2015 IREM Public Policy Priorities

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1 TAX POLICY JAN Carried Interest & 2013 Capitol Hill Visit Issue Real estate partnerships are often organized as limited partnerships (or LLCs) in which the limited partners provide capital and the general partner(s) provides operational expertise. Generally, any profits of the partnership are divided among the limited partners. A common practice, however, is to provide additional incentive for the general partner to perform well by sharing some of the profits above a certain hurdle rate with him or her through a carried interest, even when the general partner contributed little or no capital to the enterprise. During the time the property is held, the general partner receives compensation and fees that are taxed as ordinary income. The limited partners can receive both ordinary income from operations and capital gains from any profits generated during the year. When the property is sold, the limited partners receive their profits distribution (the earnings on the capital they invested) as capital gains. If the venture was successful, the general partner then also receives the value of any carried interest as capital gains income. Carried interest has been a target for many years to raise revenue. Proposed legislation in the past would have changed the tax treatment of carried interest from capital gains to ordinary income, which would almost double the taxes for any transaction with a carried interest scenario. IREM has advocated against changing the tax treatment of carried interest because real estate is a long term investment and provides an incentive for investors. Marketplace Fairness Act/Online Sales Tax Capitol Hill Visit Issue States that charge sales tax are required to collect taxes from all applicable purchases regardless if the sale is within a store or online. There is a lot of confusion following a U.S. Supreme Court case in In Quill vs. North Dakota, the court ruled that remote retailers (out of state business) that sell products or do business in other states cannot compel the remote seller to collect sales tax because it violates the interstate commerce act. However, the court did say that the U.S. Congress is in a better position to clarify the law. Advocates for online sales tax claim this is not a new tax but a tax that is already owed to states. Whereas, advocates against online sales tax claim the collection of sales tax from out of state purchases is too complex and would place unnecessary burdens on online retailers. IREM supports passage of this legislation because there is an unfair advantage given to online retailers vs. brick-and-mortar storefronts. Individuals tend to utilize brick-and-mortar services then do comparative shopping online. Prices online tend to be less without a sales tax. IREM is a member of the Marketplace Fairness Now coalition to pass fair legislation to equitably tax online transactions. Leasehold Improvements The real estate definition of Leasehold Improvements, also known as tenant improvements (TI), are the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant. These include changes to walls, floors, ceilings, and lighting, among others. In actual practice, these customized tenant improvements usually have a useful economic life of 5 to 10 years, which spans the average commercial lease term. Position Statement: IREM is in support of legislation to decrease the length of depreciable lives for tenant improvements to the length of the lease term. The Institute supports legislative language that would allow any remainder of tenant improvement costs left upon early termination of the lease to be written off upon the termination of a lease, not over the depreciable life of a structure. Page 1 of 6

2 1031 Like-Kind Exchange The Internal Revenue Code (IRC) Section 1031 like-kind exchange technique is fundamental to the real estate investment sector. Section 1031 allows businesses and individuals to essentially swap property for another like kind property that is of equal or greater value. The business or individual can then defer paying capital gains taxes on the sale of the property that is exchanged. The current law provides investors with the maximum flexibility in managing their real estate portfolio. Real estate is essentially an illiquid asset that requires substantial commitments of cash. Flexibility is needed in order to assure the free movement of property and capital. It is imperative to maintain this section of the IRC and to avoid placing a cap on the amount of capital gain deferred. Keeping this language in place will encourage real estate investment and spur the economy. FIRPTA-Foreign Investment in Real Property Tax Act It is estimated that foreign investors in CRE pay as much as 54 percent in tax penalties. FIRPTA legislation would reform the property tax law for foreign investors. This would open up more financing and refinancing opportunities in the U.S. for CRE. ENERGY POLICY 179D This is a tax deduction (not a credit) for energy efficiency projects in commercial buildings. It has to do with the amount of square feet a property owner changes to make more efficient. The property owner can take advantage of this tax deduction by upgrading their building s lighting, HVAC, or building envelope that was built or retrofitted since The total deduction cannot exceed $1.80 per square foot. To qualify, an independent third party must do an energy tax study on the property. The 179D tax deduction expired at the end of President Obama has indicated the deduction should be increased to $3.00 per square foot. IREM is a member of a coalition of industry partners to extend the 179D tax deduction. Tenant Star Similar to Energy Star, this program would allow property owners to reach various levels of energy conservation under Energy Star. In 2012 alone, it is estimated that American Businesses saved over $2.7 billion in utility bills. Presuming, Tenant Star would be as successful as Energy Star, IREM supports Tenant Star legislation. Tenant Star would connect the tenant and property owner in way that would allow them to find appropriate methods/ways to conserve energy in commercial buildings. There are no tax credits or deductions under Tenant Star; however, it does give tenants other benefits such as saving money in utility bills, protecting the environment, community leader in energy conservation, etc. IREM is a member of a coalition of industry partners to pass Tenant Star. REGULATORY POLICY Federally Assisted Housing Issues Capitol Hill Visit Issue IREM members own and manage housing projects that participate in federally-assisted housing programs such as the Section 8 project-based program, the Housing Choice Voucher program, and others. Under the Project-based programs, Page 2 of 6

3 the federal government, through the Department of Housing and Urban Development (HUD), contracts with private owners to fund the difference between the rent for the unit and 30% of the tenant s income. Advocates of these programs argue that there is a severe shortage of available housing. The availability of such housing offers 30 units for every 100 needy families. Increased regulations and burdensome requirements have led a growing number of private owners to exit from affordable housing. The federal government has significantly reduced funding for these programs in the last few years. IREM supports a national housing objective of affording citizens the opportunity to live in safe, decent and sanitary housing which can best be served by means of a healthy housing market for all economic levels. We encourage action by Congress to alleviate the hardships experienced by sponsors of projects for low-income residents through operating subsidies for restoring the economic viability of projects that are well conceived and properly managed, and to adequately fund HUD to carry out these objectives. Drones Drones, or unmanned aerial vehicles, have been used more frequently in recent years for various reasons. For the purpose of real estate and property management, professionals use drones to inspect large buildings, obtain aerial views and photographs of commercial and large multifamily properties, among other uses. The Federal Aviation Administration has recently published proposed rules to regulate the commercial use of drones. IREM will monitor the proposed rule to ensure any new regulations are fair and reasonable to real estate management professionals. It is important for IREM Members and real estate industry practitioners to be able to take advantage of this cutting edge, cost saving technology. IREM does not have a statement of policy at this time, but is currently drafting language to adopt one at the upcoming April Leadership and Legislative Summit in Washington, D.C. Disparate Impact Housing Theory Under the disparate impact HUD rule, a case for discrimination can be built against a property manager based on statistical analysis which suggests certain policies have a disproportionate impact on a protected class, rather than the intent to discriminate. If a charging party can prove that policies resulted in a discriminatory effect, the burden of proof shifts to the defendant, who must prove that a given policy is necessary to achieve one of its substantial, legitimate, and nondiscriminatory interests. If the defendant is able to prove this, the charging party can still establish liability by proving the interest could be satisfied with a policy that will have a less discriminatory effect. As a result of HUD s disparate impact rule, common business policies, which are normally carried out with no intent to discriminate against a protected class, such as occupancy limitations, credit checks, and criminal background screenings, could result in discrimination claims if they are found to have an effect on protected classes. One case involved the disparate impact housing theory is going before the U.S. Supreme Court. Arguments for Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. were heard January 21, 2015 and a decision may come as early as summer, IREM is monitoring this case closely as it will set the precedent for future disparate impact claims. Page 3 of 6

4 FASB Lease Accounting The Financial Accounting Standards Board is the organization that establishes accounting methods for U.S. businesses. Following the financial collapse in 2007, FASB began discussing ways to prevent future financial meltdowns. From discussions came proposals to change the way leases are reported on a company s balance sheet. Proposals to change lease accounting were released in 2010 and Overall, IREM is concerned with the unintended consequences of FASB s proposed lease accounting changes. Additional concerns stem from the inaccurate depiction of a company s assets to liability ratio. With the proposed lease accounting changes, the financial strength of a business would be reduced, therefore reducing the availability of credit from lenders. Lease accounting changes also have the potential to reduce lease terms. FASB and IASB would like to finalize lease accounting rules by summer of Basel III Basel III proposed rules followed Dodd-Frank Act in Original proposal included changes to the risk-weight calculation of all commercial real estate loans for financial institutions. NAR along with IREM submitted several comments to federal agencies since 2010 over Basel III proposed rules. Final rules were released in July Only the most hazardous CRE loans will be subject to higher standards or higher risk weights: high-volatility commercial real estate loans for acquisition, development, or construction of real property. The final rule was significantly less drastic than the original proposal for CRE loans; however, there are ADC loans that will be impacted over the next few years. Lead-Based Paint 2013 Capitol Hill Visit Issue The EPA is currently considering proposed rules for Lead: Renovation, Repair, and Painting Program for Public and Commercial Buildings, expanding beyond residential regulatory requirements. In May 2010, the EPA issued an Advance Notice of Proposed Rulemaking for lead-based paint in commercial spaces. The EPA has faced a number of lawsuits with environmental advocates over implementation of the Toxic Substances Control Act. Environmental groups claim the EPA has not done enough to reduce lead-based paint exposure and the potential dangers of lead-based paint in public buildings. The main concerns over the EPA s proposed rules of LRRP Program for Public and Commercial Buildings stemmed from a lack of data identifying hazards in commercial building space. Moreover, child-occupied facilities such as schools, daycare centers and housing fall under the existing residential lead paint requirements where data supports the greatest health risks. Additionally, on June 26, 2013, the EPA held a public hearing on the proposed commercial and public buildings LRRP proposed rules. IREM, CCIM Institute, and NAR participated in the public hearing and expanded the concerns outlined in comment letters submitted to the EPA over the proposed RRPP rules. The EPA expects to release a final rule for public and commercial buildings by July 17, IREM is a member of a coalition with other industry partners and has been active in submitting comment letters to EPA. OTHER POLICY ISSUES Postal Service Reform Page 4 of 6

5 Postal service reform has been underway recently due to a federal budget squeeze. On such reform is mandating the conversion of 30 million to the door mailboxes to a centralized system, meaning a multifamily and commercial properties would need to convert to a cluster system. The US Postal Service has begun implementing this already, and legislators may re-introduce legislation in the New Year that will do away with all door-to-door mail delivery. This conversion to a cluster system will cost our members both time and money. In some cases, properties cannot accommodate such a system. Also, having a cluster of mail delivered to one central location will require a property management staff member to then separate the mail; this is expensive and could potentially lead to safety and privacy risks. IREM Legislative and Public Policy Committee created a working group to monitor the reforms that have been implemented, revise an existing policy statement, and will monitor legislation. Data Security As technology has evolved and become vital for businesses, a growing number of public and private entities that keep and maintain personal information, such as financial account information, have become victims of security breaches. These breaches have exposed fundamental security flaws in the way that companies handle consumers personal information. As legislation is introduced to thwart and deal with security breaches, often language requires burdensome and expensive actions by business owners and managers. IREM encourages Congress to approve legislation which is not onerous on property owners and managers or their clients. Small businesses should not be liable for the negligent acts of third parties unless contributory negligence exists. STATE ISSUES Medical and Recreational Marijuana Since 1996, 23 states and the District of Columbia have passed some version of laws allowing for the legal use of marijuana. While the laws vary, all 24 jurisdictions allow for some use of medical marijuana. Currently 15 states allow individuals to grow marijuana for personal use. Medical Marijuana is treated differently under federal law than it is under state law. Under federal law, marijuana remains a Schedule I substance under the Controlled Substances Act. The Department of Justice published a notice of its intent NOT to prosecute activities that are legal under the state law in which the activity is taking place; but the notice also reiterated how marijuana is still illegal at the federal level. HUD prohibits marijuana use (even for medical purposes) in federally assisted properties. HUD stated that Public Housing Authorities (PHAs) and owners of such housing must deny admission to those with a household member who is illegally using a federally controlled substance; and may not provide a reasonable accommodation for new tenants. However, in some states tenants may apply for a reasonable accommodation to use medical marijuana and cannot be denied under state fair housing laws (such as California). These contradictory laws create a gray area for property managers. Page 5 of 6

6 In October, 2014, IREM s Federal Housing Advisory Board brought the issue before several HUD staffers, including Deputy Assistant Secretary, Ben Metcalf. HUD staff was unaware of the severity of the issue; in the coming year, the Board will continue to work with HUD staff to create reasonable, clear guidelines for property managers and owners. IREM Legislative and Public Policy Committee also created a working group to monitor this issue and further investigate contradictory statutes. Separate Property Management and Community Association Licensing In recent years, there has been interest in creating separate state-mandated certification or licensing for property and community association managers. In general, supporters of state mandated community association manager certification or licensing believe that managing community associations is different than real estate management of other properties and states should recognize this by requiring separate certification or licensing for those engaged in community association management. IREM believes the management of residential apartments; condominiums, cooperative and HOAs; office buildings; shopping centers involve real estate activities and should require a license. IREM is opposed to separate licensing for these real estate management activities and urges all forms of real estate management, including community association management, to be under the jurisdiction of existing state real estate broker and agent (salesman) licensing laws. IREM is opposed to separate licensing for these real estate management activities and urges all forms of real estate management, including community association management, to be under the jurisdiction of existing state real estate broker and agent (salesman) licensing laws. IREM has a working group to monitor and analyze future and existing state laws. Copper Theft Copper theft has become an epidemic across the country yet again. With the large number of vacant properties, and the increase of copper s value, copper theft plagues property managers and owners in all neighborhoods. Copper and metal theft can result in extensive property damage. Copper theft and losses to U.S. businesses cost nearly $1 billion annually according to information from the Department of Energy. Some IREM Chapters have been successful in working with local legislators in implementing common sense programs that combat copper theft. IREM will be working with chapters and members to encourage adoption of reasonable, efficient policies that address this growing issue. IREM WORKING GROUPS Postal service reform Property Management and Condo Licensing Medical and Recreational Marijuana Page 6 of 6