Members of CCIM Institute, a global commercial real estate affiliate of the National Association of Realtors (NAR), collaborated with members of the Institute of Real Estate Management (IREM) and Society of Industrial and Office Realtors (SIOR) in Washington, D.C., last week for the organizations’ 24th annual Capitol Hill Visit.
Terry Lavery, CCIM with Tucson Realty and Trust in Tucson as elected Legislative Liaison for the Southern Arizona CCIM Chapter was among eight CCIM members from Arizona. Approximately 290 members representing 30 states and the District of Columbia met with their respective representatives and senators to inform them of key legislative issues impacting the commercial real estate industry.
The organizations also recognized the 2014 CCIM and IREM Legislator of the Year U.S. Rep. Steve Stivers, a second-term representative from Columbus, Ohio’s 15th congressional district. Rep. Stivers scored 100 percent on the organizations’ 2013 voting record, including supporting Internet sales tax legislation and signing onto a position letter regarding lead paint in commercial properties. CCIM and IREM members presented the award to Stivers in his Washington, D.C. office.
Lavery told us, “There were good meetings held with Senators McCain and Flake, but was disappointed less attention was given from our House members. Lavery spoke one-on-one with Senator John McCain for over 35 minutes about key issues facing commercial real estate.”
The key issues CCIM and IREM members took to the Hill this year include the following:
1. FEDERALLY ASSISTED HOUSING
Increased regulations and burdensome requirements have led a growing number of private owners to exit from affordable housing. Over the last several years the federal government has dramatically reduced funding for affordable housing programs.
CCIM and IREM Position: Affordable housing units remain in high demand in nearly all communities nationwide. Underfunding federal programs has a negative impact on vulnerable Americans who rely on affordable rental housing.
Action Urged: CCIM Institute and IREM urge Congress to provide adequate funding for all existing affordable housing-related government contracts, preservation of all existing affordable housing stock, and to ensure that the country’s vulnerable citizens have access to safe, affordable, and decent housing.
2. TERRORISM RISK INSURANCE
On Thursday, Apr. 10th, Senator Chuck Schumer (D-NY) introduced S. 2244, a bill to reauthorize the Terrorism Risk Insurance Act (TRIA), currently set to expire at the end of 2014, for seven more years. Lead cosponsors of this bipartisan legislation are Senators Heller (R-NV), Reed (D-RI), Kirk (R-IL), Murphy (D-CT) and Johanns (R-NE). Along with extending the program, the bill also makes some changes to its mandatory recoupment amount ($27.5 billion to $37.5 billion) and reduces the federal share of the compensation for insured losses (from 85% to 80%).
The Terrorism Risk Insurance Act (TRIA) was enacted in 2002 because the private insurance marketplace was failing to provide adequate terrorism insurance coverage following Sept. 11. TRIA was extended once in 2005 for two years, and again in 2007 for seven years. It expires at the end of 2014. Reps. Michael Grimm (R-NY) and Carolyn Maloney (D-NY) have introduced HR 508, the “Terrorism Risk Insurance Extension Act.” This bill extends the Terrorism Risk Insurance Act for five more years, through 2019.
The Senate moving now to introduce a bill is a good sign that the program may be renewed this spring, as opposed to waiting until the end of the year; House Financial Services Chairman Jeb Hensarling (R-TX) has indicated that passing a reauthorization bill is one of his top priorities, and House leadership has also supported reauthorization.
TRIA is an important factor in commercial real estate. Many lenders and investors require terrorism insurance to finance large construction projects; if the program were to expire with nothing to replace it, insurers would probably exclude it from property coverage to manage their risk. It is also an important structural protection in the Commercial Mortgage Backed Securities (CMBS) market – without it, some firms may decline to rate or cap their ratings on such transactions, causing CMBS borrowers to face the threat of default or bond downgrades. For these reasons, NAR will closely analyze all legislation and continue to be a leader in the push to reauthorize the program in a timely manner.
CCIM and IREM Position: Without the government reinsurance provided under TRIA, terrorism coverage is impossible to obtain or prohibitively expensive. Without this coverage, the real estate industry would be at grave risk, with no adequate economic protection against terrorism. It is important to note that this legislation has not cost the government anything to date, and costs are only incurred if there is a substantial terrorist attack.
Action Urged: CCIM and IREM are urging members to ask their U.S. representatives to co-sponsor HR 508, and also urge their U.S. senators to support the extension of TRIA legislation.
3. TAX REFORM: DEPRECIATION, DEPRECIATION RECAPTURE, AND LIKE-KIND EXCHANGES
Depreciation: The current depreciation rules are out of date and do not reflect the economic life of structures. The 27.5- and 39-year cost recovery periods for real property should be shortened. Discussion drafts regarding tax reform have been released in both the House and Senate and both propose drastically increasing the depreciable life for real property. Specifically, the drafts propose moving the depreciable life of all real property to 43 years or 40 years (for all depreciable real estate), from the current lives of 39 years for nonresidential real property; 27.5 years for residential property; and 15 years for certain leasehold improvement property.
Depreciation Recapture: Under current law, gain on the sale of real property is treated as ordinary income only to the extent of the amount of accelerated depreciation over the straight-line amount. Since there has been only straight-line depreciation for real estate since 1986, most depreciation of real property is not now subject to recapture. However, such gains are subject to a 25 percent capital gains rate. A U.S. Senate Finance Committee staff discussion draft calls for any gain to be treated as ordinary income to the extent of any claimed depreciation, even if it is straight-line. Presumably, tax reform will bring down the top tax rate, but few think it will go as low as 25 percent. Thus, this could be a big hit to investors and owners of commercial real property.
Like-Kind Exchanges: The like-kind exchange technique is fundamental to the real estate investment industry. The current law provides investors with the maximum flexibility in managing their real estate portfolio. Essentially, real estate is an illiquid asset that requires substantial commitments of cash. Current tax reform drafts would repeal the tax deferral features of like-kind exchanges.
CCIM and IREM Position: IREM and CCIM Institute believe that it is in our nation’s best interest for Congress to encourage real estate investment in the U.S. by creating a tax system that recognizes inflation and a tax differential in the calculation of capital gains from real estate. This will stimulate economic investment and level the playing field for those who choose to invest in commercial real estate.
Action Urged: CCIM and IREM urge that no changes to the Tax Code be made that will create disincentives for investment in real estate.
Read more about CCIM’s public policy positions at https://www.ccim.com/newscenter/public_policy.