News Type: Roundtable Weekly

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

Posted on by Trey Jackson

Foreign Investment in Real Property Act - book

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

FIRPTA

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

Additional Provisions & Regulations

Treasury Department

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

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

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Hybrid Work Arrangements Impacting Office Vacancy Rates

Posted on by Trey Jackson

San Francisco cityscape

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

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

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

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

Posted on by Trey Jackson

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

Omnibus & Taxes

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

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

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Treasury Issues Proposed Beneficial Ownership Regulations on Info Retention and Disclosure

Posted on by Trey Jackson
Treasury Building bright blue sky

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

Proposed FinCEN Rules

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

House Republican Opposition

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

Corporate Transparency Act

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

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

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

Posted on by Trey Jackson

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

LIBOR to SOFR

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

Final LIBOR Rule

Libor transition to SOFR image

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

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

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

Posted on by Trey Jackson

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

A Top Concern 

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

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

Office Markets & Remote Work 

FSOC report on CRE

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

The Fed’s Influence

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

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

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

Posted on by Trey Jackson

RER Letter to Biden on Remote Work

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

Roundtable Requests 

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

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

Economic Impact of Remote Work 

Chicago cityscape sky view

Roundtable Members in the News 

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

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

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

Posted on by Trey Jackson

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

Omnibus Negotiations 

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

Tax Policy Prospects 

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

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

Implementing IRA Tax Provisions

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

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

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Spending Bill Negotiations at Impasse as Deadline Looms; Senate Democrats Re-Elect Leadership Team

Posted on by Trey Jackson

Capitol at dusk

Congress reached an impasse on a government spending package this week, leaving lawmakers with limited options before Dec. 16 when the expiration of current funding would cause a partial shutdown. Policymakers may opt to pass a short-term Continuing Resolution (CR) to fund the government at current levels while they attempt to reach an agreement by year-end on a massive “omnibus” package—which could include tax, affordable housing, and other measures important to commercial real estate. (Roll Call, Dec. 8 and Roundtable Weekly, Dec. 2)

Funding Logjam

  • Policymakers are reportedly gridlocked over $26 billion in non-defense, domestic spending that would be part of an estimated $1.7 trillion overall funding bill. Both sides have agreed on $858 billion for defense spending. (PoliticoPro, Dec. 7 and CQ, Dec. 8)
  • With the clock ticking, Democrats may introduce their own omnibus proposal next week with measures designed to attract the 60 votes needed to pass the Senate, along with a full-year CR. (Punchbowl, Dec. 8)
  • If an agreement cannot be reached, Democrats may forego new legislation in favor of a one-year CR that would freeze government funding at current levels and allow certain tax policies to expire. Some House Republicans are urging their colleagues to take another course—wait until early next year when they assume majority control and can exert greater influence over funding negotiations with the Senate’s Democratic majority. (Washington Post, Dec. 8)

Other Policy News

Sen. Kyrsten Sinema (I-AZ)

  • Senate Democrats on Tuesday voted unanimously to re-elect their entire leadership team to another term for the 118th Congress, with Majority Leader Chuck Schumer (D-NY), above right, at the helm.
  • Today, Schumer stated that Sen. Kyrsten Sinema (D-AZ), above, will keep her committee assignments after she registered as an independent and published an op-ed in the Arizona Republic about why she is leaving the Democratic Party. (The Hill, Dec. 8 and Dec. 9 | Wall Street Journal, Dec. 9)
  • Sinema suggested her decision would not affect the power balance in the Senate because she will not caucus with Republicans and her voting behavior will not change. (Politico, Dec. 9)

Separately, the Treasury Department’s recently released, initial guidance on labor standards for companies to qualify for increased incentives in the Inflation Reduction Act (IRA) will be the focus of two Department of Labor webinars next week. Register for the Wednesday, December 14 or Thursday, December 15 webinars, both scheduled for 1pm EST. (Roundtable Weekly, Dec. 2)

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White House Announces Federal Building Performance Standards

Posted on by Trey Jackson
The White House

The White House on Wednesday released a new standard to reduce scope 1 “direct” emissions from fossil fuels combusted to heat and cool federal buildings. (CNBC |UPI | PoliticoPro, Dec. 7)

Federal Building Performance Standard (BPS)

  • The Federal BPS from the White House Council on Environmental Quality (CEQ) applies to the 300,000 existing buildings owned by the U.S. government. It sets a 2030 goal for each federal agency to eliminate scope 1 emissions in 30% of its facilities. (White House Fact Sheet)

  • The Federal BPS “prioritiz[es] energy efficiency and the elimination of on-site fossil fuel use.” It is a stepping-stone toward the Biden administration’s ultimate goal of “net zero” emissions by 2045 across all federal facilities. (Exec. Order 14057, Dec. 8, 2021)

  • The Federal BPS’s “performance pathway” would achieve the goal for zero scope 1 emissions “through efficient electrification of all equipment and appliances.”

  • The Federal BPS also offers a “prescriptive pathway” for specific replacement of gas-fired furnaces and boilers. This alternate compliance route recognizes that “full decarbonization may not be practicable today” considering a building’s size and climate zone—and is designed to account for the market availability and cost-effectiveness of electrification equipment.

Relevance to Other GHG Standards

Energy.gov map of BPS
  • While the Federal BPS intends to reduce on-site scope 1 emissions, it will likely increase scope 2 emissions from electricity purchased by the federal government to power electric heat pumps, hot water heaters, and similar equipment.

  • Furthermore, the Federal BPS—and its focus to reduce fossil fuels on-site—might set an easier standard compared to a number of emerging BPS mandates at the state and municipal level.

  • Some local BPS laws may effectively require buildings to reduce overall GHG emissions at their source, which depends on whether local power grids provide “clean” electricity from solar, wind, or other renewable energy. EPA data that profiles “fuel mixes” used to generate electricity, however, indicate that coal, gas and other non-renewables account for 80 percent of the fuels that power electric grids nationally.

  • Also, local BPS laws may not offer a “prescriptive” compliance path similar to the Federal BPS that contemplates cost effectiveness in building electrification retrofits.

  • Notably, the Federal BPS sets no requirements for U.S.-owned buildings to reduce their upstream and downstream “scope 3” emissions outside of an owners’ control. (EPA website)

  • Possible measurement and reporting of scope 3 emissions has been a controversial element of a private sector, corporate GHG disclosure rule proposed by the U.S. Securities and Exchange Commission that has not yet been finalized. (Roundtable Weekly, June 10)

Other Building Policies  

Department of Energy sign

The White House’s announcements touted DOE’s Better Climate Challenge—a voluntary “pledge” that includes Roundtable members as “partners” who have committed to reduce portfolio-wide scopes 1 and 2 emissions by at least 50% within 10 years. The Roundtable is an “ally” supporting DOE’s Challenge. (Roundtable Weekly, March 4)

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