News Type: Roundtable Weekly

Real Estate Industry Congratulates Incoming Biden Administration, Offers Policy Recommendations

Posted on by Trey Jackson

13 real estate groups - logos

The Roundtable and 12 national real estate organizations this week congratulated President-elect Joe Biden and Vice President-elect Kamala Harris on their historic election and submitted detailed policy recommendations to the incoming administration in the areas of COVID-19 relief, sustainability, housing, immigration, tax policy, and infrastructure, as well as others.

  • The industry’s Dec. 16 letter acknowledges the many economic and social challenges confronting the country as President-elect Biden and Vice President-elect Harris prepare to take office, including the national response to COVID-19. The letter and supporting policy memo were also sent to every congressional office on Capitol Hill.
  • The economic impact of commercial real estate is far-reaching, wrote the organizations.  America’s commercial real estate is worth between $14.4 and $17 trillion, and directly supports 13.6 million jobs. The ownership and transfer of real estate generates over 70% of local tax revenue. Pension funds, schools, and charities have invested nearly $800 billion in real estate. 
  • The submission describes how struggles caused by COVID-19 are affecting real estate-related workers and putting pressure on small businesses, financial institutions, property values, retirement savings, and local governments. At the same, time, the organizations noted how the real estate industry is contributing to the reopening process and is prepared to help lead the economic recovery. “We pledge the support, collaboration, and collective ‘on the ground’ experience of our members so that, together, we can get past the immediate crisis and continue building healthy communities for generations of Americans,” wrote the 13 organizations.  
  • The organizations’ letter offers several recommendations for COVID-19 relief (direct relief, state and local fiscal assistance, rental assistance, liability safeguards, debt restructurings, and others) as well as recommendations aimed at long-term challenges (pandemic risk insurance, infrastructure investment, retrofitting aging buildings to optimize energy efficiency, housing affordability, immigration reform, etc.). The recommendations are then described in greater detail in the supporting policy memo accompanying the letter. 
  • “We also recognize that the pandemic has magnified systemic inequalities, and are committed to ‘build back better’ in a manner that addresses the disproportionate hardships endured by minority and low-income households and communities from the fallout of COVID-19,” the organizations stated. 
  • The letter emphasized that the industry is committed to a “nonpartisan approach to public policy” that is “focused on contributing data and fact-based analysis that improves policymakers’ understanding of how their decisions will affect real estate, jobs and communities, and the overall economy.” 

The industry’s policy agenda, and its anticipated initiatives with the new Administration and Congress, will be a focus on Jan. 26-27 at The Roundtable’s State of the Industry Meeting and Policy Advisory Committee Meetings (all virtual). 

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Roundtable President and CEO Jeffrey DeBoer Recognized for Third Consecutive Year as One of the “Top Lobbyists” in Washington, DC

Posted on by Trey Jackson

Jeffrey DeBoer image crop 475w

The prominent policy news publication The Hill this week recognized Real Estate Roundtable President and CEO Jeffrey DeBoer as one of the Top Lobbyists in Washington, DC. This is the third consecutive year that DeBoer has been recognized in the annual list. (The Hill, Dec. 10)

  • The Hill’s 2020 recognition acknowledges a variety of industry representatives for their advocacy efforts as “the people who wielded their clout and knowledge most effectively on behalf of their clients.”
  • The publication also notes, “The ranks of policy experts and influencers run deep in Washington, but these are the players who stand out for delivering results for their clients in the halls of Congress and the administration.”
  • The Roundtable’s DeBoer commented, “It is an honor to be recognized individually, but my inclusion on the list is more reflective of the overall Roundtable organization, its membership and our staff team effort. I am proud to work with highly effective leaders from the commercial real estate industry and with a staff of advocacy professionals who communicate our balanced policy agenda positions to lawmakers and regulators with a fact-based, non-partisan approach.”
  • DeBoer added, “I appreciate the consistent recognition by The Hill but I share it side-by-side with our talented membership, staff and others who work on behalf of The Real Estate Roundtable.”

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Bipartisan House Bill Would Spur Energy Efficiency Upgrades in Commercial and Multifamily Residential Buildings

Posted on by Trey Jackson

Buildings sky

New legislation introduced this week by House Ways and Means Committee members Brad Schneider (D-IL) and Tom Rice (R-SC) would accelerate depreciation for high performance upgrades in commercial and multifamily buildings – creating new jobs in the construction, design, and energy sectors; boosting equipment manufacturing; and reducing the built environment’s carbon footprint. (Rep. Schneider news release, Dec. 9)

  • The Energy Efficient Qualified Improvement Property (E-QUIP) Act proposes the establishment of an elective 10-year, straight-line cost recovery period for a new category of E-QUIP expenditures that meet strict energy efficiency criteria.  The E-QUIP benefit would apply to “above code” heating and cooling equipment; lighting; building shell components (e.g., roofs, insulation, and windows); and “smart controls” (e.g., web-enabled thermostats, occupancy and daylight sensors) – as long as they are installed through 2025.
  • Real Estate Roundtable President and CEO Jeffrey D. DeBoer helped to launch support for the E-QUIP Act during a Dec. 8 virtual meeting led by Reps. Schneider and Rice that reached a spectrum of stakeholders representing environmental, manufacturing, and real estate organizations.
  • “The E-QUIP Act checks all of the boxes for smart energy, climate, and economic policy,” DeBoer said. “Installation of high performance HVAC, lights, windows, and other building components will modernize aging buildings, save businesses billions of dollars on their energy bills, create tens of thousands of jobs, and avoid carbon emissions equal to taking 22 million cars off the road for a year. The E-QUIP Act can also encourage state-of-the-art retrofits that enhance outdoor air ventilation rates — a key practice to improve a building’s health and indoor air quality, according to the best available science.”
  • The Roundtable and numerous other stakeholders wrote to congressional tax writers last year about the need to establish an accelerated depreciation schedule for E-QUIP. (Coalition E-QUIP letter, May 8, 2019) 

E-QUIP Analysis

ACEEE E-QUIP research

The American Council for an Energy-Efficient Economy (ACEEE) released research this week estimating the E-QUIP Act’s economic and environmental impacts would include:

  • 130,000 net additional job-years
  • $15 billion energy bill savings
  • 100 million tons of carbon dioxide emissions avoided – or the equivalent emissions from 560,000 rail cars full of coal, or taking 22,000 cars off the road for one year.  (ACEEE’s E-QUIP policy brief and fact sheet)
  • “Many building owners want to make energy efficiency investments, but existing law disincentivizes them. This fix will help them upgrade from old equipment to state-of-the-art options that will reduce their energy bills while cutting carbon emissions,” said ACEEE Executive Director Steven Nadel in a press release.
  • Most investments in existing commercial and multifamily buildings are currently ineligible for the immediate tax deductions available to other business investments under the 2017 Tax Cut and Jobs Act. Instead, they are subject to depreciation periods as long as 40 years, depending on the kind of building, whether the investments affect the interior or exterior, and the tax status of the owner.
  • The current patchwork of depreciation periods is largely unrelated to the useful lifetime of the investments. The new E-QUIP proposal would apply uniform criteria to an elective 10-year depreciation period. 
  • The Roundtable and other supporters aim to undertake a coordinated advocacy effort to identify additional House sponsors for the bill, and support introduction of companion legislation in the Senate.

The E-QUIP Act will be discussed in greater detail at the “virtual” meetings of The Roundtable’s Tax Policy Advisory Committee (TPAC) and Sustainability Policy Advisory Committee (SPAC) on Jan. 27.

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Government Funding Deadline Extended to Dec. 18 as Pandemic Relief Package Proposals Face “COVID Cliff”

Posted on by Trey Jackson

Architect of the Capitol

Congress this week extended government funding until Dec. 18 to avert a government shutdown and give bipartisan negotiators more time to finalize a pandemic relief bill, which remains at an impasse over business liability and state and local government aid provisions. President Trump is expected to approve the one-week spending bill before current funding expires tomorrow.  (CNBC, Dec. 11)

  • Policymakers engaged in intense pandemic aid negotiations also face the expiration of unemployment and housing benefits scheduled at the end of this month. This “Covid cliff” includes the Dec. 31 expiration of a national eviction moratorium by the Centers for Disease Control. (CNBC, Dec. 4 and The Hill, Dec. 9)
  • House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Mitch McConnell (R-KY) recently signaled their goal was to combine a 2021 fiscal year spending bill with pandemic relief as part of a massive “omnibus” bill this month before recessing. (Politico, Dec. 4)
  • McConnell this week backed a $916 billion GOP pandemic aid proposal released Dec. 8 by Treasury Secretary Steven Mnuchin, while Democratic leaders support a $908 billion proposal issued by a bipartisan group of lawmakers last week. (BGov, Dec. 10)
  • The bipartisan coalition on Dec. 9 released details on its $908 billion stimulus proposal that includes $25 billion for residential rental assistance, state and local aid, augmented unemployment insurance benefits, a scaled-down Paycheck Protection Program (PPP) – as well as money for vaccine development, supply, and testing and tracing programs. (Framework summary for details on the bipartisan Emergency COVID Relief Act of 2020, Dec. 9)
  • Although the dueling relief plans are close in total costs, significant policy differences over business liability and state and local government aid threaten the completion of negotiations. (Wall Street Journal, Dec. 9)
  • The bipartisan group reportedly agreed this week on a needs-based formula to distribute $160 billion in state and local aid, but will not release details until compromise language addressing liability is finalized. (CQ, Dec. 9 and BGov, Dec. 10)
  • Sen. Chris Coons (D-DE) on Dec. 9 said that emerging liability language may include a six-month moratorium on coronavirus-related lawsuits that would give states time to develop their own protections. An “affirmative defense” provision may also be included to counter excessive claims against institutions subject to lawsuits. (Roll Call, Dec. 9)

Pelosi yesterday suggested that discussions over the emergency legislation could now stretch beyond the holiday season. “If we need more time, then we take more time. But we have to have a bill and we cannot go home without it,” Pelosi said. “I would hope that it would honor the December 18th deadline … We’ve been here after Christmas, you know.” (Business Insider, Dec. 10)

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Policymakers Face Government Funding Deadline as Talks Renew on Pandemic Relief

Posted on by Trey Jackson

U.S. Capitol Dome with flag

House Speaker Nancy Pelosi (D-CA) today said that Senate Majority Leader Mitch McConnell (R-KY) agreed to aim for combining a pandemic relief package with government funding legislation in an “omnibus” bill that would prevent a partial shutdown later this month. (Politico, Dec. 4)

  • Pelosi referred to the goal for attaching a coronavirus relief measure to the must-pass spending bill, stating, “That would be a hope, because that is the vehicle leaving the station. We would want a big, strong vote.”
  • McConnell commented on his discussion with Pelosi, stating, “… we had a good conversation. I think we’re both interested in getting an outcome, both on the omnibus and on a coronavirus package.” (NPR, Dec. 4)
  • Negotiations over a COVID-19 stimulus package have been at an impasse for months – House Democrats passed a $2.2 trillion relief bill, Senate Republicans favored a $500 billion measure and the Trump administration offered a ceiling of $1.8 trillion. (Roundtable Weekly, Nov. 6)
  • Congressional leaders renewed discussion this week about pandemic relief after a bipartisan group of Senate and House members proposed a compromise $908 billion package that attracted the support of Pelosi and Senate Minority Leader Chuck Schumer (D-NY). (BGov, Dec. 3)   
  • The bipartisan stimulus proposal includes $25 billion for “rental assistance,” state and local aid, augmented unemployment insurance benefits, a revival of the Paycheck Protection Program (PPP) and other small business relief, as well as money for vaccine development, supply, and testing and tracing programs. (“What’s in the $908 Billion Bipartisan Stimulus Proposal?” by The Committee for a Responsible Federal Budget, Dec. 2) 
  • Pelosi also said, “There is momentum — there is momentum with the action that the senators and House members in a bipartisan way have taken.” (Politico, Dec. 4)
  • President-elect Biden issued a statement today supporting pandemic-related funding. “Any package passed in the lame duck session is not enough,” Biden said. “It’s just the start.” (The Hill, Dec. 4)

  • Government funding is currently scheduled to expire on Dec. 11. That deadline for combining fiscal 2021 appropriations and a coronavirus relief deal could lead to a one-week stopgap bill, giving lawmakers until Dec. 18 to pass a massive “omnibus” bill before Congress breaks for recess. (CQ, Dec. 4)    

Pelosi today said, “Don’t worry about a date. It will be in sufficient time for us to get it done. The sooner the better but not at the expense of the initiatives that we need to address in the bills.” She added, “We’ll take the time we need and we must get it done. We cannot leave without it.” (CQ and The Hill , Dec. 4)

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Regulators Urge Banks to Cease Use of LIBOR for New Contracts by End of 2021 as Benchmark Rate is Scheduled to Sunset on Legacy Contracts in June 2023

Posted on by Trey Jackson

Libor transition to SOFR image

US and UK regulators are urging banks using the London Interbank Offered Rate (LIBOR) as a benchmark interest rate to stop writing new LIBOR contracts by the end of 2021, while most legacy contracts will be able to mature before use of the rate sunsets in June 2023. (Federal Reserve and Wall Street Journal, Nov. 30)

  • The UK-based ICE Benchmark Administration (IBA) announced it will consult in early December on its intention to cease US$ LIBOR. IBA intends to eliminate, subject to confirmation, one week and two month US$ LIBOR settings at the end of 2021. (Financial Conduct Authority, Dec. 4)
  • LIBOR is used as a reference rate in an estimated $200 trillion of financial contracts, including $1.3 trillion of commercial real estate loans.  UK financial authorities are phasing out LIBOR in response to manipulation concerns.
  • The Federal Reserve Board, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation on Nov. 30 released a joint statement supporting the proposal and explaining that the June 30, 2023 proposed LIBOR cessation date would allow time for “legacy contracts”—USD LIBOR transactions executed before January 1, 2022—to mature.
  • The joint statement also notes, “Failure to prepare for disruptions to USD LIBOR, including operating with insufficiently robust fallback language, could undermine financial stability and banks’ safety and soundness.”
  • Federal Reserve Vice Chair for Supervision Randal K. Quarles on Nov. 30 said, “Today’s plan ensures that the transition away from LIBOR will be orderly and fair for everyone—market participants, businesses, and consumers.”
  • “These announcements represent critical steps in the effort to facilitate an orderly wind-down of USD LIBOR,” said John Williams, President of the Federal Reserve Bank of New York and Co-Chair of the Financial Stability Board’s Official Sector Steering Group. “They propose a clear picture of the future, to help support transition planning over the next year and beyond.”
  • The Fed has urged banks to prepare for a transition away from LIBOR to the Secured Overnight Financing Rate, which will use rates that investors offer for bank securities such as loans and assets backed by bonds, instead of relying on bank quotes.

The US Treasury Department on October 9, 2019 released proposed regulations to clarify the tax consequences of replacing LIBOR in existing financial contracts, including real estate loans. The proposed rules largely align with Roundtable recommendations submitted in June 2019. (Roundtable Weekly, June 7, 2019)

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Roundtable’s Q4 Sentiment Index Shows CRE Execs Optimistic Despite Serious Market Challenges; Walker Webcast Focuses on the Future of Urban Real Estate

Posted on by Trey Jackson

Commercial real estate executives expressed a modest increase in optimism about market conditions despite serious COVID-related challenges, according to The Real Estate Roundtable’s Q4 Economic Sentiment Index released this week. (Roundtable news release, Dec. 2)

  • A majority of respondents to the survey also noted that general conditions one year from now will be either “somewhat better” or “much better” than today. 
  • “Nearly every sector of the commercial real estate industry is facing serious economic challenges due to the overall impact of the pandemic. High unemployment, closed businesses, travel reductions and more have ripped into otherwise healthy real estate portfolios, creating challenges for all building owners in meeting their payroll, utility, tax and debt service obligations. Overall industry low leverage, general market balance, and functioning capital markets are positive influences that – when coupled with growing good news regarding vaccines – results in an increased optimism on part of industry leaders,” said Real Estate Roundtable President and CEO Jeffrey DeBoer. 
  • DeBoer also said,  “That optimism is dependent however on urgently-needed additional COVID relief from Washington and on the rapid testing and availability of effective vaccines. Federal lawmakers and regulators must support further assistance to bridge people and businesses into a post-COVID economy. Help is needed quickly for local governmental budgets, as well as for people and businesses negatively economically impacted by the pandemic. And some protection from unnecessary lawsuits must be provided to businesses to spur a more robust transition back to workplaces. ” 

The Roundtable’s Q4 Sentiment Index topline findings include:

  • The Sentiment Index registered a score of 44, an increase of two points from the third quarter of 2020. Respondents continued to express optimism about future conditions, and many noted increasingly positive trends in their own portfolios. Participants from the hospitality and retail sectors were understandably less optimistic, but felt market dynamics were strong enough that successful recoveries were possible.
  • Respondents referenced stronger markets for industrial and multifamily properties, while retail and hospitality properties were perceived as challenging in this environment. Dynamics in the office sector remain uncertain for most participants as work from home policies have created an uncertain future operating environment.
  • Lower leverage and continued forbearance have combined to allow owners to retain their positions, despite distress within their portfolios. As a result, owners are resistant to realizing discounted asset prices while buyers are seeking discounts as steep as 30% within the hospitality industry.
  • Most respondents cited accessible capital markets for high quality assets, and an increase in debt as well as equity availability. Many also noted the real estate market in general has lower levels of leverage than seen in the last downturn.

Future of Urban Real Estate

Walker Webcast with Mark Parrell and Owen Thomas image

On this week’s Walker Webcast, Roundtable Member Willy Walker (Chairman & CEO, Walker & Dunlop) discussed the pandemic’s impact on urban centers with Roundtable Board Member Owen Thomas (CEO, Boston Properties) and Roundtable Member Mark J. Parrell (President & CEO, Equity Residential Investments). 

  • Thomas commented, “It’s all about the virus. CEOs increasingly are understanding the problems with all remote work. Cultures are getting stretched and it is difficult to do more creative and strategic work, to procure new customers when everyone is working remotely. Companies want to get their employees back to work but companies are also very concerned about liability. What’s going to change all that around is health security.”
  • He added, “We have to get people back to the offices, back to the big cities for the overall economy to recover.”
  • Parrell noted, “When we think about our urban centers, there are places like New York that have been around 400 years and they’ve been resilient over time. (During) the last two decades in New York, up to the pandemic, the quality of life improved so much. These cities are capable of recovery, but good leadership is required. It will be very important that these cities be led by both public and private minded individuals who, like the Partnership for New York for example, are trying to put the city back together and on its feet. Once the cities re-energize, renters will return.”
  • Parrell added, “I do think there’s going to be a migration back into city centers, based initially on price and on activation as the vaccine gets broadly distributed.”

The pandemic’s ongoing impact on CRE and the policy response will be a focus of discussion during The Roundtable’s virtual State of the Industry Business Meeting and policy committee advisory committee meetings on January 27-28, 2021.

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Commercial Real Estate Executives Optimistic Despite Serious Current Market Challenges

Posted on by Trey Jackson

A quarterly survey of commercial real estate industry leaders reflects optimism about market conditions, despite ongoing serious COVID-related challenges. Sentiment is somewhat bouyed by positive supply, demand and capital access, as well as hopeful expectations for a vaccine.  

(WASHINGTON, D.C.) — Commercial real estate executives expressed a modest increase in optimism about market conditions, according to The Real Estate Roundtable’s Q4 Economic Sentiment Index, released today. A majority of respondents to the survey also noted that general conditions one year from now will be either “somewhat better” or “much better” than today. 

Those surveyed noted particularly challenging economic conditions in the hospitality and retail sectors; market uncertainty associated with future office space use; somewhat stable multifamily markets, and relatively stronger industrial and life science markets. They cited industry fundamentals, functioning capital markets, industry-wide low leverage and modest lender debt service forbearance as factors in the industry’s ability to thus far withstand the very serious COVID-related market challenges.

“Nearly every sector of the commercial real estate industry is facing serious economic challenges due to the overall impact of the pandemic. High unemployment, closed businesses, travel reductions and more have ripped into otherwise healthy real estate portfolios, creating challenges for all building owners in meeting their payroll, utility, tax and debt service obligations. Overall industry low leverage, general market balance, and functioning capital markets are positive influences that – when coupled with growing good news regarding vaccines – results in an increased optimism on part of industry leaders,” said Real Estate Roundtable President and CEO Jeffrey DeBoer. 

DeBoer added, “That optimism is dependent however on urgently-needed additional COVID relief from Washington and on the rapid testing and availability of effective vaccines. Federal lawmakers and regulators must support further assistance to bridge people and businesses into a post-COVID economy. Help is needed quickly for local governmental budgets, as well as for people and businesses negatively economically impacted by the pandemic.  And some protection from unnecessary lawsuits must be provided to businesses to spur a more robust transition back to workplaces. ” 

The Roundtable’s Q4 Economic Sentiment Index’s Topline Findings include:

  • Increased Optimism
    Respondents’ views reflected an increase in optimism for overall and near-term conditions (from a recent and sharp drop).
  • Better General Market Conditions
    A majority of respondents anticipated better market conditions in one year’s time, having noted worse market conditions today as compared with a year ago.
  • Stable Capital Markets
    Most respondents cited accessible capital markets for high-quality assets, and an increase in debt as well as equity availability. 
     

    Data for the Q4 survey was gathered by Chicago-based FPL Associates on The Roundtable’s behalf. 

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Treasury Requests Cessation of Several Fed Emergency Lending Programs and Return of Unused Funds; Senate Republicans Want Funds Repurposed for Pandemic Relief

Posted on by Trey Jackson

Treasury Secretary Steven Mnuchin sent a letter to Federal Reserve Chairman Jay Powell yesterday requesting that five emergency lending facilities, including the Main Street Lending Program (MSLP), should not be extended past their scheduled expiration on December 31, 2020. Mnuchin also requested the Fed to return unused Treasury loan funds from the programs for Congress to re-appropriate. (Treasury letter and The Wall Street Journal, Nov. 19)

  • The MSLP has the capacity to issue up to $600 billion in loans, yet has only completed approximately 400 loans totaling $3.7 billion. (Washington Post, Oct, 30)
  • The programs were created as part of the CARES Act coronavirus aid package passed in March, which included funding for all the Fed’s emergency lending facilities. (The Hill, Nov. 19)
  • Mnuchin’s Nov. 19 letter stated, “I am requesting that the Federal Reserve return the unused funds to the Treasury. This will allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds.”
  • The decision to end the lending facilities operations cannot be done unilaterally by Treasury; it would require cooperation by the Fed.
  • Chairman Powell issued a statement after markets closed yesterday that signaled disagreement. “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” (Wall Street Journal, and CNBC interview with Mnuchin, Nov. 20)
  • Powell also said on Nov. 17 that “I don’t think it is time yet, or very soon” to close down the programs and that the Fed was “using all of our tools to support the recovery for as long as it takes until the job is well and truly done.” (Reuters, Nov. 17)
  • If the Trump administration decides not to extend the Fed programs, the new administration’s Treasury Department could reestablish them after Biden is inaugurated on Jan. 20. (Wall Street Journal, Nov. 10)

Pandemic Relief Package

Capitol side with sun and clouds

The request for the Fed to return unused funds from the lending programs comes as Congress remains at an impasse over costs for a pandemic relief package – the Trump administration offered a ceiling of $1.8 trillion, House Democrats passed a $2.2 trillion bill, and Senate Republicans favored a $500 billion measure. (Roundtable Weekly, Nov. 6)

  • Mnuchin and Senate Majority Leader Mitch McConnell (R-KY) today discussed a strategy for reviving talks between Republicans and Democrats over the stalled pandemic stimulus package. McConnell commented after the meeting about utilizing the unused Fed funds for a relief package, stating, “Congress should repurpose this money toward the kinds of urgent, important, and targeted relief measures that Republicans have been trying to pass for months, but which Democrats have repeatedly blocked with all-or-nothing demands.” (AP, Nov. 20)
  • President-elect Joe Biden on Monday urged Congress to advance the $2.2 trillion HEROES Act (H.R. 925) passed by the House. “Right now, Congress should come together and pass a COVID relief package like the HEROES Act that the House passed six months ago. Once we shut down the virus and deliver economic relief to workers and businesses, then we can start to build back better than before,” Biden said. (BGov, Nov. 16)
  • A report issued Wednesday by The Century Foundation shows that approximately 12 million Americans will lose unemployment insurance by the end of the year due to deadlines set by Congress early in the pandemic. (Washington Post and GlobeSt, “12M Workers Set to Lose Unemployment Benefits,” Nov. 19)

Lawmakers also face the added pressure of passing a government funding bill to avoid a Dec. 11 partial shutdown. Congress may choose to merge some COVID-19 aid measures into a sweeping multi-trillion-dollar omnibus funding bill during the lame-duck session to address both issues – or attempt to pass separate bills.

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Treasury Department Clarifies that Partnership-level State and Local Income Taxes are Deductible

Posted on by Trey Jackson
IRS building in Washington DC

The Treasury Department and IRS in a recent notice indicated their intent to issue proposed regulations clarifying that state and local income taxes imposed on, and paid by, a partnership or an S corporation are deductible in computing the partnership or S corporation’s taxable income.  (IRS Notice 2020-75) 

  • The announcement has important implications for real estate and other businesses operating in States with high state and local income tax burdens.  The Tax Cuts and Jobs Act of 2017 limits taxpayers’ ability to deduct state and local taxes (SALT) paid at the level of the individual taxpayer to no more than $10,000. 
  • The SALT limitation in TCJA applies to state and local taxes owed on individual wages, as well as state and local taxes paid on business income distributed to partners or S corporation shareholders.  In contrast, state taxes on corporate income remained deductible under the 2017 legislation.  However, prior to Notice 2020-75, it was unclear whether the SALT limitation applied to entity-level income taxes imposed on, and paid directly by, a partnership or S corporation.   
  • The Treasury announcement is an important step towards creating a more level playing field between publicly held C corporations and privately held pass-through businesses.   
  • Over the last three years, several States have modified their tax laws to allow partnerships, S corporations, and LLC’s to pay tax on their business income at the entity level.  States adopting an entity-level tax on pass-throughs include Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin.  In most cases, the regimes are elective.  (CNBC, Nov. 18) 
  • Uncertainty about the federal tax treatment of these regimes has limited their effectiveness.  That could change quickly with the new Treasury guidance.  Similar legislative proposals are pending in Alabama, Arkansas, Michigan, and Minnesota and more may follow in light of Treasury’s clarification.  Entity-level regimes that comply with the Treasury regulations could help restore SALT deductions for a significant share of pass-through business income. 

Other tax and economic policy issues affecting real estate were addressed this week in a CBRE panel discussion that featured Roundtable Senior Vice President and Counsel Ryan McCormick and other industry experts. (video)

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