Responding to a request for input from the chairs of the House Ways and Means Committee and Ways and Means Tax Policy Subcommittee, The Real Estate Roundtable submitted comments on the pending expiration of the Tax Cuts and Jobs Act of 2017 and ways in which tax policy can support long-term investment, economic stability, and the creation of affordable housing. (Letter, Oct. 2)

Roundtable Recommendations

The letter from Roundtable President and CEO Jeffrey DeBoer urges lawmakers to ensure that any major tax legislation in 2025 retain or include:

• The reduced tax rate on long-term capital gains. The capital gains rate is critical for driving long-term real estate investment and fostering job creation. Raising capital gains rates, taxing unrealized gains, or double-taxing gains at death would deter entrepreneurship, increase costs, and reduce economic mobility.

• Tax fairness for partnerships and pass-through entities. Half of the nation’s tax partnerships are real estate-related, making these provisions vital to the industry's success.  Section 199A, which provides a 20% deduction on pass-through business income (including REIT dividend income), allows privately held businesses to compete on a level playing field with large corporations.

• Like-kind exchanges. Section 1031 allows for the deferral of capital gains through real estate exchanges and helps gets languishing properties into the hands of new owners who will invest in, and improve, them.  Retaining section 1031 is vital to promoting reinvestment in communities, creating opportunities for minority and small business owners, and improving struggling properties.

• Tax rules that encourage, rather than deter, foreign investment in U.S. real estate. Targeted changes to the outdated and discriminatory Foreign Investment in Real Property Tax Act (FIRPTA) could unlock capital for large-scale real estate and infrastructure projects that create jobs and spur economic development.

• Incentives for affordable housing, energy efficiency, and community revitalization. The Roundtable supports expanding the low-income housing tax credit (LIHTC), improving the real estate-related clean energy tax provisions in the Inflation Reduction Act, and introducing new incentives for the conversion of obsolete commercial buildings into affordable housing. The letter also calls for a long-term extension of Opportunity Zone (OZ) tax incentives and preserving carried interest tax rules that recognize and reward sweat equity with capital gains treatment.

The Roundtable is committed to working with lawmakers to ensure the U.S. maintains a competitive tax code that encourages capital formation, rewards entrepreneurial risk-taking, and supports critical policy objectives, including accessible and affordable housing and safe and healthy communities.

Hurricane Helene wreaked havoc along the east coast, causing widespread flooding and over $20 billion in damages to homes, businesses, and infrastructure. The storm underscored the critical need to reform the National Flood Insurance Program (NFIP), which is set to expire in December.

Hurricane Helene Damages

• The frequency of severe weather events continues to rise, yet many communities are underinsured or entirely without flood coverage.

• Without a robust, long-term NFIP, property owners face escalating risks from future storms, leaving both homeowners and commercial real estate properties vulnerable.

• The NFIP is the primary source of flood coverage in the U.S., relied upon by 4.7 million properties in high-risk areas. (Reuters, Oct.3)

• Moody’s Analytics estimates the storm caused $15 billion to $26 billion in property damage, as well as an additional $5 billion to $8 billion in lost economic output. (Washington Post, Sept. 29)

• Moody's RMS Event Response is preparing a more precise estimate of the insured losses caused by Hurricane Helene that will be released in the coming weeks. (Fox Business, Sept. 30)

Roundtable Advocacy

• The Roundtable, along with nine industry organizations, wrote to Congress last week urging them to extend the National Flood Insurance Program (NFIP) before its Sept. 30 expiration. (Letter)

• As part of the CR package passed last week, the NFIP was extended until Dec. 20.

• Congress has enacted over 31 short-term extensions of the NFIP. The Roundtable has been a long-standing supporter of a long-term reauthorization of the NFIP with appropriate reforms.

• A long-term reform and reauthorization of the NFIP is essential for residential markets, overall natural catastrophe insurance market capacity, and the broader economy.

The Roundtable, along with its industry partners, continues to work constructively with policymakers and stakeholders to address commercial insurance gaps and rising costs. The Roundtable will continue advocating for targeted policy solutions that can help alleviate increased insurance costs for housing providers nationwide.

Cities across the U.S. are increasingly embracing office-to-residential conversions as part of the solution to address persistent housing shortages and high office vacancy rates driven by remote work policies. Many local governments in key metro areas have accelerated incentive programs and made major progress, bringing thousands of new homes into the development pipeline with more to come.

Challenges and Incentives

• Property conversions can be a cost-effective means to re-purpose certain CRE assets to provide new, affordable housing supply, revive struggling city centers and small businesses, restore local revenue sources, and reduce energy consumption. While costs can vary depending on the building and other project factors, at least one recent property conversion is estimated to cost 40% less than a wholly new apartment building. (Morning Brew, Sept. 24)

• Office-to-residential conversions present a path to revitalizing downtown areas, but regulatory and financial hurdles must be addressed to unlock their full potential. (ULI, Sept. 27)

• Various cities are actively pursuing policies to incentivize these conversions through zoning changes and tax incentives:

• New York City proposed a $400 million initiative to support the conversion of older office buildings into residential units. The "City of Yes for Housing Opportunity" plan aims to create 500,000 new homes over the next decade by legalizing zoning conversions for buildings constructed before 1990 in areas where residential use is allowed, and expands the types of housing commercial buildings can be converted into.

• Washington, D.C. has implemented the Housing in Downtown program, designed to catalyze new residential development through a 20-year tax abatement for commercial-to-residential conversions, with expectations to deliver 6.7 million square feet of residential use. (BisNow, Sept. 19)

• Minneapolis took steps last week to simplify its office-to-residential conversion process by passing an ordinance that streamlines the review process, reduces project timelines, and pauses certain affordability requirements for five years. (CBS, Sept. 24)

• San Francisco has seen limited success despite efforts to incentivize conversions. Only two projects totaling 165 units are underway, prompting Mayor London Breed and Supervisor Matt Dorsey to propose eliminating impact fees and affordable housing requirements for downtown conversions in key areas. (GlobeSt., Oct. 1)

• California faced a setback this week when Governor Gavin Newsom vetoed a bill aimed at expediting the conversion of vacant office buildings into residential or mixed-use spaces. The legislation would have mandated by-right approval for adaptive reuse projects, streamlining the review process by bypassing environmental reviews and local zoning approvals. (GlobeSt., Oct. 1)

• This week on the Walker Webcast, Dr. Peter Linneman (Leading Economist, Professor Emeritus, The Wharton School of Business) predicted there will be a push for back-to-office policies after the November elections, regardless who gains control of the White House. (Walker Webcast, Oct. 2)

Climate Risks and Opportunities

• Office-to-residential conversions are recognized universally as having positive climate impacts because they reduce “embodied” emissions in concrete, glass, and other construction materials relative to new projects built from the ground up. (Arup, Dec. 2023; Urban Green, Dec. 2023; NAIOP (April 2023)).

• Expanding the use of clean energy tax credits, as proposed in the IRA, could further incentivize conversion projects, helping to reduce long-term operating costs and improve building resilience.

• With tax policy debates at the forefront in Washington, The Roundtable submitted recommendations to Congressional tax leaders this week (see Tax story above), urging enhancements to the Inflation Reduction Act’s clean energy tax provisions in any future legislation. (Letter, Oct. 2)

• The recommendations included expanding energy-efficient tax credits to cover low-emissions building equipment and allowing developers to transfer the 45L and 179D credits, which would help reduce housing costs and boost energy efficiency.

• The Roundtable has also encouraged federal agencies to make key improvements to their existing low-interest loan programs to better support property conversions that support high-density, transit-oriented housing. (Roundtable Weekly, April 19)

• A recent Morningstar report highlighted the growing importance of ESG considerations in real estate investment, with 67% of global asset owners acknowledging that ESG factors have become more material over the past five years. (CREFC, Oct. 1)

The Roundtable will continue to advocate for support at the federal level, such as the bipartisan Revitalizing Downtowns and Main Streets Act (H.R.9002) introduced in July, to create market-based tax incentives for office-to-residential conversions. These projects offer a promising but complex solution to both the commercial real estate market’s transformation and the housing shortage. With proper support, they could reshape and rebuild cities across the country.