Real Estate Roundtable Talks Budget & Tax Policy and Accounting

  • BUDGET & TAX POLICY – As Obama, Congress Head Toward Confrontation on “Fiscal Cliff,” Business Leaders Step up Warnings About Potential Recession, Ratings Downgrade, Higher Interest Rates
  • ACCOUNTING POLICY – FASB, IASB Still Working Toward New Lease Accounting “Exposure Draft”; New Version Now Expected Out in Q1 2013, With 120-Day Stakeholder Review Period  

BUDGET & TAX POLICY

As Obama, Congress Head Toward Confrontation on “Fiscal Cliff,” Business Leaders Step up Warnings About Potential Recession, Ratings Downgrade, Higher Interest Rates

As Administration officials this week reportedly signaled that President Obama is prepared to veto legislation addressing the “fiscal cliff” if it doesn’t raise tax rates on the wealthy, a group of 15 top financial services executives yesterday warned of “very grave” consequences if policymakers fail to avert the massive tax hikes and budget increases scheduled to take effect after Dec. 31 (The Washington Post, Oct. 18-19).

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Administration officials this week reportedly signaled that President Obama is  prepared to veto legislation addressing the “fiscal cliff” if it doesn’t raise tax rates on the wealthy.

The consequences of letting the country go off the so-called cliff could include another downgrade in the credit rating on U.S. debt, significantly higher interest rates (and, thus, higher interest payments on the debt), another possible recession, and global financial instability, said the Oct. 18 letter to Obama and members of Congress. The letter’s signatories included the CEOs of Allstate, Bank of America, BNY Mellon, Citigroup, Credit Suisse, Deutsche Bank, Edward Jones, Goldman Sachs, JP MorganChase, MetLife, Morgan Stanley, Prudential Financial, State Street, UBS and Wells Fargo — all members of the Financial Services Forum.

“Another downgrade of our nation’s debt by a major rating service” — the first, unprecedented, downgrade by Standard & Poor’s came amidst the debt-ceiling standoff of July 2011 — “could lead to significantly higher interest rates,” the CEOs stated. Higher borrowing costs, in turn, “would worsen our nation’s fiscal burden and likely increase uncertainty and instability in global financial markets,” the CEOs added.

But the letter did not stop with the fiscal cliff; instead, it implored policymakers to also craft a credible deal for shoring up the nation’s fiscal challenges. As The Hill newspaper today paraphrased the CEOs: “If Washington merely kicks the can down the road on the cliff and does not come up with a way to bring down the nation’s debt and deficits, it risks losing its ‘moral authority as a global leader,’ the [CEO] group warned.”

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The Real Estate Roundtable repeatedly joined other business organizations and coalitions to urge a bipartisan solution to the debt ceiling crisis so that a downgrade could be averted – see Roundtable letter to the President and Congress, on July 12, 2011.

The Financial Services Forum’s warning about another potential debt downgrade came as a top executive for the nation’s largest bond firm, Pimco, said credit ratings firms will likely lower the rating on U.S. debt in early 2013. “The U.S. will get downgraded; it’s a question of when,” declared Pimco’s Scott Mather, adding, “It depends on what the end of the year looks like, but it could be fairly soon after that.”

Although the 2011 downgrade by S&P appeared to have little effect on global investors’ willingness to purchase U.S. debt — given its ongoing status as a relative safe haven — Moody’s has warned that it could take similar action if Congress fails to come up with a long-term debt-reduction plan before year-end.

Underscoring the sensitivity of U.S. real estate markets to broader financial, political and macroeconomic developments, the extreme volatility in equities markets that followed the 2011 downgrade prompted renewed widening of spreads in the commercial mortgage-backed securities (CMBS) market, fueling concerns that liquidity was again becoming harder to come by in commercial real estate and hurting prospects for a broader commercial real estate recovery.

Amidst the debt ceiling crisis of July-August 2011, The Real Estate Roundtable repeatedly joined other business organizations and coalitions to urge a bipartisan solution to the debt ceiling crisis so that a downgrade could be averted. In one such letter to the President and Congress, on July 12, 2011, The Roundtable and its coalition partners emphasized the importance of the U.S. government “mak[ing] good on its financial obligations and put[ting] its fiscal house in order. . . A great nation — like a great company — has to be relied upon to pay its debts when they become due.”

The letter explained that U.S. Treasury securities influence borrowing costs for companies, as well as mortgages, auto loans, credit cards and student debt, making this “a Main Street, not Wall Street issue.”

The letter also urged a plan for substantially reducing long-term budget deficits and stabilizing the nation’s debt, as well as a “long-term, predictable and binding plan” that will give businesses “confidence that, in the absence of a crisis, our government will not reverse course and return to large deficit spending.”

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In a separate letter, on July 28, 2011, The Roundtable and 114 other U.S. organizations urged the House to extend the debt limit and avoid a default on obligations of the United States.

In a separate letter, on July 28, 2011, The Roundtable and 114 other U.S. organizations urged the House to extend the debt limit and avoid a default on obligations of the United States. The signatories added that they “remain extremely concerned about the level of the federal debt and large annual budget deficits and remain committed to working with you and the Administration to address our Nation’s fiscal challenges.”

Yesterday’s letter from financial industry CEOs to U.S. policymakers reportedly is part of a general escalation of business community efforts to spur a bipartisan deal to avoid the year-end fiscal cliff, including the Washington-based “Fix the Debt” campaign. Among its supporters is JPMorgan Chase’s Jamie Dimon, who has pledged to do “whatever it takes” to push lawmakers toward an agreement averting the massive tax increases and steep federal budget cuts scheduled to take place in early January.

“Just take the fiscal cliff off the table. Some of the potential outcomes are very bad, and we shouldn’t take that chance,” Dimon said.

Given the pressure lawmakers are under to cut deficits and find revenue offsets — and the potential for economic dislocation from tax restructuring — The Roundtable will closely monitor lawmakers’ efforts during the post-election “lame duck” session.

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ACCOUNTING POLICY

FASB, IASB Still Working Toward New Lease Accounting “Exposure Draft”; New Version Now Expected Out in Q1 2013, With 120-Day Stakeholder Review Period

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FASB and IASB have delayed the release of a new “exposure draft” of their controversial lease accounting standards until Q1 2013.

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), which had been planning to release an entirely new “exposure draft” of their controversial lease accounting standards changes before the end of this year, have now pushed the release of the new draft into the first quarter of 2013.

The lease accounting overhaul issue first erupted in Aug. 2010, when the two organizations proposed new lease accounting rules that would dramatically change the way businesses of all kinds account for their leasing activities — while forcing income-producing real estate to be re-characterized as a financing business on financial statements.

After many twists and turns — and an outpouring of concern from The Roundtable and other stakeholders — FASB and IASB last fall agreed to exempt at least some commercial property owners from the new requirements, while still requiring tenants (lessees) to capitalize real estate leases on their balance sheets. [Roundtable Weekly, Oct. 28, 2011]

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See the summary of FASB’s Sept. 20 decisions  

The Roundtable is concerned that this proposed requirement could discourage business tenants from leasing commercial space, or could prompt them to seek shorter lease terms without renewal options, or contingent rents, to minimize the non-cash lease costs. The proposed changes could also jeopardize income property fundamentals, loan structures, property valuations, financing covenants, and the underlying economics of commercial real estate — just as the industry is beginning its slow and uneven recovery from the Great Recession, property devaluation and mortgage refinancing challenges.

This past May, 61 House lawmakers wrote to FASB, warning that its proposed changes to lease accounting standards could have “disastrous consequences” for the real estate industry, if enacted [Roundtable Weekly, June 1]. In an earlier (April 16) letter to House colleagues on this issue, Reps. John Campbell (R-CA) and Brad Sherman (D-CA) cited estimates that, under current terms, “businesses would be required to capitalize over $1.1 trillion in leased real estate assets onto their balance sheets. For businesses leasing space, especially small businesses, this will change these leases into a major liability.”

According to a summary of FASB’s Sept. 20 decisions, the revised exposure draft is tentatively set to be issued during the first quarter of 2013, with a 120-day comment period.

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Source:  The Real Estate Roundtable

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