Real Estate Roundtable Discusses Tax Policy, Capital & Credit and Land Use & Infrastructure Policy

TAX POLICY
Treasury Proposal Seeks to Ease FATCA’s Burden on Overseas Banks, But Stays Mum on U.S. Commercial Real Estate Request for Exemption

CAPITAL & CREDIT
Dodd-Frank Regulatory Proposal Could Undermine CMBS Market Recovery by Forcing Banks to Hold More Capital in Reserve for Securitized (vs. Whole) Loans

LAND USE & INFRASTRUCTURE POLICY
House Approves “Civilian BRAC” Bill to Dispose of Excess or Underutilized Federal Properties; Surface Transportation Bills Up for Key Votes in House, Senate Next Week  

 


 

TAX POLICY

Treasury Proposal Seeks to Ease FATCA’s Burden on Overseas Banks, But Stays Mum on U.S. Commercial Real Estate Request for Exemption

The Internal Revenue Service (IRS) on Wednesday released draft regulations to implement the Foreign Account Tax Compliance Act (FATCA), a 2010 law that seeks to curb tax evasion by U.S. citizens who invest in foreign accounts, by requiring foreign financial institutions to report all of their U.S. account holders to the IRS by 2013 (or face a 30% withholding tax on certain payments). Responding to complaints that FATCA could put foreign banks in the position of violating national secrecy laws, the U.S. and five European nations this week said global financial institutions could first share the data with their own governments, which would then pass on the information to Washington.

 fatca magnifying glass

The  Internal Revenue Service (IRS) on Feb. 8, 2012 released draft regulations to implement the Foreign Account Tax Compliance Act (FATCA).

The new government-to-government approach announced by the U.S., France, Germany, Italy, Spain and Britain on Wednesday was part of a broader pledge to intensify “cooperation in combating international tax evasion,” with Washington agreeing to “reciprocate in collecting and exchanging” information about U.S. accounts held by residents of those countries (The New York Times, Feb. 8).

Although the IRS and Treasury reportedly made other efforts to ease compliance burdens on overseas banks (e.g., delaying the implementation schedule, relaxing due diligence requirements banks must use in identifying U.S. accounts, and expanding the range of institutions that will not be required to enter into formal agreements with the IRS), the Feb. 8 draft regulations make no apparent attempt to address U.S. real estate industry concerns over FATCA.
(Bloomberg, Feb. 8)

In a Nov. 30 letter to the IRS, Roundtable President and CEO Jeffrey DeBoer warned that FATCA would add “substantial and unnecessary complexity and cost to foreign investment in U.S. real estate, severely discouraging the inflow of foreign capital that is critical to the U.S. real estate market and the overall economy (particularly in the current economic climate).” [Roundtable Weekly, Dec. 9]

As DeBoer explained, it is not necessary to burden investments in U.S. real estate with FATCA requirements, since “various special rules for real estate investments already discourage investment by U.S. persons in U.S. real estate through foreign entities.” These include the Foreign Investment in Real Property Tax Act (FIRPTA), the branch profits tax and “Chapter 3” withholding rules.

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Nov. 30, 2011 letter to the IRS on FATCA – Foreign Account Tax Compliance 

“….because of these rules, U.S. persons typically invest ‘directly’ into U.S. real estate (rather than indirectly through foreign entities); as such, their investment income already is reported to the IRS by U.S. real estate investment entities via the Schedule K-1 or Form 1099 mechanisms,” The Roundtable letter continued. Furthermore, said DeBoer, “applying the FATCA rules in the real estate context will do little in the way of identifying non-compliant U.S. taxpayers or encouraging compliance.”

The Roundtable is concerned that foreign investors could decide to forego investing in U.S. real estate — rather than be subjected to the cumbersome requirements, higher costs, and lower returns associated with the FATCA regime. Given the U.S. real estate sector’s heavy reliance on foreign investors, such an outcome would have dire consequences for the U.S. real estate market and would be counter to sound economic policy.

Although tax practitioners this week reportedly praised the IRS for making positive changes to the rules in response to industry comments, more work remains to be done — particularly with respect to FATCA’s impact on the U.S. commercial real estate industry. The voluminous (388-page) proposal will need to be carefully analyzed by foreign financial institutions, U.S. withholding agents, and other persons potentially impacted by FATCA.  .

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CAPITAL & CREDIT

Dodd-Frank Regulatory Proposal Could Undermine CMBS Market Recovery by Forcing Banks to Hold More Capital in Reserve for Securitized (vs. Whole) Loans

In a letter to the Federal Reserve, FDIC, and OCC last Friday, The Real Estate Roundtable and Commercial Real Estate Finance Council (CREFC) expressed concern about a pending proposal that could require banks to hold more capital in reserve for securitized assets vs. (whole) loans held on portfolio.

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Feb. 3, 2012comment letter to the Federal Reserve, FDIC, and OCC from The Real Estate Roundtable and Commercial Real Estate Finance Council (CREFC).

In addition to “penaliz[ing] securitization positions . . . such disparate treatment of asset-backed securities could lead to an imbalance in the commercial real estate finance market, potentially undermining efforts to enhance credit capacity and stalling the nation’s economic recovery,” the Feb. 3 letter stated.

The RER-CREFC letter notes the critical role loan securitization has played over the past two decades, in terms of supplementing commercial real estate credit provided by banks; the virtual shutdown of the commercial mortgage-backed securities (CMBS) market in recent years; and the importance of boosting credit capacity at a time when hundreds of billions of dollars in commercial mortgages are coming due and will need to be refinanced.

“Through 2017. . . approximately $600 billion of CMBS loans and more than $1.2 trillion in outstanding commercial mortgages will mature. Borrower demand to re-finance these mortgages will be at an all-time high. Thus, any regulatory changes that impact securitization come at a sensitive time for the CMBS market,” the letter stated.

As discussed in The Roundtable’s new 2012 Policy Agenda, “A robust secondary market for commercial mortgages is essential for recovery in commercial real estate, and essential to strengthening financial institution balance sheets across the board. Without viable securitization markets, financial institutions must keep more of their loans on their books, and maintain higher capital levels to cushion against potential losses. This, in turn, constricts lending to all types of borrowers.

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The  Roundtable’s new 2012 Policy AgendaForward.

“While nearly $30 billion of commercial mortgages were issued in CMBS in 2011, issuance was lower than expected due to financial market unease over the U.S. debt ceiling negotiations, the Euro zone crisis, and uncertainty over pending Dodd-Frank and other regulations. The 2012 projections are not much more robust, in the range of $30–$50 billion in issuance.”

Other pending Dodd-Frank regulations that could hurt efforts to revitalize the CMBS market include proposed risk-retention rules and the so-called Volcker rule.

The RER-CREFC Feb. 3 letter urges banking regulators to re-issue their December 2011 proposal on risk-based capital following the public comment period (rather than issuing a final rule). The Feb. 3 letter also urges that a comprehensive cost-benefit analysis be conducted before the rules are finalized, in order to “reduce the potential for an unintended negative impact on the securitization market, important capital formation, and the national economy.”

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LAND USE & INFRASTRUCTURE POLICY

House Approves “Civilian BRAC” Bill to Dispose of Excess or Underutilized Federal Properties; Surface Transportation Bills Up for Key Votes in House, Senate Next Week

The U.S. House on Tuesday approved legislation to create an independent, public-private commission that would identify opportunities for the federal government to significantly reduce its inventory of civilian real property — in particular excess or underutilized properties — thereby reducing operating costs and potentially raising billions of dollars that could be used for deficit reduction.

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Rep. Jeff Denham (R-CA), chairman of the House Transportation and Infrastructure Subcommittee on Economic Development, Public Buildings and Emergency Management

The “Civilian Property Alignment Act” (H.R. 1734) was introduced last May by Rep. Jeff Denham (R-CA), chairman of the House Transportation and Infrastructure Subcommittee on Economic Development, Public Buildings and Emergency Management, and is modeled after the so-called “BRAC” (Base Realignment and Closure Commission) process used to wind down unused or underused military bases. H.R. 1734 cleared the chamber by a vote of 259-164, receiving modest Democratic support.

Denham’s office estimates that “civilian BRAC” efforts could raise at least $15 billion from property sales (Washington Business Journal, Feb. 7) — a figure that some believe over values the bill’s positive effects.  However, within its first six months, the proposed commission would have to select at least five properties for sale worth $500 million or more.

The White House, which proposed a similar bill last year to streamline the federal real estate portfolio, cited a number of objections to Denham’s bill on Monday. Among other things, the Administration said Denham’s bill “does not go far enough in empowering the commission to ensure that unneeded properties are moved off the federal books,” suggesting it could tie up the fate of thousands of properties in a prolonged congressional debate (The Washington Post, Feb. 7). Under the Administration plan, the recommendations of a BRAC-like panel would go into effect unless Congress voted against the entire plan; Denham’s bill would require approval by a joint resolution of Congress.

The Administration also objected to Denham’s bill because it would limit the leasing authority of certain federal agencies, which could overburden the General Services Administration with the sole responsibility to negotiate federal leases.

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Real Estate Roundtable President and CEOJeffrey DeBoer testified  last March regarding Administration plans to dispose of excess or underutilized properties .

In Senate testimony last March regarding Administration plans to dispose of excess or underutilized properties, The Real Estate Roundtable emphasized the importance of accurately valuing federal assets for potential sale to the private sector; the need to focus on healthier “gateway” markets that are more likely to be able to absorb additional new real estate space; and the need for an efficient property disposition process that minimizes complex legal and regulatory barriers.

“In markets where recovery has not yet taken hold, the injection of under-valued properties could further depress asset values and aggravate poor real estate fundamentals,” Roundtable President and CEO Jeff DeBoer told the Senate Environment Committee. At the same time, he testified, “Over-valued federal properties that fall short of their potential to generate sufficient incomes will worsen the problem” of so-called “underwater” assets — those on which outstanding debt coming due is greater than the underlying value. [Roundtable Weekly, April 1, 2011]

Denham’s bill now goes to the Senate, where companion legislation has been introduced by Sen. Scott Brown (R-MA). Sen. Tom Carper (D-DE) is planning to introduce his own bill in coming weeks. Carper, a past Roundtable meeting guest, chairs the Homeland Security Subcommittee on Federal Financial Management, Government Information, Federal Services and International Security (GovernmentExecutive.com, Feb 7)

Transportation Bills Face Key House, Senate Votes Next Week

In related news, there was significant new activity in both chambers this past week on legislation to provide longer-term federal transportation funding.

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House and Infrastructure Committee Chairman John Mica (R-FL)

In the House, Speaker John Boehner (R-OH) and his vote-counters are reportedly working to solidify GOP support before next week’s anticipated vote on a five-year, $260 billion highway bill (H.R. 7), introduced by Transportation and Infrastructure Committee Chairman John Mica (R-FL) on Jan. 31.  Among other things, Politico reported Feb. 7, GOP lawmakers are concerned that the bill relies on funding streams that may not be available again when the legislation is up for renewal in five years.

Democrats’ objections include the bill’s proposed elimination of dedicated funding for mass transit (which would now be funded by cutting government contributions to federal employees’ pensions); and provisions to open U.S. coastal waters to oil and gas drilling, including environmentally fragile areas that have long been off limits.

Meanwhile, the Senate yesterday voted 85-11 to end debate on the “Moving Ahead for Progress in the 21st Century Act” (MAP-21), a bipartisan transportation bill that would provide $109 billion in funding for a variety of transportation and infrastructure projects over two years. On Tuesday night, the Senate Finance Committee approved a $9.6 billion package of funding offsets for the bill, eliminating most of the roughly $13 billion in funding needs that would not be covered by receipts from the national gasoline tax.

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Nov. 9, 2002 Roundtable letter to the Senate Environment Committee on MAP-21 

In a Nov. 9 letter to the Senate Environment Committee, The Roundtable welcomed MAP-21 as “a significant step” in the direction of transportation policies that are balanced, prudent and forward-thinking. “The bill advances bipartisan solutions to maintain, improve and modernize our infrastructure — while furthering the critically important objective of getting Americans back to work,” the Roundtable letter stated.

The Roundtable also praised the fact that MAP-21 would provide funding for two fiscal years. Although this is shorter than the traditional 6-year funding period for comprehensive transportation legislation, MAP-21 would “end the unconstructive cycle of shorter-term highway and transit funding that has hampered the ability of real estate and transportation planning communities to coordinate and develop surface transportation projects that best suit local, regional, state and national needs.” There have been eight short-term extensions of highway/transit funding since the last comprehensive law (SAFETEA-LU) expired in 2009.

Following yesterday’s Senate cloture vote, which prohibits further amendment of MAP-21, subsequent votes will formally attach titles approved separately by the Commerce, Banking, and Finance committees. A full Senate floor vote is expected sometime next week.

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