News Type: Roundtable Weekly

Fed Report Cites Office Loans as Potential Economic Vulnerability

Posted on by Abigail Grenadier
The Federal Reserve Board’s semiannual Financial Stability Report, April 2024

Potential losses from certain office real estate loans are an economic vulnerability within the U.S. financial system—yet considered less of a threat than last year, according to the Federal Reserve Board’s semiannual Financial Stability Report. The Fed report noted that if inflation persists and higher interest rates linger during the ongoing, post-pandemic adjustment to remote work, a wave of maturing loans could pose CRE refinancing risks for regional U.S. banks. (Fed report | Bloomberg and Reuters, April 19)

Office Sector Risk

  • The financial stability report focused on four areas of risk, including asset valuations. CRE stress was the third most cited risk, moving down from second in last October’s survey. (KPMG, April 22, 2024 and Roundtable Weekly, Oct. 27, 2023)
  • This month’s Fed report also acknowledged unique strains on CRE, especially in the office sector, “where vulnerabilities have mounted in the post-pandemic period.”
  • The report added that continued economic pressures could reduce investor risk appetite and lead to a “more pronounced correction in commercial property prices.” This, in turn, could “reduce the willingness of financial intermediaries to supply credit to the economy” and further weigh on overall economic activity.
  • Despite ongoing concerns about CRE, the Fed survey also found that the issuance of non-agency securities started to recover in the first three months of 2024.
  • A separate report from DoubleLine shows signs of improvement for the commercial mortgage-backed securities market and other capital markets and notes that borrowers in some sectors, including office, are finding access to credit. (Bloomberg, April 24)

The Roundtable’s all-member June 20-21 Annual Meeting will include a Joint Research Committee and Real Estate Capital Policy Advisory Committee Meeting to drill down into specific CRE capital and credit market trends and issues.

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Final Treasury Rules Expand Reach of FIRPTA Tax Regime

Posted on by Abigail Grenadier
The Treasury Department in Washington, DC

The Treasury Department issued final regulations this week that redefine what constitutes a domestically controlled REIT exempt from tax under the Foreign Investment in Real Property Tax Act (FIRPTA). The regulations create a new look-through rule that extends the reach of the discriminatory FIRPTA regime to common investment structures. (Final Regulations | Tax Notes, April 25 and Bloomberg Law, April 24)

New Look-Through Rule

  • By looking through a domestic C corporation to its shareholders, the new FIRPTA rules run counter to general tax principles, past IRS guidance, and historic precedent.  Moreover, the final regulations do not provide relief to widely held U.S. real estate funds with dispersed foreign ownership, even if the foreign investors are far removed and separate from the management and control of the U.S. funds’ activities. 
  • While the final rules increased the total percentage of foreign ownership of a C corp. necessary to trigger look-through treatment, the change offers little practical relief since participating U.S. investors typically will only invest in U.S. real estate through other channels (e.g., directly, through a partnership, or through a REIT).
  • Transition relief in the final regulations may offer some respite to certain foreign investors, depending on their facts and circumstances. The new look-through rule does not apply to preexisting business arrangements—but only if the entity does not acquire a significant amount of new real estate interests or undergo a significant change in its ownership during the 10-year transition period.

Roundtable Response

FIRPTA
  • Roundtable President and CEO Jeffrey DeBoer responded to the Treasury rules. “Foreign capital is badly needed to supplement domestically sourced capital in cities and downtowns that continue struggling to recover from the pandemic. The wide spread adoption of remote work, coupled with today’s high interest rates and decreased lending by banks is fueling a reinforcing cycle of declining investment, property values, and tax revenues that can only be countered through additional investment capital.”
  • “Unfortunately, the final Treasury rules on FIRPTA and domestically controlled REITs raise new barriers to passive foreign investment in U.S. real estate, including affordable housing and the conversion of underutilized office buildings,” DeBoer said.
  • The Real Estate Roundtable and some members of Congress had advocated for the withdrawal of the proposed regulations or significant changes. House Ways and Means Committee Members Darin LaHood (R-IL) and Carol Miller (R-WV) urged Treasury Secretary Janet Yellen to drop the FIRPTA proposal. (Letter to Yellen, July 28, 2023 and real estate industry coalition letter, March 1, 2023 | Roundtable Weekly: Jan. 6, March 4 and Aug. 4, 2023) 

A Roundtable Tax Policy Advisory Committee (TPAC) working group is reviewing the most recent changes and considering potential policy and tax planning strategies going forward. The next TPAC meeting will be held on June 21 in conjunction with the all-member Roundtable Annual Meeting in Washington, DC.

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Roundtable Congressional Testimony on April 30 Will Focus on Policy Actions to Strengthen CRE Markets

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

Real Estate Roundtable President and CEO Jeffrey DeBoer will testify next week before the House Oversight Subcommittee on Health Care and Financial Services about the “Health of the Commercial Real Estate Markets and Removing Regulatory Hurdles to Ensure Continued Strength.” (Watch hearing here at 2pm EST on Tuesday, April 30 | Update: Written testimony here)

CRE Market Conditions & Solutions

  • Subcommittee Chairwoman Lisa McClain (R-MI), commented on April 23 that the hearing will explore solutions to strengthen businesses that continue to struggle from the impact of pandemic-related government policies. She stated, “These businesses – including medical centers, warehouses, and offices – are crucial to our local economies and communities.” (McClain news release)
  • The other hearing witness will be Jeffrey Weidell (CEO, NorthMarq), chairman of the Mortgage Bankers Association’s (MBA) Commercial Real Estate/Multifamily Finance Board of Governors. (MBA news release, Oct. 15, 2023)

The Roundtable’s all-member June 20-21 Annual Meeting will include a Joint Research Committee and Real Estate Capital Policy Advisory Committee Meeting to drill down on specific CRE capital and credit market trends and issues.

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Senate Democrats Reintroduce Legislation to Tax Carried Interest at Ordinary Income Rates

Posted on by Abigail Grenadier

A group of Senate Democrats introduced legislation this week that would tax carried interest capital gains income at ordinary income tax rates of up to 40.8%. (Bloomberg Tax April 16)

Carried Interest Proposals

  • The Carried Interest Fairness Act was introduced on April 15 by Senate Banking Committee Chairman Sherrod Brown (D-OH) along with Sens. Tammy Baldwin (D-WI), Joe Manchin (WV), and several other Democratic co-sponsors.
  • According to Sen. Brown, the change would raise $6.5 billion in revenue over 10 years. The Senators introduced a similar bill in 2021. (Sen. Brown news release; Crain Currency, April 16)
  • This week’s carried interest bill is part of a broader effort by congressional Democrats to position legislative changes in anticipation of the expiration of 2017 Tax Cuts and Jobs Act provisions at the end of 2025. The approaching expiration of those individual provisionsis likely to drive tax negotiations next year into what some policymakers have referred to as the “Super Bowl of Tax.” (Bloomberg Tax, Jan. 4 and Axios, Feb. 16)

Democratic Proposals

FY2025 proposed Biden administration budget
  • President Biden’s 2025 budget also proposes taxing all carried interest as ordinary income. Most of the Biden tax agenda is carried over from his prior budgets. (Roundtable Weekly, March 15 and March 8 | White House Fact Sheet, March 11)
  • Senate Finance Chair Ron Wyden (D-OR) introduced legislation last year to treat the grant of carried interest as deemed compensation in the form of an interest-free loan from the limited partners to the general partner (GP). (Bloomberg Tax, Nov. 15, 2023)
  • The Roundtable has consistently opposed these and similar proposals since 2007 for failing to recognize that carried interest is actually granted for the value a General Partner adds beyond routine services, such as business acumen, experience, and relationships.  Carried interest also reflects a recognition of the risks the GP takes with respect to the partnership’s liabilities—e.g., funding predevelopment costs, guaranteeing construction budgets, and potential litigation.
  • Carried interest changes would also harm small businesses, stifle entrepreneurs and sweat equity, and threaten future improvements and infrastructure in neglected areas. They would increase the cost of building or improving infrastructure, workforce housing, and other socially desirable projects.

The Tax Cuts and Jobs Act of 2017 created a three-year holding period requirement for carried interest to qualify for the reduced 20% long-term capital gains rate.

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GOP Resolutions Aim to Overturn SEC’s Climate Rule

Posted on by Abigail Grenadier

Dual Republican House and Senate resolutions introduced this week take aim at the recent climate risk disclosure rule from the U.S. Securities and Exchange Commission (SEC). As the 2024 election season gets underway, the resolutions delineate the parties’ different views on climate policy and their clashing perspectives on the scope of agencies’ regulatory authority. (Senate and House resolutions | PoliticoPro, April 17)  

Political Differences

  • The partisan effort to overturn the SEC’s rule will not garner significant support from Democrats and the resolution is unlikely to pass the Senate. However, the resolutions have rallied Republicans to advance their message that the Biden administration’s SEC frequently steps outside the bounds of its regulatory authority. (The Hill and Bloomberg Law, April 17)
  • Banking Committee Ranking Member Tim Scott (R-SC) leads the effort in the Senate. “The SEC’s mission is to regulate our capital markets and ensure all Americans can safely share in their economic success — not to force a partisan climate agenda on American businesses,” he said in a statement.
  • Scott’s resolution has the support of 33 Republicans. Sen. Joe Manchin (D-WV) is the lone Democrat co-sponsor. (PoliticoPro, April 17).
  • Democratic support for the SEC’s rule includes Senate Banking Committee Chairman Sherrod Brown (D-OH). “I applaud the SEC for acting to address climate risks to protect workers, investors, and our economy,” Brown said after the SEC rule was released last March. (Senate Banking news release)
  • On the House side, Financial Services Committee Republicans advanced a similar resolution along a party-line vote on April 17. Committee Member Bill Huizenga (R-MI) introduced the House resolution. (Climate Wire, April 18)

Legal Pause in Effect

SEC logo and text
  • Numerous lawsuits challenging the SEC’s rule are now consolidated in federal court. The SEC agreed to stay its climate rule while litigation is pending. (Climate Wire, April 5)
  • House Financial Services Committee Chairman Patrick McHenry (R-SC) said “[t]he SEC’s stay of the rule is not enough” and that congressional action is warranted, crystallizing the political nature of the issue.

If the SEC’s rule eventually takes effect, registered companies would have to include certain climate-related disclosures in annual Form 10-Ks. Notably, the final SEC rule did not include Scope 3 disclosures, which affirmed a position strongly advocated by The Roundtable. (Roundtable Fact Sheet, March 12 and Roundtable Weekly, March 8)

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Roundtable Recommends Agency Actions to Accelerate Property Conversions

Posted on by Abigail Grenadier
Jared Bernstein, chair of the White House Council of Economic Advisors, right, and Roundtable President and CEO Jeffrey DeBoer

The Real Estate Roundtable urged the Biden administration to take a series of actions to support commercial-to-residential property conversions in an April 15 letter to Jared Bernstein, chair of the White House Council of Economic Advisors. (see Meeting story above)

Improving Agency Resources

  • The Roundtable’s letter aims to harness various federal loan programs and tax incentives to provide financial support for CRE conversions.
  • These programs, enhanced by President Biden’s Bipartisan Infrastructure Law and Inflation Reduction Act, can ideally be tailored to accelerate projects that transform underutilized assets into housing. 
  • RER’s letter states, “The Federal Guidebook’s featured programs have not lived up to their promise—yet.” The Roundtable’s suggestions to improve these U.S. agency resources support goals to increase housing supply, revitalize urban downtowns, and cut carbon emissions.

Roundtable Recommendations

Real Estate Roundtable letter on property conversions April 15, 2024
  • The April 15 letter urges agency actions to streamline environmental reviews, hasten the federal loan underwriting process, and layer various agency loan platforms to help finance housing conversions.
  • The letter recommends specific improvements to the Department of Transportation’s loan programs for transit-oriented development, which can also resonate for resources offered by HUD, DOE and EPA.
  • The Roundtable letter also details changes to the tax code and exisiting incentives that can increase energy efficiency and renewable energy investments in commercial-to-residential building conversions.

The Roundtable will continue to coordinate with White House staff and encourage modifications to federal regulations and laws that can improve CRE conversion projects.

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House Democratic Leader and Other Policymakers Discuss Economic and CRE Market Issues

Posted on by Abigail Grenadier
The Real Estate Roundtable's Spring Meeting April 15-16, 2024

This week’s Real Estate Roundtable meeting focused on national policies impacting commercial real estate, with an emphasis on the economy, the need for increased federal support for property conversions, and capital and credit issues. Guests such as House Democratic Leader Hakeem Jeffries (D-NY) and other prominent policymakers also discussed the housing crisis, return-to-office issues, and the upcoming elections. (The Roundtable’ Spring 2024 Policy Priorities and Executive Summary)

Speakers & Policy Issues

John Fish, House Democratic Leader Hakeem Jeffries, and Jeffrey Deboer
  • Democratic Leader Hakeem Jeffries (D-NY), center, with Roundtable Chair John Fish (Chairman & CEO, SUFFOLK), left, and Roundtable President and CEO Jeffrey DeBoer, right, discussed policymaking in the House, the need to balance geopolitical urgencies with pressing domestic priorities, and finding bipartisan paths to solve the nation’s problems.
  • House Financial Services Committee Member French Hill (R-AR), right, engaged in a discussion moderated by Michelle Herrick (Head of Real Estate Banking, J.P. Morgan), left, that addressed the wave of maturing CRE loans and the future of a regulatory proposal to hike bank capital requirements known as “Basel III.” (Roundtable Weekly, March 8)
Jared Bernstein, Chair of the White House Council of Economic Advisers
  • White House Council of Economic Advisers Chair Jared Bernstein, above, emphasized that affordable housing is a high-priority focus of the Biden administration—and welcomed a series of recommendations by The Roundtable on how the Biden administration could further support commercial-to-residential property conversions. He also discussed inflation’s role in credit and capital markets. (See story below)
Enice Thomas, Deputy Comptroller for Credit Risk Policy, Office of the Comptroller of the Currency (OCC)
  • Enice Thomas (Deputy Comptroller for Credit Risk Policy, Office of the Comptroller of the Currency), above, focused on economic risk for regional banks that service specific property types and locations within office and multifamily sectors. Thomas clarified that the OCC encourages bankers to work with borrowers early if any stress indicator arises in their portfolio. He added federal banking regulators are monitoring office markets closely as a wave of loan maturities looms. 
Kevin Palmer (Head of Multifamily, Freddie Mac)—right
  • Kevin Palmer (Head of Multifamily, Freddie Mac)—above right, with Roundtable Board Member Matt Rocco (President, Colliers Mortgage), left—spoke with Roundtable members about Freddie’s role in the industry. He noted that the CMBS market is “humming” and added that planning for a significant refinance opportunity is important, although exceeding Freddie’s caps is an FHFA issue.

Next on The Roundtable’s meeting calendar is the all-member Annual Meeting on June 20-21 in Washington, DC, which will also feature meetings of RER’s Policy Advisory Committees.

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Senate Bill Calls for More Federal Telework Data as Study Shows DC Agencies Using 12 Percent of Office Space

Posted on by Abigail Grenadier

A bipartisan Senate bill introduced on April 3 would increase oversight of federal telework policies after a recent report showed government agency headquarters in Washington, DC are using an average of 12% of their office space. (Committee news release and Public Buildings Reform Board report)

Congressional Push

  • The Telework Transparency Act (S. 4043) from Sens. Joni Ernst (R-IA) and Gary Peters (D-MI), chairman of the Homeland Security and Governmental Affairs Committee, would require agencies to gather information on how telework impacts agency performance and federal property decisions. (Government Executive, April 8 and Federal News Network, April 3)
  • Last month’s report from the Public Buildings Reform Board (PBRB) concludes that the “massive scale” of underutilized federal property creates an “outsized opportunity to save money and improve outcomes through property disposals and smarter real estate decisions.” (GlobeSt, April 9 and Bisnow, April 3)

Roundtable Efforts

Jeffrey DeBoer, President and CEO, The Real Estate Roundtable
  • The Real Estate Roundtable wrote to members of the Senate about the need for the federal government to end its “active encouragement of remote working for federal employees” and for federal agencies to return to their pre-pandemic workplace practices. (RER letter to the Senate, April 12, 2023 and Commercial Observer, April 14, 2023)
  • Roundtable President and CEO Jeffrey DeBoer, above, sent a similar request to President Biden, noting that federal telework policies were ignoring “the negative impacts of remote work on cities and communities, labor productivity, and U.S. economic competitiveness, as well as the quality of government services.” (RER letter to President Biden, Dec. 12, 2022)
  • The economic impact of remote work in the public and private sectors will be discussed next week during The Roundtable’s Spring Meeting in Washington, DC. (Roundtable-level members only).  

Policymaker guests will include House Minority Leader Hakeem Jeffries (D-NY), House Financial Services Committee Member Rep. French Hill (R-AR), and Jared Bernstein, chairman of the White House Council of Economic Advisers.

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States May Tap Into Federal Funds to Help CRE Owners Comply With City Climate Laws

Posted on by Abigail Grenadier
DOE LPO webinar on BPS

The U.S. Department of Energy (DOE) announced a new financing program this week for states to access federal funds that could help real estate owners meet state, city, and county building performance standards (BPS).

State Energy Financing Institutions

  • An April 9 webinar hosted by the White House and DOE’s Loan Programs Office provided information on plans to make federal money available to state energy financing institutions (SEFIs).
  • Federal funds deployed under the SEFI program will be channeled through state agencies, which in turn will provide loans and grants to qualified building owners.
  • SEFIs that receive federal DOE “certification” will assist compliance with building emissions and energy efficiency limits set by a growing number of states and localities. 
  • The LPO has released a SEFI Toolkit that describes the contours of the program.
  • The Roundtable supports non-binding federal guidelines that bring national consistency to the conflicting patchwork of local BPS mandates.(DOE “blueprint” to decarbonize buildings; Roundtable Weekly, Sept. 15)

Funding Criteria

LPO for Building Sector
  • States will establish eligibility financing criteria under federal guidelines. They will likely prioritize disbursements to buildings in low-income areas and low-income housing.
  • SEFI funds could be deployed to support commercial-to-residential property conversions in jurisdictions with BPS laws.
  • To scale the program, DOE stated on the webinar that federal funds channeled through the states will be geared to support energy work on a portfolio of buildings rather than single projects.
  • The agency also stated that DOE-sourced funds will aim to support assets that strive to meet the forthcoming national definition for a Zero Emissions Building (“ZEB”). (Roundtable Fact Sheet on ZEB, Jan. 18)

The Roundtable’s Sustainability Policy Advisory Committee (SPAC) continues to work closely with the White House and DOE on climate initiatives impacting commercial real estate.

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Broad Coalition Urges Congressional Tax Writers to Support Like-Kind Exchange Rules

Posted on by Abigail Grenadier

This week, The Real Estate Roundtable and 35 other national business organizations urged leaders of the Senate and House tax-writing committees to preserve long-standing tax rules governing like-kind exchanges (LKEs). The April 10 letter encouraged policymakers to reject proposals, such as those in President Biden’s budget, to restrict the use of LKEs. (Coalition letter, April 10)

Value of LKEs

  • The letter, sent to the chairs and ranking members of the House Ways and Means and Senate Finance Committees, details the importance of LKEs to the health, recovery, and realignment of U.S. commercial real estate in the post-pandemic economy.  
  • Exchanges have helped offset reduced transaction activity associated with high interest rates and other sources of economic uncertainty.  Without LKEs, many properties would languish—underutilized and underinvested—because of the tax burden that would apply to an outright sale.   
  • The letter notes how LKEs increase economic mobility for cash-poor small business owners, farmers, and entrepreneurs—including minorities, women, and veterans—while contributing to environmental conservation efforts, housing affordability, and redevelopment in economically struggling cities and towns.

Widespread Use

  • Academic and other economic research has repeatedly demonstrated the positive economic contribution of LKE. Research by Professors David Ling (University of Florida) and Milena Petrova (Syracuse University) estimates that 10 to 20 percent of commercial real estate transactions involve a like-kind exchange. 
  • A recent Marcus & Millichap analysis demonstrates the value of LKEs to the health and financing of the commercial real estate industry, particularly during market corrections and liquidity shortages. (Roundtable Weekly, Dec. 1, 2023)

House Tax Hearings

  • Separately, congressional hearings in the House this week considered tax provisions scheduled to expire at the end of 2025 that were enacted in the 2017 Tax Cuts and Jobs Act (TCJA).
  • During an April 11 House Ways and Means Committee hearing, Chairman Jason Smith (R-MO) stated, “With the expiration of the 199A small business deduction, we will see even more ‘closed for business’ signs up and down Main street when their federal tax rate jumps to over 40 percent.”
  • Chairman Smith added that strong bipartisan support for key TCJA provisions exists in the House after passage earlier this year of the Tax Relief for American Families and Workers Act (H.R. 7024) by a vote of 357-70. (Roundtable Weekly, Feb. 2)

The $79 billion tax package passed by the House includes Roundtable-supported measures on business interest deductibility, bonus depreciation, and the low-income housing tax credit (LIHTC), but continues to face hurdles in the Senate. The Roundtable and 21 other industry organizations that comprise the Housing Affordability Coalition urged the Senate on Feb. 15 to pass the tax package.