March Issue: Law & Policy–Center Stage

Eight critical policy pieces for 2015.

With a Republican-controlled House and Senate, the industry has reason for optimism in 2015. After the lights were turned off in 2014 without a TRIA reauthorization, the 114th Congress quickly got a move on, ultimately getting a refined six-year extension to President Obama’s desk for signature on Jan. 12. With that hurdle in the past, the industry has no shortage of new policy to address.

Clues on future fields of battle lie in President Obama’s proposed budget. The budget, for instance, proposes Capping 1031 Like-Kind Exchanges at $1 million. Doing so would remove a great deal of the flexibility required to manage a real estate portfolio. According to Dan Wagner, vice president of government relations at Inland Real Estate Group and president-elect of the Chicago Association of Realtors, educating Congress about 1031 exchanges and why they are important is a necessary step. “The last time I was walking the Hill, I was talking to some young Congressional staffers. I said, ‘I would like to speak with you about 1031 exchanges.’ Their response: ‘10:31? No, it’s 11 o’clock.’ We have a lot of work to do.”

Carried Interest and Capital Gains continue to be an issue. “The President wants to increase the top capital gains rate to 28 percent, up from 23.8 percent, which includes the 20 percent capital gains rate and a 3.8 percent Medicare Tax for the Affordable Care Act,” said Beth Wanless, senior manager of government affairs at IREM. “He has also called for the reclassification of carried interest from capital gains to ordinary income. I have worked at IREM for five years, and every year we fight this furiously.”

On a positive note, the budget does propose the permanent extension of the 179d Energy Efficient Commercial Buildings Deduction, which also includes multi-family assets of four or more stories. This is a bipartisan issue that Congress is likely to support, especially now that income redistribution is a talking point on both sides of the aisle, noted Scott Muldavin, CRE, FRICS, president of The Muldavin Co. “Energy-efficiency employment can reach deep down into communities. It is job creation and an inexpensive way to address energy needs.”

While it isn’t in Obama’s proposed budget, the bipartisan Tenant Star proposal passed the Senate as an amendment to the Keystone XL Bill in late January. The program builds off the success of Energy Star, and would encourage commercial tenants and building owners to lower energy use. “We are in support of Tenant Star,” Wanless said. “We are definitely for saving money, and our members like the voluntary nature of it.” While the Keystone XL pipeline extension is currently teed up for a veto, the Tenant Star program will likely come into play at some point. Look for socially conscious institutional investors to target high-scoring assets.

Continuing on the topic of sustainability, the EPA and U.S. Army Corps of Engineers have proposed rules to clarify the types of waterways covered under the Clean Water Act. This is expected to place more waterways under their authority, and the commercial real estate industry is generally against it. But Muldavin thinks the issue has been overblown. “Environmental initiatives have a way of contributing tremendous value to real estate,” he said. “Sure, people on the margins can be hurt, and companies should look at their portfolios and analyze them to make sure there are no impacts. But fundamentally, the improvement of water quality and water assets is a real plus for real estate.”

Industry organizations will continue to rally for the collection of an Online Sales Tax. Though a late push to get the Marketplace Fairness Act through the House failed in December 2014, advocates will bring the issue back to the Hill this year under the argument that an online sales tax is not a new tax but one already owed to the state. “We are not talking about protecting buggy whip companies; we are just saying let the marketplace be fair,” Wagner said.

A new Federal Aviation Administration framework for the regulation of small unmanned aircraft systems (a.k.a. drones) should be on every industry member’s radar. Restrictions would require commercial drone pilots to remain in sight of their craft, refrain from night operation and fly no higher than 500 feet. This could prevent marketers from showcasing what penthouse views would look like in a new high-end condo product. But ultimately safety comes first. “When you consider the concept of delivering products from Amazon to people’s homes—and you could have tens of thousands of drones flying around—you can see why there are safety concerns,” Wagner said. “While we want the best for our members, we want to make sure that the technology doesn’t get ahead of the regulations.”

Another technology sector issue to keep an eye on is Real Estate Crowdfunding. An SEC agenda has an October 2015 timeframe for final rules for Titles III and IV of the JOBS Act. Title III allows non-accredited investors to participate in offerings as high as $1 million in size. Title IV, or Regulation A+, would expand the size of the mini IPOs from $5 million up to $50 million. Once rules are finalized and filed, there is a 60-day period before businesses can use the new provisions. “I think the space will evolve as the regulations catch up to the technology,” Muldavin said. ”I even had a major insurance company ask me to take a look at crowdfunding as a potential source of equity capital. It is starting to catch their attention.”