News Type: Roundtable Weekly

FSOC Sees CRE Among Risks to U.S. Economy in 2024

Posted on by Abigail Grenadier

Last week, the Financial Stability Oversight Council (FSOC) released its 2023 Annual Report, identifying commercial real estate among the major financial risks to the U.S. economy in 2024. (FSOC 2023 Annual Report).

Report Findings

  • Developed by the FSOC, the report reviews financial market developments, describes emerging threats to U.S. financial stability, identifies vulnerabilities in the financial system, and makes recommendations to mitigate threats and vulnerabilities.
  • Citing the almost $6 trillion of commercial real estate loans outstanding in the second quarter of 2023, roughly half of which are held by U.S. banks, the report raises concerns about  “a substantial volume” of these loans that are set to mature in the next few years. (Marketwatch, Dec. 14)
  • The report states, “Elevated interest rates, high costs, and potential structural changes in demand for CRE have heightened concerns about CRE. Maturing loans and expiring leases amid weak demand for office space have the potential to strain office sector conditions further, which could cause stress to spread beyond this segment of the CRE market.”
  • The report also cites the July 2023 policy statement by the banking agencies on Prudent Commercial Real Estate Loan Accommodations and Workouts, as requested in the Roundtable’s March comment letter, and notes that accommodations and workouts are often in the best interest of borrowers and lenders.
  • The FSOC recommends that supervisors, financial institutions, and investors continue to monitor CRE exposures and concentrations closely and track market conditions. (U.S. Department of Treasury Press Release, Dec. 14)

Looking Ahead

  • In the op-ed, Rodgers stated, “To help rebalance these maturing loans, it is important to advance measures that will encourage additional capital formation. To that end, it is essential to bring more foreign capital into U.S. real estate by lifting legal barriers to investment, as well as to repeal or reform the archaic Foreign Investment in Real Property Tax Act (FIRPTA). Importantly, policymakers must not hike the tax rate on capital gains, end carried interest, or alter the 1031 like-kind exchange provisions.” (ULI Op-ed Dec. 18)
  • The paper also cited that around one-third of all loans, and the majority of office loans, may encounter substantial cash flow problems and refinancing challenges.
  • RER board member Scott Rechler (RXR) was quoted in the Wall Street Journal this week discussing the outlook for 2024. “In 2024, it’s game time. Owners and lenders are going to have to come to terms as to where values are, where debt needs to be, and right-sizing capital structures for these buildings to be successful.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will discuss many of these issues at our State of the Industry Meeting on January 23, 2024.

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Roundup: Lawmakers Seek Action on Affordable Housing Incentives, Senators Push Treasury for EV Recharging Station Guidance, and Joint Tax Committee Releases Long-Awaited “Bluebook”

Posted on by Abigail Grenadier

House Ways and Means Committee members sent a bipartisan letter to House Leadership last Friday urging consideration of the Affordable Housing Credit Improvement Act (H.R. 3238) in any potential tax legislation brought to the floor in 2024. (Letter, Dec. 15)

AHCIA Provisions

  • Since the introduction of H.R. 3238 in May, the bill has garnered strong bipartisan support with 200 cosponsors—100 Republicans and 100 Democrats. (summary of AHCIA)
  • Representatives Darin LaHood (R-IL), Suzan DelBene (D-WA) and others wrote to House leadership urging inclusion of two key changes to the low-income housing tax credit (LIHTC) in any tax legislation that emerges (Tax Notes, Dec. 15):
  • Restoring the 12.5% increase in state allocation of housing credits that expired at the end of 2021, and
  • Lowering the threshold of private activity bond financing (currently 50%) that a project must meet in order to qualify for the maximum amount of 4% housing credits. 
  • The competitive and over-subscribed LIHTC program is a critical federal tool for addressing the widespread lack of affordable rental housing. The arbitrary 50% bond financing requirement creates a barrier to affordable housing production, especially for the growing number of states that fully utilize their private activity bond cap. (Roundtable Weekly, May 19)

Senators Push Treasury to Finalize Rules for EV Recharging Infrastructure Incentives

  • The Roundtable previously submitted detailed comments seeking guidance requesting greater clarity for real estate owners and others contemplating new investments in EV recharging stations.
  • The Inflation Reduction Act generally limits the credit to facilities installed in rural or low-income census tracts. The letter encourages Treasury to adopt an inclusive definition that effectively covers any tract if 10 percent or more of the “census blocks” inside the tract are rural. 
  • The Senators’ letter includes other requests that align with the Roundtable’s comments and aims to help the administration realize its goal of deploying 500,000 chargers by 2030. For example, the Senators urge that the rules treat each port at a refueling property as a “single item” that effectively qualifies for its own credit.

Joint Tax Committee Releases “Bluebook” Describing Recent Tax Laws

Joint Committee on Taxation logo
  • On Friday, Congress’s nonpartisan Joint Committee on Taxation released its long-awaited explanation of recently enacted tax laws.
  • The so-called “JCT Bluebook” is often relied upon by Treasury officials and federal courts when implementing and interpreting tax statutes. 

Congress reconvenes in Washington the week of January 8, where they will face a fast-approaching deadline for fiscal year 2024 spending bills and additional priorities, including a tax package.

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Bipartisan Legislation to Improve REITs’ Flexibility and Competitiveness Gains Traction in the House

Posted on by Abigail Grenadier

A bill to increase the limit on the amount of assets a REIT can own through a fully taxable subsidiary is gaining momentum in the House. The bipartisan measure has picked up 18 additional cosponsors from the tax-writing Ways and Means Committee since its introduction in late August by Representatives Mike Kelly (R-PA) and Brian Higgins (D-NY). (Legislative text of H.R. 5275)

Taxable REIT Subsidiaries

  • In 1999, Congress authorized REITs to create taxable subsidiaries (C corporations) that can engage in activities not otherwise allowed at the REIT level. Common activities undertaken by taxable REIT subsidiaries (TRSs) include services such as landscaping, cleaning, concierge, childcare, and catering, among others. As professional real estate management evolved, the change was necessary to ensure REITs could compete with other full-service real estate businesses.
  • H.R. 5275 would raise the limit on a REIT’s assets attributable to its taxable subsidiary from 20 to 25 percent. The legislation would not change the longstanding REIT income rules requiring that at least 75 percent of the REIT’s total income come from sources like real property rents and interest from real estate mortgages. Similarly, the legislation would not change the REIT asset test, which requires that at least 75 percent of the value of the REIT’s assets consist of real estate, cash, cash items, and government securities.
  • The Roundtable supports the legislation to raise the TRS limitation. The issue is also a tax priority for Nareit, which is leading the outreach effort on Capitol Hill. The current 20 percent limit has created particular challenges for REITs seeking to expand and acquire assets outside the United States, such as digital infrastructure. Raising the threshold to 25 percent would restore the limit to its prior level and allow U.S.-based businesses to continue growing in competitive foreign markets.

The Roundtable and its Tax Policy Advisory Committee (TPAC) will continue working closely with Nareit and other industry partners in support of H.R. 5275 as deliberations continue on tax legislation.

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Roundtable Chairman Raises Concerns About Florida Law Impacting Foreign Investments in Real Estate 

Posted on by Abigail Grenadier
Real Estate Roundtable Chairman John Fish during The Roundtable's Fall 2023 Meeting

Roundtable Chairman John Fish (Chairman & CEO, Suffolk), above, was quoted in media articles this week raising concerns about certain aspects of a new Florida law that would limit and regulate the sale and purchase of certain Florida real property by “foreign principals” from “foreign countries of concern.”

Foreign Investment in Florida Property

  • Fish commented to Bloomberg about Florida’s SB 264, stating, “The law is far-reaching, very, very confusing, and the unintended consequences would be very, very detrimental.” (Bloomberg, Dec. 11 | Bisnow and Inman, Dec. 12)
  • The Real Estate Roundtable urged the Florida Real Estate Commission on Sept. 5 to consider specific concerns about implementing the state law, which could impair capital formation and hinder the important role legitimate foreign investment plays in U.S. real estate, the broader economy, and job growth. (Roundtable Weekly, Sept. 8)

Need for Clarifications

Florida State seal
  • In response, the Florida Department of Commerce on Sept. 21 proposed a positive clarification to one section of the law, which could have implications for similar laws in other states.
  • Montana and Alabama have also passed legislation with similar restrictions to Florida’s that ban the sale or lease of agricultural land, critical infrastructure, and properties near military bases to “foreign adversaries,” including China. (Inman, Dec. 12)
  • Broader prohibitions in another area of Florida’s SB 264—Section 204—generally preclude Chinese investors from acquiring “any interest”in any Florida real property anywhere in the state. The Roundtable is hopeful that Section 204 will be subject to clarification during the rulemaking process. (See highlighted areas in the Notice of Proposed Rule)
  • Roundtable President and CEO Jeffrey DeBoer noted in his Sept. 5 letter, “Our concern with the new law is that U.S.-managed investment funds, which are controlled and managed by U.S. nationals, may now be precluded from pursuing investment opportunities in Florida if there is any level of investor participation in the fund from countries of concern like China.”
  • The Roundtable is seeking a technical clarification that would permit U.S.-managed investment funds, which may include passive investor participation from investors across the globe to continue to pursue investment opportunities in Florida.
  • Non-U.S. investors routinely subscribe for small, generally passive minority interests in these funds. These investors exercise no control over the investments or the operation of the assets. Importantly, the investment decisions are made by the U.S.-managed funds, not by passive investors who simply commit capital for a return, not to control the underlying investments.

Florida Gov. Ron DeSantis has launched the SecureFlorida Portal, where foreign principals from foreign countries of concern like China must register property.

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Senate Finance Committee Chair Aims to Include Workforce Housing Tax Incentive in 2024 Tax Package

Posted on by Abigail Grenadier
Sen. Ron Wyden (D-OR)

The Roundtable and 12 other national real estate organizations wrote to congressional tax writers on Dec. 8 in strong support of the Workforce Housing Tax Credit (WHTC) Act (S. 3436), which would create a new tax incentive aimed at increasing the supply of moderate-income rental housing. The Senate’s top tax writer, Finance Committee Chair Ron Wyden (D-OR), above, said this week that there is a “real window of opportunity” to pass bipartisan housing legislation in the coming months that could be folded into a possible 2024 tax package. (WHTC bill summary, Dec. 7 | Coalition letter, Dec. 8 | Wyden’s Senate floor remarks, Dec. 12 | Tax Notes, Dec. 13)

Affordable Housing Tax Credits

  • Sen. Wyden told Tax Notes that housing tax credits “will be part of the discussions we’ll have to have” with House Ways and Means Chairman Jason Smith (R-MO) as they discuss elements for a possible tax package in the new year.
  • The Senate Finance Committee Chairman also commented on the Senate floor about his introduction last week of the WHTC Act (S. 3436) with Sen. Dan Sullivan (R-AL), Rep. Jimmy Panetta (D-CA) and Rep. Mike Carey (R-OH). “Our bipartisan proposal, based largely on the success of the Low Income Housing Tax Credit (LIHTC) would help spur a juggernaut of new housing construction,” Wyden said. (Video of floor remarks | Roundtable Weekly, Dec. 8)
  • Led by the National Multifamily Housing Council, the Dec. 8 industry coalition letter stated, “We believe that the Workforce Housing Tax Credit Act will only serve to complement the LIHTC.” The organizations emphasized that the WHTC would spur the development of housing targeted to renter households who face affordability challenges yet are ineligible for federal subsidies.

WHTC & LIHTC

  • The WHTC would build on the successful LIHTC by enabling state housing agencies to issue similar tax credits to developers for the construction or rehabilitation of income-capped rental housing. (One-page Senate Finance Committee summary and WHTC bill text)
  • WHTC credits could be used to build affordable housing for tenants between 60% and 100% of the area median income, or transferred to the State’s LIHTC allocation for housing aimed at lower-income tenants (generally below 60% of area median income). (Congressional Research Service summary of the LIHTC, April 26)
  • Roundtable President and CEO Jeffrey DeBoer stated, “Tax policy should support and encourage private sector investment that boosts the supply of affordable and workforce housing. The Workforce Housing Tax Credit Act would build on time-tested tax incentives like the low-income housing tax credit and further facilitate the conversion of underutilized, existing buildings to housing. We welcome this positive step forward for our nation’s housing supply.” (Roundtable Weekly, Dec. 8)
  • In the House this week, Rep. Jimmy Gomez, D-CA), reintroduced the Rent Relief Act of 2023, which would create a new tax credit for renters of a personal residence to cover part of the gap between 30 percent of their income and actual rent. Tax Notes, Dec. 13)

Rep. Gomez told Tax Notes this week that House tax writers hope to include the rent relief bill, along with Gomez’ Revitalizing Downtowns Act (H.R. 419) in bipartisan discussions about a potential tax package. H.R. 419 would provide an investment tax credit for 20 percent of the cost of converting office buildings to other uses.  (Rep. Gomez news releases, July 28 and Dec. 12 | news release, Dec. 12 | Roundtable Weekly, Aug. 11)

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Senate, House Bills Introduced to Spur Workforce Housing Development

Posted on by Abigail Grenadier

Bills introduced yesterday in the Senate and House would create a new tax incentive aimed at increasing the supply of moderate-income rental housing. The legislation seeks to expand the construction and rehabilitation of housing for middle-class families and young people starting their careers, while enabling workers to live in communities where they are employed. (Senate Finance Committee news release and bill summary, Dec. 7)

Workforce Housing Tax Credit

  • Senate Finance Committee Chair Ron Wyden, (D-OR) and Sen. Dan Sullivan (R-AL), along with Reps. Jimmy Panetta (D-CA) and Mike Carey (R-OH), introduced the bipartisan Workforce Housing Tax Credit (WHTC) Act to build on the successful Low-Income Housing Tax Credit (LIHTC) by enabling state housing agencies to issue tax credits to developers, which would subsequently be sold to investors. (1-page Senate Finance committee summary and WHTC bill text)
  • WHTC credits could be used to build affordable housing for tenants between 60% and 100% of area median income, or transferred to LIHTC for tenants generally below 60% of area median income. (Congressional Research Service summary of the LIHTC, April 26)
  • State housing finance agencies could allocate WHTC credits to developers through a competitive process. The tax credits could also be provided to developers with a 15-year compliance period and 30-year extended commitment.  (Committee summary)

Roundtable Support

  • The Roundtable strongly supports the WHTC. Roundtable President and CEO Jeffrey DeBoer stated, “Tax policy should support and encourage private sector investment that boosts the supply of affordable and workforce housing. The Workforce Housing Tax Credit Act would build on time-tested tax incentives like the low-income housing tax credit and further facilitate the conversion of underutilized, existing buildings to housing. We welcome this positive step forward for our nation’s housing supply.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) has formed an Affordable Housing Working Group, which is working with the Research Committee to develop proposals on expanding the nation’s housing infrastructure.

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Taxation of Unrealized Gains is Focus of Senate Democratic Bill and Supreme Court Case

Posted on by Abigail Grenadier

Senate Finance Committee Chairman Ron Wyden (D-OR), above, and 15 of his Senate colleagues recently introduced the Billionaires Income Tax Act (S.3367), which would tax the appreciation of wealthy individuals’ assets. On Tuesday, the Supreme Court heard oral arguments in Moore v. United States, a case challenging the federal government’s authority to tax unrealized gains under the 16th Amendment.

Billionaires Income Tax Act (BITA)

  • Under BITA, tradable, liquid assets would be marked-to-market and taxed annually on their appreciation, while illiquid assets would be subject to a “deferral recapture” tax when sold—or if certain other currently nontaxable events occur, such as death, a transfer to a trust, or a like-kind exchange. (One-page summary; section-by-section summary). (CQ, Nov. 30)
  • As drafted, the bill would apply to taxpayers with more than $100 million in annual income or more than $1 billion in assets for at least three consecutive years. (Tax Notes, Nov. 30).
  • The legislation is not limited to future appreciation of assets. It would reach back in time and apply the tax to accumulated, unrealized gains at the time of enactment.  The tax on built-in gains could be paid over a five-year period. Mark-to-market losses could be carried back for three years and applied against taxable market-to-market gains.
  • The appreciation of partnership assets (including built-in gains) and gains or losses from partnership transactions would flow through and taken into account at the partner level.
  • Related legislation was introduced in the House by Reps. Steve Cohen (D-TN) and Don Beyer (D-VA). 

Roundtable Position and Outlook

  • Real Estate Roundtable President and CEO Jeffrey DeBoer said, “Taxes rarely remain targeted, and like the income tax, this targeted proposal could be revised and expanded over time to apply to everyone. Moreover, taxing unrealized gains would upend over 100 years of federal taxation, require an unprecedented IRS intrusion into household finances, and create unknown and potentially unintended consequences at a time of economic uncertainty. Deferring the taxation of gains until an asset is sold supports entrepreneurs while encouraging the type of patient, long-term investing and productive risk-taking that drives our economy forward.”
  • In the last Congress, efforts to enact a mark-to-market regime were unsuccessful when they ran into resistance from moderate Democrats. Sen. Wyden (D-OR) acknowledged that his bill, which lacks bipartisan support, would not be part of any year-end tax legislation. (CQ, Nov. 30)

Moore v. United States

  • On Tuesday, the Supreme Court heard oral arguments in Moore v. United States, which challenges the federal government’s constitutional authority to tax unrealized income.
  • The petitioners in Moore argue that the mandatory repatriation tax in the Tax Cuts and Jobs Act exceeds Congress’s authority under the 16th Amendment to lay and collect taxes on incomes. They argue that because the tax is based on the accumulated, undistributed earnings of a foreign corporation, there is no income realization event for the Moores, who are a non-controlling minority shareholder of the corporation. (Roundtable Weekly, Oct.13)
  • Depending on the outcome and the scope of the decision, the Moore case could have implications for other forms of taxing unrealized gains, such as the appreciated value of real estate and other assets directly owned by a taxpayer.

A majority of the justices signaled they are hesitant to weigh into the broader debate of how to define income for tax purposes. A decision in Moore is not expected until June 2024. (USA Today and PoliticoPro, Dec. 5 | Tax Foundation, Aug. 30)

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GAO Reports All Federal Agencies at Less Than 50 Percent Occupancy

Posted on by Abigail Grenadier
Government Accountability Office

More than half of the federal workforce is not working in their agency offices, according to the Government Accountability Office (GAO). Sen. Joni Ernst (R-IA) released a list this week based on the GAO data that shows federal space utilization percentages range from a low of 7% to 49% with most agencies using less than 30%. (Agency list | Sen. Ernst news release | DailyMail, Dec. 6)

Federal Employees’ Return to Office

  • The GAO statistics released by Sen. Ernst, the Ranking Member of the Senate Small Business & Entrepreneurship Committee, covers 24 agencies for one week between January and March 2023. Sen. Ernst told Federal News Network this week that she is pushing the federal government to get workers back to their offices or sell their unused space.
  • In August, Ernst demanded investigations into federal departments and agencies to determine the impact of telework on the delivery and response times of government services. That same month, White House Chief of Staff Jeff Zients directed cabinet officials to increase the return of federal employees to their offices. (Federal News Network, Nov. 30 | (Government Executive, Aug. 7 | Roundtable Weekly, Aug. 11)
  • Since the pandemic, Congress has held multiple hearings and introduced legislation in both the House and Senate about the government’s remote work policies. (Roundtable Weekly, Dec. 1)
  • The General Services Administration’s (GSA) Robin Carnahan recently told the House Committee on Oversight and Accountability that her agency sees an opportunity to reduce the government’s real-estate footprint by up to 30% in the coming years. (Federal News Network, Nov. 14)

Roundtable Response

  • RER Chair John Fish (Chairman & CEO, Suffolk), above, expressed the industry’s concern about government employees’ reluctant return to their offices in last week’s Wall Street Journal. “Other parts of the country with large federal workforces are also struggling to bring back workers. Whether you’re talking about downtown Boston, or Denver or Northern Virginia, occupancy is down substantially,” said Fish. (WSJ, Nov. 28)

Roundtable President and CEO Jeffrey DeBoer has consistently emphasized that federal policies promoting remote work undermine the health of cities, local tax bases, and small businesses. The Real Estate Roundtable has urged President Biden and national policymakers to end government policies that encourage remote working arrangements for federal employees. (RER letter to President Biden, Dec. 2022; RER letter to Senate, April 2023)

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U.S. Joins Global Push to Slash Building Emissions

Posted on by Abigail Grenadier

The United States joined China, the UK, and the larger European Union this week in an international initiative to accelerate the buildings sector’s ability to reach “near zero” emissions by 2030. (United Nations press release, Dec. 6)

  • The initiative is a pledge by countries to cut emissions from building operations and construction materials down or close to zero. A Buildings and Climate Global Forum scheduled for March in Paris will flesh-out details.
  • The Biden-Harris administration’s imminent release of a proposed zero emissions building (“ZEB”) definition aligns with this international effort. The ZEB definition will be the first federal government guideline providing voluntary criteria for buildings that aspire to zero emissions status. (Roundtable Weekly, Sept. 29)

SBTi

  • SBTi’s latest guidance includes important revisions urged by The Roundtable and Nareit in joint comments submitted last summer. (Roundtable Weekly, July 14).
  • Notably, SBTi changed course from its original proposal and will allow companies to set science-based emissions targets based on “market-based” solutions such as purchases of renewable energy certificates (RECs).
  • Real estate companies can apply to participate in SBTi’s pilot program through December 10. (SBTi Call for Applicants)

CFTC Guidelines and EPA’s Portfolio Manager

  • The Environmental Protection Agency (EPA) is holding a workshop session for Real Estate Roundtable members on improvements to its ENERGY STAR Portfolio Manager benchmarking tool. The workshop will take place on January 24, 2024 as part of The Roundtable’s State of the Industry meeting in Washington, DC. (Contact RER Meetings about registration)

EPA’s improvements to its free online Portfolio Manager tool, used by nearly 25% of U.S. building space to measure energy use and GHG emissions, is widely supported by the CRE industry. (Coalition letter to EPA, Sept. 14 and Roundtable Weekly, Sept. 15)

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The Roundtable’s Jeffrey DeBoer Recognized as a “Top Lobbyist” for 2023

Posted on by Abigail Grenadier
Real Estate Roundtable President and CEO Jeffrey DeBoer

Real Estate Roundtable President and CEO Jeffrey DeBoer, above, is one of the “Top Lobbyists” in Washington, DC for 2023, according to the widely-read Capitol Hill publication, The Hill.  This is the sixth consecutive year that DeBoer has earned the recognition. (The Hill, Dec. 6)

  • The Top Lobbyists 2023 list includes “impactful advocates (who) stand out for the results they’ve delivered for their clients, companies, trade associations and advocacy groups in the nation’s capital.”
  • The Hill also noted that after pandemic restrictions were lifted, “these top lobbyists had to navigate a divided Congress—and not just the traditional Republican and Democratic divisions” as a flood of regulatory activity flowed from the Biden administration.

DeBoer commented, “I am honored to lead The Real Estate Roundtable’s policy advocacy efforts and very humbled to be included on The Hill’s top lobbyist list. This personal recognition by The Hill reflects the collective efforts of the Roundtable membership, leadership, and staff. Together we work very hard to deliver non-partisan, data-based policy positions, guided by what is good for communities, job creation, and the economy. This has always been the foundation of our organization’s effectiveness, and it has proven to be even more critical given today’s increasingly challenging policy environment.”

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