Member Services - Government Affairs

President Bush signed the Tax Prevention and Reconciliation Act, H.R. 4297, on May 17, 2006. The law contains a key provision that was strongly supported by the CCIM Institute because of its impact to commercial real estate professionals, which extended tax cuts on dividends and capital gains for an additional two years. Under prior law the current 15% capital gains rate was set to revert to 20% at the end of 2008. The Act extends the rates through 2010.

Favorable capital gains tax rates provide a boost for owners who wish to sell appreciated property. Lower rates alleviate the so-called “lock-in” effect, in which taxpayers are hesitant to sell property due to the high tax costs associated with sales. Also, lower capital gains rates alleviate in part the built-in gain that results from inflation.

CCIM Institute 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 creates a meaningful differential between the tax rates for ordinary income and those for capital gains. Additionally, CCIM Institute supports a level playing field for those who choose to invest in real estate and thus opposes rates for depreciation recapture that are higher than capital gains rate.

CCIM Institute’s Members Give Their Input On Carried Interest Bill

The financial press has pointed out that private equity markets are not subject to any federal or state financial or securities regulation. In addition to regular compensation, private equity and hedge fund managers receive a share of the profits, called “carried interests,” that are currently considered investment income and taxed as long-term capital gains. Now carried interests are receiving Congressional scrutiny.

In July 2007, U.S. Representative Sander Levin, a Michigan Democrat, introduced legislation, H.R. 2834, that treats carried interests as ordinary income taxable up to 35%. This would be a dramatic tax increase from the present law, which taxes capital gains and carried interests at 15%. The proposed bill has created concern amongst the real estate community because it is likely to have an adverse impact on most real estate partnerships.

When the carried interest bill initially was introduced, CCIM’s Government Affairs staff asked members for their thoughts and comments regarding this bill. CCIMs agreed that this tax increase would dampen their business by driving investors to put their money elsewhere such as stocks with much more favorable treatment. Thus, this would essentially diminish the value and/or put many partnerships out of business because the capital would not be there to facilitate them.

Moreover, CCIMs raised concern over the fairness of this proposed capital gains bill. The real estate business is filled with risks, including economic, market, environmental, and many more. Changing the tax policy to affect prior arranged transactions punishes all real estate partners by causing a totally different economic result to the parties involved than what was agreed with in advance.

CCIM Institute supports a meaningful differential between tax rates for ordinary income and the tax rates for capital gains.

The companion bill in the Senate, S. 1624, focuses only on private equity and hedge funds and applies exclusively to publicly traded partnerships. While the carried interest legislation originated in the House, the Senate Finance Committee was the first to hold hearings on the subject. Nonetheless, on September 6, 2007, the House Ways and Means Committee held its first hearing on carried interests, with testimony from both sides of the issue. The issue is likely to continue to be a hot topic and House and Senate leaders have all promised further discussion.

IRS Announces Stricter Scrutiny On Audits Of S-Corporations

After reviewing the results of a study to assess the reporting compliance of S corporations, the Internal Revenue Service (IRS) recently revealed that it will concentrate more on audits of S corporations. According to the National Association of REALTORS ® (NAR), the IRS will put more emphasis on compliance with payroll tax requirements as well as the accuracy of compensation and dividend allocations for owner-employees. Also, the IRS plans to increase its focus on appropriate classification of independent contractors.

The reason for this tighter scrutiny is because the IRS believes that self-employed individuals who both own and are employees of an S corporation are underpaying compensations to themselves, which lowers their payroll taxes. In contrast, the IRS speculates that individuals are over-compensating themselves in allotments of dividends because they are exempt from payroll taxes and are taxed at lower rates.

Unlike most other small business categories, real estate practitioners enjoy the safeguards of a law that controls the classification of workers as independent contractors. As long as they have a valid real estate license and a written agreement with the broker, sales agents will be treated as independent contractors. Additionally, all or most of their earnings should be a commission based on sales rather than number of hours worked.

Cost Recovery Period For Leasehold Improvements Set To Expire

Congress has anticipated a review of depreciation since 2000, but other tax policy debates have intervened. Currently, the 15-year cost recovery period for leasehold improvements has been extended, but expires on December 31, 2007. If no legislation is passed prior to this date, the leasehold improvement depreciable life of nonresidential property will jump to 39 years.

A 39 year depreciable life for tenant improvements is unrealistic. A realistic cost recovery period, such as 10-15 years, is a reasonable incentive to keep office, commercial, and retail space modern, efficient and competitive between urban and suburban space. In addition, such a change would more closely mirror corresponding lease terms for these properties.

CCIM Institute and IREM members lobbied their legislators during the 2007 Capital Hill Visit Day in support of H.R. 1591, an appropriations bill that included a leasehold improvement provision. Unfortunately, H.R. 1591 was vetoed by the President on May 1, 2007. The House vote (222 to 203) to override the veto fell short of the 2/3 vote (290) required.

CCIM Institute is in support of legislation to decrease the length of depreciable lives for tenant improvements to the length of the lease term. CCIM Institute also supports legislative language that would allow any remainder of tenant improvement costs left upon early termination of the lease to be written off upon the termination of a lease, not over the depreciable life of a structure. Additionally, CCIM Institute supports legislation that would reduce the tax on depreciation recapture to the capital gains tax rate of 15%.

U.S. House Likely To Vote On Terrorism Insurance Bill

The CCIM Institute is concerned about the escalating insurance costs and the lack of coverage for events related to terrorism and war. CCIM Institute and IREM members lobbied their legislators during the 2007 Capital Hill Visit Day to extend the Terrorism Risk Insurance Extension Act (TRIEA) that provides a federal backstop for commercial property and casualty insurers arising from terrorism. The program is necessary in order to avoid economic slowdown and to provide adequate economic protection against terrorism. The private market has not yet shown that is capable of providing this insurance on its own at an affordable price.

Because the present terrorism insurance is set to expire on December 31, 2007, Congress has held several hearings dealing with this issue throughout the year. On August 1, 2007, the House Financial Services Committee marked up H.R. 2761, the “Terrorism Risk Insurance Revision Act of 2007.” During the markup, H.R. 2761 was amended to extend the federal backstop program for 15 years. The program makes coverage available for nuclear, biological, chemical or radiological attacks; requires the Treasury Department to report on the terrorism insurance market every 2 years, including analysis of terrorism insurance pricing impacts on commercial real estate; and establishes a blue ribbon commission tasked with recommending a long-term private market solution.

The House will likely vote on H.R. 2761 this September and legislation is expected to be introduced in the Senate shortly thereafter. CCIM Institute participates in a coalition which supports this bill. The CCIM Institute will continue to work for introduction and passage of this important legislation.

Banks In Real Estate

In June the House of Representatives included in their Appropriations bill a one-year provision prohibiting the Federal Reserve and Treasury Department from finalizing a rule allowing banks to engage in real estate brokerage and management.

In July, the Senate Appropriations Committee approved language in the FY2008 Financial Services and General Government Appropriations bill that permanently prohibits national bank conglomerates from entering the real estate brokerage, property leasing and management business. This is the fourth year that the Senate Appropriations Committee has supported the permanent ban provision. The full Senate is expected to consider the FY2008 Financial Services and General Government Appropriations bill in late September.

Once the Senate passes its bill, CCIM Institute and NAR will urge conferees to keep the Senate [permanent ban] language in the final bill.

U.S. Senate and House Must Find Compromise On Energy-Efficiency Legislation

This summer the U.S. Senate and House each passed its own energy bill and the two bills vary greatly. The Senate’s comprehensive energy legislation, which passed by a vote of 65 to 27 on June 21, promotes a major expansion of renewable fuels and energy efficiency. Unfortunately, the Senate bill, as passed, does not extend the energy efficiency tax deduction for commercial buildings that the CCIM Institute supports.

Fortunately, the House bill does extend the tax deduction for energy-efficient commercial building expenditures through 2013. The Renewable Energy and Energy Conservation Tax Act of 2007 (H.R. 2776) amends the Internal Revenue Code provisions relating to renewable energy sources and energy conservation. H.R. 2776 passed the House by a vote of 221 to 189 on August 4.

The two chambers are now challenged to find a compromise. Democratic leaders are not expected to name conference committee members until October. But before there can be a conference, one chamber will have to pass the other chamber’s bill. At this time the President is not in favor of either bill.

Legislation Creates A Zero-Net-Energy Goal For Commercial Buildings

When the U.S. House Energy and Air Quality Subcommittee marked up an energy proposal in late June, the real estate coalition immediately sent a letter to the House Energy and Commerce Committee Chairman John Dingell and Ranking Member Joe Barton expressing the coalition’s concern for sections of the proposal. The coalition stated that it believed the proposal’s “zero-net-energy commercial buildings goal” to be problematic because the concept of developing and retro-fitting buildings to zero net energy standards is unrealistic and the strict timetable to achieve these goals is unattainable.

In August, the U.S. House passed the Renewable Energy and Energy Conservation Tax Act of 2007—H.R. 3221—passed by a vote of 241 to 172. The legislation includes a “zero energy commercial buildings initiative” that instructs the Commercial Director, in partnership with the Consortium, to study and refine a national goal to reduce commercial building energy use and achieve zero-net-energy commercial buildings. Unless the director concludes that the goal is unachievable or unrealistic, the goal will include the following objectives:

All new commercial buildings constructed after the beginning of 2025 must be zero-net-energy commercial buildings;
By 2035, 50 percent of the then existing stock of commercial buildings that were constructed before 2025 must be zero-net-energy commercial buildings; and
By 2050, all commercial buildings must be zero-net-energy commercial buildings.

New Law Includes 9/11 Commission Report Recommendations

On August 16, 2007, President Bush signed into law the “Implementing Recommendations of 9/11 Commission Act of 2007” (H.R. 1), which includes a provision that requires the Department of Homeland Security (DHS) by spring, 2008, to set up a program for certifying private sector entities as meeting a “voluntary” national standard for emergency preparedness. Because the legislation was in fact the 9/11 Commission Report, it quickly moved through the Senate for final passage with no debate or hearings.

This law mandates DHS adopt a voluntary private sector accreditation and certification standard that promotes emergency preparedness, that may be customized to fit the unique characteristics of various industries within the private sector, including real estate. In order to carry out its certification program, DHS is required to select a qualified nongovernmental entity to accredit qualified third parties who will actually perform the certification of real estate. DHS is expected to adopt the National Fire Protection Association (NFPA) 1600 standard or a similar standard.

Although the new law is voluntary, the law could lead to several end results. It may become the market and legal standard of care in the real estate industry. Most importantly for real estate practitioners, the standard may allow for the insurance and credit-rating industries to look closely at a company’s compliance with the NFPA standard or any other DHS selected standard in evaluating its insurability and creditworthiness. CCIM Institute members will consider a new Statement of Policy on the issue at the CCIM Institute fall business meetings.

Flood Insurance Reform Bill Passes U.S. House Committee

Congress is considering legislation that would make a number of reforms to the National Flood Insurance Program (NFIP) and separate legislation to create a national disaster program.

In July, the House Committee on Financial Services passed H.R. 3121, the Flood Insurance Reform and Modernization Act of 2007, by a vote of 38-29. The bill makes a number of significant changes to the NFIP, including a provision to encourage real estate managers to provide notice to tenants of the availability of contents insurance. The bill would also include optional coverage for wind. Full House consideration is expected this fall. There is no companion in the Senate as of yet, but they are expected to consider legislation this fall as well.

On the disaster front, the House Financial Services Committee is expected to mark up H.R. 3355 the “Homeowners' Defense Act of 2007” in late September. NAR testified on September 6 in support of the bill before a joint hearing of the House Committee on Financial Services Subcommittee on Housing and Community Opportunity and Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. The bill has two key elements: (1) A National Catastrophe Risk Consortium and (2) a program to make liquidity and catastrophic loans to state or regional reinsurance programs after a natural catastrophe. Both of these programs would enhance a state’s ability to institute disaster mitigation activities, support the availability and affordability of insurance, and help states and property owners recover faster after a disaster strikes. The bill has the support of Committee Chairman Barney Frank (D-MA) and may be debated and voted on by the Committee on Financial Services before the end of September. House leadership has expressed support for the bill and promised a vote by the full House after it is passed in committee. There is no companion bill in the Senate.

Employer Provided Health Insurance

Employer-provided health insurance continues to decline according to Census figures recently released. The percentage of Americans covered by employer-based health insurance fell to 59.7% in 2006, compared to 64.2% in 2000 and 60.2% in 2005. Census officials believe the continuing decline in employer-sponsored health insurance is a major factor in the increase in the number of uninsured Americans. In 2006, 47 million Americans were without health insurance.

This year in the United States the cost of employer provided health insurance rose 6.1% according to annual survey released on September 11 by the Kaiser Family Foundation. Although that is the smallest increase since 1999, it is still above the rate of inflation.

California State Legislature Passes Health Care Reform While Governor Schwarzenegger Pushes For Universal Health Care

The California Assembly passed a health care reform bill, A.B. 8, by a vote of 45 to 31 on September 10, 2007. Both chambers of the state legislature voted along party lines, with Republicans unanimously opposed. A.B. 8 will now be sent to the Governor for his signature. However, Gov. Arnold Schwarzenegger has pledged to veto the legislation. The Governor still plans to call a special session to address the issue.

The Governor has his own plan for universal health care, which he announced in January. This year he has been unsuccessful in persuading state legislators on both sides of the aisle to accept his universal health care plan.

The special session will give the Governor time to negotiate a deal with the Democrats who are in the majority. One point of disagreement is how to finance an expansion of health care. They disagree over who should carry the burden—individuals or employers. The Democrats’ approach is to primarily finance their plan through the contributions of employers, who would have to pay 7.5% of payroll or spend that amount on employee health care. Under the Governor’s plan employers would be charged 4%. His plan would receive more funding from a variety of sources, including hospitals, doctors, employers, individuals, and the federal government. Republicans are opposed to how both the Democrats and the Governor plan to fund their health care plans.

Small Business Health Care Crisis Acknowledged By U.S. Senate

Fast rising health insurance premiums and small profit margins have made it increasingly difficult for small businesses and the self-employed to afford health insurance. In 2006, more than 350,000 real estate practitioners were uninsured, according to the National Association of REALTORS ® (NAR).

Small business health plans (SBHPs) would permit real estate practitioners to come together through their association and negotiate for health insurance coverage, thus creating a larger pool of participants. These larger pools, in turn, increase the bargaining power of the associations and their members. With increased negotiating power and a larger pool of participants, SBHPs could increase the availability of affordable health insurance for the real estate community.

While the favorable SBHP legislation (S. 1955) was able to gain a hearing in the Senate, the change in Congressional leadership in 2007 and the opposition of the new chairs of committees with jurisdiction over health issues have made it less likely that S. 1955 will pass. However, on August 2, 2007, the Senate passed a resolution recognizing that there is a crisis in attaining accessible and affordable health insurance for small businesses. The resolution states that the Senate should act this year and provide a solution that offers a market-based solution for the self employed and small businesses. While this resolution does not fix the health insurance problems faced by small businesses, it is a commitment by the Senate to work together on a plan to provide affordable health insurance to the self-employed and small businesses.

National Affordable Housing Trust Fund

In July, the House Financial Services Committee passed H.R. 2895, the “National Affordable Housing Trust Fund Act of 2007” by a vote of 45-23. This bill, introduced by Reps. Barney Frank (D-MA) and Jim Ramstad (R-MN) will create a national fund to be used for to produce, rehabilitate, and preserve affordable housing. Eligible recipients of funds include any organization, agency, or other entity, including for-profits, nonprofits, and faith-based organizations, that have demonstrated the experience and the capacity to carry out the proposed Trust Fund activity. The Trust Fund would not require an annual appropriation, as it would take monies from profits generated by the GSEs and from income derived from the FHA HECM program. This bill expected on the House floor in early September. There is no companion bill in the Senate.

Methamphetamine Labs

In June, the Senate Committee on Environment and Public Works passed S. 635, the Methamphetamine Remediation and Research Act of 2007, by unanimous voice vote.

The Senate is expected to pass the bill later this year. The Senate bill is a companion bill to legislation passed overwhelmingly (426-2) by the House of Representatives in February (H.R. 365).

Forced Access Back Before The FCC

In March the FCC published a notice of proposed rulemaking (NPRM) on banning exclusive contracts in multiple tenant environments. This new proposal would deprive property owners of a valuable tool for providing their residents access to the kinds of services they want, and would exceed the Commission’s authority. The CCIM Institute believes that private competition and free enterprise are the best means by which to provide a level playing field for all telecommunications service providers and to ensure that the telecommunications needs of occupants are being met. We expect a final order to be published this fall.

FCC Eliminates Barriers To Competitive Entry For Cable Providers In MDUs

On August 30, 2007, the Federal Communications Commission (FCC) announced a new rule which removes barriers to competitive entry in multiple dwelling units (MDUs) and in multiunit premises when a new cable provider seeks to compete against an incumbent supplier. However, the FCC categorized sheet rock as “physically inaccessible” for any cable provider due to the physical difficulty and cost associated with accessing cable wires.

The new rule is intended to help consumers living in MDUs to enjoy the social and economic benefits of cable service competition. However, this may likely create added costs for building owners, which then may be passed on to their tenants, for expansion and renovation of riser cable space. The CCIM Institute is opposed to unrestricted access to buildings by service providers, which would require building owners to guarantee building access to a potentially unlimited number of service providers and assume much, if not all, of the costs and liabilities associated with such access.

Smoking Bans Spread Across The Country

An increasing number of cities and states are enacting smoking bans in an effort to reduce second-hand smoke. According to the American Lung Association, second-hand smoke can cause or exacerbate a wide range of adverse health effects, including cancer, respiratory infections, and asthma. Non-smokers exposed to secondhand smoke in their workplace are at an increased risk for those adverse health effects. Levels of second-hand smoke in restaurants and bars were found to be two to five times higher than in homes with smokers and two to six times higher than in office workplaces.

To find out what the law is in your state, see the chart of state smoking bans below. If your state does not have a smoking ban, you may want to inquire with your town or city to find out if there is a local ban in effect.

What To Do When Your Employee’s Social Security Number Does Not Match Up

The Department of Homeland Security (DHS) recently released its final rule, effective on September 14, on safe-harbor procedures for employers who receive a no-match letter, which is a correspondence that an employer receives from the Social Security Administration (SSA) stating that the SSA is unable to match the name and social security number (SSN) provided for a specific employee to its records.

The U.S. Immigration and Customs Enforcement amended regulations relating to the unlawful hiring or continued employment of unauthorized aliens. The regulations describe the legal obligations of an employer when the employer receives a no-match letter from the SSA or a letter from DHS. Additionally, the regulations describe safe-harbor procedures that the employer can follow in response to such a letter. CCIM Institute members may find the specific steps employers can take after receiving a letter useful.

The final rule adds two more examples to the current regulation’s definition of “knowing” to illustrate situations that may lead to a finding that an employer had constructive knowledge. The new examples follow:

The employer receives a written notice from the SSA that the combination of the name and SSN submitted to SSA for an employee does not match agency records.
The employer receives written notice from DHS that the immigration status or employment-authorization documentation presented by the employee in completing Form I-9 was not assigned to the employee according to DHS records.

Proposal For Mandatory Inspections With A Fee Announced By A Kansas Town

In the past several years, state and municipal governments have found themselves in the position of having to fund a greater number of programs with declining tax revenues. One of the avenues they have turned to in order to fill this financial gap has been the imposition of rental housing inspection and registration programs. Most often, cities seeking to implement these requirements do argue that their aim is to regulate the housing market in order to ensure that units are safe and well maintained. Property owners and managers, however, know that the rental housing market is an extremely competitive one, and if they do not maintain their property, they will be unable to attract tenants and the value of their property will decline. Furthermore, there are multiple laws already on the books that are aimed at ensuring the quality and safety of the housing stock.

Recently, the city of Emporia, Kansas announced a proposal which charges a $10 annual fee per unit and an additional fee (amount to be determined) for mandatory annual inspections of each unit. If an apartment does not pass an inspection, then the real estate owner or manager would have to pay between $25 and $500 for non-compliance. Then, the real estate owner or manager would have six months to fix the problem before the inspectors returned. The re-inspection fee would be an additional $75.

The Emporia City Commission is aware of the financial burden this proposal would have on tenants in addition to apartment owners and managers. Commissioners have told real estate managers that they understand that the fees will likely be passed on to the tenants. The CCIM Institute and IREM will continue to monitor this issue very closely.

Fire Sprinklers Proposal Gets Voted Down By International Code Council

In May 2007, delegates to the International Code Council voted down a proposal to mandate fire sprinklers in new single-family construction. The outcome of the vote maintains the fire sprinkler provisions in the appendix of the International Residential Code, allowing the provision to be voluntary for local governments to follow. Although the proposal was struck down, many local governments currently require fire sprinklers in buildings ranging from commercial to residential.

Properly installed and maintained sprinkler can effectively fight the spread of fires in their early stages before they can cause severe injury to people and property damage. Though costly to install sprinklers in new construction or retrofit in existing buildings, managers and owners can benefit from reduced insurance premiums, reduced liability, tax deductions, and increased life safety.

The CCIM Institute believes that there should be additional incentives to make sprinkler installation a cost effective option for building owners. It is important to remember relying solely on sprinklers for fire protection can result in unnecessary death and property destruction; additional life-safety measures need to be taken. Property owners and managers need to stay informed on life-safety issues and laws and be pro-active in order to protect their businesses, lives of tenants, and the property.

Copper Theft Is On The Rise

Over the last two years metal theft, particularly copper, has been on the rise. A surge in the global demand for scrap metal motivated thieves. As of September 6, 2007, the price of copper was $3.36 a pound. The cost has actually gone down from a high of $4.04 per pound in May, 2006. Across the country thieves have been stealing air conditioners for the copper coils. Thieves have been stealing air conditioning units from homes and buildings. Boldly, they are going so far as stealing HVAC systems from rooftops of buildings, costing building owners thousands of dollars to replace the systems. Environmental concerns have also arisen. Authorities are concerned about the refrigerant that is being illegally released into the atmosphere when thieves strip air-conditioners.

Thieves are not limiting themselves to HVAC systems and air conditioners. Phone companies have reported thieves stealing copper wiring from cell towers and land lines. In Tennessee, copper thieves have stolen copper vases from cemetery graves and air conditioners from churches. In their search for scrap metal, thieves will pry aluminum siding off houses and sell rented stainless steel beer kegs. In addition, they are willing to steal one hundred pound iron manhole covers.

New Jersey Is Working On A Green Building Manual

The Governor of New Jersey signed green building legislation, with an immediate effective date, into law on August 6. The New Jersey Community Affairs agency is authorized to prepare a green building manual for the purpose of ensuring that standards are available for those owners and builders who participate in any program that encourages or requires the construction of green buildings. "Green building" is building construction practices that significantly reduce or eliminate the negative impact of buildings on the environment and their occupants. The manual must include federal guidelines and regulations for energy efficiency in building construction of residential and commercial buildings. In addition the manual is expected to include topics from the following five broad areas: sustainable site planning; safeguarding water and water efficiency; energy efficiency and renewable energy; conservation of materials and resources; and indoor environmental quality. The manual will be made available to the public.

Find Out What New State Laws Have Been Enacted

Use the CCIM Institute State Legislative Database to see which bills in your state became law. Check out the member exclusive service by visiting CCIM Institute State Legislative Database.

If you have any questions, please contact the CCIM Institute Legislative Liaison, Vijay Yadlapati, at (800) 837-0706 extension 6033 or vyadlapati@cciminstitute.com.

Volume XII, Number 3 - September 2007

Capital Gains Tax Update