Economic Stimulus
Background:
The commercial real estate market has come to a virtual standstill. With credit markets frozen, many owners are finding it difficult to obtain business loans for capital improvements or refinance existing mortgages. With property owners unable to refinance their commercial structures, there has been an increase in delinquencies and foreclosures.
Without action to liquefy credit markets, new construction and development projects will most certainly be affected. Credit markets are terrorized by the fear that debt may be deemed less valuable shortly after it is issued. Commercial real estate deals are on hold these days as buyers and sellers wait for the credit crunch to ease and the economy to rebound.
Rising unemployment rates have also contributed to a decrease in demand for commercial space. Some economists project that the unemployment rate could rise to over ten percent in 2009. As a result, vacancy rates, particularly for office and retail space, have increased while rental rates have decreased.
IREM Position:
IREM urges Congress and the federal government to provide favorable relief to the commercial real estate industry in the next planned economic stimulus package. IREM recommends the following three provisions be included in the next stimulus package:
- Availability of small business loans
- Short-term loans for capital improvements
- Refinancing for mortgages
Additionally, IREM encourages Congress and the federal government to consider the following goals and solutions which support the three recommendations above:
Goal: Stabilize and Provide Liquidity to the Commercial Real Estate Credit Markets, Including Mortgage-backed Securities
Solutions:
- Make mark-to-market accounting rules more flexible, including use of discounted cash flow analysis for valuing assets in illiquid markets.
- The Treasury and Federal Reserve should exercise their authority to implement and/or expand the Term Asset-Backed-Securities Loan Facility (TALF). The TALF should be encouraged to purchase commercial mortgage-backed securities and conventional commercial real estate loans.
Goal: Maintain or Enhance Federal Tax Policies that Strengthen the Commercial Real Estate Market
Solutions:
- Retain current capital gains rules as they apply to appreciated property, like-kind exchanges and carried interests, in particular by keeping the capital gains tax rate at the existing 15%. Suspend passive loss rules.
- Improve the depreciation, depreciation recapture and leasehold improvement rules without triggering the Alternative Minimum Tax.
- Reduce the investment impediments caused by the passive loss rules by providing a temporary suspension of the rules for designated investments.
- Attract new investment in existing real estate by providing higher income limits and expenditure limits to the so-called “small investor” provisions of the passive loss rules.
Goal: Stimulate and Support the Commercial Real Estate Industry through Investment
Solutions:
- Provide federal funding for capital improvements to our nation’s infrastructure (transportation, roads, energy grids, etc).
- Encourage the commercial real estate industry’s investment in energy efficiency and “green” building initiatives through tax and other incentives, and not through legislative and regulatory mandates that artificially raise the cost of construction and operation of commercial real estate properties.
(Adopted 7/09)
The Federal Budget and Monetary Policy
We support the principle and concept of reaching a balanced budget in all political jurisdictions. Balanced state, local, county and national budgets should be maintained by reducing unnecessary expenditures and by sun-setting, capping and/or reducing the growth of programs and services that are not essential.
Stimulation of employment, growth of productivity, and inflation control are absolutely essential.
Accordingly, we urge policies that encourage savings and capital investment in housing structures, and equipment. We believe that a restrictive monetary policy should be used against inflation only to the extent necessary to supplement rigorous fiscal responsibility. Tight money policies are discriminatory in their nature, striking first and hardest at long-term mortgage credit for housing and smaller business investments without regard to their economic importance in national priorities.
Tax increases should be considered only if all spending reductions prove insufficient to significantly reduce deficits and any such increases must not create disincentives to savings and investment. In the case of a budget surplus, excess funds should be used for tax and/or debt reduction. A program to reduce the national debt must be formulated and implemented. Congress should exercise fiscal discipline by eliminating wasteful and unnecessary spending.
(6/86, updated 4/03, 10/08)
Terrorism Insurance
Background and Objective:
IREM originally took a position on terrorism insurance in November, 2001, shortly after 9/11, in response to the insurance industry’s announcement that they would no longer cover terrorism claims. The insurance industry, as well as a coalition of real estate groups, petitioned the federal government to step in and assist the real estate industry. Without proper insurance, it would be very difficult for property owners to manage or acquire properties or to refinance loans.
The Terrorism Risk Insurance Act (TRIA) was enacted in 2002, establishing a federal backstop for commercial property and casualty insurers arising from terrorism. TRIA required property and casualty insurance companies in all fifty states to offer terrorism insurance coverage when they underwrote property and casualty insurance; and any existing state exclusions to the contrary were voided. The Treasury Department would pay insurers 90 percent of claims after insured losses exceeding $10 billion in year one, $12.5 billion in year two, and $15 billion in year three. The Treasury would pay until insured losses exceeded $100 billion. The law did not have a federal standard for the awarding of punitive 3 damages in terror-related suits brought against property owners and as a result state laws on punitive damages prevailed.
TRIA was designed to provide a bridge to a time when the private insurance markets would function again. Following TRIA's enactment, terrorism insurance coverage became readily available, thus enabling billions of dollars of transactions previously stalled to go forward. The primary reasons TRIA successfully expanded terrorism insurance capacity are: 1) the program required the federal government share the risk of loss from terrorist attacks with the insurance industry; and, 2) the program required insurers offer terrorism insurance coverage to policyholders on the same terms and conditions as other property and casualty insurance.
IREM lobbied for legislation extending TRIA, which was set to expire at the end of 2005, during the 2005 IREM Capitol Hill Visit Day. Fortunately, the Terrorism Risk Insurance Extension Act of 2005 was signed into law by the President in December, 2005, ensuring that terrorism coverage would still be available and affordable to the commercial real estate industry. The program has been extended through 2007.
In response to a request from the House Financial Services Committee, the Government Accountability Office (GAO) undertook a study on the availability of Nuclear Biological Chemical and Radiological (NBCR) insurance.
The findings of the GAO report on the market for NBCR insurance were released in September, 2006 and illustrated that property/casualty insurers still generally sought to exclude such coverage from their commercial policies. In doing so, insurers rely on long-standing standard exclusions for nuclear and pollution risks. Commercial property/casualty policyholders generally reported that they could not obtain NBCR coverage. The report showed that commercial property/casualty insurers generally remain unwilling to offer NBCR coverage because of uncertainties about the risk and the potential for catastrophic losses, according to industry participants. Insurers face challenges in consistently estimating the severity and frequency of NBCR attacks for several reasons, including accounting for the multitude of weapons and locations that could be involved and the difficulty or perhaps impossibility of predicting terrorists' intentions. Without the capacity to reliably estimate the severity and frequency of NBCR attacks, which would be necessary to set appropriate premiums, insurers focus on determining worst-case scenarios.
On December 26, 2007, President Bush signed into Law the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA). The seven-year extension of the federal terrorism risk insurance program makes three major changes to the TRIA program: (1) the definition of "act of terrorism" under TRIA is expanded to allow the certification of acts "domestic terrorism"; (2) the legislation clarifies the operation of the $100 billion annual program cap; and (3) the new law changes the manner in which the mandatory portion of post-event policyholder surcharges would be collected.
IREM partnered with other industry leaders and joined the Coalition to Insure Against Terrorism (CIAT). In July 2010, IREM reached out to members and inquired about their experiences with terrorism insurance and their ability to obtain the coverage. The questions mainly focused on the availability, affordability, and need of coverage as well as the impact of the Terrorism Risk Insurance Program Reauthorization Act of 2007. In short, there was little awareness by the members of this type of coverage. Those who were aware mentioned it was provided by their carrier and grouped along with other perils such as flood and earthquake insurance. Members also mentioned that the threat may be geographical in nature and some areas/cities may be more prone to this type of activity. The responses and comments were compiled and sent on behalf of the Coalition to Insure Against Terrorism to the President’s Working Group on Financial Markets (“PWG”) in August, 2010.
On December 31st, 2014, the 2007 TRIA reauthorization was allowed to expire after Congress could not come to agreement on the terms of an extension.
On January 12, 2015, President Obama signed the Terrorism Risk Insurance Program Reauthorization Act of 2015 into law. The law renews TRIA for six years, through 2020. The new law changes the trigger amount for the federal backstop to $200 million, an increase of $100 million. Also the mandatory recoupment amount is raised to $37.5 billion, from $27.5 billion.
IREM Position:
The Institute of Real Estate Management is very concerned about escalating insurance costs and the lack of coverage for events related to terrorism and war. Prior to the events of September 11, 2001, property and casualty and general liability insurance policies typically covered damages resulting from acts of terrorism, although most excluded damages relating to acts of war. Without this coverage, the real estate industry will be at grave risk. A healthy real estate market is critical to our nation’s economy. We urge Congress and the Administration to pass legislation that would provide federal reinsurance coverage for the nation’s property and casualty insurers against losses caused by acts of terrorism or war.
(11/01, updated 10/06, 10/10, 4/15)
Federal Natural Disaster Insurance
Background and Objective:
In some areas of the country property insurance is costly, if not impossible to obtain. Because of recent hurricanes and the outlook for dramatic hurricane seasons for a decade to come, many private insurers have simply been pulling out of the market rather than face enormous risk. Other insurers are canceling or dramatically increasing premiums on existing policies. Disaster reinsurance funds at both the state and federal level can help bring reassurance to the insurance market. A federal program that protects states prone to natural disasters such as hurricanes, earthquakes, tornadoes, volcanoes, and other natural disasters, without penalizing those states less at risk, would provide property owners the opportunity to purchase coverage appropriate to their risk level. As we have seen in the recent catastrophe along the Gulf Coast, without such a federal backstop, all citizens will be paying for the costs of such disasters.
One such program is the National Flood Insurance Program (NFIP). Created in 1968 by Congress, NFIP provides flood insurance to homeowners, renters, and businesses that are located in participating communities. In order to participate, the community must adopt and enforce ordinances that meet or exceed FEMA requirements in order to mitigate their flood risk.
IREM position:
IREM is very concerned about the availability and affordability of property insurance. When property owners cannot obtain insurance, the entire real estate market is at risk. A healthy real estate economy is vital to our national interest. We urge Congress to develop a solution to this problem. A federal reinsurance program that is funded through contributions from insurers or state catastrophic insurance programs will help communities recover from disasters while preventing taxpayers from bearing many of the costs associated with such disasters.
(Adopted: 4/06. Updated: 4/10, 10/16)
National Flood Insurance Program (NFIP)
Background:
The National Flood Insurance Program (NFIP) is a unique partnership among federal, state, and local governments that helps mitigate flood risk and provides affordable flood insurance to those who need it most. It was created by the U.S. Congress in 1968 through the National Flood Insurance Act of 1968. NFIP flood insurance is sold through private insurance companies and agents and is backed by the federal government.
If the program expires, flood insurance will become more costly or even unavailable. The NFIP partners with over 22,000 communities to reduce flooding nationwide and holds 5.1 million policies representing 1.3 trillion in insurance coverage. It provides over 90% of all flood insurance nationwide and close to 100% of flood insurance coverage for individually owned properties and small- to mid-size commercial properties.
The NFIP aims to reduce the impact of flooding on private and public structures by providing affordable insurance to property owners, renters, and businesses and by encouraging communities to adopt and enforce floodplain management regulations. These efforts help mitigate the effects of flooding on new and improved structures. Overall, the program reduces the socio-economic impact of disasters by promoting the purchase and retention of general risk insurance, and specifically, flood insurance.
It is important to note that everyone lives in a flood zone; it's just a question of whether it is a low, moderate or high risk area. Land areas that are at high risk for flooding are called Special Flood Hazard Areas (SFHAs) or floodplains. A building located within an SFHA has a 26 percent chance of suffering flood damage during the term of a 30-year mortgage.
For a property that is located in a Special Flood Hazard Area (SFHA) and was financed through any federally-regulated entity (such as banks that carry FDIC insurance), by law the lender must require the owner to purchase and regularly renew flood insurance.
As it is currently structured, the NFIP is not financially sustainable over the long term. According to the Congressional Budget Office, the premiums paid into the program are not expected to cover claims in catastrophic loss years, and the program has already borrowed substantially to make up the difference.
The NFIP also offers contents insurance for renters, homeowners, and business owners. Renters can purchase up to $100,000 of contents coverage. Homeowners, who are made aware of this insurance assuming they purchase their home with a federally-insured lender, can purchase up to $250,000 of building coverage and up to $100,000 of contents coverage. Unless they are advised by the property manager or landlord, renters are not notified that they are in a SFHA or of the availability of flood insurance. Business owners can purchase up to $500,000 each of both building and contents coverage.
IREM Position:
IREM believes a strengthened National Flood Insurance Program (NFIP) combined with a robust private market is needed to maintain access to flood insurance in all markets over the long term so that it remains a viable option for property owners. For this reason, IREM supports the long-term reauthorization of the NFIP together with reforms to ensure its ongoing sustainability for property owners. Such reforms include:
- Development of more robust, cost effective private flood insurance options,
- provision of federal assistance and resources for property owners to build to higher standards, mitigate the risk of flooding, and keep insurance rates affordable,
- improvements to flood map accuracy, and
- improved and more affordable NFIP pricing policies.
(Adopted 6/07, updated 9/19)
Federal Taxation
Any tax revisions or increases enacted by the Congress should encourage savings and investment. Further, we urge Congress to:
- reject or repeal discriminatory provisions which limit and/or disallow the traditional deductions of certain interest expenses and real property taxes, investment interest deductions and deductions for interest and taxes paid during the construction period of a project;
- strengthen the depreciation and recapture provisions applicable to the sale of real property by rejecting or repealing discriminatory provisions which limit or disallow existing deductions and by making subject to recapture only that portion of depreciation taken that exceeds straight line depreciation;
- make permanent rapid amortization provisions for rehabilitation of low-income housing;
- maintain workable laws providing for the use of tax-exempt mortgage revenue and industrial development bonds while assuring that the program does not unduly compete with or replace the private marketplace;
- enact provisions which would disallow or adversely limit losses sustained through accounting procedures;
- enact legislation to allow owners who directly convert buildings to condominiums and cooperatives to qualify for full capital gains tax treatment;
- maintain a graduated investment tax credit available for old and historic structures; and
- reject proposals for enactment of a flat tax or other alternative taxation systems that serve as a disincentive for investment in real estate by limiting or repealing traditional real estate-related tax deductions for; mortgage interest, state and local property taxes, depreciation, capital gains, and other operating and business expenses.
(6/86, updated 4/05, 10/09, 4/13)
Capital Gains
Background and Objective:
The appropriate level of taxation for capital gains (the amount realized when property held for investment is sold) has been a subject of tax policy debate throughout the history of the income tax. Capital gains have been taxed at rates well below the maximum tax rate for ordinary income for at least 50 years (with the exception of the period from 1986 – 1990). During the past 30 years that rate has ranged from a high of 49% to the current rate of 15% - due to the passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003, also known as the “Bush Tax Cuts.” The current rate is temporary and was originally set to expire at the end of 2010 but has been subsequently extended through the end of 2012. When capital gains tax rates were reduced to 15% from 20% in 2003, the depreciation recapture rate remained at 25%. Prior to 1997, depreciation recapture amounts were taxed at the same rate as capital gains. President Barack Obama is expected to extend these cuts again due to the political sensitivity of the issue and the current focus on the 2012 Presidential race.
IREM Position:
IREM believes that it is in our nation’s best interest for Congress to encourage real estate investment in the United States by creating a tax system that recognizes inflation and a tax differential in the calculation of capital gains from real estate; while stimulating economic investment; and consequently leveling the playing field for those who choose to invest in commercial real estate.
(6/97, updated 4/03, 10/08, 9/12)
Depreciation
Background and Objective:
The Economic Recovery Tax Act of 1981 created a depreciable life of 15 years for all real property placed in service after December 31, 1980. The depreciable life for property placed in service after March 15, 1984 was extended to 18 years and for property placed in service after May 8, 1985, the depreciable life was extended to 19 years. Depreciation rules changed again when the tax reform act of 1986 was enacted. The depreciable life of a non-residential property changed to 31.5 years and the depreciable life of a residential property changed to 27.5 years.
Yet again, the enactment of the 1993 tax act changed depreciable life for a nonresidential building to 39 years (residential property remained at 27.5 years). The 39-year depreciation life applies to properties placed in service on or after May 13, 1993.
The extension of the depreciable life to 39 years was intended to be in return for favorable passive loss tax law and other tax law changes in 1993. Unfortunately, (see statement on passive loss), the Internal Revenue Service (IRS) did not interpret the 1993 law in such a way to be favorable to commercial real estate thereby eliminating almost any benefit to the commercial real estate industry.
In 2010, President Barack Obama signed into law the “2010 Tax Relief Act” which allowed for 100% bonus depreciation for part of 2010 and all of 2011 on qualifying assets. Furthermore, the law allowed for 50% bonus depreciation through 2012. Also, it temporarily extended 15-year depreciation recovery period for leasehold improvements through 2011.
IREM Position:
The current 39-YEAR time frame does not accurately reflect the useful life of a building and its components. IREM supports depreciation reform for nonresidential and residential real estate that secures a significantly shorter cost recovery period for commercial real estate without adding complexity or creating artificial acceleration of deductions, and specifically:
- Upon recognition of capital gain, taxpayers should be able to use sales costs to first reduce the depreciation recapture portion of the gain;
- Suspended losses should also go to reduce depreciation recapture;
- An installment sale as gain is recognized over a period of time, that a percentage of gain from appreciation and depreciation recapture be used in reporting gain;
- A partially tax deferred exchange, gain from appreciation, and depreciation recapture should be reported on an allocated percentage basis.
Any other proposed regulation that affects the reporting of capital gain by commercial, industrial or investment real estate taxpayers be reported in the most advantageous manner for the taxpayer:
IREM is pleased that the National Association of REALTORS (NAR) also supports a depreciable life for real estate that accurately reflects the economic life of the property. IREM requests NAR to assist IREM in lobbying for the adoption of favorable regulations.
(4/03, updated 10/08, 9/12)
Tenant Improvements
The real estate definition of tenant improvement is money or any other financial incentive to a lessee, by the lessor, to cover either partially or wholly, the cost of any structural changes (items such as upgraded electrical equipment, cable, reconfigured interior space, telecommunications equipment and technological updates), to a space in preparation for occupancy by the lessee.
The Economic Recovery Tax Act of 1981 created a depreciable life of 15 years for all real property placed in service after December 31, 1980. For property placed in service after March 15, 1984, the depreciable life was extended to 18 years, and for property placed in service after May 8, 1985, to 19 years. In 1986, the Tax Reform Act was enacted into law. This changed depreciation rules considerably. It changed the depreciable life of a non-residential property to 31.5 years, and the life of residential to a depreciable life of 27.5 years.
The cost for tenant improvements is amortized over the depreciable life of the nonresidential building, not, as in prior law, over the term of the lease. The current depreciable life for a nonresidential building is 39 years, while the depreciable life of a residential property is 27.5 years. This 39-year depreciation applies to properties placed in service on or after May 13, 1993. This is an outdated time frame, as it does not reflect the useful life of a building and its components.In 2010, President Barack Obama signed into law the 2010 Tax Relief Act temporarily extended 15-year depreciation timeline for qualifying leasehold improvements through 2011.
IREM Position:
IREM is in support of legislation to decrease the length of depreciable lives for tenant improvements. IREM supports legislative language that would allow the remainder of tenant improvement costs to be written off upon the expiration of a lease, not over the depreciable life of a structure.
(4/03, updated 10/08, 9/12)
Carried Interest
Background and Objective:
Most real estate partnerships, particularly those engaged in real estate development, are organized with general partners, who contribute their expertise (and, occasionally, some capital) and limited partners who contribute money and property (capital) to the enterprise. Generally the profits of the partnership are divided primarily among the limited partners who contribute capital. A common practice among real estate partnerships, however, is to permit the general partner to receive some of the profits through a "carried interest," even when the general partner has contributed little or no capital to the enterprise. The general partner's profits interest is "carried" with the property until it is sold.
During the time that the real estate is held, the general partner receives compensation in the form of ordinary income. The limited partners receive both ordinary income from operations and capital gains income from any profits generated during the year. When the property is sold, the limited partners receive their profits distributions (the earnings on the capital they have invested) as capital gains. The general partner also receives the value of its carried interest as capital gains income.
In recent years, Congress has proposed treating the income from the carried interest as ordinary income. Legislation would treat all income from a carried interest of a real estate partnership (and other types of investment partnerships, as well) as income from services, subject to ordinary income tax rates. Typically in many pieces of legislation, the tax rate on income from a carried interest would increase, from 15% to a maximum of approximately 35%.
A carried interest is designed to act as an incentive for a general partner to maintain and enhance the value of the real estate so that the operation of the property is a value-added proposition. The issue of carried interest is critical to both the recovery of commercial real estate, as well as the overall economic recovery. Under the American Tax Payer Relief Act of 2012, carried interest will increase to 20 percent for individuals with an adjusted gross income more than $400,000 and married couples with AGI more than $450,000. Individuals/couples below the $400,000/$450,000 AGI level will pay 15 percent on carried interest. This legislation is effective as of January 1, 2013.
IREM Position:
IREM opposes any proposal that would eliminate capital gains treatment for any carried interest of a real estate partnership.
(Adopted 10/07, updated 10/09, 10/13, 8/15)
Small Business Health Plans
Background and Objective:
A significant number of America's 50 million uninsured citizens are self-employed individuals or work for small employers who cannot afford to offer quality health insurance benefits to their workers. When surveyed, small business owners cited rising health insurance costs as the primary factor leading them to discontinue coverage for employees. On average small businesses pay eight to 18% more than there larger counterparts for the same coverage. Some have argued that the lack of competition is a major factor leading to premium increases.
A recent report by the American Medical Association found that a single insurer held 50 percent or more of the market in nearly 70 percent of local markets across the nation. According to the Robert Wood Johnson Foundation, in 30 states, one insurer covers more than half the citizens who purchase individual health insurance, To combat this issue in the past, proposals to allow associated groups to provide health insurance coverage through small business health plans (SBHPs), also called association health plans, have been advanced. SBHPs will allow small businesses to band together through their professional or trade associations to purchase health coverage or, alternatively, self-insure. By allowing groups to pool their buying power, spread their risk across a large employee base, eliminate layers of overlapping regulations and thus lower the administrative costs per employee, supporters argue that SBHPs will allow small businesses to offer affordable health care coverage to employees.
SBHPs would be regulated under a single set of federally-prescribed rules and permitted exemptions from costly state regulations that large corporate and union health plans already enjoy under the Employee Retirement Income Security Act (ERISA). The permitted exemptions from state regulations will allow small businesses to band together across state lines. Proponents have argued that SBHPs will increase small businesses' bargaining power with health care providers and lower their overhead costs by as much as 30 percent.
Once proposed, a SBHP is defined as a group health plan that offers fully-insured or self-insured medical benefits, has been certified by the Department of Labor and is operated by a board of trustees with complete fiscal control and responsibility for all operations. The association sponsoring the plan must have been in existence for at least 3 years for purposes other than providing health insurance coverage. All employers participating in the SBHP must be members or affiliates of the association sponsoring the plan. Covered individuals may be active or retired employees, owners, officers, directors, partners or their beneficiaries. Administrators of a plan may not discriminate among eligible participants or ‘cherry pick' risks. Likewise, premium contribution rates cannot be based on the health status or claims experience of plan participants or on the type of businesses involved.
Supporters of the proposal argue that while some small businesses now provide health coverage through program sponsored by trade and professional associations, these programs are hampered by administrative burdens and the high cost of having to comply with the requirements of up to 50 state insurance regulators, including state-mandated benefit requirements. In the small group and individual insurance market, one-fourth to one-third of every premium dollar is estimated to be spent on administrative costs; in the larger group plans, these costs are as small as 5 to 10 percent of every premium dollars.
Over the next few years health insurance reform will undergo several changes since President Obama signed the Affordable Care Act in March of 2010. According to the White House, the Affordable Care act will:
- Establish a small business health care tax credit to help small businesses afford the cost of covering their workers
- Create Health Insurance Exchanges to increase bargaining power and reduce administrative costs
- End price discrimination again small businesses with sick workers
- Increases health care security to unlock entrepreneurship
- Reduces the hidden tax on small business employees with health insurance
- Reduces premiums in the small group market
IREM Position:
IREM supports the passage of health reform measures that will address the access and affordability problems that the self-employed and small employers face when looking for health coverage.
(4/05, updated 10/09, 10/13, 8/15)
Expensing of Security Equipment
Background and Objective:
Since September 11, businesses have spent countless dollars increasing and improving building security. Petty crime and vandalism are no longer the biggest threats to our security. Property owners and businesses are working to protect American’s workforce and the physical assets of our country. Building of all types and sizes are undergoing this effort, at significant expense to improve and install security detecting and protection equipment. Deductions include all directly expensed security equipment/systems as well as maintenance expenses associated with them. Supplies necessary to operate a security program such as uniforms, batteries, control forms, access cards, etc. Building owners across the country report that their security related operating budgets have increased substantially and are still climbing. These expenses currently are deducted over a 5-7 year period.
IREM Position:
IREM supports the expensing of security equipment in the year it is placed in service. Security improvements benefit all those who work, shop, or visit the property, as well as those in surrounding properties; therefore, they should be fully deductible under the U.S. tax code.
(4/03, confirmed 10/06, updated 3/11)
Passive Loss Limitation
Background and Objective:
The 1986 Tax Reform Act contained a provision known as passive loss limitation. These rules limited the amount of deductions for losses from passive activities to the amount of income those activities generate. Passive activities are defined as those in which a taxpayer does not materially participate, and any rental activity. Thus, rental activity was deemed to be inherently passive even if rental activity is the principle business of the taxpayer, or is an integral part of the taxpayer's real estate business. The act was originally intended to broaden the tax base, and to abolish many existing tax shelters.
The Budget Reconciliation Act of 1993 included a passive loss tax law change. The intent of the new passive loss tax law is to allow individuals whose primary business is real estate to deduct rental property losses from their income. This is fair because other business professionals are permitted to deduct business losses from income.
The act stated that in order to deduct passive losses from rental activity, an individual must be a material participant in the real estate trade or business, and spend more than 750 hours and a minimum of 50% of their time in various real estate activities.
The current problem lies with the final rules and interpretation of the legislation by the Internal Revenue Service. The regulations released in February 1995 by the IRS were unfavorable to the real estate industry. As written, these regulations still treated rental real estate activity differently than other real estate activity. Final rules on passive loss were released in December 1995. These rules were an improvement to those released earlier in the year, but there still exists a separation in the definition of rental real estate activity.
The intent of the passive loss tax provision, which was released in December 1995, was to allow individuals whose primary business is real estate to deduct rental property losses from income. Retroactively effective January 1, 1995, these regulations state that a taxpayer that materially participates in rental activity does not necessarily have to interpret this rental activity as passive. Thus, losses on this activity can be used to offset non-passive income.
Taxpayers must qualify in two ways. The taxpayer must perform at least 750 hours of real estate activities in which the taxpayer materially participates and more than half the time annually must be spent in these real estate activities. Additionally, if the taxpayer works in the real estate field, he or she must own at least 5% of the business in order for the time worked to count (if the taxpayer is not 5% owner the entire year, the portion of the year that the taxpayer is 5% owner may be prorated for that time.)
Furthermore, in order to protect individual investors, the passive loss rules included an exception to assure that individuals with moderate incomes could continue to invest in real estate as individual owner-landlords. Under the exception, an individual with less than $100,000 of adjusted gross income (AGI) could deduct up to $25,000 of losses from rental real estate from other non-real estate income. The $100,000 income threshold was phased out at $150,000.
The exception was not indexed for inflation. Had it been indexed for inflation, the adjusted AGI amount would now be $182,495 and the phase out at $150,000 would now be $273,742. In addition, the $25,000 cap on allowable losses would now be $45,624. The failure to index has had the effect of diminishing the pool of likely investors who would operate as real estate investors or part-time landlords. On top of this, inflation has not kept pace with real estate prices, so the gap is even greater.
The real estate industry is still working for further improvements to the passive loss rules, including provisions that would integrate, and treat equally, passive loss rules for rental activity with those rules for other investment activity.
IREM Position:
IREM believes that active or material participants in real estate should be allowed to deduct all cash and non-cash rental losses against their other income and should be afforded the same benefits that other businesses have within the tax code. As part of the Budget Reconciliation Act of 1993, Congress qualified that real estate professionals who spend at least 750 hours and half their time annually in real estate activities will be permitted to use losses on rental real estate to offset any income. Also, current passive loss rules allow for an exception for individuals with less than $100,000 adjusted gross income to deduct up to $25,000 of losses from rental real estate from other non-real assets.
IREM urges the IRS to revise passive tax loss regulations to mirror the original intent of federal legislators in enacting a change made in 1993 to the passive loss tax law, specifically removing the 5% ownership provision.
Additionally, IREM urges the IRS to index the exception rules for inflation
Adopted*: 11/87; 6/92
Confirmed*: 1/91, 11/93, 6/96; 11/93; 11/98
Updated: 4/03, 4/09, 10/13
*Notes: This policy was originally adopted as two separate policies - “Passive loss Limitation” in 11/87, and “Passive Loss Limitation Rules Simplification” in 6/92. At the 11/98 LPR Subcommittee meeting, the Subcommittee confirmed both positions and combined them into one policy. Prior to combination, both policies had been separately confirmed - “Passive Loss Limitation” in 1/91, 11/93, and 6/96, and “Passive Loss Limitation Rules Simplification” in 11/93.
Real Estate Mortgage Investment Conduits (REMICs)
Background and Objective:
Real Estate Mortgage Investment Conduits (REMICs) are a tax vehicle created by Congress in 1986 to support the housing market and investment in real estate by making it simpler to issue real estate backed securities. A REMIC is an investment vehicle by which commercial and residential mortgages are pooled into classes and issued as mortgage backed securities to investors in the secondary mortgage market. Commercial mortgage-backed securities (CMBS) are the second largest source of commercial and multifamily real estate financings and represent more than $850 billion outstanding.
While the current volume of REMIC transactions reflects their important role in this market, certain changes to the tax code will eliminate impediments and unleash even greater potential. Of all outstanding securitized debt, roughly a quarter is attributable to commercial loans. The securitization of commercial loans is viewed as unattractive to borrowers because of the limitations the federal rules place on the loan once it is securitized. Current rules that govern REMICs often prevent many common loan modifications that facilitate loan administration and ensure repayment of investors. For example, it is difficult for a mall, whose mortgage is held as part of a REMIC, to demolish a portion of the building to construct space for a new anchor store. Under current rules, for any change to collateral, a property owner must obtain a tax opinion, if the opinion finds that more than 10% of the collateral is modified, the renovation cannot go forward.
Legislation governing REMICs has been in place for over twenty years. While it has been instrumental in increasing the flow of capital to residential properties, the rules governing loan modifications have had a dampening effect on the securitization of commercial loans. Because securitization contributes to the efficiency of and liquidity of the secondary market for mortgage loans, it is hoped that changing the REMIC rules will lower the cost of commercial real estate borrowing and spur real estate development and re-habilitation.
The 2007 Financial Crisis brought the issue of mortgage backed securities to national attention. Improper Wall Street activity regarding REMICs in part precipitated the financial crisis. Essentially, fund managers combined good mortgages with bad mortgages, repackaged them into large collateralized debt obligations (CDO’s), obtained AAA ratings for them, and sold them as securities to investment funds that included everything from pension funds to 401K’s. While the real estate and mortgage market continued to expand, the funds performed exceedingly well. As trouble in the real estate market began, the true risk associated with the funds came to light, and investors in mortgage backed securities were left holding the bag.
IREM Position:
We support legislation which amends the REMIC rules to allow more common modifications to property, such as:
- Preparing space for tenants (Tenant expansions and building additions): For example, tenant improvements would not be considered a significant modification. Under current rules, a tax opinion must be obtained before demolishing/tenant improvements begin. If the space comprises more than 10% of the REMIC collateral, the change could be denied.
- Special problems for retail space: For example, landlords could more easily reconfigure space to accommodate large anchor tenants and their requirements that only specific types of tenants occupy adjoining space so that instances where space "goes dark" because lease agreements could not be met are minimized.
- Sale of adjoining parcels: For example, legislation that would allow the sale of adjacent property that does not have any economic value to the landlord. Under current rules a tax opinion is necessary to determine whether sale materially alters the collateral --if it does, the sale would be blocked, even though the proceeds would be used to bolster reserves as required by the lender or pay down the loan.
- Addition of collateral to support building renovations and expansions: Legislation that would allow the posting of additional collateral in connection with the demolition or expansion of a property.
Under the proposal stated above, modifications to a qualified mortgage would be allowed, provided:
- The final maturity date of the obligation may not be extended, unless the extension would not be a significant modification under applicable regulations;
- The outstanding principal balance of the obligation may not be increased other than by the capitalization of unpaid interest; and
- A release of real property collateral may not cause the obligation to be principally secured by an interest in real property, other than a permitted defeasance with government securities.
- The alteration may not result in an instrument or property right that is not debt for federal income tax purposes.
(4/04, updated 4/09, 10/13, 4/15)
Consumer Price Index
Background and Objective:
According to the Bureau of Labor Statistics (BLS), Consumer Price Index (CPI) "is a measure of the average change in prices paid by urban consumers for a fixed market basket of goods and services."
Some of the samples the BLS uses to calculate CPI are:
- Urban areas selected from all U.S. urban areas
- Selected households within each selected urban area
- Retail establishments from which these consumers purchased goods and services
- Specified and unique items-goods and services purchased by these consumers
- Housing units selected from each urban area for the shelter component of CPI
Price indexes are available for the U.S. and two population groups: CPI for All Urban Consumers (CPI-U) which covers approximately 87 percent of the total population and CPI for Urban Wage Earners and Clerical Workers (CPI-W) which covers 32 percent of the population.
The CPI-U includes expenditures by urban wage earners and clerical workers, professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, retirees and others not in the labor force. The CPI-W includes only expenditures by those in hourly wage earning or clerical jobs.
Serious consideration of altering the methodology of calculating the CPI has not been made since 1998 when the Advisory Commission to Study the CPI made recommendations to the U.S. Senate Finance Committee. The method of calculating CPI, according to the commission, overstates the true cost of living. The commission recommended the CPI be calculated in such a way to better convey the cost of living. One of the recommendations was the sampling of goods and services be total U.S. sampled, not geographically. The commission also suggested that the calculation of CPI take into account the purchase of goods made on a less regular basis such as automobiles and household appliances. These recommendations would, according to the commission, create a more accurate formula for calculating CPI. Commercial landlords reliant upon CPI-based rent escalations would stand to realize less future rent if the indices were revised as proposed. Further, they could suffer hard dollar losses arising from the impact of CPI index changes on operating cost escalations due to lease caps. In 1999, the BLS shifted from an arithmetic to a geometric mean formula, which has reduced the annual growth rate of the CPI by less than 0.3 percentage points.
In FY2014, President Obama included an alternative to the traditional CPI, known as chained-CPI, into his budget proposal. Chained CPI seeks to improve on the traditional CPI by incorporating decisions made by consumers to forgo certain good and services, or switch to cheaper ones, as prices rise. This nuance would significantly alter projections for federal entitlement spending in the years to come, and supporters say it would be a positive steps towards deficit reduction.
Chained CPI remains controversial, as it would result in lower cost-of-living-adjustments for seniors, and has not been included in an official budget.
IREM Position:
IREM believes that a significant change in the current method of calculating the Consumer Price Index could negatively impact the business of property managers. Therefore, IREM believes that the current method of calculating the CPI needs to be more accurate. However, careful consideration should be given to the effects that would occur in the real estate marketplace as a result of these changes and any change should include a plan for a transition period where the old and new calculation would be used to minimize any negative impact on the commercial real estate industry.
(11/04, updated 4/09, 10/13, 4/15)
Employee Free Choice Act
Background and Objective:
Under the rules of the National Labor Relations Act, when a certain number of workers demonstrate a desire for union representation, a federally-supervised private ballot election is conducted by the National Labor Relations Board (NLRB). The Employee Free Choice Act, also known as “check card” legislation, was introduced in March, 2009 in the U.S. House of Representatives. The Senate introduced a companion bill the next day. The bills would have fundamentally changed the process for union elections and the collective bargaining process, making it easier for labor unions to organize employees into unions.
Both pieces of legislation died in the 111th Congress.
As proposed, The Employee Free Choice Act, would:
- Require the NLRB to certify union representation when a majority of employees sign a card favoring a union. The NLRB would not be required to conduct a private election.
- Impose a strict 90-day time limit for reaching an initial collective bargaining agreement. If an agreement is not met during this time, either party can request mediation from the Federal Mediation and Conciliation Service (FMCS).
- Following mediation, the legislation permits the FMCS to impose a 2-year binding contract on employers and employees. Neither party may appeal the decision.
IREM Position:
IREM urges Congress to oppose the Employee Free Choice Act. IREM supports the right of employees to choose whether to be represented by a labor union through a federally supervised private election. A secret ballot election ensures that employees are protected from coercion and intimidation.
(Adopted 7/09, 10/13, 10/15)
Energy
Background and Objective:
Energy is a vital part of the world economy and of America's way of life. Fluctuating energy costs, decreased demand, supply concerns, technological advances, and environmental considerations are changing the way we use energy and how we think about our future energy situation. As electricity and gas are a necessity rather than a luxury, discussion has surfaced regarding creating a free market to encourage competition, which in turn should bring lower utility rates. It should be noted, however, that electricity's elements are different from the other utilities in its generation, transmission, and distribution. While the transmission and distribution costs are somewhat fixed and may remain regulated, the generation of electricity may provide for the most competition and benefit for consumers. Additionally, as the demand for electricity and gas continues to increase, energy efficiency and conservation are sorely needed.
Over the past several years we have seen new initiatives intended to conserve energy. President Obama introduced the Clean Power Plan in the summer of 2015. This plan puts in place strict limits on pollution, specifically on energy producers. Also, in August of 2015 the first phase of the Tenant Star program was launched. This voluntary program is similar to Energy Star, but targeted at tenants in rental units.
IREM Position:
The free market system is the most appropriate means of attaining energy conservation and production goals. Increased conservation and domestic expansion are essential to our nation's security and economic prosperity. The nation must strive for greater energy self-sufficiency through further development of existing sources, decontrol of energy prices and the development of all new sources of domestic energy to reduce our dependence on foreign energy supplies.
We support the concept of conservation policies and the use of energy efficient technology. However, we strongly oppose mandatory national standards for building energy conservation. Specifically, IREM opposes mandatory installation, purchase, or usage guidelines for energy conserving products. Instead, we encourage positive incentives for conservation activities such as energy tax credits and an increased emphasis on energy efficient technology by the nation's building industry.
We support the security of all energy distribution systems (electrical grid, gas transmission pipelines, etc.) as the systems are the necessary backbone for the delivery of our energy needs.
It is vital that consumers (both individuals and businesses) have access to reliable, reasonably priced energy. IREM encourages its members to conserve energy and reduce demand in their facilities and to be proactive in educating tenants on programs and practices that can help conserve energy. We encourage voluntary participation in programs such as EPA’s Building Program, Green Lights Program, Energy Star Program, Tenant Star Program, the U.S. Green Building Council’s LEED program and Canada’s Green Globe program.
(5/01, updated 4/05, 10/09, 10/13, 1/14, 9/15)
Data Security
Background and Objective:
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. Individual privacy has been compromised and these breaches have put consumers at an elevated risk of becoming victims of identity theft. As of January, 2016 47 states, the District of Columbia, Puerto Rico and the Virgin Islands have enacted legislation requiring notification of security breaches involving personal information.
The number of Congressional proposals to counteract identity theft multiplied in the spring of 2005 after ChoicePoint Inc., a commercial data broker, announced that in February it may have improperly sold the personal information of almost 163,000 individuals. ChoicePoint was consequently investigated by the Federal Trade Commission. In January, 2006, the company agreed to pay $15 million to settle charges it violated consumer privacy rights, but did not admit any wrongdoing.
Then, the substantial security breach at the U.S. Department of Veterans Affairs (VA) on May 3, 2006—widely publicized by the media—triggered more legislators on Capitol Hill to introduce data security legislation. The laptop and external disk drive, containing information on 26.5 million veterans and 1.2 million active duty personnel, of a VA employee were stolen from the employee’s residence. The Secretary of the VA was not informed of the breach until May 16 and the public was not informed until May 23. The VA breach prompted Congress to narrow their focus as to when the public should be notified if sensitive data is lost or stolen.
Several House and Senate committees engaged in creating data security legislation during the 109th Congress. The Senate Judiciary Committee, Senate Commerce Committee, House Energy and Commerce Committee, and House Financial Services Committee each held mark-ups and passed legislation. The House and Senate worked to find compromise between varying proposals.
Legislative proposals primarily addressed jurisdictional authority, procedures to be followed by businesses when clients' sensitive personal information is stolen, or when businesses should notify their clients.
Meanwhile, the House Financial Services Committee passed H.R. 4127, the “Financial Data Protection Act of 2006” on June 2. H.R. 4127 prescribes consumer notification requirements and prohibits charging the related consumers for the cost of the notices and file monitoring regarding data security breaches. H.R. 4127 preempts state laws governing consumer reporter data security responsibilities, except any laws governing professional confidentiality or limiting the purposes for which information may be disclosed. This legislation never received a House vote and died in the 109th Congress.
In December, 2009 the “Data Accountability and Trust Act” passed the U.S. House and would require any organization that experiences a breach of electronic data containing personal information to notify all U.S. individuals whose information is breached. The law requires that the Federal Trade Commission to also be notified. In addition, organizations would be required to designate an information security officer and establish a data security policy. The policy would have to address the collection of personal information and include a process for identifying and correcting system vulnerabilities and disposing electronic data. The bill was approved by the House, but was never reported out of the Senate Committee on Commerce, Science, and Transportation.
During the 114th Congress (2015-2016) several similar bills were introduced, including the Data Accountability and Trust Act
(H.R. 580), the Personal Data Notification and Protection Act of 2015 (H.R. 1704), the Secure and Protect Americans’ Data Act (H.R. 4187), The Data Security and Breach Notification Act of 2015 (H.R. 1770), the Data Breach Notification and Punishing Cyber Criminals Act of 2015 (S. 1027), and the Data Security and Breach Notification Act of 2015 (S. 177). As of August, 2016 none of these bills have received a floor vote in their respective chamber.
In the spring of 2010, IREM became aware of a change in how credit reporting agencies interact with property managers and other businesses and professionals. Credit reporting agencies may begin to enforce on-site visual inspections by a third party of the business premises of each subscriber or headquarters location of the subscriber (property management company in this case). The third party would need to verify the business is legitimate, that they have permissible purpose to order the reports and they are storing the reports securely and destroying any unnecessary reports. Best practices include having a lockable filing cabinet, a shredder, and a password protected computer (depending on how the company receives their reports).
This new guideline came out of a civil suit filed against ChoicePoint by the United States Attorney General on behalf of the Federal Trade Commission. The court’s decision detailed that organizations requesting credit checks for business purposes are required to have on-site visual inspections conducted by an independent third party at the client’s expense. The court made this decision in connection with the Fair Credit Reporting Act (FCRA). It is important to note that this new rule is not in the FCRA, but instead an interpretation by the court in response to the lawsuit. Although the on-site inspections are not required by the FCRA, it is probable that most credit reporting organizations will require them in order to be in compliance.
IREM legislative staff is monitoring this issue along with all pertinent legislation due to its concern commercial real estate professionals could be included in the scope of the legislation and real estate managers would have to comply by notifying clients when data is breached.
IREM Position:
IREM has identified two main concerns with data security and consumer notification legislation. First, those bills that contain specific provisions and mechanisms that trigger notifying the consumer of a security breach, and IREM is concerned with assuring the reasonableness of the trigger mechanism and notification process. Second, the costs of compliance with state and/or federal laws would be of major concern to property managers, thus pointing to the reasonableness thresholds above referenced. 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.
IREM strongly encourages its members to use best practices protect the confidential personal information of their clients.
(Adopted: 10/06. Updated: 10/10, 10/16)
Electronic Advertising
Background and Objective:
Spam, or junk e-mail, is disliked by consumers for several reasons. They argue it clogs up e-mail programs and is time consuming because the consumer must sift through the mass of junk mail to find desired messages. Internet service providers complain that it also increases their transmission costs, which are often passed on to users in the form of higher fees.
On December 16, 2003, President Bush signed the “Can Spam” Act. The law does not ban unsolicited commercial e-mails, but does identify a series of practices that must be observed by senders, including:
- Including a legitimate return e-mail and physical postal address;
- Including a functioning opt-out mechanism, clear and conspicuous notice of the opportunity to opt-out and requiring senders to honor any such opt-out request;
- Including a clear and conspicuous notice that the message is an advertisement or solicitation; and
- Clearly identifying messages with pornographic or sexual content as such.
In addition, the law prohibits senders from falsifying or disguising their true identity and bans the use of incorrect, misleading or fraudulent subject lines. In a 2005 Federal Trade Commission report, it was determined that the Can Spam Act was successful. The success was two-fold; many online marketers now follow the mandatory “best practices” provisions, and law enforcement is now properly equipped with effective tools to bring suit against illegal spammers.
As of 2010, 37 states have enacted laws regulating spam and unwanted electronic advertising. The majority of these statutes apply to fraudulent e-mail and other laws pertain to unsolicited bulk e-mail.
Text messages sent to a mobile phone using an auto dialer are banned by the FCC under the Telephone Consumer Protection Act, unless consent was previously given.
IREM Position: IREM opposes indiscriminate, unsolicited spamming. However, IREM recognizes that electronic commerce is a significant emerging technology for advertising. IREM opposes burdensome regulations which would hinder the responsible utilization of such advertising practices.
(11/98, updated 4/09, 10/13, 4/15)
Electronic Signatures/Disclosures
Background and objective:
With the expansion of technology, many transactions are now being conducted electronically with a paperless process. In 2000, President Bill Clinton signed the Electronic Signatures in Global and National Commerce Act (E-SIGN). This law provides a framework for the use electronic signatures and electronic records by according electronic signatures the same legal effect, validity and enforceability as manual signatures. It does not, however, require any person to agree to use or accept electronic records or electronic signatures.
E-SIGN also allows most disclosures to be made in electronic form, provided the recipient has consented to receiving electronic disclosures. It does not make any changes to the content of those disclosures or any party’s rights or responsibilities under such disclosures. The replacement of paper disclosures with electronic ones will result in cost and time savings for many real estate practitioners. It will save funds on paper, postage, and storage space for disclosures and authorizations. In addition, this type of legislation marks a step toward streamlining the real estate transaction.
E-SIGN preempts state laws that do not recognize electronic signatures and addresses private-sector interstate or foreign consumer, commercial, or financial transactions that deal with real property, personal property, or services. It also allows states to establish standards and formats for records that are filed with state agencies. The National Conference of Commissioners on Uniform State Laws has approved model legislation, the Uniform Electronic Transactions Act (UETA) that meets the requirements for avoiding preemption. To date, 47 states, theDistrict of Columbia, Puerto Rico, and the Virgin Islands have adopted UETA.
IREM Position:
Provided that regulatory and logistical provisions for sufficient systemic internal controls do exist, the Institute of Real Estate Management supports the use of electronic signatures, disclosures, and authorizations. The use of such technology will streamline many real estate transactionsand allow for easier record keeping.
IREM applauds the enactment of E-SIGN on the federal level and of UETA in 47 states and the District of Columbia. IREM encourages those states that have not already done so to adopt UETA.
(11/99, updated 4/03, 10/07, 10/11)
Internet Sales/Use Taxes
Background and Objective:
Currently, the Internet Taxation debate for property managers revolves around the issue of how collection of such a tax affects state and local tax revenues. Sales tax can be charged on Internet purchases; however states cannot require online retailers to collect the tax on their own. In 1992, the U.S. Supreme Court case Quill vs. North Dakota, the Court determined that states could not compel out-of-state sellers to collect their sales taxes because the burden would be a violation of interstate commerce. Since Congress has the power under the Commerce Clause to regulate interstate commerce, they can create a level playing field for local merchants. In fact, the Supreme Court stated in the Quill decision that the problem "is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve." If legislation is passed and online retailers who do not have physical stores are required to collect and pay sales taxes, a major advantage for online retailers will be removed leaving the market more competitive.
The main components of state and local revenue are income taxes, real estate/property taxes and sales taxes. Not taxing the increasing Internet sales as they replace brick and mortar sales may result in a significant decline in the sales tax revenues for state and local government. If sales tax revenues decrease, state and local governments will have to increase other taxes, namely real estate, property, and income taxes.
In addition, if Internet merchants and their goods continue to effectively receive an exemption from sales taxes, they have an unfair competitive advantage over brick and mortar merchants in our communities. According to a 2011 study from the University of Tennessee, each $1 million of new retail sales in traditional brick-and-mortar establishments adds 3.61 jobs. The same $1 million in new sales at Amazon's average is expected to create 0.88 jobs. One out of every 11 U.S. jobs is shopping center-related. This could cause consumers to divert their shopping from stores in shopping centers and on free-standing sites to tax-free online merchants.
In March of 2015 the Marketplace Fairness Act of 2015 was introduced in Congress. If enacted, this bill would authorize each state to compel all sellers who do not qualify for a small seller exemption to collect sales and use taxes. In order to qualify for the exemption, a business must have less than $1 million in remote sales per year.
IREM Position:
IREM adopts the following policies relating to Internet sales/use taxes:
IREM supports consistent state/local sales/use taxes for economically equivalent transactions in the state or locality in which the goods are delivered.
State/local sales/use tax consequences should be consistent for economically equivalent transactions. IREM supports a level playing field for local in-store retailers and remote merchants (including Internet merchants). IREM believes that local and state governments should enforce existing taxes, rather than create new taxes. IREM firmly opposes any new programs that would impose taxes on the cost of such services, such as fees and other costs associated with the purchase and ownership of real estate.
IREM opposes federal sales tax on Internet purchases.
Federal legislation should not preempt state efforts to address their own sales and use tax issues. IREM believes the key issues associated with the Internet tax debate affect state and local government revenues. Accordingly, we believe state and local legislative action is appropriate, and we encourage state legislative action that would:
- Provide consistent sales tax consequences for economically equivalent transactions; and
- Simplify state/local processes for reporting and collection of sales/use taxes.
Therefore, we do not support federal legislation that—without the consent and participation of state governments—would preempt state efforts to address their own sales and use tax issues consistent with this position.
(11/04, updated 11/09, 10/13, 9/15)
Housing Financing
We urge continued efforts to maintain a strong role for thrifts in supplying mortgage capital, such as the maintenance of a "Qualified Thrift Lender" asset test, as well as the preservation of existing tax incentives for mortgage lending institutions. At the same time, we recognize the need to develop new sources of mortgage financing to meet future housing needs. To that end, we support the following:
Legislative and regulatory proposals which encourage pension fund investment in mortgages while maintaining the current "arm’s length" standards contained in the Employee Retirement Income Security Act (ERISA) regulations; and
Continued development of highly-marketable, mortgage-backed securities designed to attract new investment in housing from non-traditional sources. In particular, Trusts for Investment in Mortgages (TIMs), a vehicle to improve the ability of mortgage-backed securities to compete in the marketplace, should be adopted. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), as major participants in the secondary mortgage market, should be included.
(6/86, updated 11/04, 4/09, 10/13, 4/15)
Rent Control
Background and Objective:
We are opposed to government control of rents. We believe that a property owner has the right to strive for rents that will encourage investment in new construction ventures and existing property. While we are equally opposed to excessive rent increases, we firmly believe that a property should be allowed to produce sufficient income to accommodate the basic needs of its residents.
Rent controls create problems more serious than those they are intended to resolve. Rent control legislation threatens not only the traditional rights of citizens, but significantly affects the housing inventory by hastening the deterioration and loss of existing housing, while it discourages the construction of new housing.
Furthermore, by lowering the value of multifamily property, rent controls affect a community's tax base by causing a disproportionate shift of the tax burden to other types of real estate, especially single-family homes and commercial properties. This shift can potentially curtail vital municipal services. The expense of complying with rent control laws and regulations inevitably increases the cost of housing to the consumer, and the expense of enforcing rent control adds to the cost of local government.
IREM Position:
We support the availability of affordable housing for all as a responsibility of the total society, and we defend the right of Americans to own property free of unreasonable controls. Congress, HUD and numerous other agencies have invested many billions of dollars in urban areas as a means of satisfying taxpayers' needs for growth and development.
Wherever local rent controls have been initiated, the history of each impacted community has been to change growth to no-growth and development to economic malaise. In these communities the already massive infusion of federal funds is threatened; accordingly, we believe Congress and the Administration could assist in discouraging further controls by imposing a cap on housing fund allotments to those municipalities that choose to implement rent controls.
We also urge elected officials at all levels of government to oppose rent control as being counterproductive to the best interests of all segments of society and the economic well-being of the nation.
(6/86, updated 4/05, 10/09, 10/13, 8/15)
Immigration Reform
Background and objective:
The Department of Homeland Security (DHS) developed a voluntary employee verification system that can confirm a worker’s eligibility to work legally in the U.S. The initial pilot program, called Basic Pilot, used Social Security numbers and citizenship status to check the legal employment status of workers or prospective workers.
There are some who criticize the program because it does not require employers to verify the documents they receive from employees are accurate. These groups believe this system has created a large black market for counterfeit documents. On the other side, there are those who believe the Basic Pilot system is highly inaccurate and therefore provides no protection from hiring illegal workers. Lastly, there are those who believe making such a program mandatory is too high a burden on American businesses.
In 2007, the Basic Pilot program was renamed E-verify, and was subsequently improved from its last version. The new program added features including an automatic system that would flag a person and require an employer to perform a second assessment of the employee. A photo matching section was added to the system. This would match the photo on an employee’s permanent resident card to the photo in the system. Since the 2007 renaming, E-verify has undergone consistent changes and improvements to better enable an employer to check the immigration status of a potential employee.
DHS introduced the E-verify Self Check system in 2011. It is a voluntary, free service that allows individuals to check the status of their employment eligibility in the U.S. This system is still being rolled out slowly, and should continue to evolve in the coming year.
IREM position:
IREM supports an employer verification system like the current federal system that ensures that all workers be verified for their legal employment status. As currently exists, we support that the system be free for employers and that employers are held harmless from errors made by the federal system. In addition, IREM supports a guest worker program that will allow employers to temporarily hire legal foreign workers when other qualified workers are unavailable. IREM recommends that any federal employee verification system have web-based access with documentation of use capability.
(Adopted 4/06, Updated 3/12)
Bankruptcy
Bankruptcy law that specifically impact the property management industry. They are:
- Single Asset Bankruptcy
- Shopping Center Bankruptcy
- Rental Housing Abuse
- Common Interest Communities
IREM Position:
Single Asset Bankruptcy
IREM members have had experience on both sides of the bankruptcy issue. We as owners/managers, possess a unique perspective on bankruptcy issues since we have lost substantial income from tenants who have misused bankruptcy laws to avoid paying their rent; and occasionally as bankruptees who need time to reorganize their property. This gives us a unique perspective on bankruptcy issues.
As there seems to be no justification for differentiation between properties based upon their value, and certainly property values differ in different geographic jurisdictions, we believe that the 90 day automatic stay should apply to all properties, with no cap on the value of the asset. However, with some properties, extensive work is needed to formulate a successful reorganization plan in the occurrence of bankruptcy. Therefore, there should be adequate provisions that allow for the extension of the 90 day stay for successive like periods of time in highly complex cases when the debtor demonstrates to the Court that substantive progress (specifically, not wasting the asset and providing timely payments) has been achieved and benchmarked in the development and implementation of a plan of reorganization.
Shopping Center Bankruptcy
IREM believes that protections afforded shopping center owners under the Bankruptcy Code must be strengthened and protected by Congress and respected by the courts. Central to these initiatives are the following fundamental concepts:
Debtors in possession should be expected to expeditiously appraise their leaseholds and assume or reject their leases. Extensions beyond the initial sixty day deadline should be the exception rather than the rule and not exceed sixty day increments. Courts granting debtors-in-possession multiple series of extensions totaling one year or more to assume or reject leases is contrary to Congressional intent and unfair to shopping center owners.
Continuous operations clauses are the product of arm's length negotiations between landlord and tenants and breach of the clauses should be grounds for lease termination and other equitable relief due the landlords.
Landlords are routinely excluded from creditors’ committees. Therefore, courts should allow creditors to petition to be included on such committees.
Debtors in possession seeking to assign their leases should be bound by use clauses and restrictions, as tenant mix and protections of exclusives are material to the survival and success of shopping centers. Assignments should be limited to bona fide operators of retail businesses and not include temporary tenants or licensees or investment entities buying portfolios of leases to re- tenant as sub-landlords.
The definition of shopping center as provided for in the Bankruptcy Code, should be sufficiently broadened as to encompass all multi-tenanted neighborhood, community, regional, specialty and outlet centers and malls. Bankrupt tenants should not be able to escape the shopping center protections afforded landlords by motions to the court that narrowly define shopping centers.
Debtors-in-possession and trustees should be strictly held to an obligation to pay all post-petition rent, percentage rent, operating expenses and other charges as an administrative expense of the bankruptcy estate until lease resolution.
Rental Housing Abuse
The declaration of personal bankruptcy allows tenants to delay eviction and remain in their leaseholds without paying rent during the pendency of court proceedings by denying the validity of legitimate debt or other stalling tactics. This causes the owner additional rent loss and legal costs. Apartment owners and managers in some parts of the country have experienced a marked increase in the number of personal bankruptcy declarations among tenants -- many for the sole purpose of avoiding payment of rent. Such a practice is clearly an abuse of federal bankruptcy law.
The members of the Institute of Real Estate Management support the concept of federal legislation that would provide relief from current federal law which imposes an automatic stay allowing continued occupancy by a debtor tenant due to the filing of personal bankruptcy. In addition, the Institute supports federal legislative efforts to effectively correct the problems caused by the inconsistent administration of bankruptcy laws between districts and the unreasonable delays in collecting occupancy charges and assessments from bankrupt owners and tenants.
Common Interest Communities IREM believes that Congress did not intend that bankrupt owners in condominiums and cooperatives should be given a "free ride" at the expense of their neighbors. Judges in these cases have expressed regret that the bankruptcy code is overly narrow and that the problems facing common interest communities were not taken into consideration.
(4/05, updated 10/09, 10/13, 10/15)
Liability Insurance and Tort System Reform
Background and Objective:
The Class Action Fairness Act (S. 5) was signed into law on February 18, 2005. The law established a uniform set of criteria for determining when a multi-state class-action lawsuit can be moved from state court to federal court. IREM lobbied in support of this legislation.
Previously, federal courts had jurisdiction over lawsuits dealing with a federal question and cases in which all plaintiffs are citizens of jurisdictions different than all defendants, and each claimant has an amount in controversy in excess of $75,000.
The Act authorizes federal courts to hear class-action suits involving over $5 million where the case is outside the home state of the defendants or less than one-third of the class is located in the home state of the defendants. If two-thirds or more of the class members are from the defendant’s home state, the case would not be subject to federal jurisdiction. The federal court can recuse jurisdiction when more than one third of the class resides in the same state as the defendant, based on six specific factors.
The objective in moving the suits to federal courts is to make it significantly more difficult for the lawsuits to be approved. The guidelines are also intended to limit the ability of plaintiff attorneys to "venue-shop" when filing class action suits. The law cracks down on "coupon settlements" in which plaintiffs get little but their lawyers get big fees. It links lawyers' fees to the amount of coupons redeemed.
IREM remains concerned about the rising costs and availability of liability insurance due to a variety of reasons, including:
- the broad interpretation and extension of liability in all areas;
- action that has allowed a boom in lawsuits or the "right to sue;"
- judicial unwillingness to "throw out" frivolous cases; and
- unwarranted and extraordinarily high awards given in some cases by judges and juries.
IREM position:
We encourage Congress to enact legislation that will restore the availability of liability coverage at realistic rates for the professional community via reform of the existing tort system. We encourage IREM chapters to be involved in these issues as they relate to proposals in their states. Alternatives to this end include the development of a no-fault, limited award system; dispute resolution via out-of-court arbitration with punitive damage limitations; abolishing contingency fee law-suits; and statutes of limitations that would require prompt filing of lawsuits. Reforms such as these can only be brought on by acute public awareness and sustained efforts to bring costs down and to curtail unnecessary litigation.
(6/88, updated 11/03, 10/08, 10/13, 4/15)
National Housing Trust Fund
Background and Objective:
The National Housing Trust Fund was created through a provision in the Housing and Economic Recovery Act (HERA) of 2008. The NHTF, under the Department of Housing and Urban Development, aims to provide neighborhoods and communities with monies to build, preserve, and rehabilitate affordable homes for low income families and households. It is a permanent program and at least 80% of the funds must be utilized for preserving and rehabilitating rental housing. The remaining 20% can be used for other various home ownership activities, such as closing costs, down payment assistance, administrative costs and rehabilitation.
HERA requires Fannie Mae and Freddie Mac to transfer a certain percentage of their new business to help fund the Trust. Since enactment of the legislation in 2008, Fannie Mae and Freddie Mac have been placed into conservatorship. The Federal Housing Finance Agency (FHFA) currently acts as their conservator and has directed Fannie Mae and Freddie Mac to halt contributions to the Trust indefinitely due to their own respective undercapitalization issues.
For the fourth consecutive year, President Barack Obama has requested money for the NHTF. As recent as February, 2012, Obama’s proposed budget included $1 billion for funding the Trust. This money was
Referred to be “subject to PAYGO” and therefore the $1 billion must be paid for by another program or cut.
IREM Position:
IREM supports the development and preservation of affordable housing. IREM supports the creation of a National Housing Trust Fund that does not take money from other federal, state, or local housing programs. Further, IREM supports placing these funds in a lockbox that cannot be borrowed against for other federal budgetary purposes. IREM opposes Trusts whose sources of funding negatively impact housing prices or transaction fees. IREM also supports putting for-profits and non-profits on equal footing as eligible trust fund recipients.
(Adopted 10/07, Updated 3/12)
Low Income Housing Tax Credits
Background and Objective:
The Low Income Housing Tax Credit (LIHTC or Housing Credit) program was created by the Tax Reform Act of 1986 as an alternate method of funding housing for low- and moderate-income households, and has been in operation since 1987. Every year, each state is limited to a total annual housing tax credit allocation of $1.75 per resident, that they, in turn, allocate to qualified affordable rental properties that are either newly constructed or substantially rehabilitated. Tax Credits must be used for new construction, rehabilitation, or acquisition and rehabilitation.
The housing credit works by providing a dollar-for-dollar reduction in the federal tax liability of corporations and individuals that invest equity in these qualifying properties. Property developers use the credit to attract equity investments by private sector investors - usually corporations - that, in turn, use the credits to offset their federal tax liability. The investors are at risk of losing these federal tax credit benefits if the properties are not well maintained and not reserved for low income families who do not exceed established income limits. The housing credit has been a permanent part of the tax code since 1993.
IREM Position:
IREM supports federal programs that encourage the development and preservation of affordable housing. We support the development and enactment of tax incentives that encourage economic growth while making capital available at an affordable cost.
Since 1986, the Low Income Housing Tax Credit program has produced nearly one million safe, decent and affordable homes. It is also a cornerstone of the revitalization of low-income communities and contributes substantially to economic growth, generating thousands of jobs and billions of dollars in wages and federal taxes annually.
IREM supports the continuation of the Low Income Housing Tax Credit, and encourages legislation that will increase this valuable development tool.
(Adopted 10/07, Updated 3/12)
Child Care
IREM Position:
The Institute believes that resolution of the child care issue in this country can best be achieved by encouraging voluntary, flexible personnel policies and employee benefits, and by encouraging responsible local community groups and private agencies to continue as providers of child care services. At the same time, the Institute opposes the mandating of sites for child care and supports leaving this decision to the property owners and managing agents.
If you have paid for child care, you may be eligible to claim a federal tax credit through the Child and Dependent Care Credit. Interested parties may obtain more information about this potential credit at www.irs.gov.
(6/89; updated 11/97, 10/07, 10/11)
Anti-Crime Legislation
Background and Objectives:
The National Crime Victimization Survey (NCVs) has been administered by the Bureau of Justice Statistics since 1972 in order to help create a national crime index. In 2014, the most recently published report, both violent and property crime rates continued a downward trend. Violent crimes include rape or sexual assault, aggravated assault, and simple assault. The NCVS is based on victim interviews, so the report cannot accurately measure homicides. In 2014, the overall violent crime victimizations per 1,000 persons age 12 or older was 20.1, with 1.1 rapes and sexual assaults, 2.5 robberies, 4.1 aggravated assaults, and 12.4 simple assaults.
For property managers, the most common crime is property crime, which includes burglary, theft, and motor vehicle theft. In 2014, for every 1,000 households 118.1 reported being the victim of a property crime including 23.1 burglaries, 90.8 thefts, and 4.1 motor vehicle thefts. Such crimes threaten the stability of entire families, businesses, and communities. In response to the frequent occurrence of property crimes, property managers continue to feel the pressure to ensure the security of residential, multifamily, commercial, industrial, and retail properties as well as tenant safety.
In recent years, the courts have determined that property managers are liable for some crimes committed on or around the properties they manage. Interpretations of landlord/tenant laws have been broadened, widening the scope of the definition of negligence on the part of owners and managers. Property managers need to be aware of today's climate of intensified legislative focus on tenants' rights and the proliferation of suits against property owners and managers. This is especially true in cases where crime and security are involved. Commercial tenants and residents should be aware that prevention of crime is also their responsibility. To combat crime many property managers are involved in Neighborhood Watch Programs and make use of websites providing detailed information about registered sex offenders and gang activity.
IREM Position:
Crime represents a serious threat to the management of any property. IREM believes property managers and owners have an obligation to provide an environment, as safe as reasonably possible, for a property's residents, customers, employees, guests, and commercial tenants. In addition, property managers are responsible to owners for the reasonable protection of the property's physical assets.
Therefore, in light of the societal problems caused by such crimes, IREM supports tough anti-crime measures which will help property managers to better address crime and reduce criminal activity on their properties and in their communities through their day to day activities and capacities as managers.
IREM supported many of the provisions contained in the Violent Crime Control and Law Enforcement Act of 1994, including:
- Continued expansion of community policing in cities and towns across America through creation of Community Oriented Policing Services (COPS).
- Creation of community boot camps, which give young people discipline, training, and a better chance to avoid a life of crime, and provide criminal drug addicts with drug rehabilitation treatment.
- Increased penalties for gun offenses, imposition of federal death penalties for killing a federal law enforcement officer and other heinous crimes.
- Increased penalties for various crimes against children and crimes in which minors are used, and creation of a national tracking system for those convicted of child abuse or criminal offenses against minors. The tracking issue is addressed in legislation referred to as Megan's Law.
- Provides for increased penalties for possession of firearms and illegal drugs in or around schools.
- Provides for enhanced controls on illegal entry into the United States.
- Ensures swift and sure punishments once criminals have been found guilty of violent offenses.
- Provides for new death penalty crimes and procedures and life imprisonment for three-time recidivists and creates new criminal penalties for gang violence.
The year before the Violent Crime Control and Law Enforcement Act of 1994 was enacted; the Brady Handgun Violence Prevention Act was signed into law. IREM supports keeping handguns out of the hands of criminals and therefore supported the Brady bill, which requires a five-day waiting period before the purchase of a handgun.
While Congress has made progress in passing legislation intending to prevent both children and adults from sexual abuse, IREM calls for tougher penalties for interstate stalking of women and for recidivist sex offenders, as well as stronger rights for crime victims.
IREM has long supported several anti-crime measures that have recently been in the spotlight. For instance, stiff penalties for providing material support to terrorists and terrorist-related activities.
There are two programs in particular IREM supports the state and/or federal government appropriation of funds. One, a system of regional prisons based on a state/federal partnership, which require state cost sharing and implementation of various measures to crack down on criminals. The other, grants to create federal "safe school" districts to help local school districts improve security.
In regards to the legal system, IREM supports the reform of habeas corpus procedures, raised standards for court appointed legal counsel, and limits to appeals.
(Adopted: 11/93. Updated: 6/98, 10/06, 10/10, 10/16)
Federal Megan's Law
The Jacob Wetterling Crimes Against Children and Sexually Violent Offender Registration Act (“Wetterling Act”) was passed as part of the Federal Violent Crime Control and Law Enforcement Act of 1994. The groundbreaking law setup requirements for states to create and implement a sex offender registry. The law requires any individual who is convicted of a criminal offense against a minor or who is convicted of a sexually violent offense to register their current address. In addition, any individual that is deemed a "sexual predator" is required to register their address.
In 1994, seven-year old Megan Kanka, from New Jersey, was sexually assaulted and murdered by a twice-convicted sex offender who had moved into a home across the street from the Kanka family. In response to this tragedy, New Jersey passed "Megan's Law," a statute that requires the registration of convicted sex offenders once they have left the correctional system, and community notification of the identity and location of "high-risk" sex offenders. County prosecutors determine whether released offenders fall into the low-, moderate-, or high-risk categories.
PresidentClinton signed a national Megan's Law on May 17, 1996 that echoed the New Jersey statute, requiring states to establish a community notification system. Megan’s Law is section (e) of the Wetterling Act. The objectives of this law are similar to New Jersey's: the continued monitoring and observation by local authorities of released sexual offenders. The federal law requires a state's law enforcement agency to collect and release this information when necessary to protect the public. The law does not impose any limitations on the standards and procedures that states may adopt for determining when public safety necessitates community notification.
When Megan’s Law was enacted real estate professionals voiced their apprehension. Specifically, concerns were raised regarding possible material disclosure, liability, and notification requirement issues 24 of property owners and managers under Megan's Law. While over a decade has passed since the law was enacted, property managers still feel they are exposed. Property managers face risks associated with a failure to provide adequate notice about the presence of convicted sex offenders who subsequently engage in criminal conduct, but then managers may be subjected to potential liabilities for violations of privacy laws protecting offenders and their families. Very few states have specified requirements for property managers to follow to comply with existing laws. Property managers should become familiar with state enforcement of Megan’s Law as well as state privacy law requirements.
The Wetterling Act was amended again in 1998, when its requirements were changed to include heightened registration requirements for sexually violent offenders, registration of federal and military offenders, registration of nonresident workers and students, and participation in the National Sex Offender Registry (NSOR). The registry may be accessed by visiting http://www.nsopr.gov/.
In July 2006, President Bush signed The Adam Walsh Child Protection and Safety Act into law. It acts as a supplement to Megan's Law with new registration requirements and a three-tier system for classifying sex offenders with regard to their risk level to the community. The Act also instructs each state to apply identical criteria for posting offender data on the Internet
IREM Position:
The passage of a federal Megan's Law was the result of a tragic incident which should be treated with respect and sensitivity. IREM fully supports the federal government's policy to protect children from convicted sexual offenders and its operation of the National Sex Offender Public Registry as a means to reach its objective.
(11/96; updated 11/97, 10/06, 10/10, 9/14)
Private Property Rights
Background and Objective:
TheFifth Amendment of the Constitution states that ''No person shall be deprived of property without due process of law; nor shall private property be taken for public use without just compensation.'' However, due to the current jurisdictional structure of our judicial system for the litigation of private property takings cases, that constitutional right is being threatened.
Currently, property owners do not have the option of directly pursuing a Fifth Amendment "takings" claim in federal court. Private property owners whose rights have been trampled must choose between suing for injunctive relief in the Federal district courts or monetary relief in the U.S. Court of Federal Claims. If the owner wishes both to invalidate the government's action and seek compensation at the same time, then separate suits must be filed in both courts. Many times the government argues that one court cannot decide on the relief sought until the other court has made a determination on the relief within that court's jurisdiction. This split jurisdiction forces property owners to file multiple lawsuits in multiple courts in order to gain relief. This shuffling of claimants between district court and the Court of Federal Claims is known as the "Tucker Act Shuffle," and the process frequently is long and costly.
IREM Position:
Governments shall not arbitrarily infringe on the basic right of the individual to acquire, possess and freely transfer real property, and shall protect private property rights as referred to in the 5th and l4th Amendments of the United States Constitution.
We support legislative implementation of the 5th Amendment's guarantee of compensation when property rights are taken. Every person should have the right to acquire real property with confidence and certainty that the use or value of such property will not be wholly or substantially eliminated by governmental action at any level without just compensation or the owner's express consent.
We recognize the need for all levels of government to be able to exercise legitimate police powers in the regulation of private property to protect the health, safety and general welfare of its citizens. However, when government actions or regulations are not founded within legitimate police powers, the government should be required to pay just compensation for the unlawful takings of the owners property right and burden placed on the property owner.
In addition, IREM supports legislation, which will provide property owners expeditious access to administrative and judicial systems at all levels - local, state and federal - to pursue Fifth Amendment takings claims or relief from other property rights violations.
(Updated 11/04, 4/09, 9/14)
Data Quality
Background and Objective:
The Information Quality Act of 2001 required the Office of Management and Budget (OMB) to issue government-wide guidelines for ensuring and maximizing the quality of information (including statistical information) disseminated by federal agencies. The guidelines establish quality standards for all information disseminated by Federal agencies after October 1, 2002, regardless of when that information was first disseminated. The guidelines define four statutory terms for information quality: quality, utility, objectivity, and integrity. Agencies must implement “pre-dissemination” review processes for all information, and must also include “administrative mechanisms” that allow affected persons to seek and obtain the correction of information that does not comply with the OMB and agency standards.
IREM Position:
The Institute strongly supports data quality and integrity. In order to accomplish the goals of many regulations – health and safety – solid scientific research must be used. We strongly support and promote the quality, objectivity, utility, and integrity of federal government information. Furthermore, all research findings must be transparent, so experts in the private sector can review the findings and verify them. Without data quality, there will be no public trust of government actions.
(Updated 11/02, 4/09, 9/14)
FASB Lease Accounting Changes
Background and Objective:
The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) proposed lease accounting changes that would bring nearly $1.3 trillion in leased assets back onto companies’ balance sheets, with roughly 70 percent being real estate leases. Under the proposal, companies would be required to use a “right-of-use” accounting model where both lessees (renters) and lessors (property owners) recognize assets and liabilities arising from lease contracts. Currently, accounting rules allow many businesses to classify leases as operating expenses, which do not appear on their balance sheets. Both FASB and IASB believe these changes would improve transparency as well as provide investors with more consistent and concise financial reporting. However, if enacted, this proposal could negatively impact the financial stability of many businesses, which could prolong our nation’s economic recovery.
If enacted, this proposal would impact businesses of all sizes, especially lessees and lessors of commercial real estate. With more bloated balance sheets, some companies may see their debt-to-equity ratios increase and find it more difficult to obtain credit, especially those with heavy debt loads or still recovering from the recession. The proposed accounting changes could also complicate compliance with debt covenants or agreements between the bank and borrower, which usually prohibit companies from borrowing more than they are worth. By capitalizing new and/or existing leases, some businesses could be over their debt covenant and be in default of their loan. This could force some firms to put up more equity on existing loans or even have their credit lines revoked.
Additionally, the elimination of off-balance-sheet financing would be detrimental to commercial property owners. More frugal lessees will want less space and shorter-term leases without renewal options or contingent rents, which will decrease cash flow for property owners. Shorter-term rents will likely reduce the borrowing capacity of many commercial real estate lessors, who rely on leases and the value of the property as collateral in order to obtain financing. Ultimately, property owners would be forced to increase rent rates due to market uncertainty and reduce tenant improvements due to shorter recovery periods. Conversely, this change could encourage firms to consider buying instead of leasing commercial real estate. The accounting proposal comes at an inopportune time with the commercial real estate industry in the midst of a financial crisis, and nearly $1.4 trillion in loans due by 2014 and an already very limited capacity to refinance.
While a hard deadline has not yet been set, the current time frame for when these new standards officially go into effect is roughly late 2015 to early 2016.
IREM Position:
IREM is concerned that the new lease accounting proposal will be detrimental to our nation’s economy by reducing the overall borrowing capacity of many commercial real estate lessees and lessors. Also, IREM is opposed to lease accounting standard changes that would treat the income producing real estate business as a financing business on company balance sheets. Such a step would not accurately depict the unique characteristics of the investment real estate sector and in turn discounts the usefulness of the industry’s financial statements.
(Adopted 10/10, 2/14)
Private Transfer Fees
Background and Objective:
On August 12, 2010, the Federal Housing Finance Agency (FHFA) proposed a regulatory guidance for public comment that would restrict Fannie Mae, Freddie Mac and the Federal Home Loan Banks from investing in mortgages with private transfer fee covenants. This guidance would extend to mortgages and securities purchased by the Federal Home Loan Banks or acquired as collateral for advances, as well as to mortgages and securities purchased or guaranteed by government sponsored enterprises (GSEs). This action would end the use of private transfer fees in 60 to 70 percent of the real estate market.
A private transfer fee, sometimes called a "flip tax," is a one-time fee paid when a home is sold. Typically the fee, usually a fraction of 1% of the home sale price, in some cases helps fund community homeowners associations or other not-for-profit organizations.
FHFA is reacting to a recently new practice by which developers charge the fee as an ongoing source of revenue. Some association covenants require transfer fees to third parties, unaffiliated with the property or community association. The New York Times has cited Freehold Capital Partners as a prime mover in this effort. Freehold, based in New York is a real estate financing firm headed by Joseph B. Alderman III, a Texas developer. The firm claims to have signed up more than 5,000 developers as clients who are interested in these fees as a future revenue stream against which they could borrow or sell debt securities, according to the Times. It is this practice from FHFA appears to be attempting to shield the GSEs.
However, many homeowners associations and condominium associations use transfer fees to benefit the community and residents. These are a way to spread the costs of infrastructure or other benefits over time, and limit the immediate financial impact on residents.
In March 2012, the Federal Housing Finance Agency issued a final rule prohibiting Fannie Mae, Freddie Mac, and Federal Home Loan Banks from dealing in mortgages encumbered with private transfer fees. While the FHFA does not have the authority to ban covenants for private transfer fees, the final rule effectively ensures they will no longer be used by banning Fannie Mae, Freddie Mac, and Federal Home Loan Banks from buying mortgages with private transfer fee agreements.
In addition, nearly 40 states have banned private transfer fees.
Private transfer fees paid to homeowners associations and certain not-for-profit organizations are not included in the rule. The rule does make an exception for fees that are used for the benefit of the residents of the property, with specific definitions for the benefits.
IREM Position:
IREM understands the opposition to private transfer fees* that are hidden fees and serve no benefit to the community or residents of the condo or homeowner association. However, many such fees are disclosed and are used to the benefit of the residents. We believe limiting the use of such fees could limit the amenities and benefits available to residents. Therefore, IREM recommends that FHFA and FHA include an exemption for those associations who fully disclose their fees, and who utilize those fees for the direct benefit of the community.
* Exempt from the term “transfer fee” are fees that are paid directly to the property management company, bookkeeping company, whomever is handling the association's ownership lists, accounting books and records and generation of the new owner information packages. The fee is not paid to the Association, nor are these fees included in the annual budget creation.
These fees are charged in direct relation to the additional services required when there is an ownership change. The additional bookkeeping tasks of closing the previous owners ledger / account, setting up the new owners for accounting purposes, mailing the new owner information or a new owners packet, possibly recoding entry systems, providing key fobs, gate keys or gate openers, etc.
The fee is not used, or depended upon, as a source of income to the benefit to the community association or the residents. The fee is not a revenue stream for the association to be used for operating costs or long-term component replacement reserves, as the fee is not paid to the association. The fee is earned and paid to the entity performing the additional tasks that are required purely as a result of the sale transaction.
All costs incurred by the management company, bookkeeping company etc are disclosed to real estate agents when they seek the association's governing documents and also to the escrow / title company prior to the close of escrow.
(Adopted 10/10, updated 1/21/14)
Small Business Administration’s 504 Refinancing Program
Background and Objective:
Under the Small Business Jobs Act, the Small Business Administration (SBA) enacted a temporary program allowing small businesses to refinance eligible fixed assets in its 504 program. The program commenced on February 17, 2011 and began accepting applications for loans on February 28. This program provided small businesses the opportunity to lock in long-term, stable financing, and finance eligible business expenses as well as protect jobs and hire additional workers. It was estimated that nearly 8,000 businesses across the United States took advantage of this program. The temporary program provided up to $7.5 billion in SBA-guaranteed financing, with a total project cost of $17 billion.
This temporary program is not to be confused with SBA’s 504 permanent loan program approved under the American Recovery and Reinvestment Act (Stimulus) in 2009. The temporary program expired on September 27, 2012 and was not extended via legislation.
IREM Position: IREM supports this temporary refinancing program as it provides loans to small business owners, and could particularly be effective in the real estate sector. It is crucial for commercial real estate practitioners to consider utilizing this program. Financing from commercial banks is sparse. Small business owners may use the 504 refinancing loans for employee salaries, rent, utilities, inventory, pay off or down credit debt, or other financial obligations.
IREM supports the reintroduction of legislation in Congress that would extend this program for one more year. Further, IREM supports the lobbying efforts to get this legislation passed and implemented as small businesses are in dire need of critical refinancing.
(Adopted 10/12)