Author: Trey Jackson

Senate Banking Committee Releases Housing Finance Reform Outline; Real Estate Coalition Working to Establish GSE Reform Principles

Posted on by Trey Jackson

Senate Banking Committee Chairman Mike Crapo (R-ID) on Feb. 1 released an outline for reforming the nation’s housing finance system, including the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.  (Crapo Statement and Housing Reform Outline, Feb. 1)

Senate Banking Committee Chairman Mike Crapo (R-ID) on Feb. 1 released an outline for reforming the nation’s housing finance system, including the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. 
(Crapo Statement and Housing Reform Outline, Feb. 1)
  • Fannie and Freddie form the underpinnings of a $5.3 trillion financial market for single-family and multifamily mortgages.
  • Crapo’s outline states, “The multifamily businesses of Fannie Mae and Freddie Mac will be sold and operated as independent guarantors.”  The proposal outlines a new housing finance system that aims to: 
    • Reduce the systemic, too-big-to-fail risk posed by the current duopoly of mortgage guarantors
    • Preserve existing infrastructure in the housing finance system that works well, while significantly increasing the role of private risk-bearing capital
    • Establish several new layers of protection between mortgage credit risk and taxpayers
    • Ensure a level playing field for originators of all sizes and types, while also locking in uniform, responsible underwriting standards
    • Promote broad accessibility to mortgage credit, including in underserved markets  
  • The Committee has also tentatively scheduled a Feb. 14 nomination hearing on Mark Calabria as director of the Federal Housing Finance Agency (FHFA). Calabria is currently chief economist to Vice President Mike Pence.  The FHFA oversees Fannie Mae and Freddie Mac, which have been held in conservatorship since September 6, 2008.  ( Wall Street Journal, Feb. 5)  

    “Housing finance reform must appropriately balance taxpayer protections with the need to establish an efficient marketplace that can provide strong and sustained mortgage liquidity in single family and multifamily markets – as well as affordable housing,” said Roundtable President and CEO Jeffrey DeBoer. 

     

  • White House Spokeswoman Lindsay Walters stated on Tuesday, “Housing finance reform is a priority for the administration. The White House expects to announce a framework for the development of a policy for comprehensive housing finance reform shortly.”  She added the administration intends to work with Congress to formulate a reform plan that will address taxpayer risks and housing affordability. (Bloomberg, Jan. 29) 

House Financial Services Committee Chairwoman Maxine Waters (D-CA) is expected to oppose measures that seek to limit the government’s role in the mortgage market. 

Industry Developing Principles for Reform  

The Real Estate Roundtable continues to work as part of an industry coalition to develop certain principles that would form the foundation of GSE reform legislation 

  • “Housing finance reform must appropriately balance taxpayer protections with the need to establish an efficient marketplace that can provide strong and sustained mortgage liquidity in single family and multifamily markets – as well as affordable housing,” said Roundtable President and CEO Jeffrey DeBoer.  

“Reform should encourage the transfer of appropriate credit risk to the private sector, while building on the highly effective risk sharing mechanisms utilized in Fannie Mae’s existing Delegated Underwriter Servicing (DUS) program and Freddie Mac’s K Deals,” DeBoer added.

 

Treasury Releases Highly Anticipated Final Regulations on New Pass-Through Deduction

Posted on by Trey Jackson

The Treasury Department on Jan. 18 issued final regulations and new guidance on the 20 percent deduction for qualified pass-through business income (under Internal Revenue Code section 199A).

The Treasury Department on Jan. 18 issued  final regulations  and new guidance on the 20 percent deduction for qualified pass-through business income (under Internal Revenue Code section 199A).

  • The new 20% deduction for pass-through business income is one of the most important – and complex – elements of the 2017 tax overhaul law.  The deduction was designed to provide relief to the 30 million businesses in the United States that are not C corporations, and thus don’t benefit from the corporate tax cut. 
  • The proposal was a key topic of Roundtable President and CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before lawmakers released the first version of their tax overhaul in the fall of 2017, and The Roundtable was closely involved in the legislative development of the provision.  (Roundtable Weekly, Sept. 22, 2017) 
  • The final regulations are largely positive, addressing several concerns highlighted in Roundtable comments that could have limited taxpayers’ ability to apply the deduction against real estate rental income. 
    • For example, Treasury agreed with The Roundtable and reversed its prior position on how non-recognition transactions, such as a like-kind exchange or a contribution of property to a partnership, affect the pass-through deduction.  The proposed regulations effectively would have penalized taxpayers for engaging in non-recognition transactions. 
    • Treasury adopted the Roundtable request to allow for aggregation of trades or businesses at the “entity” level, not just the individual level.  Treasury also adopted the Roundtable request to allocate the basis of a property to partners based on “book” depreciation rules, not tax depreciation rules. 
  • In certain areas, the final rules did not adopt specific recommendations offered in Roundtable comments, but nonetheless set forth helpful guidance. 

    The proposal was a key topic of Roundtable President and CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before lawmakers released the first version of their tax overhaul in the fall of 2017.  ( Roundtable Weekly, Sept. 22, 2017) 

    • The Roundtable had asked Treasury to clarify that all real estate rental income would be considered income from a trade or business—a requirement of the statute.  Treasury declined to go this far, but did issue a proposed revenue procedure (IRS Not. 2019-07) that would establish a safe harbor for real estate rental income earned by taxpayers who spend 250 hours, directly or indirectly, on the activity. 
    • The Roundtable had encouraged Treasury to allow taxpayers to aggregate all real estate rental activities, including those conducted in separate entities, at the individual level.  While Treasury did not adopt this simplification, it did offer helpful new examples to clarify when real estate activities are sufficiently similar to permit aggregation by individuals.
  • In addition, proposed regulations issued alongside the final rules ensure that investors who receive REIT dividends indirectly through an interest in a mutual fund are eligible for the pass-through deduction—a priority for The Roundtable, Nareit, and others. 
  • TPAC will discuss issues related to the Section 199A regulations during its next meeting on Jan. 30 in Washington, held in conjunction with The Roundtable’s State of the Industry (SOI) Meeting.  

House Ways and Means Committee Chairman Richard Neal will also participate in the SOI meeting.  Neal – the long-standing co-chair of the House Real Estate Caucus – will discuss prospects for tax policy legislation with Roundtable Board Member John Fish (Chairman and CEO, SUFFOLK) on Jan. 29. 

TAX POLICY

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President Trump, Congress Agree to 3-Week Shutdown Reprieve As Negotiations Proceed Over Border Security

Posted on by Trey Jackson

President Trump today announced an agreement with congressional Democrats to reopen the federal government for three weeks—under the condition that negotiations proceed over border security, including his demand for a wall on the Mexican border.

After announcing the agreement, President Trump added, “We really have no choice but to build a powerful wall or steel barrier.  If we don’t get a fair deal from Congress, the government will either shutdown on Feb. 15 again or I will use the powers afforded to me under the laws and constitution of the United States to address this emergency.” 
(C-Span, Jan. 25)

  • The short-term agreement comes after two bills in the Senate to reopen the government failed yesterday, largely along party lines.  Today’s agreement would pave the way for Congress to quickly pass a Continuing Resolution (CR), restoring operations to approximately 25 percent of government agencies affected by the shutdown and providing back pay for 800,000 federal workers who have been furloughed or told to report to work without pay. 
  • The agreement would allow funding for agencies affected by the shutdown to continue at current levels through Feb. 15—including the Department of Homeland Security (DHS), which oversees border and immigration issues (such as the EB-5 investment program).   The deal would also require negotiations to proceed between the House and Senate over a full-year DHS funding bill that would address all aspects of border security.   
  • After announcing the agreement, Trump added, “We really have no choice but to build a powerful wall or steel barrier.  If we don’t get a fair deal from Congress, the government will either shutdown on Feb. 15 again or I will use the powers afforded to me under the laws and constitution of the United States to address this emergency.” (C-Span, Jan. 25)
  • The Senate approved the funding legislation tonight by a voice vote. The House followed, passing the CR by unanimous consent and sending the bill to President Donald Trump for his signature.  (The Hill and CNNand  Associated Press, Jan. 25)
  • The reprieve comes as airports along the East Coast reported delays today due to a lack of air traffic controllers. The Federal Aviation Administration (FAA) reported flight delays to LaGuardia Airport in New York, Newark’s Liberty International Airport in New Jersey and Philadelphia International Airport. (FAA Statement, Jan. 25)
  • Earlier this week, three aviation unions — the National Air Traffic Controllers Association, the Air Line Pilots Association and the Association of Flight Attendants-CWA — issued a statement citing the shutdown’s increasing threat to air transportation safety.  “We cannot even calculate the level of risk currently at play, nor predict the point at which the entire system will break.  It is unprecedented,” according to the statement. (AFA news release, Jan 23)

During the shutdown, the Environmental Protection Agency (EPA) deactivated the website of its Energy Star program. The Roundtable’s Sustainability Advisory Policy Committee (SPAC) has worked closely with EPA on both their Energy Star whole-building and tenant-space labeling programs.

  • The shutdown also posed a risk that payments by federal tenants to office owners could not be met. The General Services Administration (GSA), which makes the government’s rent payments in arrears after the end of the month, faced the repercussions of the shutdown by posting a message on its website to landlords.  The GSA stated it “is aware of concerns from the Lessor community regarding GSA’s ability to make timely rent payments,” and “is diligently exploring all available options.”  (Bisnow, Jan. 18)  A map showing the GSA’s lease footprint illustrated the potential impact of the shutdown, as the agency rents over 187 million square feet for federal workers and business. (Bloomberg, Jan. 4)
  • During the shutdown, the Environmental Protection Agency (EPA) deactivated the website of its Energy Star program.  The deactivation could impact local-level regulatory compliance deadlines in major urban markets that require owners to use EPA’s tools to benchmark and publicly disclose building energy consumption data.  The Roundtable’s Sustainability Advisory Policy Committee (SPAC) has worked closely with EPA on both their Energy Star whole-building and tenant-space labelingprograms.
  • On Jan. 17, Energy and Commerce Committee Chairman Frank Pallone, Jr. (D-NJ) wrote to EPA Acting Administrator Andrew Wheeler requesting information on the Energy Star’s site deactivation.   Pallone also announced this week that the full Committee will hold a hearing on Jan. 31 about the impact of the shutdown on affected agencies within its jurisdiction.

The impact of the partial government shutdown and prospects for a long-term resolution beyond Feb. 15 will be a focus of discussion during The Roundtable’s State of the Industry Meeting and Policy Advisory Committee meetings on Jan. 29-30 in Washington, DC.

PARTIAL GOVERNMENT SHUTDOWN

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President Trump, Congress Agree to 3-Week Shutdown Reprieve As Negotiations Proceed Over Border Security

Industry, Investors Await Opportunity Zones’ Clarifying Guidance Amid Shutdown Delay

Posted on by Trey Jackson

The government shutdown is slowing progress on tax guidance important to real estate, including Opportunity Zone incentives.  The IRS cancelled a Jan. 10 administrative hearing on the October proposed regulations.  However, under a special two-year IRS appropriation for tax reform implementation, and the agency’s own contingency plan, background work continues on Opportunity Zone rules and other  critical regulatory guidance.”

The  Wall Street Journal reported on Jan. 15 that “there has been a surge in site acquisitions in the zones last year as developers planned for a surge of investments. There were 58% more deals [in] the zones in the third quarter of 2018, compared with the same quarter in 2017.”  (WSJ, Jan. 15 and Real Capital Analytics.)

— enlarge graphic— 

  • The Wall Street Journal reported on Jan. 15 that “there has been a surge in site acquisitions in the zones last year as developers planned for a surge of investments. There were 58% more deals [in] the zones in the third quarter of 2018, compared with the same quarter in 2017.”  (WSJ, Jan. 15 and Real Capital Analytics.)
  • John Lettieri, chief executive of the Economic Innovation Group, a public policy organization that advocated for the inclusion of opportunity zones in last year’s tax overhaul, told The Journal, “The sooner you get regulatory clarity, the more benefit is available to investors and the sooner they can stand up a marketplace.” (WSJ, Jan. 15)
  • The Real Estate Roundtable on Dec. 19 provided formal commentsthat encourages Treasury and the IRS to clarify a number of tax issues that would remove uncertainty for potential opportunity zone investors and opportunity fund managers.  The letter was the second round of Roundtable comments on opportunity zones following Treasury’s publication of proposed regulations last October. (Roundtable Weekly, Oct. 21, 2018 and Dec. 19, 2018)
  • Roundtable Senior Vice President & Counsel Ryan McCormick participated this week in a CBRE conference call presentation on qualified opportunity zones.  Joining McCormick was Steven Kennedy (Director, PwC), a member of The Roundtable’s Tax Policy Advisory Committee Working Group on Opportunity Zones, and experts from CBRE’s capital markets and research team. The Jan. 16 CBRE PowerPoint presentation can be downloaded here.
  • Also this week, Jared Bernstein, a former chief economist to former Vice President Joe Biden, authored an op-ed in the Washington Postin support of the opportunity zone program.  Bernstein and Kevin Hassett, current chairman of the White House Council of Economic Advisers, wrote the original paper that put forward the opportunity zone concept.  In the Jan. 14 op-ed, Bernstein states, “[M]ost OZ communities have faced disinvestment and depopulation for so long, they have both the need and capacity to absorb new investment, development and people without displacing local residents … I suggest we give OZs a chance, while scrutinizing their progress.”

The future of the OZ program will be discussed by Sen. Tim Scott (R-SC) – who led the effort in Congress for enactment of the opportunity zone program – and Roundtable member Geordy Johnson (CEO, Johnson Development Associates, Inc.) on Jan. 29 during The Roundtable’s State of the Industry Meeting in Washington, DC.  Opportunity Zones will also be a focus of The Roundtable’s TPAC meeting on Jan. 30.

116th CONGRESSIONAL COMMITTEES

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Partial Government Shutdown Continues Over Border Wall Disagreement

Posted on by Trey Jackson

Unless an agreement with Congress is reached soon, President Trump this week indicated he is considering declaring a national emergency in order to fund the construction of a border wall on the southern border.  A national emergency declaration would face significant legislative and legal opposition, yet it could create a path to end the partial government shutdown that tomorrow will become the longest in U.S history, exceeding the 21-day shutdown of 1995-96.  (New York Times, Jan. 9 / NBC News, Jan. 10 / Politico, Jan. 10

Unless an agreement with Congress is reached soon, President Trump this week indicated he is considering declaring a national emergency in order to fund the construction of a border wall on the southern border.

  • Federal Reserve Chairman Jerome Powell said this week that if the current situation is prolonged, it would start to noticeably affect the economy.  “If we have an extended shutdown, I do think that would show up in the data pretty clear.”  Powell added that  the full economic impact of closed government agencies is difficult to track because data usually provided by the Commerce Department is not currently available, due to the shutdown.  (Economic Club of Washington  video interview at 13:30, Jan. 10)
  • Nine of the 15 Cabinet-level departments remain unfunded, including Agriculture, Homeland Security, State, Transportation, Interior and Justice.  800,000 federal workers won’t receive paychecks due today. (AP, Jan. 11).  Historically, federal workers ultimately do receive back pay for government shutdowns.
  • According to S&P Global Ratings Chief U.S. Economist Beth Ann Bovino, “We estimated that this shutdown could shave approximately $1.2 billion off real GDP in the quarter for each week that part of the government is closed.” (CNBC, Jan. 11) White House Council of Economic Kevin Hassett last week offered a similar assessment, estimating economic output would decrease by about 0.1 percent every two weeks. (Bloomberg, Jan. 3)
  • President Trump this week cancelled a planned Jan. 21 trip to the annual World Economic Forum in Davos, Switzerland after recently saying he may keep the government closed for “months or even years.”  (Time, Jan. 10 and AP, Jan. 4) 

    Federal Reserve Chairman Jerome Powell said that if the current situation is prolonged, it would start to noticeably affect the economy.  “If we ave an extended shutdown, I do think that would show up in the data pretty clear.”  (Economic Club of Washington video interview at 13:30, Jan. 10, 2019)

  • Despite the shutdown, The IRS announced this week that the 2018 tax filing season will begin on Jan. 28.  Last year, the IRS issued nearly $300 billion in tax refunds to 102 million taxpayers between January and May, with an average refund of more than $2,700.  Any major disruption in tax refunds could dampen economic growth.  A detailed IRS contingency plan for handling the tax filing season and enforcement and taxpayer assistance is expected soon. (IRS, Jan. 7 and TIME, Jan. 9) 
  • Additionally, until the shutdown ends, the EB-5 Immigrant Investor Regional Center Program and federal cleanups at Superfund sites around the nation are suspended.
  • The National Association of Realtors yesterday reported that the partial shutdown is starting to cause transactional delays related to federal housing, mortgage, and other programs of interest to the real estate industry (NAR, Jan. 10). 
  • “All the fluctuations that’s going on puts a pause on companies deciding what long-term investments to make,” NAR chief economist Lawrence Yun said. “Do they actively purchase a commercial property knowing there could be further disruption in the future? They could be more hesitant or go on a more [smaller] scale.”  (Commercial Observer, Jan. 2)
  • Negotiations over the border wall impasse broke down this week when President Trump ended a meeting with Democratic leaders. Trump tweeted that the meeting had been a “total waste of time” and reported that when House Speaker Nancy Pelosi (D-CA) told him that Democrats wouldn’t approve border-wall funding, “I said bye-bye, nothing else works!”  (Wall Street Journal, Jan. 10) 

The effects of the government shutdown and prospects for policymaking in the new Congress will be topics for discussion during The Roundtable’s Jan. 29-30 State of the Industry Meeting in Washington, DC.

 

Tax Technical Corrections Draft Bill Released by Outgoing House Ways and Means Chair; New Chair Plans Hearings on Tax Overhaul’s Impact

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Outgoing House Ways and Means Chairman Kevin Brady (R-TX) released a draft bill on Jan. 2  that includes tax technical corrections to previously enacted legislation, including the Tax Cuts and Jobs Act (TCJA) overhaul. 

Outgoing House Ways and Means Chairman Kevin Brady (R-TX) released a  draft bill  on Jan. 2  that includes tax technical corrections to previously enacted legislation, including the  Tax Cuts and Jobs Act (TCJA)  overhaul. 

  • Rep. Brady stated, “We are releasing this discussion draft of technical corrections with respect to the TCJA and other tax legislation to inform stakeholders and provide the American people an opportunity to submit feedback on the draft provisions.  I look forward to gaining valuable feedback from the public and working with my colleagues in the House and Senate on both sides of the aisle as we continue to provide clarity and certainty for job creators across the country seeking to invest in their workers and our communities.”  
  • The path forward for a technical corrections bill in the 116th Congress will be set by the new Ways and Means Chairman – Rep. Richard Neal (D-MA).
    • Clarification that the recovery period for qualified improvement property is 15 years, or 20 years under the alternative depreciation system (ADS);
    • Clarification that REIT dividends received indirectly by a mutual fund shareholder qualify for the 20% pass-through deduction;
    • Clarification that the Opportunity Zone tax deferral benefit only extends to capital gains – a position that was also incorporated in Treasury’s October proposed regulations.
    • Numerous other clarifications in the Brady draft relate to business interest (§ 163(j)), the pass-through deduction (§ 199A), and the limitation on active losses (§ 461(l).  

The path forward for a technical corrections bill in the 116th Congress will be set by the new Ways and Means Chairman – Rep. Richard Neal (D-MA) . 
  • There is strong bipartisan support for certain technical corrections, such as the 15-year recovery period for qualified improvement property, which could help spur action on a larger tax package.  
  • However, the current draft does not clarify that a business electing out of the new interest limitation is subject to a 30-year ADS recovery period for residential rental property placed in service before 2018.  The issue could be addressed in future versions of the legislation.  
  • Prospects for enactment of technical changes is uncertain, although Ways and Means Chairman Neal stated this week that hearings on tax legislation may be held in early 2019 on the TJCA’s impact and alternative proposals.  Neal also suggested that he will seek agreement with Ranking Member Brady on legislation addressing healthcare, infrastructure and retirement savings. (Wall Street Journal and Tax Notes, Jan. 4)

The Roundtable’s Tax Policy Advisory Committee (TPAC) will review these proposals, which will be a focus during TPAC’s Jan. 30 meeting, held in conjunction with The Roundtable’s State of the Industry Meeting in Washington, DC.  

 

White House Executive Order Aims to Stimulate Opportunity Zone Investment by Channeling Federal Resources; Additional OZ Regulations Expected in January

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President Trump on Dec. 12 signed an Executive Order that seeks to facilitate long-term equity investment in new Opportunity Zones and other low-income communities.  The order formally established the White House Opportunity and Revitalization Council.  (White House statement and PBS Video, Dec. 12)

President Trump on Dec. 12 signed an Executive Order that seeks to facilitate long-term equity investment in new Opportunity Zones and other low-income communities.   (White House statement and PBS Video)

  • Congress created Opportunity Zones in the 2017 Tax Cuts and Jobs Act to encourage long-term, capital investment in economically struggling, low-income communities.  Opportunity Funds that invest in tangible business property, such as real estate, located in a qualifying zone are eligible for tax benefits that are tied to the investment holding period.  The capital gain on an Opportunity Fund investment is excluded from tax altogether if the asset is held for 10 years or more. 
  • In June 2018, the Treasury Department designated 8,761 communities in all 50 States, the District of Columbia, and five Territories as Opportunity Zones.  (IRS Notice 2018-48 and Roundtable Weekly, June 22) 
  • The new Council will lead joint efforts across executive departments and agencies to implement reforms that streamline existing regulations, optimize the use of federal resources, and align the requirements for public and private investment programs in economically distressed communities. The Council will also present the President with a number of reports identifying and recommending ways to encourage investment in these areas.   (White House statement, Dec. 12).  The White House signing was live streamed and included comments from Sen. Tim Scott (R-SC), the original author and sponsor of Opportunity Zone legislation.  (New York Times, Jan. 29, 2018)
  • The Council-chaired by Secretary of Housing and Urban Development Ben Carson-will be comprised of officials from 13 Federal agencies and include Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross.

Second Round of Opportunity Zone Regulations Expected in January

  • The Treasury Department released its first round of Proposed Regulations governing the Opportunity Zone program in October.   An Oct. 26 GlobeSt.com interview with Real Estate Roundtable President & CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick focused on the initial regulatory guidance and its implications for the real estate industry.

    The next round of Opportunity Zone regulations may be released in January, according to Treasury Assistant Secretary for Tax Policy David Kautter, above.  (Tax Notes, Dec. 14). 
  • The next round of Opportunity Zone regulations may be released in January, according to Treasury Assistant Secretary for Tax Policy David Kautter.  (Tax Notes, Dec. 14)
  • The day after the White House Executive Order signing, Kautter told reporters that it would be “about January before we come out with additional guidance.”  Kauter noted, “The first set of regulations was designed to provide rules for getting funds up and operating, and the second set of rules is more about the operational aspects of the funds themselves.”
  • According to the New York Times, an anonymous administration official said Tuesday that the coming regulations would include reporting requirements for investments in Opportunity Zones to evaluate the program‘s impact.  (New York Times, Dec. 12)

The Roundtable’s Tax Policy Advisory Committee (TPAC) recently convened a panel on Opportunity Zones that included the tax counsel for Senator Tim Scott (R-SC).  TPAC’s Opportunity Zone Working Group is developing additional comments on how the industry can help the program fulfill its ambitious objective of stimulating economic development and job creation in low-income communities. (Roundtable Comment Letter, June 28 and Roundtable Weekly, July 20)