Category: Roundtable Weekly

Virginia Plans to Advance Internet Sales Tax Legislation as Opponents Aim to Roll Back Supreme Court’s Wayfair Decision

Posted on by Trey Jackson

The Supreme Court’s recent South Dakota v. Wayfair decision allowing States to collect tax owed on remote internet sales purchases could generate an estimated $250 million in annual revenue for the state of Virginia, which is aiming to start its online sales tax program this summer. 

The Real Estate Roundtable and seven other national trade organizations wrote to congressional leaders on Sept. 17, 2018 opposing any legislation that reverses or limits the Supreme Court’s June 22 decision in South Dakota v. Wayfair, which allows States to collect tax owed on remote internet sales purchases.

  • Many states are seeking to expand their tax authority over online sales in the wake of the Supreme Court’s June 21 South Dakota v. Wayfair decision.  The 5-4 Wayfair ruling strongly suggests that South Dakota’s law requiring remote sellers to collect sales tax on more than $100,000 of in-state sales or 200 transactions complies with constitutional law.  
  • Virginia Finance Secretary Aubrey L. Layne Jr. recently told Bloomberg Tax that a state bill in next year’s Virginia legislative session would align with principles supported in the high court’s Wayfair decision.  Layne said details of the bill may be unveiled in December and added, “My guess is it probably won’t be effective until July.”  (BNA, Oct. 30) 
  • Despite the Wayfair ruling, a bipartisan quartet of House members led by Rep. Jim Sensenbrenner (R-WI) introduced legislation on Sept. 13 that would  prohibit states from requiring remote sellers with less than $10 million in national annual sales from collecting and remitting sales and use taxes – pending a compact approved by Congress.  In addition to Sensenbrenner’s Online Sales Simplicity and Small Business Relief Act of 2018 (H.R. 6824), other bills in Congress would go even further in reversing the Wayfair decision.   (Tax Notes, Nov. 7)
  • Opponents of the decision are asking Congress to include restrictions on States in an end-of-year bill.  (Bloomberg, Oct. 24).  However, legislation to roll back Wayfair is unlikely.  Any major legislation must be negotiated by leaders of both parties, who have limited time during a Lame Duck session.  Congressional negotiators are expected instead to focus on a handful of “must pass” bills. 
  • The Real Estate Roundtable and seven other national trade organizations wrote to congressional leaders on Sept. 17 opposing legislation that reverses or limits Wayfair.  (Wayfair Comment Letter, Sept. 17) 

The business coalition letter explains that for more than a decade, industry groups “have undertaken significant efforts to establish economic parity between online and brick-and-mortar sellers that would better reflect the changing dynamics of today’s omnichannel marketplace. For Congress to insert themselves post-ruling only creates additional uncertainty and further complicates the implementation process, while undermining the level playing field created by the Wayfair decision.”  (Roundtable Weekly, Sept. 21) 

The eight organizations conclude the letter by offering to work with Congress on any problems that may arise from state implementation of remote internet sales tax collection allowed by Wayfair.  (Roundtable Weekly, June 22)

 

Guidance on Business Interest Deduction Limit May Address Real Estate Investment Issues

Posted on by Trey Jackson

The Treasury Department and Internal Revenue Service are close to issuing draft regulations on the new business interest expense limitation, enacted in last year’s tax overhaul.  Regulations related to the Tax Cuts and Jobs Act can be designated for an expedited, 10-day review by the White House Office of Management and Budget before publication and public release, though the timetable can be extended if needed.

A Feb. 21, 2018 Roundtable letterurged Treasury to clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.

  • The Tax Cuts and Jobs Act capped the amount of interest that a business with revenue over $25 million can deduct annually – to no more than 30 percent of earnings before interest, taxes, depreciation, and amortization.  The provision also includes an important exception for an “electing real property trade or business.” 
  • This exception reflects policymakers’ understanding that limits on the deduction for interest expense could have enormous negative consequences for property values, real estate markets, and economic growth.  (Reference: Real Estate Forum, Jan/Feb 2018,  Decoding The New Tax Bill) 
  • The Real Estate Roundtable on Feb. 21, 2018 wrote to Treasury Secretary Steven Mnuchin and offered a number of recommendations to resolve ambiguities in how the new limitation will apply.  The Roundtable requested clarifications to ensure the exception operates as intended for common real estate ownership arrangements – focusing on the scope and application of the exception for an electing real property trade or business. 
  • The letter urged Treasury to clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is indeed exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.  As relevant examples, the letter describes four common scenarios where the financing of a real property trade or business occurs through a tiered structure. Clarifying the rules for real estate in the context of tiered arrangements will help avoid potential disruptions.  (Roundtable comment letter, Feb. 21, 2018)
  • In April, Treasury and the IRS released Notice 2018-28 to provide interim guidance on the new limit until the proposed regulations are issued. For real estate investors, however, the Notice leaves unanswered some of the key issues related to the financing of real estate.  (IRS, April 2 and Roundtable Weekly, April 6)   
  • On Oct. 25, OMB’s Office of Information and Regulatory Affairs (OIRA) acknowledged receipt of the proposed section 163(j) rules from Treasury.  After OIRA completes its review, the proposed guidance will be issued.  A second set of regulations, focused specifically on pass-through entities, is expected in December.

The Roundtable’s Tax Policy Advisory Committee will continue to seek appropriate clarifications as Treasury moves forward with regulatory projects related to implementation of the Tax Cuts and Jobs Act.

Pipe-Bomb Mailings Draw Attention to Building Security, Terrorism Risk Insurance Program

Posted on by Trey Jackson

In the wake of this this week’s national pipe-bomb mail campaign, the implications for building security and terrorism risk insurance are profiled in today’s The Real Deal.  (Real Deal NY, Oct. 26)

In the wake of this this week’s national pipe-bomb mail campaign, the implications for building security and terrorism risk insurance are profiled in today’s The Real Deal.  (Real Deal NY, Oct. 26)

  • Real Estate Roundtable Senior Vice President Chip Rodgers is quoted in the article, which reports how numerous building managers are ramping up security after multiple suspicious packages containing potential explosive devices were found mailed to high-profile Democrats throughout the country. 
  • The Real Deal also reports that the Terrorism Risk Insurance Act (TRIA) helps building owners manage the risks associated with large-scale acts of terrorism.
  • Rodgers comments that although the small size of the devices discovered this week are not likely to trigger TRIA, the attempted attacks show how “terrorism continues to pose a clear and present danger to our nation, to American businesses and to real estate.” 
  • With the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) scheduled expiration date at the end of 2020, The Roundtable is advocating for the long-term reauthorization of the program.Rodgers also notes that “TRIA does not stop terrorist attacks, but it does undermine the goals of terrorists who seek to weaken or destroy our economy.”  He adds other nations have permanent terrorism insurance programs because they “recognize that markets cannot underwrite this risk.”
  • “There is no homeland security without economic security,” Rodgers told The Real Deal.

The Roundtable’s Homeland Security Task Force (HSTF) and Risk Management Working Group (RMWG) met on Oct. 18 at the Federal Bureau of Investigation’s New York City office to discuss the threat landscape and real estate industry concerns.  HSTF and RMWG will meet next on Nov. 13 at the FBI’s Washington, DC headquarters.

Congressional Lame Duck Session Could Consider Condominium Tax Accounting and Other Real Estate Tax Policy Issues

Posted on by Trey Jackson

Following the Nov. 6 mid-term elections, a “Lame Duck” session of Congress is expected to consider various tax policies of importance to commercial real estate.   

Several tax issues of importance to real estate may be in play during the November “Lame Duck” congressional session, including  condo tax accounting rules; technical corrections; the cost recovery period for qualified improvement property (QIP);and tax extenders.

  • As part of a potential year-end omnibus spending bill to fund the government, tax policies that may be addressed include condo tax accounting rules; technical corrections; the cost recovery period for qualified improvement property (QIP); and tax extenders.  (Roundtable Weekly, Oct. 12) 
  • Current condo tax accounting rules require multifamily developers of buildings with five or more residential units to recognize income and pay tax on their expected profit as construction is ongoing — well before pre-sale transactions are closed and full payment is due from the buyer.  This mismatch of cash flow and tax liability prevents income tax deferment until a condo building is finished.   Home builders of single-family homes, townhouses and row houses are not subject to this accounting rule restriction. 
  • A House bill introduced last summer by Reps. Carlos Curbelo (R-FL) and Joe Crowley (D-NY) aimed to correct this disparity.  Although the Fair Accounting for Condominium Construction Act (H.R. 3659) stalled in 2017, it could serve as a template for inclusion in year-end tax legislation.  The Real Estate Roundtable supports lawmakers’ efforts to pass H.R. 3659. 
  • Other congressional efforts to ensure that development accounting rules treat condos like other residential construction included a 2016 letter from 10 members of the Senate Finance Committee urging regulatory corrections to former Treasury Secretary Jack Lew. 
  • Roundtable President and CEO Jeffrey DeBoer on April 7, 2017 sent a letter to Treasury Secretary Steven Mnuchin   outlining eight regulatory actions the Treasury Department could take to stimulate new real estate investment, job creation, and economic growth.  Among the recommendations addressed in the letter are tax accounting for new condominium construction; the Foreign Investment in Real Property Tax Act, tax treatment of private real estate funds and partnership tax rules. 

Last week, an article on the condo tax accounting issue in The Real Deal included a quote from Roundtable Senior Vice President & Counsel Ryan McCormick, who commented on the outlook for correcting the current rules.  “Legislation may be the most likely route, in light of all the work ongoing at Treasury with tax reform,” McCormick said.

Roundtable Comment Letter Urges Treasury to Simplify, Streamline New Pass-Through Deduction Regulations

Posted on by Trey Jackson

The Real Estate Roundtable on Monday submitted detailed recommendations to the Treasury Department on simplifying and streamlining  the new 20 percent tax deduction for pass-through businesses. (Roundtable letter, Oct. 1)

The   Real Estate Roundtable on Monday submitted detailed recommendations to the Treasury Department on simplifying and streamlining  the new 20 percent tax deduction for pass-through businesses. (Roundtable letter, Oct. 1)

  • Passed as part of last year’s tax overhaul, the deduction can reduce the top tax rate on qualifying pass-through income, including rental income, to 29.6 percent.  Once it is fully implemented, section 199A will be a powerful incentive for capital investment and job growth.
  • The comment letter from Roundtable President and CEO Jeffrey DeBoer suggests four major simplifications that would provide greater certainty, lessen the need for wasteful restructuring, and reduce taxpayer-government controversies.   

 Trade or business definition  
The final regulations should clarify that rental income from real property held for the production of rents will be considered a trade or business for purposes of section 199A;

Aggregation  
The final regulations should allow taxpayers to treat all qualifying real estate rental activities, whether held directly or through a pass-through entity, as if held in a single “trade or business” for purposes of section 199A;

Non-recognition transactions 
When assets with associated unadjusted basis immediately after acquisition (UBIA) are transferred in a non-recognition transaction (such as a like-kind exchange or the contribution or distribution of assets involving a partnership or S corporation), the general rule should be that the UBIA of an asset (and its duration) carries over; and

Separating trades and businesses 
The final regulations should provide rules to help taxpayers ascertain when multiple activities (including multiple activities conducted in a single entity) constitute discrete trades or businesses.

  • With a few exceptions, last year’s Tax Cuts and Jobs Act limited the pass-through deduction to businesses with employees or capital-intensive businesses that invest in long-lived (i.e., depreciable) assets, including real estate.  This so-called wage/capital limitation applies to partnerships, S corporations, and sole proprietorships, but does not apply to ordinary REIT dividends and income from publicly traded partnerships.
  • During the tax reform debate, The Roundtable’s Tax Policy Advisory Committee (TPAC) formed a task force to review the regulations, analyze their impact on real estate investment and jobs, and craft specific recommendations for policymakers. 
  • The pass-through deduction (section 199A) was a key element of Roundtable President and CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before lawmakers released the first version of the proposal in the fall of 2017.   (Roundtable Weekly, Sept. 22, 2017)

TPAC will continue to offer insight to Treasury officials and congressional tax-writing committees before final regulations are expected by the end of the year.

 

Senate Democrats and House Republicans Urge Tax Policy Correction for Real Estate Improvements’ Cost Recovery Period

Posted on by Trey Jackson

Two recent letters – one from 16 Democratic Senators to Treasury Secretary Steven Mnuchin and the other from 58 House Republicans to GOP leadership – urge policymakers to fix an unintentional drafting mistake in last year’s tax overhaul that mistakenly increased the cost recovery period for qualified improvement property (QIP).  (House Letter, Oct 2 and Senate Letter, Sept 24) 

The tax policy drafting error currently affects leasehold improvements, expenditures made to improve common spaces in shopping centers and office buildings, and other interior improvements to nonresidential structures.

  • The drafting error in the tax law has resulted in a significantly longer 39-year cost recovery period for new, qualified nonresidential interior improvements.  The original intent of Congress was to allow the immediate expensing of QIP – or provide a 20-year recovery period in the case of taxpayers electing out of new limitations on the deductibility of business interest.  
  • The mistake currently affects leasehold improvements, expenditures made to improve common spaces in shopping centers and office buildings, and other interior improvements to nonresidential structures.  The current, longer cost recovery period effectively increases the after-tax cost of upgrading and improving commercial real estate.  (“Correcting the Drafting Error Involving the Expensing of Qualified Improvement Property” – The Tax Foundation , May 30)     
  • In Monday’s joint letter to House Speaker Paul Ryan (R-WI) and House Ways and Means Committee Chairman Kevin Brady (R-TX), 58 House Republican members state, “While they wait for Congress to act to correct this error, these businesses are forgoing renovations, halting plans to revitalize declining malls, and placing safety improvements on hold.  Not only does this hurt restaurants and retailers, but also the businesses involved in the planning and renovations, and ultimately our communities.  
  • This week’s House letter urges GOP leadership to address the QIP investment drafting error via legislation, while also recommending that Treasury should issue interim guidance while refraining from enforcing the drafting error.  

    Congress could address the issue during the lame duck congressional session between the mid-term election and January.

  • In the Sept. 24 joint letter to Secretary Mnuchin, 16 Senate Democrats address the need for a QIP correction, stating: “Improper implementation of this portion of the 2017 law would cause disruption to a wide range of industries, including the nation’s retail, restaurant and commercial property industries. Given this, and the potential for considerable harm to local economies, we believe it would be prudent for Treasury to address this issue and its interpretation through guidance.” 
  • The Real Estate Roundtable and a broad-based business coalition urged Secretary Mnuchin in August to issue guidance clarifying certain provisions included in tax overhaul legislation enacted last year – including the cost recovery period for qualified improvement property. (Coalition letter, Aug. 22) 
  • Roundtable President and CEO Jeffrey DeBoer stated, “In 2015, Congress voted overwhelmingly to permanently extend the 15-year recovery period for certain property improvements.  By passing tax reform, Congress intended to consolidate those changes.  Treasury should now use its authority to provide taxpayers with relief until a technical corrections bill is enacted.  Treasury guidance will remove taxpayer uncertainty, unlock investment, and spur job-creating property upgrades and renovations.”  (Roundtable Weekly, Aug. 24)

Congress could address the issue during the lame duck congressional session between the mid-term election and January. A number of tax issues are outstanding, including tax reform technical corrections and expired tax provisions.

 

Banking Regulators Invite Comments on Proposed Rule for High Volatility Commercial Real Estate (HVCRE) Loans

Posted on by Trey Jackson

Three federal banking agencies on Tuesday invited public comment on a proposal to modify capital rules for high volatility commercial real estate (HVCRE) exposures – as required by Sec. 214 of the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155).  (Roundtable Weekly, May 25)

Three federal banking agencies on Sept. 18, 2018 invited public comment on a proposal to modify capital rules for high volatility commercial real estate (HVCRE) exposures.

  • Following the enactment of S. 2155 on May 24, federal regulatory agencies were tasked with developing a rule to clarify the treatment of High Volatility Commercial Real Estate acquisition, development, or construction (HVCRE ADC) loans in accordance with the new statute. 
  • The law’s changes to the HVCRE capital rules are aimed at clarifying and promoting sustainable acquisition, development and construction and lending by addressing key deficiencies in the agencies’ prior regulations governing the criteria for HVCRE or HVADC loans. (Roundtable HVCRE Comment Letter, March 2) 
  • The proposal by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation also asks for comment on certain terms contained in the revised definition of high volatility commercial real estate.
  • The changes, when finalized, would apply to all banking organizations subject to the agencies’ capital rules. Comments will be accepted for 60 days after publication in the Federal Register.  

Since 2015, The Roundtable’s HVCRE Working Group and industry coalition partners have played a key role in advancing specific reforms to the HVCRE Rule and will develop a comment letter to the agencies in response to the current proposal.

 

New Anti-Terrorism Guide for Commercial Building Security Professionals

Posted on by Trey Jackson

An online anti-terrorism tool to help commercial office building security professionals perform facility assessments was released this week by The Department of Homeland Security’s (DHS) Science and Technology Directorate.  (Facility Executive, Sept. 17).

Businesses filing for SAFETY Act protections can receive Designation and Certification for their Qualified Anti-Terrorism Technology, which can cap their liability.

  • The web-based tool – based on the Best Practices for Anti-Terrorism Security (BPATS) for commercial office buildings – streamlines the application process for building owners seeking to obtain Qualified Anti-Terrorism Technology (QATT) status. (Homeland Preparedness News, Sept. 19) 
  • The BPATS Assessment Tool for Commercial Facilities is a program for evaluating a building’s security system. This assessment approach can be included in support of an application should a building owner chose to seek protections under the  Support Anti-Terrorism by Fostering Effective Technologies (SAFETY) Act. 
  • Businesses filing for SAFETY Act protections can receive Designation and Certification for their Qualified Anti-Terrorism Technology, which can cap their liability. The SAFETY Act was enacted in 2002 because of concerns that liability would hinder investment in the latest security technologies and programs following the attacks of September 11, 2001.  (DHS News Release, Sept. 17) 
  • “With the BPATS, our goal was to develop a comprehensive tool that security professionals could use to assess the anti-terrorism security of commercial office buildings,” said Bruce Davidson, Director of DHS’ Office of SAFETY Act Implementation (OSAI). “The output from their BPATS assessment should enable building leadership to take steps to enhance their building’s security and provide the foundation for a well-structured follow-on SAFETY Act application.” 
  • The preferred users of this tool are trained security professionals whose credentials will be reviewed by the National Institute of Building Sciences before gaining access to the tool. They would be trained in using the checklist to evaluate various components of building security by SAFETY Act standards, including access control, risk awareness, physical security, IT security, and more. The guide spans seven categories, 411 best practices, and approximately 60 associated common practices. 
  • The DHS’ Science and Technology Directorate reached a significant milestone earlier this year approving its 1,000th application for SAFETY Act protection.  The Roundtable’s Homeland Security Task Force has worked constructively with DHS on this issue over the years.  The Task Force will be meeting in two special sessions this fall. 

Publications:

Best Practices for Anti-Terrorism Security (BPATS) for Commercial Office Buildings  

Field Guide: Conducting BPATS Based Assessments of Commercial Facilities

 

Ways and Means Passes “Tax Reform 2.0” Legislation; House GOP Leaders Plan September Floor Vote

Posted on by Trey Jackson

The House Ways and Means Committee yesterday passed “Tax Reform 2.0” legislation along party lines (21-15) that would make permanent individual and pass-through business tax cuts set to expire at the end of 2025.  House leaders plan a full chamber vote by the end of this month to highlight the GOP’s signature economic policy achievement before the November mid-term elections. (House Ways and Means Committee Mark-up Resourcesand Reuters, Sept. 13)

House Ways and Means Chairman Kevin Brady (R-TX) during the “Tax Reform 2.0” mark-up on Sept. 13.

  • The proposed legislation consists of three bills that would make permanent the individual and pass-through business provisions of the Tax Cuts and Jobs Act (P.L. 115-97); boost employer and individual retirement plans; and allow startup businesses to write off more of their costs.  (Ways and Means summary of Protecting Family and Small Business Tax Cuts Act of 2018 – H.R. 6760)
  • House Ways and Means Chairman Kevin Brady (R-TX) commented on the 2.0 package in an interview with CNBC’s Squawkbox, “We expect to have it ready for a floor vote in September. Locking in the permanence, we think, is fair and it’s pro-growth, creating another million and a half new jobs in the long run.”
  • Despite statements by Brady and House Speaker Paul Ryan (R-WI) about a full House vote this month, attracting support from GOP incumbents in high-tax states may be difficult due to a permanent extension of the new cap on federal deductions for state and local tax deductions (SALT).  The tax reform package is also unlikely to pass the Senate without support from Democrats, although the three House bills may be considered separately.
  • The nonpartisan, congressional Joint Committee on Taxation released a report on Sept. 12 estimates that the House’s second round of tax cuts could cost more than $657 billion over a decade. The costs of making the tax cuts permanent alone would cost about $631 billion, according to the report.

The House will be out of session until Sept. 25, which gives Congress four days to pass government funding by Oct. 1 to avoid a shutdown.  Yesterday, House Appropriations Chairman Rodney Frelinghuysen (R-NJ) announced at a meeting of House and Senate conferees that a deal has been reached on a continuing resolution to keep all of the government funded through at least Dec. 7. 

 

EPA to Commence Review Period of New ENERGY STAR Building Scores; Office, Industrial Certifications Temporarily Suspended Pending Further Analysis

Posted on by Trey Jackson

Last month the Environmental Protection Agency (EPA) announced the first updates to its ENERGY STAR scoring models in over a decade, as the agency moved from 2003 to 2012 data for its foundation to rate buildings.  (See Roundtable Weekly, Aug. 17.)  EPA announced yesterday that it will commence a “review period” to solicit stakeholder feedback on these recent ENERGY STAR score updates.  Certifications for office, industrial, and certain other building categories will be temporarily suspended during this review period.

EPA announced yesterday that it will commence a “review period” to solicit stakeholder feedback on recent ENERGY STAR score updates.  Certifications for office, industrial, and certain other building categories will be temporarily suspended during this review period.

  • ENERGY STAR is the key federal label that rates and compares U.S. buildings’ energy performance.  Currently, EPA lists 34,625 buildings and plants, representing more than 5 billion square feet of commercial space across the country, as ENERGY STAR certified.  Through initial analyses of Sustainability Policy Advisory Committee (SPAC) membership, The Roundtable  learned that the application of the new 2012 data appears to result in materially different outcomes on scores depending upon building size, geography, and source of heating, and these outcomes were inconsistent.  RER on behalf of the industry highlighted the issues to the EPA, and the EPA responded with the announced review period.
  •  “The review period will help us ensure that the models are working as intended to deliver energy performance metrics that empower … the business case for owning and operating energy-efficient buildings,” the agency stated.  During the review period, EPA and real estate stakeholders will have the opportunity to assess variables such as a building’s size, location, and fuel mix, to fully consider if these and other factors have had an indiscriminate impact on the new scoring models.
  • “We commend EPA in taking this step toward transparent decision making so our industry can recommend any necessary, data-driven changes to ENERGY STAR’s updated scoring models ,” said Roundtable President and CEO, Jeffrey D. DeBoer.  “The Roundtable and our Sustainability Policy Advisory Committee look forward to partnering with EPA during its review period.”
  • Other federal agencies, state and local governments, and non-governmental organizations frequently rely on ENERGY STAR’s tools and rating system for their own programs related to building energy efficiency.  EPA advised it will “coordinate with program implementers and policymakers that leverage the ENERGY STAR score on the appropriate use of the new metrics during the review period.”

The review period and temporary suspension of ENERGY STAR building certifications do not apply to multifamily, data center, hospital, senior care communities, and manufacturing facilities, according to EPA.