A bipartisan $79 billion tax package overwhelmingly approved this week by the House still faces potential hurdles in the Senate. The bill contains Roundtable-supported measures on business interest deductibility, bonus depreciation, and the low-income housing tax credit (LIHTC).  (Associated Press, and Wall Street Journal, Jan. 31 | The Hill, Feb. 2)

Industry Support for House Bill

• On Wednesday, the House voted 357-70 to pass the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024). House GOP leaders gained additional support for the bill by allowing a floor vote next week on the SALT Marriage Penalty Elimination Act (H.R. 7160), which would increase the cap on state and local tax deductions to $20,000 from $10,000 for married couples. (PoliticoPro and TaxNotes, Feb. 2)

• House Ways and Means Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Ron Wyden (D-OR) negotiated the larger tax package. Sen. Wyden and senior congressional staff discussed the legislation last week with Roundtable members during The Roundtable’s all-member 2024 State of the Industry Meeting in Washington. (Roundtable Weekly, Jan. 26)

• Last Friday, The Roundtable joined the National Multifamily Housing Council (NMHC) and a large coalition of housing and other real estate groups in a letter to Congress in support of the tax bill.  The letter focused on the bill’s important improvements to the low-income housing tax credit, which will significantly increase the construction and rehabilitation of affordable housing over the next 3 years. (Coalition letter, Jan. 26)

Tax Measures Face Senate Scrutiny

• In the Senate, the House-passed tax bill faces an uncertain path forward. Senate Finance Committee Ranking Member Sen. Mike Crapo (R-ID) and other Republican Senators have raised concerns regarding the lack of a work requirement for the child credit, the cost, the proposed pay-for, and other aspects of the bill. Senate Minority Whip John Thune (R-SD) added the bill would not be able to clear a possible Senate filibuster without amendment votes. (The Hill, Feb. 2)

• Provisions in the House tax bill affecting real estate include:
  
  
  • Low-Income Housing Tax Credit
    A Roundtable-supported three-year extension (2023–2025) of the 12.5 percent increase in LIHTC allocations to states. The bill also reforms LIHTC's tax-exempt bond financing requirement, which will allow more affordable housing projects to receive LIHTC allocations outside of the state cap.
    
    
  • Business Interest Deductibility
    A retroactive, four-year extension (2022–2025) of the taxpayer-favorable EBITDA standard for measuring the amount of business interest deductible under section 163(j). The changes do not alter the exception to the interest limitation that applies to interest attributable to a real estate business.
    
    
  • Bonus Depreciation 
    Extension of 100 percent bonus depreciation through the end of 2025. As under current law, leasehold and other qualifying interior improvements are eligible for bonus depreciation. In 2026, bonus depreciation would fall to 20 percent and expire altogether after 2026.  

Other provisions in the agreement include reforms to the child tax credit, the expensing of R&D costs, disaster tax relief, a double-taxation tax agreement with Taiwan, and a large pay-for that creates significant new penalties for abuse of the employee retention tax credit (ERTC) rules and accelerates the expiration of the ERTC.

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The Real Estate Roundtable (RER) and Nareit submitted comments today to the U.S. Department of Energy (DOE) on its draft definition for Zero Emissions Buildings (ZEB). DOE’s initiative would impose no federal mandates while showing U.S. leadership on climate policy. (Joint comments cover letter and addendum | Roundtable Weekly, Jan. 5)

A “Path to ZEB”

• The ZEB national definition aims to set voluntary criteria that could help building owners provide auditable, consistent statements to investors, tenants, and policy makers about long-term aspirations for a building's decarbonization. (DOE announcement | National Definition Draft)

• The RER/Nareit comments emphasize that few buildings today could meet zero emissions status. Rather, the ZEB definition can be a guideline to support lifecycle investments when boilers, water heaters, and other systems reliant on fossil fuels reach the end of their lives after years of use. (Joint comments cover letter and addendum)

• Concrete actions that owners can take now to show an asset is “on the path” to zero emissions status are key to ZEB’s success as a long-term goal.

• The joint comments urge DOE to recognize “NextGen”—the imminent label for low-carbon buildings from the Environmental Protection Agency (EPA)—as the intermediate step for a building that aspires to reach ZEB status.  

• EPA plans to make NextGen building certifications available later this year. EPA unveiled final NextGen criteria, also voluntary, at a meeting of RER’s Sustainability Policy Advisory Committee (SPAC) last week in Washington, D.C. (Roundtable Weekly, Jan. 26 and EPA’s Presentation on NextGen to SPAC)  

Comments on the National ZEB Definition

Topline points from the RER/Nareit comments (cover letter and addendum) include:

• ZEB should provide ambitious but attainable policy for individual buildings and portfolios, residential and commercial, across product types.

• DOE’s national definition should be leveraged to bring consistency and uniformity to the patchwork of building related climate programs, which are imposed by state and local performance standards and pushed by international frameworks. (Roundtable Weekly, Sept. 15 and RER’s Climate and Energy Priorities, Jan. 2024)

• DOE should not re-invent the wheel. It should align the ZEB definition with the ecosystem of federal data, methods, and guides that already pertain to buildings.

• ZEB’s general nationwide definition must consider regional variables such as the climate and electric grid conditions pertinent to where a building is located.

• The definition’s success depends on consistent methods for building owners to measure energy use and emissions. ZEB must reflect metrics tracked in Portfolio Manager, EPA’s free online software. (Roundtable Weekly, Sept. 15 and EPA’s Portfolio Manager Upgrade Project)

• A “zero” emissions standard requires a reasonable exclusion of emissions from emergency power generators. This exclusion to protect health and safety is necessary for building operations to continue when the electric grid fails.

• Many buildings have physical and regulatory restrictions that preclude onsite solar panels, wind turbines, and battery storage. DOE’s draft correctly permits valid and credible “market-based” measures, such as the purchase of renewable energy certificates (“RECs”), to meet the definition’s renewable energy criteria.

A final ZEB definition is expected later this year. The real estate sector also awaits final climate risk corporate disclosure rules this spring from the U.S. Securities and Exchange Commission. (Roundtable Weekly, Jan. 12)

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On Jan. 30, The Real Estate Roundtable urged the Florida Department of Agriculture and Consumer Services to consider several recommendations on implementing a new law that could have negative consequences for foreign real estate investment in the state. Twenty states have enacted restrictions on foreign investors in real estate or agricultural land, eight states are considering similar measures, and others are exploring the issue. (Roundtable letter)

Restrictions on Foreign Investment in U.S. Real Estate

• The Florida agency is considering various aspects of the proposed rule, published on Sept. 21, which implements State Senate Bill 264 (SB 264). The law aims to limit and regulate the sale and purchase of certain Florida real property by “Foreign Principals” from “Foreign Countries of Concern.”

• The Roundtable’s Jan. 30 letter commended the national security intentions of the Florida measure yet emphasized that the technical language of SB 264 is much broader in scope than the publicly stated intent of the law. The Roundtable also offered several recommendations to help achieve the law’s stated goals without discouraging U.S.-managed investment funds from pursuing investment opportunities in Florida.

• Real estate and agricultural land are a critical element of Florida’s economy, with state property taxes contributing over 18% of its overall tax revenue. If legal language in SB 264 is not corrected, implementation of the law could have unintended and negative consequences for investment in Florida and the state’s economy.

Roundtable Recommendations

The Real Estate Roundtable’s concerns with Section 204 (692.202) of SB 264 include:

• The new law may prevent U.S. investment funds, controlled and managed by U.S. nationals, from pursuing investment opportunities in Florida if there is any level of investor participation in the fund from countries of concern like China. Non-U.S. investors routinely subscribe for small, generally passive minority interests in these funds. These third-party investors do not have the right to participate in the management of the funds in any way or exercise control over the partnership or its underlying investments.

• A certain interpretation of a de minimis exception available for investment funds controlled by U.S. registered investment advisers could nullify the exception’s application to many different types of private funds controlled by U.S. asset managers that invest in Florida real estate.

• Clarification is needed about the definition of a “controlling interest” that impacts exceptions to the law based on an investor’s meaningful ownership or influence. (SB 264 text).

• In September 2023, the Florida Department of Commerce proposed a positive clarification to a different section of the foreign investment law in response to a previous Roundtable request. RER is hopeful that its current request for further clarification of Section 204 will also be considered during the rulemaking process. (See highlighted areas in the Notice of Proposed Rule)

This week’s letter from Roundtable President and CEO Jeffrey DeBoer urged the Florida agency to consider the impact of their interpretation and implementation effort carefully, so that they do not inadvertently prohibit major U.S. investments that are safe from control by foreign countries of concern. Clear legal clarifications to SB 264 can continue to promote safe real estate investment that encourages economic growth without sacrificing the security or economic interests of Florida.

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A group of seven key Democrats from the House Appropriations Committee on Jan. 22 urged Securities and Exchange Commission (SEC) Chair Gary Gensler to exempt real estate assets from a proposed “Custody” rule. The proposal would fundamentally change the ownership and transfer rights of real estate, and impose severe investment limitations on advisory clients. The congressional letter supports The Roundtable’s strong opposition to the rule. (Congressional letter)

Proposed “Qualified Custodian” Layer 

• The SEC’s Safeguarding Advisory Client proposal would inject significant confusion into well-established transaction protections, rules, and procedures governing real estate transactions by imposing a new layer of unclear and unnecessary oversight. (SEC Rule proposal)

• Current law (the “Custody Rule”) under the Investment Advisers Act of 1940 requires an investment adviser to maintain clients’ funds and securities with a qualified custodian. The new proposed SEC rule would expand this requirement to maintain all advisory client assets with a qualified custodian. It is not possible to maintain other physical investments such as real estate with a qualified custodian.

• The letter, led by Rep. Joseph Morelle (D-NY), noted the SEC has acknowledged that real estate assets may not be easily subject to theft or loss and therefore may not need safeguarding protections. Additionally, the letter states, “The ownership of a real estate asset is tracked by mortgages and deeds recorded by municipalities, further decreasing the likelihood of theft.”

• The House Democrats also emphasized that the SEC’s proposal would materially inhibit investors’ access to real estate investment strategies through an advisor. The additional layer of unnecessary oversight would also compound pressures on residential and commercial real estate markets, which are currently constrained by a lack of affordable housing, high interest rates, and increased office vacancies.

Real Estate Exemption

• The Appropriations Committee members’ letter requested “the Commission exclude real estate from the scope of any final rule.” They also stated that the Commission should not place additional pressure on residential and commercial real estate markets.

• An Oct. 30, 2023 letter from Real Estate Roundtable President and CEO Jeffrey DeBoer to the SEC reiterated the current legal protections that promote the safe-keeping of real estate assets held in advisory accounts or funds. DeBoer urged the SEC “… in the strongest possible terms to exclude real estate from the scope of any final [Safeguarding] rule,” citing the ample set of existing protections that prevent real estate assets from fraudulent transfer.  (Roundtable Weekly, Nov. 3, 2023)

• The Roundtable and a diverse group of 25 trade associations previously wrote to SEC Chair Gary Gensler on Sept. 12, 2023 to oppose the Custody Rule proposal and explain the negative impacts it would have on investors, market participants, and the financial markets. 

Fed and OCC Voice Concerns

• Federal Reserve Chair Jerome Powell and acting Comptroller of the Currency Michael Hsu recently expressed concerns over the SEC's proposed expansion of existing custody regulations. (PoliticoPro, Feb. 2)

• Powell and Hsu responded to a Nov. 1 inquiry from Rep. Andy Barr (R-KY), who chairs the House Financial Services Committee Subcommittee on Financial Institutions and Monetary Policy. The Fed and OCC leaders stated that extending the SEC custody proposal to assets beyond "funds and securities" would require a significant change in custody practices at depository institutions.

• Both regulators said their agencies are engaged with the SEC about the proposal. (Letters from Powell and Hsu via PoliticoPro)

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) Custody Rule Working Group met with the SEC’s Division of Investment Management last November about the proposal and developed The Roundtable’s comments. Details about RECPAC’s next meeting this spring in New York City are forthcoming.

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