Legislative News

State Budget Shortfalls Leave Lawmakers Scrambling For Revenue Sources
Since the start of the recession, states have been struggling to maintain revenues and many have underperformed revenue forecasts.  The most pessimistic revenue expectations have not even been met, causing massive gaps in state budgets.  In order to reconcile a collective $158 billion in revenue shortfalls prior to the beginning of the FY2010 business cycle, 48 states employed a strategy of spending cuts combined with tax and fee increases.  As of October 1, 2009, all 50 states had begun their FY2010 business cycles.  Despite their efforts, 35 states are facing $32 billion in new revenue shortfalls this fiscal year. 

State budget gaps are primarily due to the unusually high unemployment rate, which reached 10.2 percent nationally in October 2009.  While states vary in their revenue sources to fund government operations, personal income tax and sales tax tend to be the main revenue sources for many states.  When unemployment levels are high, state income tax collection levels drop.  Moreover, residents reduce their spending during hard economic times, causing a reduction in sales tax collections. 

In order to fund revenue shortfalls at the start of the 2010 fiscal year, many states enacted a combination of tax increases, service cuts, and layoffs.  However, the $32 billion in new shortfalls that have opened since has forced governors and state lawmakers to propose or enact yet still additional service cuts and tax increases.  For example, Indiana Governor Mitch Daniels directed all state agencies to cut spending by 10 percent in addition to 5 percent cuts at the start of the current fiscal year.  In Michigan, Governor Jennifer Granholm plans to cut state spending by 20 percent, on top of the 10 percent made to balance the current budget.  Additionally, attempting to resolve their state deficit, Michigan Senate Democrats have proposed taxing estates worth more than $2 million.

Funding from the economic stimulus package has provided some temporary relief for states.  Otherwise, many states would have been forced to make even more drastic cuts.  For the current fiscal year, states have been able to fill 30 to 40 percent of their budget deficits with money from the $787 billion economic stimulus package.  However, of the roughly $250 billion of the stimulus package set aside for states, most will have been distributed by the end of 2010.  Therefore, while the stimulus package will continue to help states fill their budget gaps in 2011, it will provide less than it did in 2010. 

Conditions are expected to remain positive in only in a handful of states such as North Dakota and Iowa due to stable housing markets and high prices for agricultural commodities.  However, the financial outlook remains grim for the rest of the country.  In fact, the Pew Center on the States warned of “fiscal peril” in ten states due to rising foreclosure rates, poor financial management, and elevated unemployment rates.  These states include: Illinois, Michigan, Wisconsin, California, Oregon, Nevada, Arizona, New Jersey, and Rhode Island.  Furthermore, the Pew report suggests that many states will continue to see significant revenue shortfalls since “states historically have their worst years after a national recession ends, as they cope with higher Medicaid and other safety-net expenses, at the same time revenues lag because of stubborn unemployment.”  If state revenues continue to decline, as this study suggests, states will be forced to consider additional sources of revenue, likely in the form of new and increased taxes and fees.  While potential revenue sources will vary from state to state, likely sources may include the wealthy and even real estate practitioners.

New Commercial Real Estate Loan Rules Aim to Help Banks Restore Lending
On October 31, 2009, the FDIC introduced new guidelines to bank examiners that could reduce the number of bank write-offs of nonperforming commercial real estate loans.  The new regulations would allow financial institutions to work with commercial real estate borrowers who continue to be creditworthy customers, despite a deterioration of their financial condition.

Under the new guidelines, banks are not necessarily required to classify certain commercial real estate loans that are technically underwater but still able to generate enough cash to pay existing debt service as delinquent mortgages.  Therefore, in some circumstances, banks may preserve capital and write down fewer losses on distressed commercial real estate loans. .

Offering an example of the type of allowances created by the new guidelines, regulators suggested banks can divide troubled loans into performing and nonperforming parts.  Banks can avoid taking a loss on the entire loan by only taking the loss on the nonperforming part. 

Providing further illustration, the Wall Street Journal cited a hypothetical example where a developer builds a retail center, leases one site to a retailer, yet can’t lease the other sites.  Under the new guidelines, the bank could create a healthy loan supported by the leased space, and a nonperforming loan from the remainder of the loan.  As a result, banks would be required to set aside less backup capital for the split loans than for the original loan.

The new guidelines are of particular importance to the commercial real estate community, as a study conducted by Foresight Analytics revealed that commercial real estate trouble contributed to 100 of 120 bank failures this year.  Furthermore, the firm estimates that close to $800 billion in maturing commercial real estate mortgages are underwater.  The new regulations would apply to $110-$130 billion of these loans. 

IREM will continue to support policies and principles aimed at jumpstarting commercial real estate lending and investor confidence.

President Signs Emergency Economic Stabilization Act Into Law
Congress acted quickly to pass the legislation in an effort to repair the U.S. economy.  The Senate amended the “Emergency Economic Stabilization Act of 2008” bill and passed it by a vote of 74 to 25 on October 1, 2008.  Then, two days later on October 3, the House voted 223 to 205 to approve of the Senate’s changes.  Hours later, the President signed the Emergency Economic Stabilization Act of 2008 into law.  Provisions of the 451-page law that are of particular interest to IREM Members are highlighted below. 

Highlights of tax provisions:  

• Extends the Energy Efficient Commercial Buildings Deduction for five years, through December 31, 2013.  Current law allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings.  The amount deductible is up to $1.80 per square foot of building floor area for buildings achieving a 50% energy savings target.  The energy savings must be accomplished through energy and power cost reductions for the building’s heating, cooling, ventilation, hot water, and interior lighting systems. 
• Provides AMT relief.  The Alternative Minimum Tax (AMT) was created in 1969 to prevent a small number of wealthy Americans from evading paying taxes.  Over the years the AMT has come to affect more people every year because the AMT is not indexed for inflation.  This law prevents an estimated 26 million Americans from having to pay more in taxes this year.
• Natural disaster tax relief.  Provides temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados, and flooding.  Also, temporary tax-exempt bond financing and low-income housing tax relief for areas damaged by Hurricane Ike.
• Extends leasehold improvements.  Extends the 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements through January 1, 2010 for property placed in service after December 31, 2007.  Extends the 15-year recovery period for depreciation of certain improvements to retail space through January 1, 2010 for property placed in service after December 31, 2008. 

Highlights of the Troubled Asset Relief Program:

• Purchases of troubled assets. The U.S. Treasury is authorized to establish a Troubled Asset Relief Program (TARP) to purchase troubled assets from financial institutions.  The law includes provisions to prevent unjust enrichment by participants in the program.  A Financial Stability Oversight Board will be established to ensure that the policies the Secretary of the Treasury is implementing protect taxpayers and are in accordance with the economic interests of the U.S.
• For mortgages and mortgage-backed securities acquired through TARP, the Treasury Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through various programs.  The Secretary will be allowed to use loan guarantees and credit enhancements to avoid foreclosures. 
• Limits executive compensation. The Treasury Secretary will write executive compensation rules governing financial institutions that sell the government troubled assets.  Where the Treasury buys assets directly, the financial institution must observe standards limiting incentives and prohibiting golden parachutes.
• Authorization to purchase troubled assets.  Authorizes the full $700 BILLION requested by the Treasury Secretary for implementation of TARP.  The Secretary is allowed to use $250 billion of those funds immediately in authority under this law.  Upon a Presidential certification of need, the Secretary may access an additional $100 billion.  The final $350 billion may be accessed if the President transmits a written report to Congress requesting such authority. 
• Raises the statutory limit on public debit from $10 trillion to $11.3 trillion.  (As of October 3, 2008 the public debt is $10.128 trillion)       
• Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.
• Raises the FDIC and the National Credit Union Share Insurance Fund deposit insurance limits from $100,000 per account to $250,000 until December 31, 2009. Temporarily raises the borrowing limits at the Treasury for the FDIC and the National Credit Union Share Insurance Fund.

If you have questions, please contact IREM Legislative Staff at (800) 837-0706, ext. 6021, or email achesley@irem.org.  

LIHTC Utility Allowance Regulations Released
The IRS recently released final regulations that amend the utility allowances regulations concerning the low-income housing tax credit (LIHTC) to provide new options for estimating tenant utility costs. The final regulations affect owners of low-income housing projects who claim the credit, the tenants in those low-income housing projects, and the state and local housing credit agencies that administer the credit. The effective date for the final regulations is July 29, 2008. These changes are a result of IREM reviewing the issue with the Department of Treasury.

If the cost of any utility (other than telephone, cable television, or internet) for a residential rental unit is paid directly by the tenant(s), and not by or through the owner of the building, the gross rent for that unit includes the applicable utility allowance. The amendment extends the choice in applicable utility allowances to other buildings. Previously, the choice was limited to buildings assisted by Rural Housing Service (RHS), buildings with RHS assisted tenants, and buildings regulated by HUD. The new regulations allow owners of LIHTC buildings that are neither RHS assisted nor HUD regulated, and in which no tenant in the building receives RHS tenant assistance, to choose from one of the following options when determining the applicable utility allowance:

1. Public housing authority (PHA) utility allowance
2. The local utility company estimate
3. Agency estimate—a building owner may obtain a utility estimate for each unit in the building from the Agency that has jurisdiction over the building, provided that the Agency agrees to provide the estimate. Costs incurred in obtaining the estimate are borne by the building owner.
4. HUD Utility Schedule Model—a building owner must calculate a utility estimate using the model that can be found on the LIHTC website.
5. Energy consumption model—a building owner may calculate utility estimates using an energy and water and sewage and consumption and analysis model.

To read the Section 42 Utility Allowance Regulations Update (6 pgs), click here.

Housing and Economic Recovery Act Signed Into Law
The "Housing and Economic Recovery Act of 2008," H.R. 3221, was signed into law by the President on July 26, 2008. The law has three provisions of interest to commercial real estate professionals. First, the law provides for the development of a national affordable housing trust fund that will be funded by a percentage of the profits from the GSEs. The trust fund will cover costs of any defaulted loans in FHA foreclosure program. Later on, the trust fund will be used for the development of affordable housing. Second, the Low Income Housing Tax Credit (LIHTC) program will be modernized to make it more efficient. Third, the law provides $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.

HUD Streamlines Processing of FHA Multifamily Insurance Applications With LIHTC
The U.S. Department of Housing and Urban Development (HUD) is streamlining the processing of Federal Housing Administration (FHA) multifamily insurance applications with Low Income Housing Tax Credits (LIHTC). As a result of the change, FHA will be able to commit on loans earlier. In addition, developers will be able to raise additional funds through higher pricing on tax credits because investors will not be required to post all of the equity initially. HUD’s Mortgagee Letter 2008-19, which provides for the streamlined process, became effective July 22.

U.S. House Passes Leasehold Improvement, Brownfields, and Energy Incentives Legislation
On Wednesday, May 21, the U.S. House of Representatives passed legislation (H.R. 6049) by a vote of 263 to 160 that would renew and extend several important real estate provisions through December 31, 2008. These extensions include the 15-year cost recovery period for leasehold improvements and the immediate deduction of brownfield cleanup costs. The bill also includes several energy incentives. As a response to climate change, the legislation includes several incentives for commercial and residential real estate developers to use environmentally friendly construction methods and install energy efficient heating, air conditioners, and appliances. Similar legislation is pending in the Senate Finance Committee.

During the IREM and CCIM Institute Capitol Hill Visit Day on April 16, IREM Members lobbied for leasehold improvement depreciation, energy tax credits, and positive incentives for green buildings. To view the IREM briefing papers on these issues, click here

FTC Publishes Final Rule on CAN-SPAM Act
The Federal Trade Commission (FTC) published the final rule "Definitions and Implementation Under CAN-SPAM Act" on May 21, 2008. The rule becomes effective on July 7, 2008 and provides definitions, modifications, and clarifications to the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM). To read the final rule, click here.

EPA Publishes Final Lead-Based Paint Renovation Regulation--Read The IREM Summary
The Environmental Protection Agency published the long-awaited final lead-based paint renovation regulations recently. These final regulations establish rules to govern lead-based paint renovation, repair, and painting activities that create lead hazards in single and multi-family housing constructed prior to 1978. Property owners, property managers and contractors are now required to follow a variety of notification, work safety and notification procedures before, during and after renovation activities to prevent the creation of lead-based paint hazards. These new rules will primarily impact a property management portfolio, as well as property managers/owners of multi-family properties. Click here to read the IREM summary of the rule. Click here to view a PowerPoint Presentation on how the ruling will affect your property management portfolio.

Senate Passes Legislation Extending The National Flood Insurance Program
On May 13, 2008, the U.S. Senate voted 92 to 6 to pass legislation (S. 2284/ H.R. 3121) that will extend the National Flood Insurance Program (NFIP) through Fiscal Year 2013. Without Congressional action, the NFIP is set to expire on September 30, 2008. In addition, the bill establishes a bi-partisan commission to study and report back to Congress with recommendations for addressing property natural disaster insurance availability and affordability. The bill has been sent to the House.

During the IREM and CCIM Institute Capitol Hill Visit Day on April 16, 2008, IREM Members lobbied in support of natural disaster insurance legislation, including an extension of the NFIP. To read the briefing papers on the Hill Visit issues, click here (the natural disaster insurance paper is on page 3).

Leasehold Improvement Legislation Introduced
Senate Finance Committee Chairman Max Baucus (D-MT) has introduced legislation—S. 2886—that includes a provision to renew and extend the 15-year cost recovery period for leasehold improvements. On April 17, 2008 the bill was referred to the Senate Finance Committee.

New Guidance on “Reasonable Modifications” under the Fair Housing Act
On March 5, 2008, the Departments of Housing and Urban Development (HUD) and Justice (DOJ) released guidance reinforcing the right of persons with disabilities to make “reasonable modifications” to their dwellings if a structural change to their dwelling or to a common area of the building or complex in which they live is needed.  The guidance is designed to strengthen housing providers and homeowners’ associations’ understanding of their obligations regarding the “reasonable modifications” provision of the federal Fair Housing Act (FHA).

The new guidelines, issued in the form of questions and answers, cover such topics as:

• What is a reasonable modification?
• Who must comply with the reasonable modification requirement?
• Who is responsible for expenses associated with the upkeep or maintenance of a reasonable modification?
• When and how should an individual request permission to make a modification? 
• What types of documents and assurances may a housing provider require regarding the modification before granting the modification?
• What procedures are available to a person wishing to challenge a denial of a requested modification?

The guidelines are available online at http://www.usdoj.gov/fairhousing.

U.S. House Passes Bill Providing Energy Efficient Commercial Buildings Tax Incentives
On February 28, 2008, the House passed H.R. 5351, the Renewable Energy and Energy Conservation Act of 2008, by a vote of 236 to 182. The bill would extend federal tax incentives for energy efficiency and renewable energy technologies that have expired or will expire at the end of this year. Specifically, it extends tax incentives for energy efficiency in commercial buildings.

IREM, the CCIM Institute, and NAR are part of a coalition that supports H.R. 5351. The coalition sent a letter in support of the bill to House Representatives prior to the House vote on the bill. In its letter the coalition stated that the incentives must be extended immediately to avoid significant harm to the developing clean energy industries in the United States. The technologies produced by these industries play a vital role in reducing global warming pollution, creating new high-wage jobs in our country, and saving consumers and businesses money on their energy bills.

Two Year Ban on Banks in Real Estate
On December 26, 2007, the President Bush signed into law the FY2008 omnibus appropriations bill which includes a two-year provision prohibiting banks from entering the real estate brokerage, property leasing and management business. The National Association of REALTORS® continues to lobby for a permanent ban.

Commercial Real Estate Professionals Await Impact Of New Energy Law
The Energy Independence and Security Act of 2007 became law on December 19, 2007.  The “High Performance Commercial Buildings” section is of the most interest to commercial real estate professionals.  A Director of Commercial High-Performance Green Buildings is to be appointed who will report to the Assistant Secretary for Energy Efficiency and Renewable Energy.  By March 19, 2008, the new director must formally recognize groups that qualify as a high-performance green building partnership consortium.

The director must establish the “Zero-Net-Energy Commercial Building Initiative” to reduce the quantity of energy consumed by commercial buildings located in the U.S. and to achieve the development of zero net energy commercial buildings in the U.S.  The goal of the initiative is to develop and disseminate technologies, practices, and policies for the development and establishment of zero net energy commercial buildings for:

• Any commercial building newly constructed in the U.S. by 2030;
• 50% of the commercial building stock of the U.S. by 2040; and
• All commercial buildings in the U.S. by 2050.

It is important to note that the goal of having all commercial buildings achieve zero net energy by 2050 is a goal, not a mandate. 

The law does not contain any tax incentives for commercial building owners and managers. 

Terrorism Insurance Bill Signed Into Law
The President signed the Terrorism Risk Insurance Revision Act of 2007 (H.R. 2761) into law on December 26, 2007. The law extends the federal government’s terrorism risk insurance backstop, which was set to expire on December 31, 2007, for seven years through 2014. IREM participates in a coalition that supported this legislation.

AMT Relief Bill Signed by into Law by the President
The House voted 352 to 64 in favor of the Senate amendment to H.R. 3996, the Tax Increase Prevention Act of 2007, on December 19, 2007. The President signed H.R. 3996 into law on December 26. The legislation will extend alternative minimum tax (AMT) relief for one year for nonrefundable personal credits and increase the AMT exemption amount to $66,250 for joint filers and $44,350 for single filers to ensure that no additional taxpayers are liable for the AMT this year.

New State Laws
The following state laws of impact or interest to real estate owners and managers became effective on January 1, 2008:

• Renters in Illinois will be allowed to stay in a home that is being foreclosed for the length of the rental agreement or for 120 days as long as the tenant continues to pay rent.  A homeowner in Illinois will have the right to keep living in a mortgaged property during foreclosure, with exceptions. (Illinois SB 258)
• The minimum wage in New Mexico will increase in two phases.  Employers must pay $6.50 an hour.  On January 1, 2009, it will increase to $7.50 an hour. (New Mexico SB 324)
• Illinois enacted the “Smoke Free Illinois Act” that prohibits smoking in public places and places of employment.  "No Smoking" signs have to be posted in each public space and place of employment where smoking is prohibited.  Any manager, lessee, owner, or employer in control of any public place or place of employment may designate a non-enclosed area, including outdoor areas, as an area where smoking is also prohibited provided that there is a conspicuously posted sign prohibiting smoking.  (Illinois SB 500)  To read the entire text of the new law visit, click here.
• Oregon has enacted a comprehensive government ethics law that limits legislators to $50 gifts, increases penalties for ethics violations, and makes financial disclosure forms filed by legislators more accessible to the public and easier to understand.  (Oregon SB 10)
• In Texas, a home seller must disclose whether the home was used in the manufacture of methamphetamine.  (Texas HB 271)
• Drivers will not be allowed to read, write or send electronic messages while operating a motor vehicle in the state of Washington.  (Washington House Bill 1214)

Check back soon for frequent updates! 

To view archived legislative news from 2008, click here.

To view archived legislative news from 2007, click here.

To view archived legislative news from 2006, click here.

To view archived legislative news from 2005, click here.