A group of eight Democratic Senators introduced legislation on July 11 that would prohibit for-profit owners of 50 or more single-family rental homes from taking depreciation or business interest expense deductions on their properties. 

“Short-Sighted Proposal”

• Senate Banking Committee Chairman Senator Sherrod Brown (D-OH), one of the bill’s sponsors, said, “big investors funded by Wall Street buy up homes that could have gone to first-time homebuyers, then jack up rent, neglect repairs, and threaten families with eviction.” Similar concerns were expressed by several cosponsors: Senator Ron Wyden (D-OR), chair of the Senate Finance Committee, along with Sens. Elizabeth Warren (D-MA), Tina Smith (D-MN), Jeff Merkley (D-OR), Jack Reed (D-RI), John Fetterman (D-PA), and Tammy Baldwin (D-WI).  (Senate Banking press release, July 11)
  
  
• Real Estate Roundtable President and CEO Jeffrey DeBoer, below, said, “Improving and expanding housing affordability is a goal we all share, and any illegal or unjust actions by landlords should not be tolerated. However, this legislation is a short-sighted proposal that will drive up housing costs for working Americans, reduce property values for existing homeowners, and further discourage new home construction.”

• “The bill deflects attention from the real, underlying causes contributing to high housing costs: inflation, labor shortages, and supply chain challenges; rising interest rates and tight credit conditions; NIMBY’ism, discriminatory zoning rules, and restrictive land-use policies; and insufficient investment in the low-income housing credit, to name just a few. Many of these factors are deep, structural challenges. Institutional investors are a convenient scapegoat and a distraction from the real work that must be done to address housing affordability,” DeBoer added.
  
  
• By denying basic business expense deductions, the Stop Predatory Investing Act would distort housing markets and create additional, restrictive policies that exacerbate the current supply/demand imbalance.
  
  
• Depreciation ensures that the cost of a capital investment is reflected in the measurement of income and recovered, for tax purposes, over the economic life of the investment. Depreciation deductions compensate property owners for the normal wear and tear that reduces the value of a structure over time. Interest expense deductions ensure that taxable income properly takes into account the cost of borrowing to invest in a trade or business.
  
  
• Depreciation and interest expense deductions are not “tax breaks” as suggested by the bill’s sponsors. (Senate Banking one-page summary)

House Tax Legislation

• Tax legislation advanced by the House Ways and Means Committee in June is unlikely to receive a vote before Congress starts its August recess.
  
  
• House Majority Leader Steve Scalise (R-LA), above, noted this week that the appropriations bills and reauthorization of the National Defense Authorization Act (NDAA), passed today in the House, are the chamber’s current priorities. “Getting the NDAA done and getting the appropriations bills are what are front and center right now. Then, we’ll really look forward to getting that economic agenda moving forward,” Scalise said. (Bloomberg Law, July 12)
  
  
• Republican Ways and Means Committee members last month approved their proposed tax legislative package along party lines, including measures on business interest deductibility, bonus depreciation, and opportunity zones. (Tax Notes, June 14 | Ways and Means Committee, June 13 and Roundtable Weekly, June 9)

Scalise added that Ways and Means Committee Chairman Jason Smith (R-MO) is still “working with other members on remaining issues with that bill.” (Bloomberg Law, July 12)

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Federal Reserve Vice Chair for Supervision Michael Barr this week said higher capital requirements for banks with $100 billion or more in assets are likely to be one of several regulatory proposals expected soon from federal banking regulators. The Roundtable has warned that such a policy “would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on (commercial real estate) asset values.” (Barr’s speech, July 10 and Roundtable letter to federal regulators, March 17)

Fed Proposals

• Barr added that the rules would be the equivalent of requiring the largest banks to hold an additional $2 of capital for every $100 of their risk-weighted assets. He also commented that the changes—including long-term bank debt requirements and adjustments to how banks measure their financial market risks—“would not be fully effective for some years” because of the formal rulemaking comment process and a lengthy transition period for implementation. (Barr’s speech, The Wall Street Journal and Axios, July 10)
  
  
• Roundtable President and CEO Jeffrey DeBoer noted during an April 6 Walker Webcast that “The concept of additional regulations and expanding liquidity are kind of counter to each other. [The financial turmoil] has to be allowed to settle through and transition. We ought to be working together and the federal government ought to be helping people transition to that new world.” (Roundtable Weekly, April 7)
  
  
• The Roundtable’s June 13 Annual Meeting featured a joint RECPAC and Research Committee meeting discussion with Senate Banking Committee Member Bill Hagerty (R-TN) on liquidity concerns and possible new regulations, along with a presentation by CBRE industry experts on  CRE conditions.

Bipartisan Congressional Concerns

• During a June 21 Senate Banking Committee hearing on President Biden’s three nominations for the Federal Reserve Board, Sen. Mark Warner (D-VA), above, shared concerns raised by his Republican colleagues Bill Hagerty (TN), Tim Scott (SC), and Thom Tillis (NC) on Barr’s agenda to increase capital requirements for banks.
  
  
• Sen. Warner stated, “I do worry, when we've got as aggressive a monetary policy as we have … that if there's not a phase-in on some of these new capital standards, we could have the perfect storm of these two entities intersecting, and dramatically decreasing access to credit, at a moment when we've got large segments of our economy, commercial real estate in particular, could really be hit hard.”
  
  
• House Financial Services Committee Chairman Patrick McHenry (R-NC) said during a June 21 hearing featuring Fed Chairman Jerome Powell that "... a massive increase in capital standards for medium and large institutions... would limit banks’ ability to lend money, exacerbating the looming credit crunch, and starving families and small businesses of the capital they need.” (Roundtable Weekly, June 23)
  
  
• The top members of the House subcommittee focused on bank regulation—Reps. Andy Barr (R-KY) and Bill Foster (D-IL)—wrote to Barr on July 7, urging him to “minimize negative impacts as we enter a phase of potential credit tightening. We must strike the right balance between safeguarding our financial system and ensuring banks of all sizes can support communities’ access to credit.” The bipartisan letter also requested a “cost-benefit analysis, including supporting data, for any rulemaking you intend to propose.” (Letter to Barr and Politico Pro, July 7)

What’s Next

• Barr added in his speech this week, “I will be pursuing further changes to regulation and supervision in response to the recent banking stress, including how we regulate and supervise liquidity. I expect to have more to say on these topics in the coming months.”
  
  
• Former Fed Vice Chair for Supervision Randal Quarles, above, on July 12 criticized the Fed’s bank capital requirements proposal. Quarles said, “It’s a mistake. It will restrict the ability of the financial system to provide support for the real economy.” (Bloomberg, July 12). Prior to Barr, Quarles contributed to the Fed’s report on the failure of Silicon Valley Bank that concluded the central bank’s supervisory approach was partially to blame for the banking crisis. (Associated Press, April 28)
  
  
• Fed Governor Michelle Bowman spoke out against tougher baking regulations on June 25, stating, “Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision.” She added, “It is abundantly clear that regulatory and supervisory reform is on the way.” (Bowman speech and Bloomberg, June 25) 

RECPAC will continue to work on Roundtable responses to potential federal regulatory proposals affecting bank liquidity and CRE. 

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As the buildings sector makes progress on reducing greenhouse gas emissions to meet global climate goals, The Roundtable and Nareit submitted comments today about proposed guidance that would create “unworkable and unattainable” standards. (RER-Nareit joint comments)

Science-Based Targets

• The real estate groups submitted their joint letter to the Science-Based Targets initiative (“SBTi”), a body with global influence. In May, SBTi released extensive draft guidance for companies in the buildings sector to set emissions reduction levels based on climate science. SBTi’s targets aim to achieve a goal of “net zero emissions” by 2050 in accord with the 2016 Paris Agreement administered by the United Nations.
  
  
• The controversial draft guidance was developed by an advisory group comprised largely of academia and environmental organizations—with minimal representation from real estate developers, owners, and financial institutions. SBTi asked stakeholders to comment on its proposal, prompting the letter from The Roundtable and Nareit.
  

• A number of real estate companies use science-based protocols to establish portfolio-wide emissions reductions targets. The Roundtable convened a working group of its Sustainability Policy Committee (SPAC) to review and assess SBTi’s draft guidance. Nareit conducted a similar process with its members. These efforts resulted in the organizations’ unified position.

RER-Nareit Position

• The Roundtable and Nareit seek a constructive dialogue with SBTi, as their letter explains. However, the real estate groups expressed concern that SBTi’s proposal would require building stakeholders to set emissions targets for sources and operations they do not control, based too heavily on estimates and speculation as opposed to actual and verifiable data.
  
  
• Key points raised in the joint comments include:
  
  
  • Building owners must have options to purchase off-site renewable energy when they set science-based targets. Real estate in dense urban areas faces major barriers to deploy solar panels and similar measures on-site, so owners should be encouraged to increase overall clean energy supplies for broader market availability.
    
    
  • There should be no categorical, across-the-board mandate to set emissions targets based on tenants’ energy use because building owners do not control operations in leased spaces. Nor do owners have general access to meter data showing how much energy a tenant uses.
    
    
  • Emissions goals should not require, in all circumstances, reporting on “embodied carbon” in materials. Manufacturers do not uniformly provide such embodied emissions data for the concrete, steel, and other products they produce—so building stakeholders should not be required to guess this information in their climate reports.
    
    
  • Full-blown building electrification is not practicable, feasible, or even desirable for occupants’ safety and comfort in all cases. SBTi should abandon its proposed ban on all new fossil fuel building installations starting in 2025.    

Why It Matters

• There is no mandate in the U.S. at the federal level for real estate companies to set science-based emissions targets. However, anticipated rules from the U.S. Securities and Exchange Commission are expected to require registered companies to report to investors on material climate-related financial risks. Those disclosures could include corporate efforts to reduce emissions following SBTi’s and similar standards. (Roundtable Weekly, March 17, March 6 and June 10, 2022).
   
• In addition, key aspects of SBTi’s proposal counter voluntary efforts underway at the U.S. Environmental Protection Agency and the U.S. Department of Energy that recognize advances in low-carbon buildings and portfolios. (Roundtable Weekly, March 3 and March 4, 2022)
  
  
• Moreover, varying and often conflicting climate mandates on buildings are proliferating at the local level. (Roundtable Weekly, Dec. 9, 2022). SBTi’s proposed approach should not gain traction in regulatory building performance standards imposed by cities and states. 

A final version of SBTi’s buildings sector guidance is expected this fall. The Roundtable will continue to track the issue, coordinate with Nareit and other allied groups, and educate policy makers as this matter develops. 

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