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

CRE Market Conditions & Solutions

• Subcommittee Chairwoman Lisa McClain (R-MI), commented on April 23 that the hearing will explore solutions to strengthen businesses that continue to struggle from the impact of pandemic-related government policies. She stated, “These businesses – including medical centers, warehouses, and offices – are crucial to our local economies and communities.” (McClain news release)

• House Oversight Committee Chairman James Comer (R-KY)—the lead sponsor of the House-passed Stopping Home Office Work’s Unproductive Problems (SHOW UP) Act (H.R. 139)—said it is urgent that federal employees return to their offices. (Roundtable Weekly, Feb. 3, 2023 and Comer news release)

• DeBoer’s testimony will recommend a range of policy actions that lawmakers and regulators should enact to strengthen CRE markets and encourage overall economic growth. The testimony will be available via the RER website and posted on the subcommittee website.

• The other hearing witness will be Jeffrey Weidell (CEO, NorthMarq), chairman of the Mortgage Bankers Association's (MBA) Commercial Real Estate/Multifamily Finance Board of Governors. (MBA news release, Oct. 15, 2023)

• MBA released a report on April 23 that details recent levels of commercial real estate mortgage borrowing and lending. The 2023 Commercial Real Estate/Multifamily Finance Annual Origination Volume Summation estimates that $429 billion of CRE mortgage borrowing and lending transpired last year. That total represents a 47% decrease from $816 billion in 2022, and a 52% decrease from the record $891 billion in 2021. (Report order information, MBA)

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

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

New Look-Through Rule

• By looking through a domestic C corporation to its shareholders, the new FIRPTA rules run counter to general tax principles, past IRS guidance, and historic precedent.  Moreover, the final regulations do not provide relief to widely held U.S. real estate funds with dispersed foreign ownership, even if the foreign investors are far removed and separate from the management and control of the U.S. funds’ activities. 

• While the final rules increased the total percentage of foreign ownership of a C corp. necessary to trigger look-through treatment, the change offers little practical relief since participating U.S. investors typically will only invest in U.S. real estate through other channels (e.g., directly, through a partnership, or through a REIT).

• Transition relief in the final regulations may offer some respite to certain foreign investors, depending on their facts and circumstances. The new look-through rule does not apply to preexisting business arrangements—but only if the entity does not acquire a significant amount of new real estate interests or undergo a significant change in its ownership during the 10-year transition period.

Roundtable Response

• Roundtable President and CEO Jeffrey DeBoer responded to the Treasury rules. “Foreign capital is badly needed to supplement domestically sourced capital in cities and downtowns that continue struggling to recover from the pandemic. The wide spread adoption of remote work, coupled with today’s high interest rates and decreased lending by banks is fueling a reinforcing cycle of declining investment, property values, and tax revenues that can only be countered through additional investment capital.”

• “Unfortunately, the final Treasury rules on FIRPTA and domestically controlled REITs raise new barriers to passive foreign investment in U.S. real estate, including affordable housing and the conversion of underutilized office buildings,” DeBoer said.

• The Real Estate Roundtable and some members of Congress had advocated for the withdrawal of the proposed regulations or significant changes. House Ways and Means Committee Members Darin LaHood (R-IL) and Carol Miller (R-WV) urged Treasury Secretary Janet Yellen to drop the FIRPTA proposal. (Letter to Yellen, July 28, 2023 and real estate industry coalition letter, March 1, 2023 | Roundtable Weekly: Jan. 6, March 4 and Aug. 4, 2023) 

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

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On Thursday, the IRS issued a package of final regulations on the transferability of tax credits for rooftop solar and other clean energy investments under the Inflation Reduction Act (IRA). (Final regulations and IRS news release, April 25)

Transferability

• The final rules relate to the transferability of qualifying credits to third-party credit purchasers in the context of partnerships and pass-throughs, as well as potential credit recapture events and penalties for excessive credit transfers. (PoliticoPro, April 25 and Tax Notes, April 26)

• Treasury has also provided guidance on the implementation and application of the IRA’s prevailing wage and apprenticeship requirements. (Roundtable Fact Sheet | Roundtable comments to Treasury and Roundtable Weekly, July 28, 2023)

• The ability to transfer clean energy credits allows REITs to participate in the new IRA tax incentive regime. The final regulations address several concerns raised by The Roundtable in its July 2023 comment letter, particularly in the context of REIT investments. For example, the regulations clarify that as-yet-untransferred credits are disregarded for purposes of the REIT 75% asset test.

• Unfortunately, the final regulations did not reverse the Biden administration’s prior guidance that generally limits the ability of mixed real estate partnerships (taxable and tax-exempt partners) to maximize their credit benefits through a combination of credit transfers and direct payments.  Mixed partnerships can still claim the new tax credits, but may lose some of the financial value due to the specific tax attributes of the individual partners. 

• Treasury indicated additional guidance is likely to help taxpayers meet the cumbersome credit registration requirements and ensure taxpayers can qualify for the underlying incentives. The IRS also updated its FAQs on tax credit transfers on April 25.  

The Roundtable's Energy Credit Transferability/Direct Pay Working Group is analyzing the regulations and assessing their impact on CRE.

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

Office Sector Risk

• The financial stability report focused on four areas of risk, including asset valuations. CRE stress was the third most cited risk, moving down from second in last October’s survey. (KPMG, April 22, 2024 and Roundtable Weekly, Oct. 27, 2023)

• This month’s Fed report also acknowledged unique strains on CRE, especially in the office sector, “where vulnerabilities have mounted in the post-pandemic period.”

• The report added that continued economic pressures could reduce investor risk appetite and lead to a “more pronounced correction in commercial property prices.” This, in turn, could “reduce the willingness of financial intermediaries to supply credit to the economy” and further weigh on overall economic activity.

• Despite ongoing concerns about CRE, the Fed survey also found that the issuance of non-agency securities started to recover in the first three months of 2024.

• A separate report from DoubleLine shows signs of improvement for the commercial mortgage-backed securities market and other capital markets and notes that borrowers in some sectors, including office, are finding access to credit. (Bloomberg, April 24)

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

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