- Sep 23, 2016
In a presidential election year, especially one as contentious as this, most real estate leaders have only slight hope that significant legislation will be passed by the end of 2016. Instead, many top industry groups are using the remaining months to focus on ensuring last year’s key legislation is being implemented in a positive way for real estate and to gear up for the issues they want to advocate for in 2017. They’ll also be monitoring the cumulative impact of new laws and regulations set to take effect by the end of the year and identifying possible issues they’d like to see addressed. With many concerns on their minds, several industry organizations spoke to CPE about their top legislative priorities for 2016 and beyond, and the potential impacts on the real estate industry.
Across the board, tax reform is a major issue for real estate leaders. While the Protecting Americans from Tax Hikes Act of 2015 included several tax provisions that benefited real estate—such as extending the Section 179d tax deduction for energy-efficient improvements—there are still some areas industry leaders would like to see modified.
“When the PATH Act was passed, everything was kind of lumped together,” observed Henry Chamberlain, president & CEO of the Building Owners and Managers Association International. He said that while the act revised down the leasehold depreciation schedule for tenant improvements to 15 years from the previous 39 years, which better reflects tenants’ use of the space, “we’d like to see the match-up closer to the actual useful life of the asset.” He noted that typical leases are five to 10 years. “That frees up capital to then invest back into the building or into other projects,” he noted.
The PATH Act also significantly reformed the Foreign Investment in Real Property Tax Act of 1980, otherwise known as FIRPTA, including doubling the ownership interest foreign investors can hold in a publicly traded REIT and exempting foreign pension funds altogether, allowing more capital to flow into U.S. real estate. But real estate leaders are now monitoring how the legislation is being implemented. “We want to make sure that the regulations it’s implementing are done in the most flexible and robust way possible for real estate owners, financiers and managers,” noted Jeff DeBoer, president & CEO of the Real Estate Roundtable.
Looking toward the next legislative session, real estate leaders want to participate in the tax reform debate to ensure issues relevant to the industry are understood “so nothing is done to inadvertently harm the real estate industry, which is such a big part of the economy,” DeBoer said.
International Council of Shopping Centers President & CEO Tom McGree agreed with this sentiment, adding that if a change was made to provisions like interest deduction or like-kind exchanges, which “have been an inherent part of the Tax Code for some time, it would be important first and foremost that Congress and policymakers understand the needs of our industry, and second, that we understand the pros and cons of any possible changes and the impact they could have on this industry.”
Regarding when any changes will take place, though, “everybody would recognize that getting any type of comprehensive tax reform done in the middle of an election year is unlikely,” McGee said.
The Dodd-Frank risk-retention rules set to take effect on Dec. 24 have left many real estate leaders uncertain about the credit available for their transactions.
“The multiplicity of regulations is very burdensome to financial institutions, and we think over time they’re going to restrict liquidity and credit availability,” DeBoer said.
Marty Schuh, vice president of legislative and regulatory policy for the Commercial Real Estate Finance Council, agreed, adding that the rules “could have a real effect on pricing for borrowers and investors in commercial real estate.”
Last year, a “fix” was introduced to Congress called the Preserving Access to CRE Capital Act of 2016 (HR 4620), which was passed by the House Financial Services Committee but hasn’t gone to a vote, noted Schuh. The legislation would modify the risk-retention rules to ease new requirements on the CMBS market, which has seen a decrease in new issuances this year as it faces the two- to three-year long wall of maturities, DeBoer explained.
He added that the uncertainties surrounding the rules are “slowing down the CMBS market, and that’s impeding the economy.” Both Schuch and DeBoer said the big question is whether the economy will be able to accommodate these maturing loans with the new regulations coming into play.
An ongoing issue has been marketplace fairness, which is growing in significance with the explosion of e-commerce. While brick-and-mortar retailers are required to collect sales tax at the point of purchase, online retailers are not, putting physical retailers at a disadvantage, explained Chris Mellen, president of the Institute of Real Estate Management and the vice president of the Simon Cos.
While the Marketplace Fairness Act and Remote Transactions Parity Act of 2015 were both introduced in Congress last year, “there hasn’t really been any progress as of yet,” he said.
Unsurprisingly, this is also a top legislative priority for ICSC. “There’s an inequity, or non-level playing field, between the collection of taxes in a physical environment versus in an e-commerce environment,” McGee observed. He hopes the House or Senate will introduce a bill this year—as does DeBoer.
“We’re hopeful in the short period of time left this year we can finally get this issue done, because everyone—not just brick-and-mortar retailers—is being asked to pay more in taxes because people who should be paying these taxes on purchases are not paying them.”
Real estate leaders also hope reforms to the Americans with Disabilities Act will be addressed this year. In recent years, there have been many “drive-by lawsuits where attorneys disproportionately file suit against a building where there is not specific access,” Chamberlain noted. The ADA Education and Reform Act of 2015 suggests a “notice and cure provision,” which would give property owners a 90- to 120-day period to fix the access issue. “Rather than spending the money on attorneys, let’s spend the money on better access,” he said.
IREM is also an advocate of the legislation, which includes “an education reform for government workers so they can guide commercial property owners on this,” Mellen said.
While both Chamberlain and Mellen hope progress can be made this year, the issue will likely be addressed next term.
Energy Efficiency Incentives
A major piece of legislation signed into law last year was the Energy Efficiency Improvement Act of 2015, which authorized Tenant Star—a voluntary program to encourage more energy-efficient design and use of space. The Department of Energy is now discussing how to implement the program, which DeBoer hopes will be “done as quickly and clearly as possible” so tenants are incentivized to “design, occupy and use their space in buildings in the most energy-efficient manner.”
Chamberlain agreed, adding that BOMA supports related tax incentives like the Section 179d tax deduction for energy-efficient commercial buildings. The deduction received a two-year extension as part of the PATH Act, but BOMA would like to work on “improving how the incentives can be applied to buildings so we can incentivize owners to make retrofits that drive energy efficiency.” He hopes to get the bill through this year, although he acknowledged “there’s not a lot of time to do business in an election year.”
The overall consensus was that the remainder of 2016 will likely be a time for educating industry leaders and policymakers on important issues to prepare for 2017. “When Congress comes back next year, there are serious problems and issues, from financial regulation to tax reform to energy issues, that all come into play,” DeBoer said. “We want to be prepared and be a reliable, credible source in the debate.”
Originally appearing in the September 2016 issue of CPE. Button image by Image by emarto/iStockphoto.com.