News Type: Roundtable Weekly

Real Estate Roundtable Perspective: Opportunity Zone Regulations Answer Critical Questions Regarding Real Estate Investment

Posted on by Trey Jackson

Recent Proposed Treasury Regulations governing the new “Opportunity Zone” investment program – and its potential to spur productive real estate investment in struggling, low-income communities – is the focus of an Oct. 26 GlobeSt.com interview with Real Estate Roundtable President & CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick. 

  • In the interview, DeBoer and McCormick provide answers to critical questions regarding the highly anticipated regulatory guidance and its implications for the real estate industry.
  • DeBoer notes, “For real estate, the proposed regulations are unquestionably positive. They clarify key technical questions and open issues, and they should allow investments in funds and in underlying projects to go forward. While some important questions remain, we continue to believe that the Opportunity Zone program will be a powerful catalyst for transformational real estate investment in these designated low-income areas.”
  • The Treasury in June designated more than 8,700 low-income census tracts in the United States, Puerto Rico, and territories as qualified Opportunity Zones. (IRS Notice 2018-48 and Roundtable Weekly, June 22 and Interactive Map, Economic Innovation Group)
  • The Wall Street Journal reported this week that the highly-anticipated guidelines have offered investors greater certainty to begin the process of raising and investing billions of dollars into new real-estate funds targeting opportunity zones.  (WSJ , Oct 23)
  • The GlobeSt Q&A also clarifies who can defer gain by investing in an Opportunity Fund; the 180-day time period when investors are required to roll capital gain into a Fund; and how the proposed rules allow a Fund to mobilize capital over a period of nearly three years. 
  • McCormick explains in the article : “The proposed rule creates a ‘working capital safe harbor.’ Opportunity Funds have a minimum of 31 months to invest their working capital in qualified opportunity zone property. The longer runway aligns better with the practical realities of real estate investment.”  
  • DeBoer also offers clarifications about the “original use” and “substantial improvement” tests of an Opportunity Zone property, noting that they “… are critical elements of the Opportunity Zone program, and they are clarified in important ways in the proposed rules. Keep in mind, Congress wanted to stimulate new capital investment, not simply the transfer of income-producing assets from one owner to another. Therefore, property must either be put to its original use by the fund, or the fund must substantially improve the property. The Opportunity Zone law defines substantial improvement as the doubling of the adjusted tax basis of the property. The regulations provide that the original use and substantial improvement requirements only relate to the structure and not the underlying land.”
  • Further clarification about the program is expected.  According to DeBoer, “Some of the most important questions relate to Opportunity Fund transactions and the tax consequences when a fund buys, sells, and/or reinvests in Opportunity Zone property … Treasury and the White House have indicated that additional guidance is forthcoming before the end of the year. The Roundtable will be working with policymakers to ensure the next tranche of guidance and the final rules maximize productive, job-creating investment in Opportunity Zones.”

The Roundtable’s Tax Policy Advisory Committee (TPAC) recently convened a panel on Opportunity Zones that included the tax counsel for Senator Tim Scott (R-SC), the original author and sponsor of Opportunity Zone legislation.  TPAC’s Opportunity Zone Working Group will continue to provide insight into how the industry can help the program fulfill its ambitious objective of stimulating economic development and job creation in low-income communities. (Roundtable Comment Letter, June 28 and Roundtable Weekly, July 20) 

Treasury Releases Proposed Rules on Opportunity Zones Program

Posted on by Trey Jackson

The Treasury Department today released Proposed Regulations giving investors added guidance regarding the new “Opportunity Zone” investment program.  The Real Estate Roundtable’s Tax Policy Advisory Committee (TPAC) Opportunity Zone working group will analyze the much-anticipated regulatory proposal and their consequences for real estate-related jobs and investment.  (IRS proposed rules, Oct. 19)

In late June, The Estate Roundtable provided formal comments to Treasury Department and IRS officials regarding implementation guidance that could maximize real estate investment, capital flows and jobs into newly designated Opportunity Zone communities. (Roundtable Weekly, June 29)

“Real estate development and redevelopment is a key component of any region’s economic strength and growth,” wrote Roundtable President and CEO Jeffrey DeBoer.  “In our view, successful implementation of the Opportunity Zone program requires careful consideration of how the new rules will apply to real estate and real estate investment activities.” 

Congress created Opportunity Zones in the 2017 Tax Cuts and Jobs Act to encourage long-term, capital investment in economically struggling, low-income communities.  Opportunity Funds must invest in tangible business property located in a qualifying zone, which can include real estate, and the tax benefits are tied to the investment holding period.  The capital gain on an Opportunity Fund investment is excluded from tax altogether if the asset is held for 10 years or more.

The Treasury in June designated more than 8,700 low-income census tracts in the United States, Puerto Rico, and territories as qualified Opportunity Zones. (IRS Notice 2018-48 and Roundtable Weekly, June 22) 

Certain elements of the Proposed Regulations may be relied upon immediately, whereas others will take effect when final regulations are issued.  Comments are due 60 days after the proposed guidelines are published in the Federal Register, and a hearing will be held on January 10, 2019.

 

 

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

Posted on by Trey Jackson

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

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

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

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

Roundtable and Business Coalition Seek Administrative Relief, Shorter Cost Recovery Period for Nonresidential Real Estate Improvements

Posted on by Trey Jackson

This week The Real Estate Roundtable, along with 239 businesses and trade groups, wrote to Secretary Mnuchinurging the Treasury Department to provide taxpayers with administrative relief from a drafting mistake in last year’s tax overhaul that increased the cost recovery period for qualified improvement property (QIP).

This week, The Real Estate Roundtable, along with 239 businesses and trade groups,  wrote to Secretary Mnuchin  urging the Treasury Department to provide taxpayers with administrative relief from a drafting mistake in last year’s tax overhaul that increased the cost recovery period for qualified improvement property (QIP).

  • The drafting error in the tax law has resulted in a significantly longer 39-year cost recovery period for new, qualified nonresidential interior improvements.  The intent of Congress was to allow the immediate expensing of QIP – or provide a 20-year recovery period in the case of taxpayers electing out of new limitations on the deductibility of business interest. 
  • In the Oct. 9 letter to Secretary Mnuchin, the coalition addressed the need for a QIP correction, along with the unintended consequences if action is not taken.  The letter raised concerns that the drafting error is resulting in “[d]elays in store and restaurant remodeling projects,” “[b]usinesses refraining from purchasing or leasing vacant stores or other leasehold spaces that require improvements,” and “[l]oss of construction jobs associated with commercial renovation projects.”  
  • The coalition letter was sent in response to the Administration’s request for comments on newly proposed regulationsimplementing the additional first year depreciation deduction (immediate expensing) benefit.  The coalition submission also included two recent letters—one from 16 Democratic Senators to Treasury Secretary Steven Mnuchin and the other from 58 House Republicans to GOP leadership—reiterating the importance for policymakers to correct this unintentional drafting mistake in last year’s legislation, while recommending that Treasury should issue interim guidance and refrain from enforcing the drafting error.  (House Letter, Oct 2 and Senate Letter, Sept 24)
  • The Real Estate Roundtable and a broad-based business coalition urged Secretary Mnuchin in August to issue guidance clarifying certain provisions included in tax overhaul legislation enacted last year – including the cost recovery period for qualified improvement property. (Coalition letter, Aug. 22)

Congress could address the issue during the lame duck congressional session between the mid-term election and January. Senate Republican Conference Chairman John Thune (R-SD) said GOP lawmakers are motivated to address a number of tax issues that are outstanding, including tax reform technical corrections and expired tax provisions. (The Hill, Oct. 11)

 

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

Posted on by Trey Jackson

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

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

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

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

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

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

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

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

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

 

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

Posted on by Trey Jackson

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

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

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

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

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

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

 

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

Posted on by Trey Jackson

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

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

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

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

 

New Anti-Terrorism Guide for Commercial Building Security Professionals

Posted on by Trey Jackson

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

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

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

Publications:

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

Field Guide: Conducting BPATS Based Assessments of Commercial Facilities

 

Real Estate and Business Organizations Oppose Legislation Challenging Supreme Court Decision on Internet Sales Tax

Posted on by Abigail Grenadier

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

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

  • Despite the high court’s Wayfair ruling, a bipartisan quartet of House members led by Rep. Jim Sensenbrenner (R-WI) introduced legislation on Sept. 13 that would bar states from collecting taxes from out-of-state internet vendors until 2019.
  • Other bills would go even further in reversing the Wayfair decision.  They include the Stop Taxing Our Potential Act of 2018 (S. 3180), introduced by Sen. John Tester (D-MT) and the Protecting Small Business from Burdensome Compliance Costs Act (H.R. 6724). introduced by Rep. Bob Gibbs. The likelihood that legislation challenging Wayfair will get through the current Congress, especially with the mid-term elections fast approaching, is slim.  (Politico, Sept 17)
  • The business coalition letter to Senate and House leadership explains that over the better part of a decade, these industry groups “have undertaken significant efforts to establish economic parity between online and brick-and-mortar sellers that would better reflect the changing dynamics of today’s omnichannel marketplace. For Congress to insert themselves post-ruling only creates additional uncertainty and further complicates the implementation process, while undermining the level playing field created by the Wayfair decision.” 

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

 

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

Posted on by Trey Jackson

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

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

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

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