes to work together and achieve an outcome that will bring stability and transparency to the derivatives markets without unduly undermining the responsible risk management practices of companies across the country.”

Participants in the fly-in meetings also urged support for bipartisan legislation that would exempt true derivatives end-users from having to post margin (cash collateral) as required under Dodd-Frank.

“True end-users are firms and companies that use derivatives to manage their risks — not to speculate,” said Rep. Michael Grimm (R-NY), who introduced the “Business Risk and Price Stabilization Act of 2011” (H.R. 1610) in April with Rep. Bill Owens (D-NY).  Added Grimm, “Exempting them from posting margin will free up capital that will help maintain low and stable prices for consumers, create jobs, and keep American companies competitive.”

Rep Michael Grimm 

Rep. Michael Grimm (R-NY), above, introduced the “Business Risk and Price Stabilization Act of 2011″ (H.R. 1610) in April with Rep. Bill Owens (D-NY). 

Such legislation is necessary to address ongoing ambiguity among end-users about how they would be treated under regulatory margin proposals released by the Commodity Futures Trading Commission (CFTC), Securities and Exchange Commission (SEC) and Federal Deposit Insurance Corp. (FDIC) in April — and concerns that regulators could revisit these issues later on.

A study released by the Coalition in February found that if U.S. companies were required to put up 3 percent cash collateral on every OTC derivative trade, with no exemptions, capital spending by those firms could contract up to $6.7 billion annually, and 130,000 jobs could be put at risk (The Wall Street Journal, Feb. 13; Dow Jones, Feb. 14).

The analysis also showed significant ambiguities among non-financial companies about potential requirements they might face under Dodd-Frank. Nearly half of the firms polled said they are unsure whether central clearing and trading requirements would apply to them (44 percent), or whether they will be required to post collateral for hedges that have not been centrally cleared (49 percent). 

Source:  The Real Estate Roundtable

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