News Type: Roundtable Weekly

Clarifying guidance on the new pass-through deduction enacted in last year’s tax overhaul bill is needed “as soon as possible,” according to a letter sent this week by House Ways and Means Committee Ranking Member Richard Neal (D-MA) to Treasury Secretary Steven Mnuchin and Acting Internal Revenue Service Commissioner David Kautter.  (Neal Letter, May 1)

Clarifying guidance on the new pass-through deduction enacted in last year’s tax overhaul bill is needed “as soon as possible,” according to a letter sent this week by House Ways and Means Committee Ranking Member Richard Neal (D-MA) to Treasury Secretary Steven Mnuchin and Acting Internal Revenue Service Commissioner David Kautter.  (Neal Letter, May 1)

The new tax relief for pass-through businesses is a core element of the Tax Cuts and Jobs Act signed by President Trump in December – and is vital to ensure that the legislation treats all types of businesses, including real estate, fairly and equitably.  (Roundtable Weekly, Dec. 22, 2017) 

The Tax Cuts and Jobs Act reduced the top tax rate on corporations by 40 percent. The new 20 percent pass-through deduction (section 199A) can lower the top tax rate on qualifying pass-through business income to 29.6 percent. Such income was previously taxed at a top rate of 39.6 percent.  

In January, The Roundtable wrote to Treasury Secretary Mnuchin  offering several suggestions designed to maximize the economic impact of the pass-through deduction and avoid unnecessary disruptions to business activity.  [Roundtable Letter, Jan. 18]. 

Specifically, the letter urged Treasury to issue guidance: 

• clarifying that until final regulations are issued, all qualified trade or business activities may be aggregated at the partner level for purposes of the provision’s wage and asset tests;
• allowing businesses to qualify for the pass-through deduction with respect to permissible services, even if the business also engages in service activities that are excluded from the deduction (assuming the permissible services are provided on an arm’s length basis); 
• clarifying that the transfer of real estate in a like-kind exchange does not adversely affect a taxpayer’s pass-through deduction;
• confirming that the benefit of the deduction extends to shareholders invested in REITs through a mutual fund;
• construing the “principal asset” test in a manner that does not treat the skill or reputation of a firm’s employees as an “asset” of the business, unless they are reflected in an amortizable tax asset (such as workforce in place); and 
• confirming that, in the context of the pass-through deduction, the reasonable compensation rules apply exclusively to S corporations.

The new tax law, enacted last December, was the subject of a Senate Finance Committee hearing last week, where Senate Democrats focused on the pass-through deduction.  (  SFC hearing  , Early Impressions of the New Tax Law – April 24)

In Neal’s letter sent this week, the top democrat on the tax-writing House Ways and Means Committee cites taxpayer (and tax advisors) confusion over the deduction, stating, “Without computational and definitional guidance to assist taxpayers in determining whether, and to what extent, they may quality for the pass-through deduction, it is  difficult for them to properly calculate their quarterly estimated tax payments.”  (Neal Letter, May 1)

Neal adds, “As a result, taxpayers are left struggling to understand its implications, and opportunities to exploit its ambiguities abound. I urge Treasury and IRS to issue guidance as soon as possible to address these concerns.”

He also urges the Trump Administration to issue guidance to prevent abuses of the pass-through deduction. “As taxpayers and practitioners navigate the outer limits of the pass-through deduction, we’re concerned about signs of aggressive tax-minimization strategies,” Neal states in the letter.

The new tax law, enacted last December, was the subject of a Senate Finance Committee hearing last week, where Senate Democrats focused on the pass-through deduction.  (  SFC hearing  , Early Impressions of the New Tax Law– April 24)

House GOP leaders have recently signaled a deal could be reached this month between the House and Senate to pass the first rewrite of the 2010 Dodd-Frank Act (DFA).  A Senate DFA financial reform bill passed in March includes a measure to reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule – a top Roundtable priority. 

House Financial Services Committee Chairman Jeb Hensarling, (R-TX) said he is open to moving the Senate-passed Dodd-Frank reform bill without changes if there are “other pathways” to advance House financial reform bills not included in the Senate plan. ( Wall Street Journal , April 26)

The bipartisan HVCRE measure originated in the House of Representatives as the Clarifying Commercial Real Estate Loans bill (H.R. 2148), which was introduced by House Financial Services Committee members Representatives Robert Pittenger (R-NC) and David Scott (D-GA).  After being voted out of the committee by a near unanimous vote (59-1), it passed the House by voice vote in November of last year (Roundtable Weekly, Nov. 10).  The Senate Banking Committee took up an identical bill in February (S. 2405), which was co-sponsored by Senators Tom Cotton (R-AR) and Doug Jones (D-AL). 

With the HVCRE measure included in the Senate-passed DFA financial reform bill, the legislation has lingered in the House amid requests from conservatives, led by House Financial Services Committee Chairman Jeb Hensarling, (R-TX), for more extensive changes.  (Roundtable Weekly, March 16 and March 23) 

Substantive changes by the House would likely send an amended bill back to the Senate, which could threaten support by Senate moderates and sink the prospects for passing the legislation.  Hensarling told reporters last week, “I’m not naïve. Ultimately the fate of these House bills rests in approximately eight self-styled moderate Senate Democrats.”  (Reuters, April 26) 

Hensarling added that he is open to moving the Senate bill without changes if there are “other pathways” to advance House financial reform bills not included in the Senate plan.  (Wall Street Journal, April 26) 

Speaker of the House Paul Ryan (R-WI) on Monday said, “… the capstone of our regulatory reform agenda is our replacement of Dodd Frank. We already have a bill out of the House. We have a bill out of the Senate, which is pretty amazing. So, we’re gonna get that done.” He added, “We’re a few weeks away from getting our bill into law that rewrites the Dodd Frank law.”    (The Weekly Standard, April 30) 

House Majority Leader Kevin McCarthy (R-CA) this week reiterated that the effort to pass modest DFA reforms, versus repeal, will come soon.  “I think you are within a month of getting it … done,” McCarthy said Monday during the Milken economic conference.  He pledged that the legislation will be delivered to President Trump before November’s midterm elections, saying, “At the end of the day there will be a bill at the President’s desk.” (Reuters, April 30) 

Changes to HVCRE Rule  

If the Senate bill moves forward in the House, its Roundtable-supported HVCRE language would clarify and reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule  that has created needless confusion and increased borrowing costs.  

The Roundtable and twelve other real estate organizations on March 2, 2018 sent a  comment letter  urging all members of the Senate Banking Committee to take the necessary steps to enact S. 2405 by including the measure in the broader Dodd-Frank reform package (S. 2155).

The current HVCRE Rule is overly broad and includes many stabilized loans without construction risk in this HVCRE category, unduly burdening those loans with capital charges meant to protect banks from heightened construction risks. As a result, banks, including small community financial institutions, have been deterred from making this type of loan, which can represent up to 50 percent of a small bank loan portfolio.   

The Senate’s HVCRE measure would clarify which types of loans should be classified as HVCRE loans to ensure they do not impede credit capacity or economic activity, while still promoting economically responsible commercial real estate lending.  ( Roundtable Weekly, Jan. 12). 

Importantly for borrowers, the 15% equity requirement would be revised to expressly include contributed land/property at the appreciated land value as determined by a FIRREA appraisal and bank review (versus the cost basis under the current rule). The measure would also clarify that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don’t trigger the capital penalty. 

HVCRE reform has been a top policy priority of The Real Estate Roundtable and its industry coalition partners, who have submitted numerous policy comment letters to policymakers since 2015. The Roundtable’s HVCRE Working Group has also played a key role in advancing these specific reforms. (Roundtable letter, March 2)

Real estate industry and trade association leaders gathered this week with key policymakers in Washington, D.C. for The Roundtable’s 2018 Spring Meeting, where major topics of discussion included current market conditions and the economic outlook; the upcoming mid-term elections; infrastructure funding; terrorism risk insurance; immigration reform; and tax reform implementation.

Real estate industry and trade association leaders gathered this week in Washington, D.C. for the Roundtable’s 2018 Spring Meeting.

Roundtable Chair William C. Rudin (CEO & Vice Chairman, Rudin Management Company, Inc.) launched the Spring Roundtable Meeting with a report outlining the Roundtable’s policy priorities, such as working closely with the Treasury Department to ensure proper tax reform implementation; Dodd-Frank reform; a more market-oriented terrorism risk insurance program; attracting overseas tourists through the “Visit U.S.” coalition; reforming the EB-5 immigrant investor program; and regulatory reforms and streamlining processes for infrastructure modernization.

The Roundtable’s business meeting featured the following speakers: 

• Tom Brokaw, Senior Correspondent, NBC News
• Sen. Mitch McConnell (R-KY), Senate Majority Leader
• Sen. Chris Coons (D-DE)
• Sen. Rob Portman (R-OH)
• Ray W. Washburne, President & CEO, Overseas Private Investment Corporation
• Julian Enoizi, Chief Executive, Pool Reinsurance Company Limited

World-renowned journalist and NBC News reporter Tom Brokaw with Roundtable Chair William C. Rudin (CEO & Vice Chairman,  Rudin Management Company, Inc.  )  .

World-renowned journalist and NBC News reporter Tom Brokaw spoke to Roundtable members about his lengthy career in Washington and a variety of current events.  Brokaw said that while the nation faces issues of gun violence; an ever-evolving digital transformation; challenges of statesmanship; and generational differences, he emphasized the “U.S. is a nation built on big ideas” that is open to positive change – and there must be great leaders willing to be involved in their communities and businesses. 

Senate Majority Leader Mitch McConnell‘s dialogue with Roundtable members focused on the positive aspects of the past 15 months in the Senate, specifically the Tax Cuts and Jobs Act of 2017; confirmation of 12 circuit judges (the most since the 1800s); and 15 regulatory repeals made possible by the Congressional Review Act.  Sen McConnell also discussed the electoral landscape for November’s mid-term elections; the challenges of raising capital and financing infrastructure projects without having to solely rely on the federal government; and plans to continue to work with the administration on comprehensive immigration reform. 

Senate Majority Leader Mitch McConnell (R-KY)

A common theme echoed throughout the day was the continued need for bipartisanship in the House and Senate.  Sen. Chris Coons (D-DE) and Sen. Rob Portman (R-OH) both members of the Senate Foreign Relations Committee, and Ray Washborne, CEO and President of Overseas Private Investment Corporation (OPIC), discussed the recent introduction of The Better Utilization of Investments Leading to Development Act of 2018 (the BUILD Act (S.2463). The legislation is intended to promote sustainable growth in developing economies through U.S. business investment and provide more accountability for taxpayers at no expected cost. The development finance corporation will leverage the U.S. private sector’s expertise and investment capital to generate economic growth in the developing world that will support American interests. (Senate Foreign Relations Committee, Feb. 2018)

Julian Enoizi, Chief Executive of Pool Reinsurance Company Limited, who works closely with The Roundtable’s Homeland Security Task Force (HSTF) and Real Estate Information Sharing and Analysis Center (RE-ISAC), engaged Roundtable members in discussions regarding the constantly evolving terrorism threat and provided insight into developing a long-term or permanent U.S. reinsurance pooling mechanism for terrorism risk – similar to programs in the United Kingdom and throughout Europe. 

After the business meeting, approximately 30 additional policymakers attended a reception and dinner that evening at the Newseum, where real estate CEOs and trade association leaders had the opportunity to further discuss policy issues with lawmakers in an informal setting. 

Next on The Roundtable’s calendar is the all-member Annual Meeting on June 14-15 at the InterContinental Hotel-The Wharf in Washington, D.C.

Commercial real estate activity in the Fed’s 12 regional districts show mostly positive results, yet concerns about trade tariffs are widespread, according to the Federal Reserve’s latest “Beige Book” report about economic conditions. (The Fed, April 18)

Commercial real estate activity in the Fed’s 12 regional districts show mostly positive results, yet concerns about trade tariffs are widespread, according to the Federal Reserve’s latest  “Beige Book” report  about economic conditions. (The Fed, April 18)

A new focus on the threat of a trade war appears in the report, with the word “tariff” used 36 times, compared with zero references in the prior survey.  The second line in the report states, “Outlooks remained positive, but contacts in various sectors including manufacturing, agriculture, and transportation expressed concern about the newly imposed and/or proposed tariffs.”  (Reuters, April 18)

The report summary also notes that steel and aluminum prices rose, “sometimes dramatically” due to the new duties imposed by the Trump Administration. (Roundtable Weekly, March 9)  The Beige Book is one of the first official reports showing the economic impact of the new tariffs on domestic business. (Wall Street Journal, April 18)

Contacts in nine of the 12 districts commented directly on the impacts of tariffs, citing concerns related to rising prices, future uncertainty, investment decisions, and how to pass increased costs on to consumers.

A summary of each Fed district is included in the report, which shows economic expansion at a modest to moderate pace throughout March and early April, with the labor market described as “tight.”

Although the Fed reports that commercial real estate activity and construction has improved since March, prices have increased for building materials, especially for lumber, drywall, and concrete.  (GlobeSt, April 19)

The Fed will consider the Beige Book findings during its next meeting on May 1-2.  On Monday, New York Fed President William Dudley said the Fed would likely rise interest rates three or four times in 2018.  (Fed Calendar and CNBC, April 16)

Roundtable President and CEO Jeffrey DeBoer noted the commercial real estate industry’s concerns earlier this month, stating, “Proposed tariffs, coupled with the earlier tariffs on steel and ongoing dispute with China could have unfortunate and unintended effects on the U.S. economy by raising construction costs, and reducing jobs in real estate development.  China has continually taken advantage of trade practice laws, particularly intellectual property-vital for the U.S. to continue developing new technology, whether it be machinery, software, or energy efficient building solutions and should be held accountable but in a measured way.”  (Roundtable Weekly, April 6)

The economy and CRE will be a focus at The Roundtable’s Spring Meeting next week in Washington, which will include Senate Majority Leader Mitch McConnell (R-KY) as a featured guest.