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May 2010
HIGHLIGHTS
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SENATE-PASSED DERIVATIVES REFORM PROPOSAL CONTINUES TO THREATEN END-USERS
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SENATE ADOPTS NAREIT-SUPPORTED AMENDMENT TO PRESERVE FEDERAL PREEMPTION OF PRIVATE PLACEMENT SECURITIES OFFERINGS
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PROPOSED NEW TAX TREATMENT FOR CARRIED INTERESTS LIKELY TO BE VOTED ON SOON, UPREIT CONCERNS ADDRESSED BY LAWMAKERS
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HOUSE WAYS AND MEANS COMMITTEE REVIEWS ENERGY TAX INCENTIVES; LEVIN EXPRESSES SUPPORT FOR REIT FIX
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SENATOR CARDIN INTRODUCES ENERGY GRANT BILL TO BENEFIT REITS
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NEW CLIMATE CHANGE BILL UNVEILED IN SENATE
On May 20, the Senate passed comprehensive financial reform legislation that includes dramatic changes to the over-the-counter derivatives markets. Unlike the derivatives reform proposals that the House of Representatives passed in Dec. 2009, this legislation could significantly limit the ability of REITs and publicly-traded real estate companies to utilize derivatives, such as interest rate swaps, to manage their exposure to risk.
As recently as mid-April, it was expected that Senate Agriculture Committee Chairman Blanche Lincoln (D-AR) and Ranking Member Saxby Chambliss (R-GA) would come to a bipartisan agreement that would provide transparency for the entire derivatives market and protect so-called “end-users” from new clearing and margin requirements that would limit the risk of derivatives dealers, speculators and systemic institutions.
Unfortunately, due to a variety of political pressures, those bipartisan negotiations fell apart, and the proposal passed by the Senate raises significant questions for end-users. Most importantly for NAREIT members, it remains unclear if those entities that own, operate, develop or lease physical assets will be able to avail themselves of protections provided in the bill for “commercial end users.”
As the House and Senate negotiate final legislation to be sent to President Obama for his signature, NAREIT will continue to advocate both for specific provisions that will protect REITs and publicly-traded real estate companies, and – in coordination with its partners in the Coalition for Derivatives End-Users – for more fundamental changes that will protect all derivatives end-users. For more information on NAREIT’s efforts, CLICK HERE.
If you would like to participate in this advocacy, please contact Kirk Freeman, Senior Director, Government Relations at kfreeman@nareit.com.
The comprehensive financial regulatory reform legislation, passed by the Senate on May 20, will preserve the Federal preemption of private placement securities offerings utilized by many U.S. companies, including listed and public-registered, non-traded REITs. As a result of NAREIT’s advocacy, senators unanimously supported an amendment to the bill that removed a provision allowing states to impose their own set of regulations on private securities offerings.
Last month, NAREIT joined the U.S. Chamber of Commerce, the Real Estate Investment Securities Association, the Investment Program Association, The Real Estate Roundtable, the Financial Services Roundtable, the Private Equity Council, and the Securities Industry and Financial Markets Association in sending a letter to all members of the U.S. Senate indicating that Section 926 of the financial regulatory reform bill would “significantly harm the ability of companies to raise capital and expand their enterprises through private placements” pursuant to Rule 506 of Regulation D ("Reg D") of the Securities Act of 1933. To view the letter supported by NAREIT, CLICK HERE.
Rule 506 offerings have become an important method by which companies raise money privately from investors. In 1996, as part of the National Securities Markets Improvement Act (NSMIA), Congress provided a federal preemption from state securities laws, known as “Blue Sky laws,” for securities covered under Rule 506. As initially written, the Senate bill would have effectively repealed this preemption by allowing individual states to impose their own, unique requirements on any securities that the SEC did not determine to be preempted after 120 days of consideration. NAREIT and the other signatories to the letter believed the current proposal failed to acknowledge the critical importance of private placement financing at a time when capital is already scarce.
On May 17, the Senate unanimously approved an amendment offered by Sen. Kit Bond (R-MO) to replace the language in Section 926 with wording that disqualified felons and bad actors from participating in Rule 506 offerings, while protecting legitimate private offerings. NAREIT worked with the staffs of Senate Banking Committee Chairman Christopher Dodd (D-CT) and Sen. Bond to craft this amendment, which was cosponsored by seven Senators. In addition, the Bond/Dodd amendment modified the standard for “accredited investors,” or angel or private investors, by adjusting the current standard for net worth of $1 million to exclude the investor’s primary residence. NAREIT and the multi-industry coalition sent a letter supporting the Bond/Dodd amendment to all member of the U.S. Senate prior to its adoption. To view Sen. Bond’s amendment, CLICK HERE; to view the coalition letter supporting the Bond amendment, CLICK HERE.
NAREIT is pleased with this positive development, and appreciates the efforts of Sen. Bond and others to rectify a situation that could have significantly harmed the ability of companies to raise capital and expand their enterprises through private securities offerings. The House financial regulatory reform bill, which passed last December, does not contain any reference to Regulation D or “accredited investors.” Therefore, the upcoming House-Senate conference committee that will negotiate the details of a final bill will either include the Senate’s language in Section 926 or eliminate it from the conference report.
Prior to Memorial Day, Congress is expected to vote on an extension of several popular tax preferences and social programs that have or will soon expire. Faced with requirements to offset any legislation that will reduce tax revenues, Congress continues to seek new revenue-raising measures. In this case, both the Senate and the House plan to turn their attention to taxing partnership interests attributable to investment-related services - also known as carried interests - as ordinary income rather than capital gains.
Previous carried interest proposals that have passed the House of Representatives could have caused immediate recognition of built-in carried interest gains at ordinary income rates in the context of UPREIT "roll ups" or intra-group transfers of partnerships interests that today qualify as tax-deferred transactions. This acceleration of tax could have significantly decreased UPREIT formations as well as contributions to existing UPREITs and DownREITs.
On April 29, representatives from NAREIT and The Real Estate Roundtable met with staff members of the Joint Taxation, House Ways & Means and Senate Finance Committees to discuss the potential impact of carried interest legislation on REITs. As a result of this meeting, the statutory language of a new extenders proposal was released by the Ways and Means Committee on May 20 that could be considered by the House as soon as next week. In this draft, a new section has been added which would allow an election under which a services partner who contributes his or her carried interest to a partner could defer the recognition of his or her gain. Another new section would provide a similar rule for partnership distributions. To review the statutory language of this proposal, CLICK HERE.
On Apr. 14, the House Ways and Means Committee held a hearing entitled “Energy Tax Incentives and Green Job Economy.” NAREIT submitted written testimony for this hearing and requested that appropriate attention be paid to REITs as Congress considers tax incentives to promote energy efficiency. To view the statement, CLICK HERE.
Specifically, NAREIT has been working with lawmakers to eliminate many of the barriers that prevent REITs from taking full advantage of current or proposed energy tax incentives. Among several items, NAREIT supports H.R. 4599, the “Renewable Energy Expansion Act of 2010,” introduced by Rep. Earl Blumenauer (D-OR), which would provide a refundable tax credit for investments in renewable energy projects entered into before Jan. 1, 2013. This proposal is likely the best way to extend an expiring energy grants program authorized in last year’s economic stimulus bill. H.R. 4599 includes language authored by Rep. Linda Sanchez (D-CA) that would allow REITs to receive this incentive without regard to the dividends paid deduction. For more information on H.R. 4599 and the proposal by Rep. Sanchez, CLICK HERE.
NAREIT is pleased that multiple times during the hearing, Rep. Blumenauer highlighted the REIT-specific provisions in his bill and encouraged the invited witnesses and his colleagues support its enactment.
On Apr. 29, Sen. Ben Cardin (D-MD), a member of the Senate Environment and Public Works Committee, and co-chair of the Congressional Real Estate Caucus, introduced legislation to allow REITs to fully participate in the expiring energy grants program authorized in last year’s economic stimulus law.
S. 3289, the “Sustainability Grants Program Act of 2010,” is identical to legislation in the House of Representatives authored by Rep. Linda Sanchez (D-CA) and included in H.R. 4599, the “Renewable Energy Expansion Act of 2010” (see reference above). S. 3289 has been referred to the Senate Finance Committee and awaits further action. To view S. 3289, CLICK HERE
NAREIT will be working with Sen. Cardin’s staff to secure additional cosponsors in the coming weeks.
Sens. John Kerry (D-MA) and Joseph Lieberman (I-CT), have released the details of the “American Power Act”, a comprehensive proposal they authored to address issues related to climate change. For more information on this proposal, CLICK HERE.
An initial review of the proposal indicates that it does not contain provisions harmful to the real estate community similar to those that were included in H.R. 2454, the “American Clean Energy and Security Act,” which passed the House of Representatives in June 2009. For example, the prior proposal included provisions related to building codes, labeling, and retrofitting incentives, that caused concern for real estate interests.
It appears the Kerry-Lieberman proposal will also be silent on tax incentives promoting energy efficiency in commercial buildings that have been introduced this Congress. NAREIT will closely monitor this proposal to determine its long-range impact on REITs and the publicly traded real estate community.
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