Roundtable Weekly

This week, The Real Estate Roundtable discusses:

  • DODD-FRANK REGULATION
    House Lawmakers Mulling “Legislative Alternative” to Volcker Rule; New Senate Bill Seeks Clear Exemption for Business “End-Users” from Pending Derivatives Requirements
  • TAX POLICY
    Internet Sales Tax Legislation Gains Bipartisan Backing on Capitol Hill as States Seek to Capture Lost Revenue and as “Brick-and-Mortar” Retailers Seek “Marketplace Fairness”
  • CAPITAL & CREDIT POLICY
    Basel III Comment Deadline Extended to Oct. 22; Coalition Letter Urges Regulators to Study Impact of Proposed Rules on Non-Financial Businesses, such as Real Estate    

DODD-FRANK REGULATION

House Lawmakers Mulling “Legislative Alternative” to Volcker Rule; New Senate Bill Seeks Clear Exemption for Business “End-Users” from Pending Derivatives Requirements  

House Financial Services Committee Chairman Spencer Bachus (R-AL) on Tuesday warned that the Dodd-Frank “Volcker Rule” (Section 619) could have “devastating” economic repercussions, calling on stakeholders, investors and the public to submit input on “legislative alternatives.” Any such comments must be submitted by Sept. 7 — in advance of a committee hearing on Volcker-rule alternatives planned for this fall (BNA Banking Daily, Aug. 9).

Bachus Chairman

House Financial Services Committee Chairman Spencer Bachus (R-AL) called on stakeholders, investors and the public to submit input on “legislative alternatives” to Dodd-Frank “Volcker Rule” (Section 619) by Sept. 7

Financial regulators unveiled a sweeping set of proposed implementing regulations last October, but have run into stiff opposition from industry and lawmakers, who say the proposed rules are overly complex, fail to delineate between so-called “proprietary trading” and market making, and could hurt capital formation and the economy. The Volcker Rule seeks to reduce risks facing U.S. financial institutions by barring them from proprietary trading and from sponsorship of private equity and hedge funds.

In a formal comment letter to regulators in January, The Real Estate Roundtable explained that some financial firms sponsor private equity funds and other “third party” investment funds that invest in commercial real estate, and that the pending rule could essentially push financial services companies out of the asset management and real estate fund business. This would further constrain capital and credit flows at the worst possible time.

The real estate sector — “a very important catalyst to the broader economy, and a significant employment base — needs policies that will facilitate equity investment in commercial real estate,” stated the Jan. 27 comment letter. If applied to commercial real estate, the Volcker Rule “would limit the amount of private equity capital available, without advancing the stated purpose of the Act to reduce systemic risk.”

Separately, a bipartisan group of about 120 House lawmakers wrote to regulators early this year, urging them to go back to the drawing board with the proposed rulemaking.

New Senate Bill Would Ensure that Business “End-Users” — Including Real Estate Firms — Can Continue Using Derivatives for Everyday Risk Management

A bipartisan group of Senators last week unveiled legislation that would clearly exempt non-financial end-user companies from margin requirements applied to their derivatives trades under the 2010 Dodd-Frank law. The bill was introduced Aug. 1 by Senators Mike Johanns (R-NE), Mike Crapo (R-ID), Jon Tester (D-MT), Herb Kohl (D-WI), Pat Toomey (R-PA) and Kay Hagan (D-NC).  

Capitol Dome

A bipartisan group of Senators last week unveiled legislation that would clearly exempt non-financial end-user companies from margin requirements applied to their derivatives trades under the 2010 Dodd-Frank law

In a statement of support, The Roundtable and its partners in the Coalition for Derivatives End-Users said the bill “helps Main Street businesses invest more funds in expanding their operations and creating jobs by freeing them from the costly and needless requirements that are threatened by Dodd-Frank Act margin regulations. The bill is about protecting companies that use derivatives to manage risk, not create it.”

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.

In June, Sens. Crapo and Johanns tried to advance similar reforms as an amendment to Senate farm legislation, but the amendment was rejected during Senate deliberations.

However, the House overwhelmingly approved two bills in March that are supported by the Coalition for Derivatives End-Users. The first of these (H.R. 2779) would exempt inter-affiliate swaps from the regulatory requirements of Dodd-Frank’s Title VII; the second bill (H.R. 2682) would create a partial exemption from margin requirements for derivatives end-users.

The coalition on Aug. 1 stated that it looks forward to Senate approval of the new bipartisan Senate legislation (mirroring the bill’s overwhelming passage in the House earlier this year.)  

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TAX POLICY

Internet Sales Tax Legislation Gains Bipartisan Backing on Capitol Hill as States Seek to Capture Lost Revenue and as “Brick-and-Mortar” Retailers Seek “Marketplace Fairness”  

Legislation allowing states to require Internet retailers to collect sales tax for online purchases — and to level the playing field between “brick-and-mortar” and Internet-based retailers — appears to be gaining ground on Capitol Hill, prompting speculation that lawmakers could act before year-end (despite an extraordinarily busy congressional schedule and election-year politics).

  internet sales tax

The commercial real estate market

As reported in BNA Daily Tax Report on Aug. 7, several factors appear to have shifted debate on this issue in recent months — so that fewer lawmakers are questioning the legitimacy of collecting online sales taxes, focusing instead on how to avoid making the process overly burdensome for smaller businesses. These factors include:

Increased recognition at the state level (particularly among GOP governors) of the volume of sales occurring through online retailers — and the lost sales tax revenue that represents

Increased recognition (particularly among Republicans) that authorizing states to collect sales tax revenue would reduce the need for federal funding support

States’ significant strides toward simplifying their sales tax codes through the efforts of the Streamlined Sales Tax Governing Board

The improving quality of tax collection software, which should reduce burdens on remote retailers

 • Increased recognition that a federal solution is needed to resolve tax collection questions raised by the Supreme Court’s 1992 Quill v. North Dakota decision (which held that a state may not compel a retailer to collect and remit state sales tax if the retailer has no physical presence, or “nexus,” in the state)

As one observer noted in the BNA report, “Policymakers of every stripe….have recognized this is something Congress needs to address and something that needs to be solved. Whatever your perspective on the issue, it is clear a significant majority believes this is an issue that Congress must address, as the court alluded to” in its 1992 Quill decision.

 Sen. Rockefeller Committee Chair

Senate Commerce Committee Chair John D. Rockefeller IV (D-WV) expressed strong support for a Roundtable-backed bill on the internet sales tax issue.

At a Senate Commerce Committee hearing last week, Committee Chair John D. Rockefeller IV (D-WV) expressed strong support for a Roundtable-backed bill authored by Senators Mike Enzi (R-WY), Richard Durbin (D-IL), and Lamar Alexander (R-TN) [S. 1832] — saying he hopes to get it through the committee before year-end.

However, with very few days left in the congressional calendar and other urgent matters looming — such as the year-end “fiscal cliff” — Rockefeller will likely be hard pressed to find enough time for a successful markup, and to convince Majority Leader Reid (D-NV) to bring legislation to the floor. A more realistic timetable for action is next year, when Congress is expected to delve into serious debate about comprehensive tax restructuring.

There was also significant discussion at the Senate hearing about the need to minimize burdens on small business — e.g., by setting a threshold below which retailers would be exempt from sales tax collection requirements. Lawmakers also emphasized the need to avoid increasing the costs of e-commerce or discouraging economic activity — themes echoed at a House Judiciary Committee hearing a week earlier. 

Womack Speier

Co-sponsors of the “Marketplace Equity Act” (H.R. 3179) — Reps. Steve Womack (R-AR) and Jackie Speier (D-CA)

 

At the July 24 House hearing, the co-sponsors of the “Marketplace Equity Act” (H.R. 3179) — Reps. Steve Womack (R-AR) and Jackie Speier (D-CA) — testified that allowing states to tax online sales would level the playing field for online retailers and brick-and-mortar stores with a physical presence in the state. With online sales growth considerably outpacing sales at brick-and-mortar stores, they added, states will increasingly feel the impact of lost sales tax revenue.

The Womack-Speier bill would authorize states to require the collection of sales tax by online retailers, provided the state has a simplified system for calculating and implementing these taxes (Bloomberg/BNA Daily Tax Report, July 25).

In a sign of a shift among GOP governors, Tennessee Gov. Bill Haslam (R) testified on behalf of the National Governors Association in favor of legislation such as H.R. 3179, saying it is needed to level the playing field among retailers, and end what he and others call an unfair advantage for online retailers that costs states more than $20 billion in year in revenue. 

Responding to concerns that online retailers would face an enormous burden trying to figure out sales taxes for some 10,000 taxing jurisdictions, Haslam said that tax software has advanced sufficiently to be able to handle such calculations. Harper argued that these concerns could also be addressed by requiring states to simplify their sales tax rules (as included in the Womack-Speier bill).  

  Wall Street Journal

Joint letter to the editor of The Wall Street Journal on August 7 by the International Council of Shopping Centers (ICSC), Retail Industry Leaders Assn. and National Retail Federation

Another issue debated (but not resolved) at the House Judiciary hearing was where to draw the line for sales tax collection. According to Bloomberg/BNA, lawmakers were unable to agree on whether companies with less than $1 million in national sales should be exempt from collecting taxes, whether the cutoff should be $500,000, or whether all businesses should have to collect them, as some committee members said.

In a joint letter to the editor of The Wall Street Journal on Tuesday (Aug. 7), the International Council of Shopping Centers (ICSC), Retail Industry Leaders Assn. and National Retail Federation wrote that “traditional retailers have had the rug pulled out from under them” as a result of the “sales-tax loophole,” which has left them “unable to compete with the artificial price advantage enjoyed by online merchants.” They warned that “this has created a domino effect in communities throughout the nation as local stores are forced to close and jobs are lost.”  

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CAPITAL & CREDIT POLICY

Basel III Comment Deadline Extended to Oct. 22; Coalition Letter Urges Regulators to Study Impact of Proposed Rules on Non-Financial Businesses, such as Real Estate  

The Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corp. (FDIC) on Wednesday gave U.S. banks (and other stakeholders) an additional 45 days to digest — and comment on — draft regulations to implement the Basel III capital accord. The original deadline for public comment, Sept. 7, has now been extended to Oct. 22.

 2012_07_26 IMAGE - Basel III Letter

In a July 26 letter to regulators, The Roundtable and a coalition of real estate, insurance and other business advocacy groups urged regulators to extend the Basel III comment period by 90–150 days

“The comment period was extended to allow interested persons more time to understand, evaluate and prepare comments on the proposals,” the Fed said Aug. 8. The draft rules, released in late June, would apply tougher capital rules for all 7,307 U.S. banks. They would also force financial institutions to rely more on equity than debt to fund themselves, so that they are able to better withstand significant losses.

As The Wall Street Journal reported Aug. 8, “The proposal was an unwelcome surprise to small bankers struggling amid uneven economic growth, tough new rules limiting fees and technological and regulatory moves that have made larger banks more profitable.”

In a July 26 letter to regulators, The Roundtable and a coalition of real estate, insurance and other business advocacy groups urged regulators to extend the Basel III comment period by 90–150 days. The letter also called for regulators to study the potential impact of the proposed regulations on liquidity and capital formation for non-financial businesses, such as real estate.

In its 2012 Policy Agenda, released in January, The Roundtable raised concerns that the proposed new capital requirements under Basel III could “exacerbate credit challenges facing real estate and hurt broader credit capacity,” and urged policymakers to make sure the new risk calculations do not exert a drag on the reemerging securitization market. The Roundtable also said the new accord should be calibrated appropriately to avoid disproportionately higher borrowing costs for commercial real estate borrowers.

The Roundtable is pulling together a Basel III working group within its Real Estate Capital Policy Advisory Committee (RECPAC) to help assess the impact of the proposed rules and aid in developing comments for regulators. Roundtable members interested in joining this group are invited to contact Senior VP Clifton (Chip) Rodgers via email or call (202) 639-8400. 

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