Author: Trey Jackson

New Federal Rules Issued Regarding Real Estate Construction, Clean Energy Projects

Posted on by Trey Jackson

Housing Construction WorkerThe Biden administration issued two new rules this week impacting real estate construction and investments in clean energy projects. 

  • Davis-Bacon: The U.S. Labor Department on Tuesday issued a final rule to overhaul Davis-Bacon standards that determine prevailing wages for workers on construction projects covered by a federal contract or financially assisted by federal grants, loans, guarantees or insurance.
    • Construction association AGC issued a statement expressing “preliminary” concerns that “this rulemaking critically missed an opportunity” to inject “more accurate data” in processes to establish prevailing wage rates in local markets across the nation.
    • Laborers and mechanics constructing transportation, energy, water, toxic site clean-ups, and other infrastructure financially supported by the bipartisan Infrastructure Investment and Jobs Act (IIJA) must meet the new Davis-Bacon requirements. (IIJA project map)
    • Inflation Reduction Act (IRA) projects receiving clean energy tax incentives are not required to meet Davis-Bacon rules, but they can qualify for increased credits and deductions if workers are paid prevailing wages. (RER’s IRA fact sheets) 
    Solar installation workers

  • “Bonus” Tax Credits: The Treasury Department and IRS on Thursday released final rules explaining how IRA “bonus credits” can be awarded to solar, wind, and associated storage projects in low-income communities. (The Hill, August 10)
    • Qualifying projects in census tracts eligible for new market tax credits (NMTCs) can receive a 10% solar credit boost, while those supported by low-income housing tax credits or Section 8 rental assistance can receive a 20% solar credit increase. (RER’s IRA “bonus rate” chart)
    • The “bonus” incentives – over “base” rate tax credit amounts – are competitive. Bonuses will be awarded through an application process run by the U.S. Department of Energy scheduled to open this fall.

The Roundtable submitted comments in June when the IRS proposed the “bonus credit” program. (Roundtable Weekly, June 30). It will update its summary of IRA-related agency guidance following analysis of the newly issued rule.

 #  #  # 

Commercial Real Estate Executives Optimistic Despite Challenging Market Conditions

Posted on by Trey Jackson

August 16, 2023 (WASHINGTON, D.C.) — Industry leaders remain optimistic about future market conditions while acknowledging uncertainty due to interest rate increases, maturing office loans, financing costs, prolonged remote work policies, and labor productivity, according to The Real Estate Roundtable’s Q3 2023 Sentiment Index.

Roundtable President and CEO Jeffrey DeBoer said, “Many maturing loans were financed when base rates were near zero and now need to be refinanced in a challenging environment where rates are much higher, values are lower, and markets are less liquid. Higher rates are also contributing to cyclical pressure on valuations. On top of that, remote work has devastated America’s downtowns and stalled office demand.”

DeBoer added, “The economy has undergone significant transformations due to the pandemic. The realities and challenges we face today requires us to rethink how businesses and people use offices, retail, housing, medical care, and more. Future buildings must accommodate the changes to be successful. The Roundtable will continue to advocate and support measures that boost the availability of credit and enhance the formation of capital in the commercial real estate industry, particularly during these times of market uncertainty.”

The Roundtable’s Economic Sentiment Index—a measure of senior executives’ confidence and expectations about the commercial real estate market environment—is scored on a scale of 1 to 100 by averaging the scores of Current and Future Economic Sentiment Indices.­­­­ Any score over 50 is viewed as positive. ­­­­

The Q3 Sentiment Index topline findings include:

All indices reported increases: The Q3 2023 Real Estate Roundtable Sentiment Index registered an overall score of 46, an increase of five points from the previous quarter. The Current Index registered 33, a six-point increase from Q2 2023, and the Future Index posted a score of 59 points, an increase of four points from the previous quarter.

Disparities between asset classes persist in these challenging market conditions. Hotel and retail markets are largely performing well. Niche asset classes continue to generate interest. On the other hand, office is performing poorly, and rental growth in multifamily and industrial are starting to abate.

Perceptions of declining asset values continue to dominate, with 95% of survey participants reporting that asset values are lower as compared to last year. While Class A properties across all asset classes are trading at competitive prices, managers are still in a “wait and see” mindset for other assets, resulting in lower transaction volumes and an inability to complete accurate valuations.

The availability of capital —both debt and equity—continues to be a pressing topic; 85% and 69% of survey participants, respectively, believe that today’s conditions are more difficult than a year ago. Although managers face a difficult capital raising environment, only 24% and 9% of participants believe debt and equity availability respectively will be worse a year from now as the industry works to creatively solve financing issues.

Data for the Q3 survey was gathered by Chicago-based Ferguson Partners on The Roundtable’s behalf in July. See the full Q3 report.

The Real Estate Roundtable brings together leaders of the nation’s top publicly-held and privately-owned real estate ownership, development, lending and management firms with the leaders of major national real estate trade associations to jointly address key national policy issues relating to real estate and the overall economy.

House Democrats Urge Federal Regulators to Incentivize CRE Conversions

Posted on by Trey Jackson
Rep. Jimmy Gomez (D-CA) at hearing

Rep. Jimmy Gomez (D-CA), above, and nine other House Democrats last week urged federal banking regulators to incentivize conversions of commercial real estate to other uses. Rep. Gomez previously introduced the Roundtable-supported Revitalizing Downtowns Act (H.R. 4759) in 2021 to encourage adaptive use of older buildings. Sen. Debbie Stabenow (D-MI) also introduced companion legislation in the Senate (S. 2511). (Rep. Gomez news release, July 31)

Federal Regulators & CRE Conversions

  • The recent letter to Fed Chairman Jerome Powell and other regulators stated that the congressional policymakers are concerned how the COVID-19 pandemic continues to exert a negative influence on markets and regional banks. “We are especially interested in the impact of this instability on the $6 trillion dollar market for retail and office space CRE, which has been unduly impacted by pandemic related disruptions,” the letter states.
  • The letter also noted, “It is essential that all arms of the federal government take prudent steps to limit the impact of a CRE market contraction, and innovate to encourage reuse of vacant commercial space as a potential source of housing.” (Rep. Gomez news release, July 31)

Legislation & Tax Credits 

Chicago office building into condominiums

White House Initiative The White House

  • The Roundtable on Dec. 12, 2022 urged the Biden administration to support “legislation to facilitate the increased conversion of underutilized office and other commercial real estate to much-needed housing.” (RER letter to President Biden, Dec. 12 andGlobeSt, Aug. 8)
  • Last month, the administration announced a new initiative that will establish a multi-agency working group to “develop and advance federal funding opportunities” for commercial-to-residential conversions that would help increase the supply of energy-efficient affordable housing. (Reuters and HousingWire, July 27 | Roundtable Weekly, July 28)

New CRE Conversion Study

  • A new analysis from researchers at New York University and Columbia University explores the potential for renewable energy investment tax credits in the Inflation Reduction Act to help subsidize CRE adaptive use and green conversions. (National Bureau of Economic Research) 
  • The August study, Converting Brown Offices to Green Apartments, also notes the significant role that local zoning laws, permitting policies, and building codes could play in encouraging CRE conversions. The authors conclude that about 11% of commercial office buildings in the 105 largest cities are candidates for conversion, and that an estimated 400,000 new apartment units could be created. (Axios, Aug. 8)

A property conversions working group created by The Real Estate Roundtable’s Tax Policy Advisory Committee will continue to respond to legislative proposals affecting potential property conversion activities. 

#   #   # 

SEC Issues Final Cybersecurity Disclosure Rules for Public Companies

Posted on by Trey Jackson
SEC Cyber Disclosure

The Securities and Exchange Commission (SEC) finalized new rules last week by a vote of 3-2 that will require public companies to disclose more information about cybersecurity-related incidents, risk management, strategy, and governance. A joint comment letter by The Real Estate Roundtable and Nareit about the SEC proposal was cited nearly a dozen times in the final rule. (SEC fact sheet | Roundtable-Nareit comment letter, May 9, 2022)

Industry Objections

  • The Roundtable and Nareit expressed a number of concerns in their May 2022 letter about the proposed rule’s rigid incident reporting deadlines and granular requirements, which the industry organizations stated may unintentionally exacerbate cybersecurity risks for issuers while imposing unjustified burdens. (Roundtable Weekly, May 13, 2022)
  • Under the new rules, registered companies must report cyber-attacks by filing an 8-K form with the SEC within four business days, which The Roundtable and Nareit objected to in their joint letter.
  • Responding to these concerns, the SEC stated in its final rule that it is “… providing for a delay for disclosures that would pose a substantial risk to national security or public safety, contingent on a written notification by the Attorney General, who may take into consideration other Federal or other law enforcement agencies’ finding.” (Pensions and Investments, July 26)
  • The SEC also responded to industry concerns by stating it had “streamlined” its requirements on cyber-attack disclosures to focus more on the potential effects, rather than the details of the incident itself. (Wall Street Journal, July 26 | PillsburyLaw and GreenbergTaurig)
  • The agency states in its final rule, “To that end, to balance investors’ needs with the concerns raised by commenters …The final rules will require the registrant to describe the material aspects of the nature, scope, and timing of the incident, and the material impact or reasonably likely material impact on the registrant, including its financial condition and results of operations.”
  • SEC Chairman Gary Gensler emphasized that the final rule does not require disclosure of non-material information related to incidents—unlike the original proposal issued in March 2022. (SEC news release, July 26, 2023 and Roundtable Weekly, March 18, 2022)

New Disclosures Required

Federal Register
  • Public real estate companies will also be required to disclose the board of directors’ oversight of cybersecurity threats, identify any board committee (or subcommittee) responsible for cybersecurity oversight, and the processes by which the board or (sub) committee is informed about these risks.
  • The final SEC rule will become effective on September 5, according to a notice today in the Federal Register. All registered public companies, other than smaller reporting companies, must begin complying by Dec. 18, 2023.

The Roundtable’s Homeland Security Task Force will remain engaged with government officials and private sector partners on industry best practices to detect, protect, and respond to a variety of key threats, including cyber-attacks.

#  #  #

Real Estate Industry Urges FHFA to Avoid Linking New Regulations to GSE Financing

Posted on by Trey Jackson

FHFA logo

The Roundtable and an industry coalition recently submitted separate comments in response to a Request for Input from the Federal Housing Finance Agency (FHFA) on multifamily properties with mortgages backed by Fannie Mae and Freddie Mac (the Enterprises). The letters encourage the FHFA to remain focused on the Enterprises’ stated mission “to serve as a reliable source of liquidity and funding for housing finance and community investment.” The industry comments also raise concerns about the FHFA imposing counterproductive property restrictions, such as rent control, on multifamily properties backed by loans from the Enterprises. (Roundtable comments, July 28 and Industry coalition comments, July 31)

Industry Solutions

  • The Roundtable’s comments encouraged the FHFA—the regulator and conservator of the Enterprises—to focus on its pivotal role in America’s housing finance market by maintaining Enterprise support of the multifamily affordable housing market, particularly for low-income households. The letter noted that the imposition of counterproductive restrictions on Enterprise-backed financing and private rental housing providers would lead to less investment and development in the affordable housing market, especially during this time of market uncertainty.
  • The Roundtable letter expressed support for measures to:
    • Enhance the Low-Income Housing Tax Credit (LIHTC);
    • Support initiatives that explicitly tie federal funding of infrastructure and other federal funding for “green” initiatives to local assurances to improve exclusionary zoning;
    • Reduce regulatory costs, including a broad range of fees, standards and other requirements imposed at different stages of the development and construction process; and,
    • Stabilize the GSEs to ensure appropriate liquidity in mortgage markets.
  • The Roundtable’s July 28 letter also noted the important role of institutional investors as a source of capital for affordable housing. The comments emphasized how FHFA should not disincentivize this important source of capital for expanding the housing infrastructure.

Coalition Comments

FHFA RFI response coalition graphic

  • The real estate coalition’s July 31 letter reiterated that the best way to help the nation’s renters find affordable housing is to keep the Enterprises focused on financing housing creation. The real estate organizations note that rental housing is already a heavily regulated industry that should not be subject to a one-size-fits-all set of new “protections” that conflict with the unique housing needs of individual markets.  
  • National Multifamily Housing Council President Sharon Wilson Géno said, “When we have market dynamics like we do now, where we have really high interest rates and difficulty accessing capital, the GSEs are even more important. If they start putting mandatory restrictions and rent caps on their products, people are going to go back into that private market at higher cost, and that’s going to increase rent and decrease affordability.” (PoliticoPro, Aug. 1)

This week, Senate Banking Chair Sherrod Brown (D-OH) and 17 Senate Democrats also responded to the FHFA by supporting rent increase limits and other tenant measures on properties with federally backed loans from the GSEs. (Senate Banking Committee letter, Aug. 1)

#   #   #

House Ways and Means Members Call on Treasury to Withdraw FIRPTA Regulatory Proposal

Posted on by Trey Jackson

House Ways and Means Committee Members Darin LaHood (R-IL) and Carol Miller (R-WV) recently called on Treasury Secretary Janet Yellen to withdraw a proposed IRS rule that would expand the reach of the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980. The policymakers’ request followed a letter by The Real Estate Roundtable and 14 other real estate trade organizations that urged congressional tax-writing committees to oppose the FIRPTA proposal. (Letter to Yellen, July 28 and Industry coalition letter, March 1)

Retroactive Rewrite for REITs

  • Under current law, shareholders of domestically controlled REITs are not subject to FIRPTA, a statutory regime that subjects foreign investors to capital gains tax on their U.S. property investments.
  • The proposed IRS Look-Through Rule would no longer treat a taxpaying U.S. C corporation that has ownership shares in a REIT as a U.S. person—if more than 25% of the owners of the C corporation are foreign. If enacted, the new rule would trigger FIRPTA capital gains, retroactively, on REITS and investment structures used for decades when planning real estate and infrastructure investments.

Congressional CRE Concerns

buildings cityscape
  • Reps. LaHood and Miller asked Treasury and the IRS to reverse course and withdraw the proposed regulation, stating in their letter, “The proposed regulation’s retroactivity is severely burdensome and is already having a chilling effect on foreign investment, which has been a vital contributor to the economic health of the U.S. commercial real estate market. If Treasury decides to move forward with this proposal, it is imperative that the retroactivity provisions are removed.”
  • The letter also noted the proposed change would limit access to capital at a time when the CRE market is showing signs of destabilization. The House taxwriters added, “We fear this proposal could worsen the commercial real estate outlook and harm the many Americans who rely on these crucial investments in their communities.”

Industry Response

Additionally, The Roundtable, Nareit, American Investment Council, Managed Funds Association, and ICSC submitted comments to Treasury in February in opposition to the proposed look-through rule. The organizations wrote that the regulation would “reverse decades of well-settled tax law, severely misconstrue the statute, and contradict Congressional intent.” (Letter to Treasury, Feb. 27)

#  #  #

Office-to-Residential Conversions Part of New Biden Plan to Increase Energy-Efficient, Affordable Housing Supply

Posted on by Trey Jackson

The White House

The Biden administration announced a new initiative yesterday to increase the energy-efficient affordable housing supply, including a multi-agency working group to “develop and advance federal funding opportunities” for commercial-to-residential reuse. (Reuters and HousingWire, July 27)

Support for Office Conversions

  • White House Chief Domestic Policy Adviser Neera Tanden said, “With high rates of commercial vacancies across the country, we see a tremendous opportunity for conversions to residential housing.” (PoliticoPro, July 27)
  • An administration statement listed a variety of new initiatives aimed at lowering housing costs and boosting supply that include:
    • Promoting commercial-to-residential conversion opportunities, particularly for affordable and zero emissions housing; 
    • Expanding financing for affordable, energy efficient and resilient housing; and,
    •  Reducing barriers to build housing such as restrictive and costly land use and zoning rules. 

Agency Actions 

HUD building in Washington, DC

  • HUD: Yesterday’s announcement included opportunities for localities that develop high-density zoning rules to apply for grants from the Department of Housing and Urban Development (HUD) under a new “Pro-Housing” Program. This follows HUD’s release on Tuesday of new funds for research and policy guidance on economically viable office-to-residential conversions, with applications due by October 12. (HUD Press Release)
  • DOT: A similar grant program run by the Department of Transportation (DOT), “Reconnecting Communities and Neighborhoods,” will provide funds for planning and construction projects (primarily in disadvantaged communities) for transit-oriented affordable housing.
  • EPA: The White House also announced that the $27 billion Greenhouse Gas Reduction Fund, created by the Inflation Reduction Act (IRA) and administered by the U.S. Environmental Protection Agency (EPA), will be available for energy efficiency building retrofits and commercial-to-residential conversions.
  • GSA: The White House statement advised that the General Services Administration (GSA) will launch an effort to identify under-utilized and surplus assets in the federal real estate portfolio that present the “best opportunities” for public-private partnership, commercial-to-residential projects.
  • DOE: Yesterday, the Department of Energy (DOE) released program and legal documents for $8.8 billion in rebates authorized by the IRA. State-level energy agencies will dole out federal rebates that can be used for high-efficiency appliances and electrification equipment installed in single-family homes and multifamily units, including measures in adaptive reuse projects. 

This week’s announcements follow commitments made by the Biden-Harris administration in its Housing Supply Action Plan, released in May 2022. That month, The Real Estate Roundtable and 18 other real estate organizations urged Congress to work with the Biden administration, housing providers, lenders, and other stakeholders to pursue bipartisan solutions to increase the nation’s supply of housing. (Coalition letter, May 23 and Roundtable Weekly, May 22) 

#  #  # 

Federal Regulators Approve Proposal to Increase Bank Capital Requirements, Internal Dissent Signals Cautious Approach to Final Rules

Posted on by Trey Jackson

Federal Reserve building in Washington, DC

Federal bank regulators this week approved a sweeping set of proposed changes that would increase capital requirements for the nation’s largest banks by as much as 20%, which could significantly affect liquidity available for commercial real estate transactions, impact asset values, and influence economic growth. Dissenting votes on the proposed rulemaking revealed rare disagreement among regulators, and Fed Chairman Jerome Powell signaled a cautious approach to consideration of any final rule as a 120-day public comment period begins. (Axios and PoliticoPro, July 27)

New Capital Framework

  • The Fed, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly approved the proposal, which would substantially revise the regulatory capital framework for banking organizations with total assets of $100 billion or more. Stakeholder comments on the 1,100-page proposed rulemaking are due by Nov. 30. (See Interagency Overview of the Notice of Proposed Rulemaking for Amendments to the Regulatory Capital Rule, July 27)
  • Fed Chairman Powell voted for the proposal, but noted a significant tone of caution, stating, “Raising capital requirements also increases the cost of, and reduces access to, credit … threatening a decline in liquidity in critical markets and a movement of some of these activities into the shadow banking sector.” He added, “While there could be benefits of still higher capital, as always we must also consider the potential costs. As the financial system evolves, it is important that regulation evolve with it. I look forward to hearing from all stakeholders on how best to strike that balance.” (Federal Reserve Board – Statement by Chair Jerome H. Powell)
  • Statements were also issued by Fed Governors Michelle W. Bowman and Christopher J. Waller, who voted against the proposal. Extensive background information on the proposal is available on the Fed’s website, including a video of the Fed’s July 27 Open Board Meeting, Board memo, Fact Sheet, Statements and Federal Register Notices.
  • The proposed changes to large bank capital requirements would implement the final components of international banking regulations known as the Basel III “endgame” following the U.S. banking turmoil in March 2023. The agencies’ proposal would have a long phase-in period and not impact community banks. (CNBC, July 27)
  • Real Estate Roundtable President and CEO Jeffrey DeBoer stated in a March 2023 comment letter to Fed Vice Chair Michael Barr and other key regulators, “At this critical time, it is important that the Agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values. A deflationary spiral must be avoided at all costs. As recent events are only amplifying the contraction of credit, it is important for the Agencies to take measures to maintain sufficient liquidity levels and support positive economic activity.”

CRE Challenges

2023 Real Estate Roundtable Chairman John Fish

  • The Wall Street Journal this week quoted Roundtable Chair John Fish, above, (SUFFOLK Chairman and CEO) and Roundtable Board Member Scott Rechler, (RXR Chairman and CEO) on the influence of the agencies and their positive joint policy statement issued last month that granted flexibility for CRE workouts. Agencies’ joint statement, June 29 and Roundtable Weekly, June 30)
  • Fish noted that the agencies’ recent policy statement “is a bridge to the other side. It’s what the real-estate industry was asking for.” Rechler also praised the new policy and added, “Since the failure of the regional banks, regulators have come on very hard.”
  • Major refinancing pressures facing CRE are shown in new Trepp data released this week, which estimates $528.7 billion of commercial mortgages will mature this year—and increase to $532.8 billion next year. (TreppTalk, July 25)
  • Trepp notes the data indicates “the market is facing a wall, if not a mountain, of maturities that would make the 2015-2017 wall of maturities look almost inconsequential. During that period, roughly $1.1 trillion of loans were scheduled to come due.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) plans to work on industry comments in response to the agencies’ proposed rulemaking.

#  #  #

Monetizing Energy Credits: Roundtable Submits Recommendations to Treasury

Posted on by Trey Jackson
U.S. Capitol

The Real Estate Roundtable submitted comments today on proposed and temporary tax regulations regarding the transferability and direct payment of clean energy credits under the Inflation Reduction Act (IRA) of 2022. (Roundtable comments, July 28)

 IRA Incentives 

  • Congress passed the IRA last August. The law significantly increases the size of existing tax incentives for energy-saving improvements to commercial real estate. Perhaps even more importantly, the legislation contained key reforms related to the transferability and direct payment of energy tax credits.

  • The reforms have made the incentives relevant to a large and previously untapped segment of real estate owners, including REITs, pension funds, and private foundations. The incentives include:

    • Tax-exempt real estate owners that invest in solar panels and other improvements can elect to receive direct payments from the Treasury in lieu of the expanded investment tax credit.
    • Taxable real estate owners, including REITs, can sell the credits to third parties for cash. 
    • The credit amount can range from 6% to 60% of the qualifying investment, depending on factors such as the size, location, domestic content, and wages paid to equipment contractors.
  • Roundtable comments submitted last year included recommendations on the IRA’s transferability provisions. On June 14, the Treasury Department and IRS issued proposed regulations to implement the provisions, as well as temporary regulations establishing a pre-filing registration process.

  • The IRS rules adopted certain Roundtable recommendations, such as the ability to divide and sell the credits from a single project to multiple transferees. Other recommendations, which would have maximized the value of the credits in mixed real estate partnerships involving taxable and tax-exempt partners, were rejected as contrary to the statute and difficult to administer.  

Energy Credits Monetization  

U.S. Treasury Building
  • Today’s letter from Real Estate Roundtable President and CEO Jeffrey DeBoer commends Treasury for providing greater clarity on its credit monetization mechanism and for laying out a rational process and timeline for property owners to claim and transfer credits or receive payments.

  • The Roundtable’s July 28 letter—developed by a joint working group of the Roundtable’s Tax and Sustainability Policy Advisory Committees (TPAC and SPAC)—also encourages Treasury to revisit the issue of mixed partnerships and asks for clarification that the credits are not “bad assets” for purposes of the 75% REIT asset test.

  • The credit monetization tools enacted in the IRA offer valuable new opportunities to access and raise capital for energy-saving improvements to commercial real estate. The deadline for comments to Treasury and the IRS is August 14, and final Treasury regulations are expected this year.  

The Roundtable’s Energy Credit Transferability Working Group will remain engaged with policymakers as the rules are finalized and implementation continues. 

#   #   #

Senate Finance Chairman Seeks Expanded Taxation of Sovereign Wealth Funds’ Real Estate, Other Investments

Posted on by Trey Jackson

Senate Finance Committee Chairman Ron Wyden (D-OR)Legislation introduced this week by Senate Finance Chairman Ron Wyden, above, would repeal tax rules applicable to foreign governments and their investment arms (“sovereign wealth funds”) if that government has more than $100 billion invested globally and does not qualify for an exception. (Wyden’s news release and one-page summary, July 26) 

Section 892 

  • Citing specific concerns related to the recent merger between the Professional Golf Association (PGA) Tour and the Saudi Public Investment Fund, Chairman Wyden’s expansive bill—the Ending Tax Breaks for Massive Sovereign Wealth Funds Act—would deny application of the tax code’s long-standing section 892, which exempts certain passive income earned by foreign governments from U.S. income taxation.
  • Countries that have a free trade agreement or tax treaty with the United States could continue to qualify for section 892, provided they are not listed as a “foreign country of concern”by the U.S. State Department. According to Chairman Wyden, the legislation would apply to China, Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, and Russia. (PoliticoPro, July 26) 

Foreign Investment & CRE 

Real Estate Roundtable President and CEO Jeffrey DeBoer

  • Some of the listed countries are large investors in U.S. commercial real estate and represent a key source of capital for job-creating U.S. real estate investment. 
  • “Section 892 is nearly as old as the tax code itself, and the tax principle it represents—sovereign immunity for foreign governments—is older than the tax code. Disrupting and rewriting these rules on a whim because of a single transaction is risky and unwarranted. The consequences for U.S. real estate, jobs, and the economy could be severe,” said Real Estate Roundtable President and CEO Jeffrey DeBoer, above.
  • “The United States is able to attract foreign capital for jobs and productive real estate investment because foreign investors have confidence in our rule of law. They believe the USA is a safe place to invest,” continued DeBoer. “When leading lawmakers threaten to overturn 100-year-old tax policies because of a single, unpopular transaction, it raises legitimate concerns. Congress should tread carefully in this area and fully understand the potential implications of its action.”
  • CBRE’s Global Head of Capital Markets Christopher Ludeman stated, “Sovereign wealth funds are among the largest and most important investors in global real estate, especially in the U.S. where, by conservative estimates, they have invested over $25 billion since 2021. At a time when capital flows into real estate are scarce, transaction volume is down by 53% in the first half of 2023 compared to the first half of 2022. In this environment, SWFs are an important source of capital, investing close to $9.7 billion this year alone. This is the wrong time to put any new restrictions on capital flows into real estate, which this bill would do.”   

Established Law 

IRS logo

  • The section 892 tax exemption for foreign governments does not extend to commercial activities or active ownership of U.S. real estate. Income from an interest in a U.S. real property-holding corporation that a foreign sovereign does not control is generally exempt from U.S. tax as income from an investment in a U.S. security—consistent with the general rule that section 892 is limited to passive investments.
  • Over the years, Treasury guidance and IRS rulings have further defined the scope of the provision and its interaction with other tax provisions, such as section 897 and the Foreign Investment in Real Property Tax Act (FIRPTA).
  • The original version of section 892 was enacted in 1917 and is based on Supreme Court case law that dates to 1812. Similar foreign government tax exemption regimes apply in other countries, such as the United Kingdom, Canada, Australia, and Japan. See JCT, Economic and U.S. Income Tax Issues Raised by Sovereign Wealth Fund Investment in the United States (2008). 

The Wyden bill includes grandfathering rules that would apply to certain investments through 2025. The rules would cover capital deployed or committed prior to enactment and investments in publicly traded companies, provided the investment is less than 10 percent. Any grandfathering benefits would expire beginning in 2026. (Wyden’s one-page summary of the bill, July 26) 

#   #   #