News Type: Roundtable Weekly

Senate Confirms Mark Calabria as FHFA Director Overseeing Fannie Mae and Freddie Mac

Posted on by Trey Jackson

The Senate yesterday confirmed Mark Calabria, previous chief economist to Vice President Mike Pence, as director of the Federal Housing Finance Agency (FHFA) – the federal regulator overseeing Fannie Mae, Freddie Mac and the multi-trillion dollar Federal Home Loan Bank System. 

The Senate yesterday confirmed Mark Calabria, previous chief economist to Vice President Mike Pence, as director of the Federal Housing Finance Agency (FHFA) – the federal regulator overseeing Fannie Mae, Freddie Mac and the multi-trillion dollar Federal Home Loan Bank System.

  • Calabria will now have broad influence over reshaping the role of the Government Sponsored Enterprises (GSEs) brought under government conservatorship during the financial crisis. 
  • Senate Banking Committee Chairman Mike Crapo (R-ID) said on the Senate floor yesterday that Calabria “committed to working with me, and other members of this body, to reach a comprehensive solution on ending the conservatorship of Fannie and Freddie, once and for all.  He agrees with me, and many others, that action on housing finance reform is the prerogative of Congress, and that after over a decade of conservatorship, it is long overdue.”  (Politico, April 4) 
  • Sen. Crapo and President Trump last week launched separate efforts aimed at reforming the multi-trillion-dollar financial market for single-family and multifamily mortgages, including the GSEs’ Fannie Mae and Freddie Mac.  Chairman Crapo’s  recent housing reform outline proposes to return the GSEs to private control.  (Roundtable Weekly, Feb. 8) 
  • Sen. Crapo will be a featured speaker at next week’s Spring Roundtable Meeting in Washington. 
  • President Trump last week released a presidential memo directing “the Secretary of the Treasury and the Secretary of Housing and Urban Development to craft administrative and legislative options for housing finance reform.”  (Wall Street Journal, March 27) 
  • President Trump also aims to end the GSEs’ conservatorship, “promote competition in the housing finance market … create a system that encourages sustainable homeownership and protects taxpayers against bailouts.”  The memo supports the preservation of the 30-year fixed-rate mortgage. ( White House announcement, March 27) 
  • A coalition of 23 national real estate organizations, including The Real Estate Roundtable, sent a letter supporting Calabria’s confirmation this week to Senate leadership.  (Coalition confirmation support letter, April 1) 

The Real Estate Roundtable and 27 industry organizations last month submitted principles for reforming the GSEs. (Roundtable Weekly, March 1) 

Financial Accounting Standards Board (FASB) Rejects Bank Proposal on Loan Losses

Posted on by Trey Jackson

The Financial Accounting Standards Board (FASB) this week voted to reject a proposal by regional banks to soften the impact of a change that will force banks to book losses on bad loans much faster.  This rejection means that the Current Expected Credit Loss (CECL) accounting standard will proceed as planned at the beginning of 2020 for publicly traded U.S. banks and later for other financial institutions.  A business coalition that included The Real Estate Roundtable last month had urged further study amid concerns that CECL may soon begin to reduce aggregate bank lending.  (Coalition Letter, March 5)

  

The Financial Accounting Standards Board (FASB) this week voted to reject a proposal by regional banks to soften the impact of a change that will force banks to book losses on bad loans much faster.

  • The new CECL model will require certain financial institutions to estimate the expected loss over the life of a loan beginning in January 2020 – a significant change to the way banks calculate reserves on assets.  CECL may cut into earnings and regulatory capital by forcing some banks to boost their loan-loss reserves.  (Wall Street Journal, April 3) 
  • For real estate, there is concern is that banks may reduce lending volumes as they build up additional capital reserves to be in compliance with CECL.  (Roundtable Weekly, March 8) 
  • The regulatory change in how banks estimate loan and lease losses (ALLL) will require substantial changes in data analytics and financial methodologies.  Details on FASB’s April 3 Tentative Board Decision are available here. 
  • The March 5 coalition letter cited a 2018 KPMB survey showing companies are struggling to make certain accounting, modeling and data decisions to be in compliance with CECL.  (KPMG, “Financial institutions feeling the crunch in countdown to CECL implementation”)  
  • Rep. Blaine Luetkemeyer (R-MO) and Ranking Member Patrick McHenry (R-NC) recently wrote to Securities and Exchange Commission Chairman Jay Clayton expressing concerns about the coming CECL loan loss accounting approach and its effects on markets and investors.  Luetkemeyer and McHenry wrote that they are worried CECL implementation-which begins in 2020 for publicly traded banks-could have unanticipated effects on the financial and housing industries with questionable benefit.  
  • The CECL accounting rule change was issued by the Financial Accounting Standards Board (FASB) in June 2016 as a result of the 2008 financial crisis.  (FASB, Credit Losses) 
  • The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will continue to address the potential impact of the new accounting standard and work with the CECL business coalition on CECL implementation issues. 

In addition to The Roundtable, the 8 signatories to the March 5 coalition letter were the U.S. Chamber of Commerce, American Bankers Association, Bank Policy Institute, Commercial Real Estate Finance Council, Mortgage Bankers Association, National Association of Realtors, Credit Union National Association and National Association of Federal Credit Unions. 

Bipartisan Senate Legislation Proposes Reporting Requirements for Opportunity Funds; Freddie Mac Releases Analysis of OZs

Posted on by Trey Jackson

Bipartisan Senate legislation introduced May 8 would direct the Treasury Department to collect data and issue annual reports on Opportunity Zone (OZ) tax incentives. Reporting requirements were included in the original Investing in Opportunity Act before Congress passed it as part of tax reform in December 2017.

The Opportunity Zones bill (S. 1344)—introduced by Sens. Cory Booker (D-N.J.), Tim Scott (R-S.C.), Todd Young (R-Ind.), and Maggie Hassan (D-N.H.)­—would require data on the number of opportunity funds created, their asset classes, their holdings, and their economic ripple effects in the designated OZs where they invest. (BGov, May 8)

  • Congress approved the creation of Opportunities Zones-economically distressed areas characterized by high poverty and subpar employment opportunities-and tax incentives to encourage redevelopment in these lower-income communities.
  • The program allows for capital gain related to a current sale or transaction to be deferred until December 31, 2026 – if investors place their capital gain into a fund that makes qualified investments in Opportunity Zones.  Individuals and entities can contribute to these Opportunity Funds.
  • The bill (S. 1344)—introduced by Sens. Cory Booker (D-N.J.), Tim Scott (R-S.C.), Todd Young (R-Ind.), and Maggie Hassan (D-N.H.)­—would require data on the number of opportunity funds created, their asset classes, their holdings, and their economic ripple effects in the designated OZs where they invest. (BGov, May 8)
  • “Already leaders in rural and urban communities across the country are beginning to use Opportunity Zones as a valuable new tool to drive high-impact investment into their communities,” Sen. Booker said. “This legislation will restore and strengthen transparency measures to ensure [the Opportunity Zones program] lives up to its original promise and delivers real impact to those who need it most.”  (Sen. Booker news release, May 8)
  • “Opportunity Zones have been a unifying message for both Republicans and Democrats,” Sen. Scott said. “It’s imperative that we create reporting requirements to allow us to accurately measure the success of the initiative…” 
  • The Treasury Department last month released a highly-anticipated, second set of Opportunity Zone (OZ) regulations that seek to provide certainty to potential OZ investors and drive economic development in economically distressed communities nationwide. (reference: 169-page Treasury regulations and IRS news release, April 17 / Roundtable Weekly, April 19) 
  • No action on S. 1344 is imminent, though Congress could consider tax legislation this summer or fall. 

Freddie Mac has released an analysis of its own financial data to show multifamily market characteristics in Opportunity Zones.  Notable among the reports many findings were the following: 

Freddie Mac has released an analysis of its own financial data to show multifamily market characteristics in Opportunity Zones.

  • Housing units in OZs tend to be relatively old-28.7% of the multifamily rental stock was built prior to 1960 (compared to a rate of less than 20% elsewhere).
  • The population density of OZs is low-about two-thirds of the national rate
  • Of the 117 opportunity funds identified by the National Council of State Housing Agencies as of April, 76% have an investment focus on multifamily residential development. 

The report concludes that census tracts designated by governors as OZs “overlap quite well with areas that Freddie Mac targets for affordable housing assistance.” 

The OZ program’s goals and incentives were the focus of a Jan. 29 discussion during The Real Estate Roundtable’s State of the Industry Meeting, which featured Sen. Scott and Roundtable member Geordy Johnson (CEO, Johnson Development Associates, Inc.). (Roundtable Weekly, Feb. 15)

Real Estate, Environmental Groups Recommend Accelerated Depreciation for Energy Efficient Building Equipment

Posted on by Trey Jackson

A broad coalition of real estate and environmental organizations urged congressional tax writers this week to establish an accelerated depreciation schedule for a new category of Energy Efficient Qualified Improvement Property installed in buildings – or “E-QUIP.”  (Coalition E-QUIP Letter, May 8)

  

A broad coalition of real estate and environmental organizations urged congressional tax writers this week to establish an accelerated depreciation schedule for a new category of Energy Efficient Qualified Improvement Property installed in buildings – or “E-QUIP.” (Coalition E-QUIP Letter, May 8)

  • The coalition, led by The Real Estate Roundtable, recommends “a uniform E-QUIP 10-year recovery period [to] promote productive business investment by spurring high performance upgrades in commercial and multifamily buildings. In turn, optimizing energy efficient building performance will help create well-paying jobs in the construction, design, and energy sectors; boost equipment manufacturing; enhance our country’s energy independence; and reduce the built environment’s carbon footprint.”    
  • Legislation supported by The Roundtable is currently pending to fix a technical error from the Tax Cut and Jobs Act regarding depreciation of interior building improvements, known as Qualified Improvement Property (“QIP”).  (Roundtable Weekly,  March 15 and QIP Policy Comment Letter, April 26)  However, even if Congress fixes the QIP mistake, it would not meaningfully encourage commercial and multifamily owners to invest in expensive high-performance building equipment.    
  • The new E-QUIP coalition thus proposes a beneficial 10-year cost recovery period for efficient HVAC, lights, roofs and other components that will save energy and reduce carbon emissions attributable to buildings, their tenants, and other occupants.  
  • Roundtable President and CEO Jeffrey DeBoer said, “The purpose of establishing a new E-QUIP category in the tax code is to stimulate productive, capital investment on a national level that modernizes our nation’s building infrastructure while helping to lower greenhouse gas emissions.  As Congress considers potential tax, infrastructure, and climate legislation, the E-QUIP proposal should have bipartisan appeal on a range of important policies prioritized by Republicans and Democrats.”
  • An elective 10-year, straight-line cost recovery period for E-QUIP expenditures for taxable income, as well as for earnings and profits purposes, is the core of the proposal.  Other elements recommended to Congressional tax writers for consideration in E-QUIP legislation are set forth in the real estate and environmental groups’ coalition letter.   

E-QUIP will be one of many policies affecting commercial real estate discussed during the June 11-12 Annual Roundtable Meeting in Washington DC.

Roundtable Urges Senate Committees to Address Federal-State Cannabis Policy Conflicts Constraining Banking, Real Estate Transactions

Posted on by Trey Jackson

The Real Estate Roundtable on April 30 wrote to the Senate Banking and Judiciary Committees urging hearings to consider the SAFE Banking Act (S. 1200) and the STATES Act (S. 1028) – measures that would provide clarity for banking firms and real estate providers to fully serve the needs of cannabis-related businesses deemed legal under state law.  (Roundtable Policy Letter, April 30)

Roundtable President and CEO Jeffrey DeBoer states in the April 30 letter, “Passage of the SAFE Banking Act is a strong first step to clarify a full range of proper business conduct in the rapidly evolving context of cannabis policy.”

  • The bipartisan Secure And Fair Enforcement (SAFE) Banking Act is led by co-sponsors Sens. Cory Gardner (R-CO) and Jeff Merkley (D-OR).  S. 1200 clarifies that banks would not face adverse action on a loan to a real estate owner solely because that owner leases property to legitimate, state-licensed, cannabis-related businesses (CRBs).  The measure would also protect sellers and lessors of real estate and other CRB “service providers” by clarifying that proceeds from state-approved marijuana-related transactions do not derive from unlawful activity, and thus do not provide a predicate for federal criminal money laundering.
  • Roundtable President and CEO Jeffrey DeBoer states in the letter, “Passage of the SAFE Banking Act is a strong first step to clarify a full range of proper business conduct in the rapidly evolving context of cannabis policy.”
  • DeBoer encouraged the committees to hold hearings on the SAFE Act to create a record for resolving and reconciling the conflict between business transactions that are deemed legal under state law, yet exposed to federal criminal liability.  If the SAFE Act is enacted, federally regulated banks would no longer face the threat of sanction simply by providing financial services to a legitimate state-authorized CRB.
  • The Roundtable letter also supports the swift enactment of the bipartisan Strengthening the Tenth Amendment Through Entrusting States  (STATES) Act, led by Sens. Cory Gardner (R-CO) and Elizabeth Warren (D-MA).  S. 1028 would ensure that each state has the right to determine for itself the best approach to cannabis within its borders.  (U.S. News & World Report, April 4 and  Roundtable Weekly, April 12)  
  • In the House, the STATES Act (H.R. 2093) was reintroduced on April 4 by Reps. Earl Blumenauer (D-OR) and David Joyce (D-OH).  Additionally, the SAFE Act (H.R. 1595) – co-sponsored by Reps. Ed Perlmutter (D-CO), Denny Heck (D-WA), Steve Stivers (R-OH) and Warren Davidson (R-OH) – was approved by the House Financial Services Committee on March 27 by a 45-15 vote. (Roundtable Weekly, April 26) 

Prospects for passing cannabis-related bills in the Senate remains uncertain.  Senate Banking Chairman Michael Crapo (R-ID) this week expressed doubt about the SAFE Act in Congress.  “As long as cannabis is illegal under federal law, it seems to me to be difficult for us to resolve this,” he said.  (Politico Pro, May 1)

President Trump and Democratic Leaders Aim for $2 Trillion Infrastructure Package; Roundtable Recommends Policies to House Transportation Committee

Posted on by Trey Jackson

President Donald Trump and Democratic congressional leaders on Tuesday agreed to pursue a $2 trillion infrastructure package and meet again in three weeks to discuss possible revenue sources.

The Roundtable on April 29 submitted  infrastructure policy recommendations to House Committee on Transportation and Infrastructure Chairman Peter DeFazio (D-OR) and Ranking Member Sam Graves (R-MO).  

  • House Speaker Nancy Pelosi (D-CA) said after the White House meeting, “We did come to one agreement: that the agreement would be big and bold.”   Senate Minority Leader Chuck Schumer (D-NY) added,  “… now it’s up to the president and the White House to tell us how they pay for it.” (Associated Press, April 30)
  • Schumer stated in his Dec. 6, 2018 letter to the president there would be no deal on infrastructure without addressing climate change.  Schumer wrote that one of the policies that should be included in any infrastructure package should, “Provide permanent tax incentives for domestic production of clean electricity and storage, energy efficient homes and commercial buildings …” (Schumer’s letter to President Trump and  Washington Post op-ed).
  • House Committee on Transportation and Infrastructure Chairman Peter DeFazio (D-OR) also attended the April 30 White House meeting.  DeFazio’s committee held a Member’s Day hearing on the next day to share their infrastructure priorities. “While I continue to press my colleagues on the Committee on Ways & Means, House Leadership, the Senate, and the White House on a path forward on funding, this Committee must do its legislative work,” DeFazio stated in his opening remarks.
  • The Roundtable on April 29 submitted infrastructure policy recommendations to DeFazio and Ranking Member Sam Graves (R-MO).  Roundtable President and CEO Jeffrey DeBoer states in the letter, “We offer policy suggestions within your Committee’s jurisdiction to improve programs to repair and modernize the transportation and other systems upon which the U.S. economy depends.  We also suggest targeted changes to the federal tax code, requiring coordination with the Ways and Means Committee, to help pay for our nation’s infrastructure deficit.”  (Roundtable Infrastructure Policies letter, April 29)
  • DeBoer emphasized the goal of the policies is to offer “a holistic approach to modernize our aging infrastructure [that] will create American jobs, boost economic growth, address climate threats, and improve the quality of life in all regions of the country.” 

    The Roundtable’s key suggestion to help pay for infrastructure is to repeal the Foreign Investment in Real Property Tax Act  (FIRPTA) of 1980. Bipartisan FIRPTA repeal legislation ( H.R. 2210 ) was introduced in the House on April 10. (Roundtable Weekly, April 12) 

The Roundtable’s key suggestion to help pay for infrastructure is to repeal the Foreign Investment in Real Property Tax Act  (FIRPTA) of 1980.  FIRPTA imposes a discriminatory layer of capital gains tax on foreign investment-a tax burden that does not apply to any other asset class.  Repealing FIRPTA would serve as a market-driven catalyst to finance improvements in our nation’s infrastructure.  Bipartisan FIRPTA repeal legislation (H.R. 2210) was introduced in the House on April 10. (Roundtable Weekly, April 12).

Other infrastructure policies detailed in The Roundtable’s April 29 letter include: 

  • A beneficial, 10-year cost recovery period for investments that improve energy efficiency performance in commercial and multifamily buildings;
  • Proposals supported by Democratic and Republican administrations alike to streamline the permit process for infrastructure projects;
  • An increase in the federal gas “user fee” in a responsible and sustainable manner;
  • Revising IRS “volume caps” and other limitations on tax-exempt bonds;
  • Improving the TIFIA loan program to encourage more public-private partnerships to finance infrastructure; and
  • Reasonable federal-state cost share rules for grants to support mass transit projects of regional and national significance (like the NY-NJ Gateway program).

The Roundtable’s DeBoer discussed the role of public-private partnerships to develop infrastructure projects on CNBC’s Squawk Box  in June 2017.  (Roundtable Weekly, June 9, 2017)  

Ways and Means Chairman Richard Neal (D-MA) has indicated he intends for his committee to consider an infrastructure bill soon.

#  #  # 

Business Coalition Urges Congress to Correct Cost Recovery Period for Nonresidential Real Estate Improvements

Posted on by Trey Jackson

A coalition of businesses and trade groups, including The Real Estate Roundtable, today urged all members of Congress to cosponsor the Restoring Investment in Improvements Act (H.R. 1869 /  S. 803) – a bill that would correct a drafting error in tax reform.  The legislation would give qualified improvement property (QIP) a 15-year depreciation period and restore its eligibility for accelerated bonus depreciation. (QIP Policy Comment Letter, April 26)

 

A coalition of businesses and trade groups, including The Real Estate Roundtable, urged all members of Congress to cosponsor the Restoring Investment in Improvements Act (H.R. 1869 /  S. 803) – a bill that would correct a drafting error in tax reform.  The legislation would give qualified improvement property (QIP) a 15-year depreciation period and restore its eligibility for accelerated bonus depreciation. (QIP Policy Comment Letter, April 26)

  • House Ways and Means Committee members Jimmy Panetta (D-CA) and Jackie Walorski (R-IN) introduced H.R. 1869 on March 26. The Senate bill (S. 803) was introduced earlier in the month by Sens. Pat Toomey (R-PA) and Doug Jones (D-AL).  (Roundtable Weekly, March 15)
  • The legislation would correct a mistake in the Tax Cuts and Jobs Act of 2017 that lengthened the cost recovery period for QIP, which generally applies to improvements to the interior of existing nonresidential buildings.  
  • The error has resulted in a significantly longer 39- or 40-year cost recovery period.  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.
  • The April 26 coalition letter to leadership in the House and Senate, as well as leaders of tax committees in both chambers, notes that there is no budget impact to restore the QIP depreciation to 15 years.  
  • Specific examples are offered in the letter to show the negative consequences that the current law is having on QIP investments and commercial renovation projects.  The letter states, “Not surprisingly, it is causing numerous negative ripple effects for individuals and businesses, including on job creation, sales of QIP products and building supplies, property values, building occupancy and rental income, cost-saving energy efficiency gains, and even on fire safety.”
  • Roundtable President and CEO Jeffrey D. DeBoer said, “The Restoring Investment in Improvements Act would enact an immediate and necessary correction to the Tax Cuts and Jobs Act.  It would reverse an unnecessary drag on building investment, construction activity, and job creation.  Congress should move on this common-sense legislation quickly and reinstate a much shorter cost recovery period for building improvements.” 

In the weeks ahead, the House Ways and Means and Senate Finance Committees may address “technical corrections” to the TCJA, such as the cost recovery period for QIP along with other tax legislative priorities. (Roundtable Weekly, March 29)

Jobs Originating through Launching Travel (JOLT) Act Aims to Encourage Tourism to the U.S. and Bolster Job Creation

Posted on by Trey Jackson

Reps. Mike Quigley (D-IL) and Tom Rice (R-SC) reintroduced the bipartisan Jobs Originating through Launching Travel (JOLT) Act of 2019 (H.R. 2187) on April 9 to improve national security, increase international tourism, create jobs and reform visa laws. 

The Visit U.S. Coalition endorsed the introduction of the JOLT Act last year and again this month on its reintroduction. (Roundtable Weekly, July 27, 2018 and Visit U.S., April 9)  The coalition, led by the U.S. Travel Association and the American Hotel and Lodging Association, includes The Real Estate Roundtable, U.S. Chamber of Commerce and the American Resort Development Association.  

The Visit U.S. Coalition endorsed the introduction of the JOLT Act last year and again this month on its reintroduction. (Roundtable Weekly, July 27, 2018 and Visit U.S., April 9)  The coalition, led by the U.S. Travel Association and the American Hotel and Lodging Association, includes The Real Estate Roundtable, U.S. Chamber of Commerce and the American Resort Development Association.   

The JOLT Act proposes to: 

  • Strengthen visa processing by setting timely goals for applicants; 
  • Create a pilot program at the State Department to utilize videoconferencing technology for applicants who lack easy access to U.S. embassies;
  • Rename the Visa Waiver Program (VWP) the Secure Travel Partnership to more accurately reflect the realities of security and travel facilitation within the program;””
  • Modify the VWP to prevent overstays, and increase the ability of secure countries to participate;
  • Increase the ability of Canadians to stay up to 240 days per year;
  • Improve coordination between the Department of Homeland Security and the State Department. 

“Welcoming international travelers to American shores has undeniable benefits – from boosting the economy with spending at hotels, restaurants, and retail stores, to showing the world what makes America great,” said Visit U.S. Coalition spokesperson Andrea Riccio.   According to the coalition, each overseas traveler spends approximately $4,200 when they visit the U.S., directly supporting 1.2 million jobs and $33.7 billion in wages.  (Visit U.S. news release, April 9) 

A panel discussion at last year’s Annual Roundtable Meeting focused on travel and tourism, economic growth and commercial real estate.  Participants included Roger Dow, President and CEO, U.S. Travel Association; Katherine Lugar, (former) President and CEO, American Hotel & Lodging Association; Senator Amy Klobuchar (D-MN) and Anthony E. Malkin  (Chairman and CEO, Empire State Realty Trust).  (Roundtable Weekly, June 15, 2018)

House Expected to Vote on Cannabis SAFE Banking Bill; STATES Act Reintroduced to Resolve Federal-State Legal Conflicts Over Cannabis

Posted on by Trey Jackson

A pair of bills working their way through Congress could allow financial institutions to provide legal cannabis companies with banking services and resolve federal-state laws governing cannabis.

State-by-State Cannabis Policies — interactive map from National Cannabis Industry Association. 
  • Congressman Earl Blumenauer (D-OR), founder and co-chair of the Congressional Cannabis Caucus, said that the House will soon vote on the SAFE Act – a bill allowing banks to work with marijuana businesses in certain states. (The Hill, April 19)
  • The House Financial Services Committee on March 27 approved the Secure and Fair Enforcement (SAFE) Banking Act of 20119 (H.R. 1595). The bipartisan bill, approved by a 45-15 vote, was co-sponsored Reps. Ed Perlmutter (D-CO), Denny Heck (D-WA), Steve Stivers (R-OH) and Warren Davidson (R-OH).
  • The Real Estate Roundtable in March sent a letter urging swift enactment of the bill to the leadership of the Financial Services and Judiciary Committees.  Roundtable President and CEO Jeffrey DeBoer noted in the letter, “The SAFE Banking Act provides much-needed clarity for the banking, real estate, and business sectors to function within the contours of state laws that have legalized marijuana.”  (Roundtable Weekly, March 29)

As the SAFE and STATES Acts move the cannabis issue forward in Congress, prospects for passing marijuana-related bills in the Senate remains uncertain.  (Fortune, April 19)

  • Blumenauer and Rep. David Joyce (D-OH) on April 4 also reintroduced the Strengthening the Tenth Amendment Through Entrusting States Act (STATES Act) in the House, which would ensure that each state has the right to determine for itself the best approach to cannabis within its borders.  (H.R. 2093) 
  • According to a summary of the bill, 47 states have laws permitting marijuana or marijuana-based products. Washington D.C., Puerto Rico, Guam, and a number of tribal nations have similar laws.  Last year,  Michigan, Missouri, Oklahoma, Utah, and Vermont all expanded legal marijuana.
  • In the Senate, the STATES Act (S. 1028) was reintroduced by Sens. Cory Gardner (R-CO) and Elizabeth Warren (D-MA) to resolve the federal-state conflict over cannabis laws.  (U.S. News & World Report, April 4 and Roundtable Weekly, April 12)  

As the SAFE and STATES Acts move the cannabis issue forward in Congress, prospects for passing marijuana-related bills in the Senate remains uncertain.  (Fortune, April 19) 

 

Treasury Issues Highly Anticipated and Favorable Opportunity Zones Guidance

Posted on by Trey Jackson

The Treasury Department on Wednesday released a highly-anticipated, second set of Opportunity Zone (OZ) regulations that seek to provide certainty to potential OZ investors and drive economic development in economically distressed communities nationwide. (reference: 169-page Treasury regulations and IRS news release, April 17) 

President Donald Trump with Scott Turner, executive director of the White House Opportunity and Revitalization Council,  at the April 17 Opportunity Zone Conference with state, local, tribal and community leaders. (Official White House Photo by Shealah Craighead)  

  • A White House Opportunity Zones event on Wednesday featured President Trump, Treasury Secretary Steven Mnuchin and officials from local governments around the country.  (White House Remarks and  Video, April 17)
  • The Treasury Department designated more than 8,700 low-income census tracts as Qualified Opportunity Zones last June. (IRS Notice 2018-48).  Treasury estimates that Opportunity Zones will boost investment in these targeted areas by $100 billion.  According to White House Chief Economist Kevin Hassett (citing Zillow data), property values in Opportunity Zones have appreciated by about 20 percent since zone designations were made in early 2018. 
  • Roundtable President and CEO Jeffrey DeBoer said, “We are pleased that these proposed regulations provide answers to many key structural and operational questions that have concerned potential opportunity zone investors, developers, and business owners.   The opportunity zone program, designed to stimulate investment in economically struggling communities nationwide, has tremendous potential.   We look forward to continuing to work with policymakers to reduce unnecessary, counterproductive aspects of the new law.”

The Roundtable previously submitted two comment letters to policymakers on Opportunity Zones, one in June 2018 and one in December 2018. (Roundtable Weekly: Oct. 19, and  Dec. 21). The rules issued this week expanded on the previously proposed regulations and address a variety of OZ investment issues.  Positive developments in the newly proposed regulations include the following:

The  169-page Treasury regulations and IRS news release, April 17

  • Opportunity Funds that own more than one property can sell assets individually after a 10-year holding period and fund investors can exclude the gain, without a requirement that the fund investor sell his or her interest in the fund.  In addition, the regulations clarify that multi-asset Opportunity Funds that choose to set up separate funds for individual assets can reduce the administrative burden on their investors through the use of a “feeder” fund that aggregates the fund interests;
  • Opportunity Funds can make nontaxable, debt-financed distributions to fund investors during the 10-year holding period, provided they comply with “disguised sale” rules that limit distributions made during the first 2 years;
  • Land (improved and unimproved) is qualified opportunity zone business property provided it is used in an active trade or business, and it does not have to meet the “original use” or “substantial improvement” requirements that apply to structures;
  • The working capital safe harbor, which provides up to 31-months for Opportunity Funds to deploy capital, is further liberalized.  Specifically, the regulations clarify that: (1) subsequent contributions of capital to the same Opportunity Fund are subject to a new 31-month period, and (2) the 31-month period is extended if the delay is due to waiting for government action or approval;
  • Leased property, including property leased by an Opportunity Fund from a related property, can qualify as opportunity zone business property if certain requirements are met.  This clarification in particular should help existing owners of property in Opportunity Zones participate in the tax incentives without having to sell or dispose of their ownership interest; 

Roundtable President and CEO Jeffrey DeBoer said, “We are pleased that these proposed regulations provide answers to many key structural and operational questions that have concerned potential opportunity zone investors, developers, and business owners.”

  • Real estate that straddles an Opportunity Zone border can qualify as opportunity zone business property as long as the portion of the property that is inside the zone is substantial relative to the total property;
  • While the sale of an asset during the 10-year holding period is generally a taxable event for the Opportunity Fund investors, the regulations infer that a fund could do a like-kind exchange and as long as the replacement property is qualified opportunity zone business property, the gain would be deferred for the investors;
  • Lastly, the regulations include a number of changes that aim to facilitate investment in operating businesses, which should increase tenant demand for commercial real estate located in Opportunity Zones.

The IRS has scheduled a public hearing on the second set of proposed rules for July 9, 2019. Comments are due 60 days after the proposed rules are published in the Federal Register. A third set of proposed guidelines is expected on Opportunity Fund’s reporting requirements to measure the effectiveness of the program.

The OZ program’s goals and incentives were the focus of a Jan. 29 discussion during The Real Estate Roundtable’s State of the Industry Meeting, which featured Sen. Scott and Roundtable member Geordy Johnson (CEO, Johnson Development Associates, Inc.). (Roundtable Weekly, Feb. 15) 

The Roundtable’s Tax Policy Advisory Committee (TPAC) plans to continue its work with policymakers on the OZ program and regulations affecting Qualified Opportunity Funds.