Author: Trey Jackson

GOP Speaker Votes Stymie Start of House Session in Divided 118th Congress

Posted on by Trey Jackson

14th Vote for House Speaker 2023

The protracted vote process for Republican House Speaker this week stalled the start of the new GOP House majority in a narrowly divided 118th Congress, portending difficulties ahead for policymakers to reach agreement on raising the debt limit this summer and passing FY24 funding for the government by Sept. 30. This speaker election is the longest since 1859. (Semafor, Jan. 6 | The Hill, Jan. 5 | Bloomberg Law, Jan. 3)

House Challenges Ahead U.S. Capitol evening

  • Until a House speaker is elected, new representatives cannot be sworn in, lawmakers cannot introduce bills, and committee chairs (including leadership of the important tax-writing House Ways and Means Committee) cannot be confirmed. (BGov, Jan. 6 and ABC News, Jan. 5)
  • Sen. John Cornyn (R-TX), an adviser to the Senate GOP leadership team, said raising the debt limit with a slim, five-seat Republican majority in the House that can be leveraged by a small group of staunch conservatives, “will probably be the single biggest challenge the House will have.” (The Hill, Jan. 5)
  • Failure to raise the U.S. debt limit would lead to a first-ever default, causing financial chaos in the global economy. In 2011, an impasse between Republicans and President Obama over increasing the debt limit led to a temporary downgrade of the credit of the United States. The crisis ended after an agreement was reached to cut more than $2 trillion in spending over a decade. (New York Times, Dec. 9, 2022 and Washington Post, Dec. 5, 2022 | Congressional Research Service, Nov. 22, 2022)
  • Additionally, funding for the government expires on Sept. 30, the end of the federal fiscal year. A legislative standoff on spending priorities for FY24 after Sept. 30 could lead to either a “Continuing Resolution” to fund the government programs at current levels or a partial shutdown. (CQ, Dec. 29, 2022)

The Regulatory Front

SEC logo - image

  • The new Republican majority in the House is expected to bring intense oversight of government programs funded by the Inflation Reduction Act (IRA) passed by Congress in August—and increased scrutiny of proposed regulations that could impact commercial real estate. (Roundtable Weekly, Aug. 12, 2022)
  • The IRA included nearly $370 billion in climate spending—the largest federal clean energy investment in U.S. history—with measures important to CRE. [See Roundtable Fact Sheets on the IRA & CRE: Clean Energy Tax Incentives (Sept. 20) and Revenue Provisions (Aug. 17)]
  • The Real Estate Roundtable submitted extensive comments to Treasury and the IRS on Nov. 4 that address various clean energy tax incentives in the IRA. (Nov. 4 letter and Roundtable Weekly, Aug. 12)
  • The Roundtable also plans to submit comments by Jan. 18 to the Environmental Protection Agency on EPA federal grant programs that could impact CRE.

  • Securities and Exchange Commission (SEC) climate disclosure regulations are now expected by April. The proposed rules would require all registered companies to disclose material financial risks related to climate change, and may include new disclosure requirements for “Scope 3” GHG emissions. The Roundtable submitted extensive comments to the SEC about the proposal on June 10. (Roundtable Weekly, June 10, 2022)

Policymaking in the 118th Congress and regulatory proposals affecting CRE will be among the topics discussed during The Roundtable’s Jan. 24-25 State of the Industry Meeting in Washington, DC.

#  #  # 

Washington, DC Mayor Reiterates Roundtable’s Call for Federal Personnel Return-to-Work

Posted on by Trey Jackson

DC Govt Office building

Washington, DC Mayor Muriel Browser this week reiterated views expressed by The Real Estate Roundtable to President Biden about getting more federal workers back to the workplace and converting underutilized commercial real estate spaces into affordable housing. (ABC News, Jan. 2 and Roundtable letter, Dec. 12, 2022)

Federal Employees & Remote Work

DC Mayor Muriel Bowser

  • “The federal government represents one-quarter of D.C.’s prepandemic jobs and owns or leases one-third of D.C.’s office space,” Bowser, above, said in her third inaugural address on Jan. 2. “We need decisive action by the White House to either get most federal workers back to the office most of the time, or to realign their vast property holdings for use by the local government, by nonprofits, by businesses and by any user willing to revitalize it.” She added that converting office space into housing is the key to unlocking the potential of a reimagined, more vibrant downtown. (MarketWatch, Jan. 4)
  • Prominent DC office landlords sent a letter on Nov. 28 to the District’s chief financial officer about eroding local market conditions, including increased vacancy rates, lackluster leasing activity, equity flight, and a financing drought—especially for assets with high levels of vacancy. The landlords warned that DC may face a significant loss of tax revenue that could threaten the city’s fiscal health, and that other cities are experiencing similar conditions. (Commercial Observer, Nov. 29 and Bisnow, Nov. 28)     

  • A recent federal employee survey from the U.S. Office of Personnel Management reports that about 42% of federal employees “telework” at least a few days per week.
  • The federal government maintains facilities in 2,200 communities, influencing local leasing activities, property values, and surrounding small businesses. (Roundtable Weekly, Dec. 16, 2022)
  • Federal proposals aimed at encouraging more Americans back to the workplace, including enhanced child- care and eldercare benefits, are under consideration as the administration formulates its 2023 economic agenda. (Wall Street Journal and The Hill, Dec. 20)

Roundtable View

Virtual SOI 2022 DeBoer and Fish

  • Real Estate Roundtable Chair John Fish, above right, and President & CEO Jeff DeBoer, left, wrote to President Biden last month about the consequences of federal agencies’ promotion of permanent remote work—and how remote work magnifies the ongoing, harmful economic impacts on cities, local tax bases, and small businesses. (Roundtable Weekly, Dec. 2 and Dec. 16, 2022)
  • Roundtable Chair John Fish also recently responded to plans by the state of Massachusetts to vacate at least 355,000 square feet of its office footprint. Fish told The Boston Globe on Dec. 27 that government agencies at all levels should consider the effects on small businesses and property taxes when evaluating their back-to-office policies.
  • The Roundtable comments also expressed supported legislation that could help facilitate “the increased conversion of underutilized office and other commercial real estate to much-needed housing.” The letter stated that incentives for conversion projects could be modeled on the rehabilitation tax credit as a cost-effective means to increase the housing supply, create jobs, and boost the local tax base.

How cities are responding to the impact to hybrid work arrangements will be one of several topics that Miami Mayor Francis Xavier Suarez, who also serves as president of the U.S. Conference of Mayors will discuss with Roundtable members at our Jan. 24 State of the Industry Meeting in Washington.

#  #  # 

Treasury Dept. Issues New Rules on Taxation of Foreign Investment in U.S. Real Estate

Posted on by Trey Jackson

Foreign Investment in Real Property Act - book

On December 28, Treasury and the IRS released new tax regulations affecting foreign investment in U.S. real estate. 

FIRPTA

  • Among the changes, a proposed rule would repeal a long-standing private letter ruling that foreign investors have relied on when structuring inbound investments. 
  • Under current law, shareholders of domestically controlled REITs are not subject to the Foreign Investment in Real Property Tax Act (FIRPTA)—a statutory regime that subjects foreign investors to capital gains tax on their U.S. property investments. 
  • The proposal, if finalized, would expand the reach of FIRPTA by denying a REIT’s status as domestically controlled if a U.S. corporate shareholder of the REIT is foreign-owned. In other words, the rule would look through a domestic C corporation that owns the REIT, even if the C corporation is a U.S. taxpayer that pays U.S. income tax. 
  • The proposed regulation surprised foreign investors and real estate fund managers who have relied on a 2009 IRS private lettering rule, which held that a domestic C corporation that owns shares in a REIT is a U.S. owner for purposes of determining whether the REIT is domestically controlled. 
  • The proposed rule appears to conflict with policies underlying FIRPTA-related ownership attribution changes enacted in the 2015 PATH Act.  As a practical matter, the tax consequences of the proposal are retroactive because they would apply to existing investments made years ago. (Weil Tax Alert and Skadden Insights)

Additional Provisions & Regulations

Treasury Department

  • Other provisions in the proposed regulations are more favorable. For example, they include rules that allow a sovereign wealth fund to preserve the tax exemption applicable to foreign governments if the fund has only a minority, non-controlling interest in a U.S. real estate business. 
  • Simultaneously, Treasury also released final regulations last month related to the FIRPTA exemption for foreign pension funds, which the Roundtable worked to enact in 2015. The final regulations are largely positive and should facilitate even greater investment in U.S. real estate by qualified foreign pension funds. 

The Real Estate Roundtable’s Tax Policy Advisory Committee (TPAC) has created a working group to develop formal comments and respond to the recent Treasury releases.

#  #  #

Hybrid Work Arrangements Impacting Office Vacancy Rates

Posted on by Trey Jackson

San Francisco cityscape

This week, rising U.S. office vacancy rates were the focus of several media reports as a result of the ongoing, negative impact of hybrid work arrangements. 

  • On Dec. 20, CNBC’s Squawkbox reported that 100 million square feet of office space is now available in Manhattan.
  • On Dec. 18, The Real Deal reported on The Roundtable’s recent letter to President Joe Biden about the harmful economic and social consequences of widespread remote work on cities, local tax bases, and small businesses.
  • The article included a quote from Real Estate Roundtable Chairman and SUFFOLK CEO John Fish and The Roundtable’s President and CEO Jeffrey DeBoer, who stated in their letter, “We are concerned that certain administration policy guidance is encouraging federal agencies to adopt permanent work-from-home policies for federal employees and thereby actually magnifying negative economic and social consequences for cities.” (Roundtable Weekly, Dec. 16)
  • On Dec. 17, the New York Times reported on office vacancy rates in San Francisco. “Office buildings are at about 40 percent of their prepandemic occupancy, while the vacancy rate has jumped to 24 percent from 5 percent since 2019,” according to the article, “What Comes Next for San Francisco’s Emptied Downtown.”

Commercial real estate trends and potential policy responses will be discussed during The Roundtable’s Jan. 24-25 State of the Industry Meeting in Washington, DC.

#  #  # 

House to Vote on Senate-Approved “Omnibus” Funding Package

Posted on by Trey Jackson

U.S. Capitol golden glowThe House of Representatives is expected to pass a Senate-approved $1.65 trillion fiscal 2023 bill by tomorrow to avert a government shutdown. President Biden needs to sign the 4,155-page “omnibus” package before midnight on Dec. 23 to fund the government through Sept. 30, 2023. (CNBC and Politico, Dec. 22 | The Hill, Dec. 20)

Omnibus & Taxes

  • The omnibus passed by the Senate today includes $858 billion in military spending and approximately $772.5 billion in nondefense discretionary spending. The $1.65 trillion legislative package is a slight increase over the previous fiscal year’s $1.5 trillion omnibus. (Wall Street Journal, Dec. 22)
  • The massive funding bill also includes a bipartisan package of retirement savings provisions, but not other proposals on lawmakers’ shortlist of end-of-year tax priorities, such as an expansion of the low-income housing tax credit (LIHTC). The Roundtable’s support for the LIHTC and other provisions such as modernizing the rules for REITs and facilitating condominium construction will continue into the 118th Congress. (Tax Notes, Dec. 21 and Roundtable Weekly, Oct. 21)

The outlook for policy in the new Congress will be a topic for discussion during The Roundtable’s Jan. 24-25 all-member State of The Industry Meeting in Washington.

#  #  # 

Treasury Issues Proposed Beneficial Ownership Regulations on Info Retention and Disclosure

Posted on by Trey Jackson
Treasury Building bright blue sky

The Treasury Department issued a set of proposed rules this month that address how government officials could access information about the “beneficial owners” of most corporations, limited liability companies, and other entities created in or registered to do business in the United States. (Fact Sheet, Dec. 15 and Federal Register, Dec. 16)

Proposed FinCEN Rules

  • The Dec. 15 Notice of Proposed Rulemaking (NPRM) issued by Treasury’s Financial Crimes Enforcement Network (FinCEN) follows a final beneficial ownership rule issued on Sept. 30. The previous rule requires millions of companies to report information about their beneficial owners—persons who own at least 25% of a company or exert significant authority over it—to FinCEN. (Final Rule | Fact Sheet | Roundtable Weekly, Sept. 30)
  • The Roundtable and three other national real estate organizations submitted detailed comments to FinCEN on May 5, 2021 addressing several implementation concerns related to the beneficial ownership registry. (Roundtable Weekly, May 7)
  • FinCEN Acting Director Himamauli Das said, “The beneficial ownership information reporting rule finalized earlier this year is a major step forward in unmasking shell companies and protecting the U.S. financial system from abuse by money launderers, drug traffickers, sanctioned oligarchs, and other criminals.”
  • “In this next step, the proposed rule would provide the highest standards of security and confidentiality while ensuring that the new beneficial ownership database is highly useful to law enforcement agencies in its efforts to combat financial crime.” Das added, “As we drive toward full implementation of the Corporate Transparency Act, we move closer to exposing criminals, corrupt actors, and anyone trying to hide ill-gotten gains in the United States.” (Treasury news release and FinCEN Fact Sheet, Dec. 15)

House Republican Opposition

Rep. Patrick McHenry
  • The Chairman-elect of the House Financial Services Committee, Patrick McHenry (R-NC), above, raised concerns about the proposed regulations, stating that protecting Americans’ financial privacy will be a top priority of Committee Republicans’ oversight and legislative initiatives next Congress. (McHenry news release, Dec. 15)
  • “Today’s Notice of Proposed Rulemaking issued by FinCEN does not prioritize Americans’ financial privacy in the way Congress intended,” McHenry said. “FinCEN must include the appropriate protections to prevent unauthorized access and use of the sensitive information collected under this new regime. Until we see a real effort to protect this confidential information, Republicans remain concerned about FinCEN’s commitment to privacy and civil liberties.”

Corporate Transparency Act

  • This month’s proposed set of rules addresses provisions of the Corporate Transparency Act (CTA), which became law in Jan. 2021, and target tax fraud, terrorism financing, and money laundering. (Tax Notes, Dec. 16)
  • The Roundtable is part of a broad coalition of business trade groups that supports a legal challenge by the National Small Business Association (NSBA v. Janet Yellen), which challenges the constitutionality of the CTA. (Coalition statement of support, Dec. 7 and NSBA’s website on the CTA)
  • The coalition stated, “It is clear whatever marginal benefit the CTA affords law enforcement will be far outweighed by the costs borne by small businesses and their owners.”
  • The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will continue to work with industry partners to address the implications of FinCEN’s proposed rules and the impact it could have on capital formation and the commercial real estate industry. Written comments on the NPRM are due by Feb. 14, 2023.

RECPAC will meet on Jan. 24, 2023 in conjunction with The Roundtable’s State of the Industry Meeting in Washington.

#  #  #

Fed Adopts SOFR as Fallback Benchmark Rate to Replace LIBOR on Certain Legacy Contracts

Posted on by Trey Jackson

Federal ReserveThe Federal Reserve Board on Dec. 16 adopted SOFR (Secured Overnight Financing Rate) as the fallback benchmark rate to replace LIBOR (London Interbank Offered Rate) in certain financial contracts after the use of LIBOR expires on June 30, 2023. (Federal Register notice and Bloomberg Law, Dec. 16)

LIBOR to SOFR

  • LIBOR was the dominant reference rate used in recent decades for financial contracts—including commercial real estate debt, mortgages, student loans and derivatives—worth an estimated $223 trillion. (Roundtable Weekly, Dec. 10, 2021.)
  • The Fed’s action this month implements a final rule from the Adjustable Interest Rate (LIBOR) Act (H.R. 4616)—passed by Congress in March to provide a uniform, nationwide solution for so-called tough legacy contracts that do not have clear and practicable provisions for replacing LIBOR. (Roundtable Weekly, March 11, 2022)
  • The Real Estate Roundtable and 17 national trade groups submitted letters in 2021 on April 14 and July 27 to policymakers in support of measures to address “tough legacy” LIBOR-based contract issues. (Roundtable Weekly, Dec. 10, 2021)

Final LIBOR Rule

Libor transition to SOFR image

  • The final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts subject to the LIBOR Act. These contracts include U.S. contracts that do not mature before LIBOR ends and that lack adequate “fallback” provisions that would replace LIBOR with a practicable replacement benchmark rate. (Fed Reserve Board’s memo, Dec. 2 and Fed news release, Dec. 16)
  • The final rule also restates safe harbor protections contained in the LIBOR Act for market participants who need to switch existing LIBOR-referencing financial contracts to a replacement benchmark for debt instruments before the replacement date on June 30, 2023. (Federal Register notice on LIBOR)

The LIBOR transition will be among the issues discussed during The Roundtable’s Real Estate Capital Policy Advisory Committee’s (RECPAC) next meeting on Jan. 24 in Washington, DC during The Roundtable’s State of the Industry Meeting.

#  #  #  

Federal Regulators Identify CRE as a Risk to U.S. Financial Stability

Posted on by Trey Jackson

U.S. Treasury DepartmentA council of federal financial regulators chaired by Treasury Secretary Janet Yellen stated in their 2022 Annual Report released today: “the commercial real estate (CRE) and residential real estate sectors have the potential to increase risks to U.S. financial stability significantly.” (Treasury Department news release and PoliticoPro, Dec. 16) 

A Top Concern 

  • The Financial Stability Oversight Council (FSOC) identified CRE among its top market and credit concerns heading into 2023, given rising interest rates and borrowing costs. (FSOC Annual Report, pages 18-20)
  • Among the FSOC’s report conclusions:
    • “Rising interest rates, uncertain economic conditions, continuing weakness in urban commercial real estate, and the possibility that some post-pandemic changes in demand for CRE will become permanent have heightened concerns about CRE.”

    • “The Council recommends supervisors and financial institutions continue to monitor CRE exposures and concentrations, ensure the adequacy of credit loss allowances, assess CRE underwriting standards, and review contingency planning for a possible increase in delinquencies.” 
  • “In extreme cases, CRE credit losses can lead to outright bank failures, particularly for banks with high exposure to CRE loans,” according to the regulators’ report. 

Office Markets & Remote Work 

FSOC report on CRE

  • The Council emphasized that the office property market may face the most uncertainty, with the prospect of weak future demand as return-to-office plans evolve and users decide how much space they need.
  • The 2022 Annual Report notes that office property demand may take time to stabilize as tenants navigate remote work decisions and adjust leasing decisions. The FSOC also reports that a slow return to densely populated urban office centers could reduce the desirability of office properties and nearby retail space.
  • “This may be especially true for older, less desirable office spaces with fewer modern amenities,” the report acknowledges.
  • The report also notes, “structural changes in the demand for office space can lead to weaker credit quality for loans secured by office properties over the long term.”

The Fed’s Influence

  • FSOC regulators also caution that more aggressive action by the Fed—either in its interest rate decisions or changes in its holdings of mortgage-backed securities—could lead to further increases in mortgage rates that could negatively affect financial stability. (FSOC 2022 Annual Report and PoliticoPro, Dec. 16 ) 

The Council’s mission is to identify risks to the financial stability of the United States, promote market discipline, and respond to emerging risks to the stability of its financial system. (FSOC website) 

#  #  # 

Roundtable Urges President Biden to Weigh Negative Impacts of Remote Work on Cities, Broader Economy

Posted on by Trey Jackson

RER Letter to Biden on Remote Work

The Roundtable wrote to President Joe Biden on Dec. 12 about the ongoing, harmful economic impacts of widespread remote work on cities, local tax bases, and small businesses—and how work-from-home policies by federal agencies threaten to magnify these negative economic and social consequences. (Roundtable letter | GlobeSt and CoStar, Dec. 15) 

Roundtable Requests 

  • The letter from Real Estate Roundtable Chair John Fish and President & CEO Jeff DeBoer urges President Biden “to direct federal agencies to enhance their consideration of the impact of agency employee remote working on communities, surrounding small employers, transit systems, local tax bases and other important considerations.”

  • The federal government maintains facilities in 2,200 communities, influencing local leasing activities, property values, and surrounding small businesses. Cities may continue to struggle if federal agencies encourage their employees to work-from-home on a permanent basis. Unfortunately, some federal officials view agency remote work simply as a recruiting tool or cost-saving measure. [Office of Personnel Management testimony, Future of Federal Work Part II, before House Committee on Oversight and Reform (July 21, 2022), and OPM’s Future of Work FAQ]
  • The Roundtable letter notes that federal agencies’ actions to emphasize the benefits of permanent remote work differ from the current direction of private sector employers, who are increasingly recognizing the need to bring employees back to the workplace.
  • The Roundtable comments also encourage President Biden to support legislation that could help facilitate “the increased conversion of underutilized office and other commercial real estate to much-needed housing.” The letter states that incentives for conversion projects could be modeled on the rehabilitation tax credit as a cost-effective means to increase the housing supply, create jobs, and boost the local tax base. 

Economic Impact of Remote Work 

Chicago cityscape sky view

Roundtable Members in the News 

  • Roundtable Chair John Fish (Chairman and CEO, SUFFOLK) spoke with Bloomberg Intelligence on Dec. 9 about the consequences of rising interest rates, the impact of remote work, labor force participation, and the general economic outlook. (Chair Fish interview begins at 26:05)
  • Former Roundtable Chair Bill Rudin (Co-Chairman & CEO, Rudin Management Company, Inc.) discussed real estate challenges and the potential for office-to-residential conversions in New York City on Dec. 14 during an interview with CNBC’s Squawk on the Street.
  • Roundtable Board Member Kathleen McCarthy (Global Co-Head of Blackstone Real Estate) was interviewed on Dec. 9 by Bloomberg Radio on a wide range of real estate investment issues, asset types, and her experience in the industry. 

Commercial real estate trends and potential policy responses will be discussed during The Roundtable’s Jan. 24-25 State of the Industry Meeting in Washington, DC.

#  #  #

Congress Extends Funding Deadline to Dec. 23; Democrats Pushing Full-Year Omnibus Spending Bill

Posted on by Trey Jackson

U.S. CapitolThis week, Congress passed a government funding extension package until Dec. 23 while appropriators continue working on a $1.7 trillion FY2023 “omnibus” spending deal that they may unveil on Monday. (CQ News and BGov, Dec. 16) 

Omnibus Negotiations 

  • President Biden is expected to sign the extension today, as bipartisan efforts to reach a funding agreement continue among congressional policymakers. Some Republicans, including House Minority Leader Kevin McCarthy (R-CA), are urging their colleagues to postpone negotiations until January when the GOP assumes majority control of the House. (Wall Street Journal, Dec. 14)
     
  • The logjam in reaching a final deal focuses on $26 billion in non-defense, domestic spending. Both sides have agreed on $858 billion for defense spending. (Forbes, Dec. 14)
     
  • If an agreement on an omnibus cannot be reached next week, Democrats may forego new legislation in favor of a one-year continuing resolution that would freeze government funding at current levels and allow certain tax policies to expire. (Roundtable Weekly, Dec. 2 and Dec. 9) 

Tax Policy Prospects 

House Ways and Means Chairman Richard Neal (D-MA)

  • Chances that a spending agreement will include tax policy—including “extenders” of tax incentives that have expired or are set to lapse after 2022—are uncertain. (Roundtable Weekly, Dec. 9)
  • House Ways and Means Committee Chair Richard Neal (D-MA), above, said on Thursday, “We continue the negotiations. The conversations are ongoing. I still can see the contours of a big deal.” (BGov, Dec. 16)
  • Senate Minority Whip John Thune (R-SD) said earlier this week that he is doubtful that a year-end tax deal will be added to an omnibus. (Politico, Dec. 13)

Implementing IRA Tax Provisions

  • The Internal Revenue Service (IRS) will open a new office to monitor the agency’s implementation of the 2022 Inflation Reduction Act’s clean energy provisions, according to a new IRS report released Thursday.
  • The Inflation Reduction Act (IRA) Transformation & Implementation Office will include units focused on “implementation of new tax law provisions, taxpayer services transformation, tax compliance transformation and human capital transformation.” (BGov, Dec. 15)
  • Additionally, The White House released a guidebook this week on the IRA’s clean energy provisions as a compendium reference to the large amount of federal energy and climate programs financed by the IRA. (White House Fact Sheet, Dec. 15) 

The Roundtable will discuss energy and tax policy developments during our 2023 State of the Industry and Policy Advisory Committee meetings on Jan. 24-25 in Washington, DC.

#  #  #