IREM LA Chapter No. 6

LEGISLATIVE UPDATE

Contact: Kim Hosea: (213) 673-8869 or kim.hosea@cnb.com

Summary Of 2009 Legislative And Regulatory Victories
IREM had a number of legislative/regulatory victories this year. The big Banks in Real Estate fight finally ended – and we won! On March 11, 2009, President Obama signed into law the FY2009 Omnibus Appropriations Act that permanently prohibits banks from entering the real estate brokerage and management businesses. IREM had worked hand in hand with NAR to block the proposed rule ever since it was published in January 2001 by convincing Congress that the rule was inconsistent with banking law, bad for consumers, and bad for banking.

IREM also had a victory in the House-passed Energy bill. This bill originally included energy audits of all properties, required energy labels for all buildings, and disclosure of all findings at sale or lease of the property. The final version of the bill, H.R. 2454, does NOT have an audit requirement, and only requires energy labels for new construction. This was a major victory which required lots of political manpower – including being an issue at the 2009 Capitol Hill Visit Day. IREM continues to work with Senators to ensure the same harmful provisions are not included.

IREM had another victory from the 2009 Capitol Hill Visit Day with the announcement that the Troubled Asset-backed securities Loan Facility (TALF) program would be extended into 2010 and would be expanded to cover commercial mortgage-backed securities (CMBS). In November the first new CMBS in 18 months was sold under the TALF program and more loans are in the pipeline. IREM has a new statement of policy related to the economic stimulus and commercial real estate. The full statement can be found on IREM’s website. In short, it promotes the availability of small business loans, Short-term loans for capital improvements, and refinancing for mortgages. Additionally, IREM encourages Congress and the federal government to consider the following goals: Stabilize and Provide Liquidity to the Commercial Real Estate Credit Markets, Including Mortgage-backed Securities; Maintain or Enhance Federal Tax Policies that Strengthen the Commercial Real Estate Market; and Stimulate and Support the Commercial Real Estate Industry through Investment.

IREM also passed a new policy motion related to tenant notification in foreclosure. IREM believes notification of tenants is important whenever displacement may occur. We would support requirements that banks and lending institutions be required to notify tenants of a pending foreclosure on the property. IREM would support that tenants, if all rents are paid and current, and are in compliance within all other requirements of the lease, could remain in the property through the end of the lease, assuming the subsequent owner does NOT intend to use the property as a principal residence. Legislation became law on May 20, 2009 that provides this notification requirement.

Status Of Energy Reform
Energy reform and environmental concerns have been a stated priority of the Obama administration since he began his campaign for president. Since his election, President Obama has made clear his expectations for legislative action on environmental policies. While the House of Representatives passed comprehensive legislation known as the American Clean Energy and Security Act of 2009 (H.R. 2998, the Waxman-Markey bill), the Senate has yet to pass their own energy bill.
Senators John Kerry and Barbara Boxer introduced legislation known as the American Clean Energy Jobs and American Power Act (S. 1733, the Kerry-Boxer bill), which is intended to serve as the accompanying bill to H.R. 2998. Unlike the House bill, which included comprehensive energy and climate goals, the Senate bill focuses primarily on reducing greenhouse gas (GHG) emissions. Key areas where the Senate bill differs from the House bill include the 2020 reduction target and preemption of Environmental Protection Agency (EPA) regulatory authority.

The Kerry-Boxer bill creates more aggressive standards for reductions in GHG emissions, setting reduction requirements at 20%, as opposed to the 17% reduction requirements established by the House bill. Both bills use a 2005 baseline for reductions. Additionally, the Waxman-Markey bill supersedes EPA regulatory authority, while the Kerry-Boxer bill retains EPA authority.

An important similarity between the Waxman-Markey and Kerry-Boxer bills is the omission of real estate energy labeling requirements. As originally drafted, the Waxman-Markey bill would have required energy audits for all buildings and homes, would have required that these buildings be labeled and the energy rating label be disclosed a time of lease and/or sale, and would have allowed any citizen to bring a private right of action against any entity that contributes to global warming. IREM members successfully lobbied members Congress during the 2009 Hill Visit, educating them on the negative effects that labeling poses to the real estate industry.

Currently, the Kerry-Boxer bill has met the approval of the Senate Committee on Environment and Public Works, who voted to advance the bill without real estate energy labeling requirements. It is important to note that many of the bill’s details are still being worked out, with some having yet to be specified and others added as it makes its way through various committees.

Tax Treatment Of Carried Interest – Legislative Outlook
On December 10, 2009, the House passed a “tax extenders” bill (H.R. 4123), which includes extensions on a variety of tax breaks that are scheduled to expire at the end of the year. This piece of legislation has several provisions that are beneficial to the commercial real estate industry, such as a 15 year leasehold improvement depreciation extension until December 31, 2010, as well as an extension to the current 50 percent bonus depreciation, allowing property owners to deduct 50 percent of the cost of qualifying property in addition to the regular depreciation allowance that is normally available. Moreover, the bill extends the current $1.80 per sq. ft. energy tax credit for commercial property owners who achieve 50 percent energy savings through energy retrofits. The bill also provides an extension to Brownfields expensing provisions which allow real estate owners to recover environmental cleanup costs in the year they are incurred. While all of these elements of the bill are extremely beneficial to the commercial real estate industry, the House bill also included tax increase that could adversely affect many real estate partnerships in order to help pay for these and other extensions.

Under the House bill, income generated from carried interest could be taxed at a rate of ordinary income (at 35% or more), as opposed to the current capital gains rate (15%). Most general partners with existing carried interests will be penalized under the passed legislation. Extensive rules for carried interests in real estate partnerships are provided, so that some real estate general partners will continue to receive capital gains treatment, while many will face ordinary income treatment.

The loss of capital gains treatment for real estate investment partnerships would turn long-established taxation rules upside down. Real estate partnerships, from the smallest venture to the largest investment fund, have a carried interest component. Approximately $1 trillion of commercial and residential properties are held by partnerships. Changing the tax rates on carried interest from capital gains rates to ordinary income rates would be devastating to these businesses.

Such a tax increase clearly discriminates against real estate compared to other assets and puts it at a greater competitive disadvantage for investment dollars. Additionally, it puts more pressure on a fragile commercial real estate industry already facing a rapid rise in delinquencies and foreclosures, as well as a growing challenge to access credit.

Currently Senate Finance Chairman Max Baucus (D-MT) opposes an increase to the treatment of carried interests, making it unlikely that such a provision will be passed by the Senate. Additionally, the Senate will likely not introduce its own version of the House tax extenders bill until early next year due to the health care debate. Nonetheless, a tax increase could be slipped into any one of the bills that are currently before the Senate. To prevent this from happening, IREM submitted a joint letter with NAR and CCIM Institute urging all 100 Senators to not change the current capital gains treatment of carried interests for real estate partnerships.

Tax treatment of carried interest was one of the issues taken to the Hill last April by IREM members. IREM legislative staff continues to monitor legislation concerning tax treatment of carried interest and is in communication with members of Congress.

CMBS Markets Start To Thaw With The Help Of TALF And PPIP
In a sign of improvement for the commercial real estate industry, the first bond deal backed by commercial real estate debt was sold without assistance from the federal government. The new $460 million commercial mortgage-backed securities (CMBS) deal, which was issued earlier this month by Bank of America, features a more conservative structure and greater safeguards for its investors. This deal follows last month’s first CMBS issuance in more than a year, when Goldman Sachs issued $400 million in CMBS debt that was backed by Developers Diversified Realty Corp. (DDR) properties. The deal was made possible through the government’s Term Asset-Backed Securities Loan Facility (TALF). Like the Bank of America deal, the DDR deal was also conservative in nature, suggesting investors have renewed their appetite for CMBS debt with relatively low risk levels.

TALF was created earlier this year in an effort to thaw the frozen $900 billion CMBS market, which has been a significant source of funding for the commercial real estate industry in the past decade. Under the program, the Federal Reserve provides investors with low-cost loans to buy securities backed by commercial real estate debt. It is estimated that roughly a dozen more CMBS deals are in the works, with most investors hoping to tap into TALF. This includes an expected new issuance of CMBS by JP Morgan which is backed by $500 million in properties owned by Inland Western Retail Real Estate Trust Inc.

Prior to the DDR deal, TALF was viewed as a moderate success because only credit card and auto companies took advantage of the program. CMBS deals have been slow to participate in TALF due to the long-term nature and complexity of putting together these deals, often taking between six months and two years to complete. This prompted the federal government to extend TALF for another six months. The original sunset date of December 31, 2009, was extended to June 30, 2010 for newly issued CMBS (after January 1, 2009). Also, TALF was extended to March 31, 2010 for CMBS sold before January 1, 2009, known as “legacy CMBS.”

Additionally, tight CMBS restrictions in TALF continue to prevent many banks and investors from partaking in the program. Securities eligible for TALF include both new and legacy (issued before January 1, 2009) triple-A-rated CMBS with loan maturities no more than 5 years. However, lower-rated CMBS are not eligible for TALF and continue to clog the balance sheets of many banks, forcing them to take steep write downs, constricting lending even further. Despite these shortcomings, TALF along with another government program called the Public Private Investment Program remain key factors to help promote liquidity and facilitate private lending once again.

The Public Private Investment Program, known as PPIP, is another program created this year by the federal government which aims to revive the dried up credit markets. Under this program, the U.S. Treasury matches capital and offers debt to private firms in order to purchase banks’ toxic assets, such as CMBS.

While PPIP has been plagued by delays, the U.S. Treasury announced late last month that Marathon Asset Management LP was the eighth investment group to raise the $500 million minimum required to qualify for the program. The eight selected firms have raised a combined total of $5.07 billion, which the Treasury will match dollar for dollar. In addition, the government will provide debt financing, which will bring the total purchasing power of PPIP to $20.26 billion.

Although the recent activity in TALF and PPIP is an encouraging sign for the commercial real estate industry, these deals alone will not solve the industry’s huge capacity shortfall in available credit. This lack of capacity – coupled with the downturn in the overall economy, including high unemployment, low consumer confidence and falling property values – threatens the country’s economic recovery and is severely compounded by the fact that more than $1 trillion in commercial mortgage loan maturities are coming due in the next few years. In fact, the inability to secure financing could easily result in increased loan defaults, or the forced sale of properties at greatly depressed prices, creating a ripple effect of financial losses and more job layoffs.

IREM will continue to work with NAR to make sure that the federal government’s initiatives and programs are effective in not only restoring credit capacity and confidence in the commercial real estate credit markets, but also attracting investor participation.

REMIC
On September 15, 2009, the U.S. Department of Treasury issued final guidance for commercial mortgage loans held by a Real Estate Mortgage Investment Conduit (REMIC). Real Estate Mortgage Investment Conduit (REMIC) is 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. REMICs are essentially the vehicle by which loans are grouped into securities.

Regulations implemented over 15 years ago limit commercial property owners with securitized mortgage to reposition their property to meet changing economic trends. Under the new guidance, Revenue Procedure 2009-45 describes the conditions under which modifications to certain mortgage loans will not cause the IRS to challenge the tax status of REMIC’s or investment trusts. In other words, the guidance increases the flexibility given to servicers to modify commercial mortgages within a REMIC by allowing special servicers to make significant modifications without the REMIC losing its tax-free status.

Additionally, the new guidelines permit a change in the terms to be negotiated if, based on all the facts and circumstances, and after meeting the threshold for a qualified loan, the holder or servicer reasonably believes there is a “significant risk of default” of the loan upon maturity of the loan or at an earlier date, and that the modified loan will present a substantially reduced risk of default.

Furthermore, the IRS issued final regulations under 1.860G (T.D. 9463) expanding the list of exceptions that will not be considered “significant modifications” of an obligation held by a REMIC.

The final regulations issued expands the list of permitted exceptions to include changes in collateral, guarantees and credit enhancement of an obligation as well as changes to the recourse nature of an obligation.

Updated IRS guidelines should provide much needed flexibility for owners with properties utilizing REMICs and facilitate better communication and planning between the servicer and the borrower.

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

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

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

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

Accounting Rules Continue To Have Deep Impact On Commercial Real Estate
It is no secret that the credit crisis has put immense pressure on the commercial real estate industry, which threatens to slow the national economic recovery. Liquidity in the commercial real estate market has been considerably hampered by one of its key lending vehicles – the nearly frozen $900 billion commercial mortgage-backed securities market, known as CMBS.

Currently, banks and the CMBS market represent most of all outstanding commercial real estate loans. In addition to banks tightening their loan volumes, the CMBS market has ceased to function with respect to new issuance until more recently. Even with the recent new issuance of CMBS by both Bank of America and Goldman Sachs over the last couple months, the CMBS market continues to be plagued by systemic dysfunction. In fact, the CMBS market provided approximately $240 billion in financing in 2007, which accounted for nearly 50 percent of all commercial lending. Yet in 2008, the CMBS market provided less than $13 billion in financing, despite enormous demand for capacity from borrowers. Without a functional CMBS market, many property owners across the country will face a growing challenge to refinance an estimated $1.4 trillion worth of commercial real estate loans which are set to mature over the next few years.

The liquidity crisis has been exacerbated by certain Fair Value Accounting (FVA) standards, known as Mark-to-Market. In particular, the interpretation and application of FAS 157 led banks to mark down their mortgage-backed securities as they declined in value, forcing them to report hundreds of billions of dollars in losses over the last year. However, in early April 2009, after pressure from Congress, the Financial Accounting Standards Board, known as FASB, voted to change these rules to allow assets to be valued at what they would go for in an “ordinary” sale, as opposed to a forced distressed sale – a step that would lift banks’ balance sheets and thereby encourage greater lending.

While this rule change is encouraging, other FASB accounting rules such as FAS 166 and FAS 167 (formerly FAS 140 and FIN 46(R)) threaten the recovery of the securitized markets. These two new rules, effective on January 1, 2010, eliminate the Qualifying Special Purpose Entity (QSPE), which makes commercial real estate securitization possible. The QSPE enables banks and companies to treat transfers of financial assets as a sale rather than a financing for accounting purposes. This allows firms to keep these transferred assets off balance sheets. However, the new accounting rules would essentially force banks “to bring hundreds of billions of dollars in assets back onto their balance sheets, forcing them to set aside more capital.” These new rules also require a company to perform a qualitative analysis when determining whether it must consolidate.

Worried that these changes could have a detrimental effect on the lending, in November 2009, Representative Scott Garrett (R-NJ) introduced an amendment to conduct a study of the impact of FAS 166 and 167 on the securitization markets during the Financial Services Committee “markup” (analysis) of the Financial Stability Improvement Act of 2009.

IREM will continue to encourage accounting policy makers to fully examine FAS 166 and 167 and consider the far-reaching implication of these changes for the securitized commercial real estate credit markets and the businesses and consumers they serve.

House Financial Services Financial Proposals
In response to the Wall Street activity that many lawmakers view as the cause for the current financial crisis, Rep. Barney Frank and the House Financial Services Committee introduced legislation to tighten regulations on the financial industry. The result of their efforts was the Consumer Financial Protection Agency Act, passed by the House of Representatives on December 11, 2009. Specifically, the bill establishes a new regulatory agency and regulatory standards for financial services companies, and will create a new agency with oversight responsibilities for monitoring the derivatives market.

NAR worked extensively with Congressional staff members to ensure that commercial real estate property managers and brokers would not be affected by new regulations. Staff members assured NAR that commercial real estate managers and brokers were not even a consideration for new regulations, and that the protections being sought through the bill were “business to consumer” protections – not “business to business” protections. Congress defines commercial real estate activities as “business to business.”

Currently, there is no companion bill in the Senate. IREM legislative staff will continue to monitor the legislation’s progress through Congress and will work to ensure consideration for our members’ best interests.

NAR/RCA Commercial Outreach Activity
Last June, IREM and representatives from other leading commercial real estate firms and organizations were brought together by NAR in order to identify commonalities and reach a conceptual agreement on policy priorities aimed to restore liquidity and stability back to the commercial real estate industry.

Since this meeting, coalition members have met to fine-tune its policy statement as well as ways to carry out this message to members of Congress. Members came to a unanimous consensus on a principle-based policy statement, which includes support for the federal government’s Term Asset-Backed Securities Loan Facility (TALF) and Public Private Investment Program (PPIP), as well as favorable federal tax rates and accounting principles that would help revitalize commercial real estate lending. Additionally, group members vowed to work together in both educating and providing lawmakers these policy principles to help them address the commercial real estate liquidity crisis. This would be best accomplished through face-to-face meetings between members of each group participating in the coalition and their lawmakers.

Since then, NAR has organized numerous meetings between Realtors and its coalition partners, with members of the House Financial Services Committee, which oversees lending issues related to the commercial real estate industry. In fact, NAR was able to put together its first successful meeting between Congresswoman Judy Biggert of Illinois and her Realtor constituents. Additional meetings with members of Congress are planned for the coming months and will continue to be scheduled until the flow of credit and stability is fully restored to the commercial real estate industry.

EPA Air Regulations
In the U.S. Supreme Court case of Massachusetts vs. Environmental Protection Agency (2007), twelve states and several U.S. cities brought suit against the EPA to force the agency to regulate carbon dioxide and other greenhouse gas emissions under authorities granted by the Clean Air Act (CAA). Prior to the court case, the EPA argued that they lacked authority to regulate emissions, and therefore would not.

The Supreme Court ruled in a 5-4 decision that the Clean Air Act does give the EPA authority to regulate tailpipe emissions, as well as discretion in regulating carbon dioxide emissions. The decision also required the EPA Administrator to determine whether greenhouse gas emissions contribute to air pollution which may pose a threat or danger to public health.

On December 7, 2009, the EPA finalized findings identifying 6 greenhouse gases that contribute to air pollution that may endanger public health. This is known as the “endangerment finding” and provides the basis for EPA regulation of greenhouse gas emissions under the Clean Air Act. The endangerment finding takes effect on January 14, 2010 when the EPA is expected to institute new federal tailpipe standards for greenhouse gases.

The promulgation of tailpipe emissions regulations for light-duty motor vehicles would automatically trigger greater, overarching regulation of greenhouse gas emissions under the Clean Air Act, specifically Prevention of Significant Deterioration (PSD) and Title V permitting requirements.

Currently, applicability levels for PSD and Title V permitting requirements begin at 250 tons of carbon dioxide equivalent per year. New buildings and buildings undergoing significant modifications would fall under the new rule requirements. Any new or existing source exceeding 250 tons per year without an existing Title V permit would have 1 year to submit a Title V permit application.

On October 27, 2009, the EPA proposed a new rule to tailor applicability standards for greenhouse gas (GHG) emissions from stationary sources under the Prevention of Significant Deterioration (PSD) and Title V programs of the Clean Air Act. Stationary sources include any building or stationary facility that emits greenhouse gases. At current CAA levels, small sources such as small to mid-sized office buildings, apartment buildings, schools, hospitals, and other buildings could be subject to costly and burdensome permitting requirements.

In an effort to establish thresholds that more appropriately target the nation’s largest emitters, the tailoring rule would raise the applicability threshold from 250 tons per year to 25,000 tons per year. In doing so, 90% of the nation’s largest emitters including coal, cement, steel, and electrical plants would fall under the regulatory authority of PSD and Title V requirements. Most small, medium, and even many large commercial buildings would thereby be exempt from EPA regulations.

IREM supports the proposed rule as it is of great benefit to its membership. Higher applicability thresholds will enable most real estate professionals to avoid costly and burdensome permitting requirements. As the United States continues to struggle to overcome the recession, energy regulations that negatively impact the economic and competitive viability of the business community would be of great detriment to the national economy. Efforts by the EPA to more appropriately place the burden of emissions standards on those who contribute the highest level of emissions are in the best interest of IREM members.

Passage Of Health Care Reform Legislation Still Priority For Congress And White House
Due to rising health care costs and lack of insurance coverage across the country, passage of health care reform legislation continues to be the number one priority in Congress and the White House. After months of debate and negotiation, the Democratically-controlled Senate appeared to have come to a tentative agreement on a health care reform bill. This bill aimed to cut the cost of health care and expand health insurance for millions of Americans, and it would have had the 60 votes necessary for final passage.

However, because Senator Lieberman (I-CT) objected to a provision in the bill that would have expanded Medicare to individuals between the ages of 55 and 64, Senate Democratic leaders have been scrambling to revise their health care overhaul bill. Since the majority of Senate Republicans oppose this bill, Senator Lieberman’s vote is vital for its passage.

Under the original agreed upon bill, a “public option,” or a government-run health plan to compete with private insurers, was dropped because it was unpopular with many moderate Democrats. In order to satisfy the liberal wing of the Senate, Democratic leaders added a provision that would have opened Medicare, a government program originally created to provide health insurance for the elderly, to people ages 55 to 64. Specifically, these individuals would have been able to buy into Medicare at subsidized rates, but would likely have paid more than retirees currently served by the program.

In addition to expanding Medicare, the bill would have given the Office of Personnel Management authority to create a new national non-profit health plan. The plan would have been run by nonprofit entities set up by the private sector and would have been accessible to the public through new insurance exchanges. If these private entities were not able to keep insurance costs low, a public option would have been triggered.

Also, the plan would have required most individuals and families to get coverage through their employer, on their own, or through a government-offered plan. Those choosing not to get coverage would have been required to pay a fine. Employers would not have been required to offer coverage, but firms with more than 50 employees would have paid an annual fee of $750 per employee if the government subsidized their employees’ health insurance coverage. Individuals and families making up to 400 percent of the federal poverty level would have been eligible for tax subsidies.

In all, this legislation would have extended insurance coverage to an estimated 31 million Americans currently without coverage at the cost of $848 billion over 10 years. This would have been funded through a Medicare payroll tax increase from 1.45 percent to 1.95 percent on income over $200,000 for individuals and $250,000 for couples. A new 5 percent cosmetic surgery tax, as well as a 40 percent tax on insurance plans with premiums above $8,500 for individual coverage or $23,000 for family plans, would have been implemented to help pay for expanded health coverage.

The House passed its own health care bill in early November. While the House bill contains many of the same provisions as the Senate bill, such as mandates preventing insurance companies from denying coverage due to preexisting conditions and expanded drug coverage for Medicare enrollees, it differs with respect to cost and other key provisions. Rather than expanding Medicare like the Senate bill, the House bill contains a public option plan that would compete directly with private insurance companies. The bill also would cover 96 percent of Americans by 2019, which is 2 percent more than the Senate version. Moreover, employers are required to provide insurance to their employees or pay a fine of 8 percent of payroll. Companies with payrolls under $500,000 annually are exempt and small businesses with 10 or fewer workers would receive tax credits to help them provide coverage.

With a price tag of $1.055 trillion over 10 years, the House bill plans to levy a 5.4 percent income tax surcharge on individuals with income over $500,000 and couples making more than $1 million. There are also $400 billion in cuts to Medicare and Medicaid; a new fee on medical devices; limits on contributions to flexible spending accounts; a combination of corporate taxes and other fees; and penalties for individuals and employers who do not acquire coverage.

Given that the House already passed its health care bill, Senate democratic leaders hope to have legislation ready for a floor vote before Christmas. Even with the Medicare setback, the Senate may be able to vote on their bill before their unofficial Christmas deadline. If the Senate passes its health care version, both chambers (House and Senate) would go to conference committee and reconcile their differences. Once this is completed, legislation would be sent to the President for final approval.

American Reinvestment And Recovery Act
In response to the economic crisis facing the United States, Congress passed the American Reinvestment and Recovery Act on February 17, 2009. The goals of the Recovery Act were to create new jobs and save existing ones, spur economic activity and invest in long-term growth, and provide accountability and transparency in government disbursement of funds. In order to accomplish these goals, Congress allocated $787 billion in economic aid through spending and tax cuts. As of December 17, 2009, approximately $149 billion have been paid out through various grants and loans, and $301 billion in funds remain.

On November 6, 2009, President Obama signed into law the Worker, Homeownership and Business Assistance Act of 2009. Under the enactment of the law, three key provisions of the Recovery Act were extended:

Emergency Unemployment Compensation

Under the new legislation, workers may receive an additional 14 weeks of unemployment benefits. In states where the unemployment rate exceeds 8.5%, an additional six weeks of benefits are available for a total of 20 weeks. In addition, $25 in recovery funds are added to each regular benefit payment.

Business Tax Credits

For businesses incurring net operating losses in 2008 and/or 2009, the new law extends or expands tax benefits. Businesses of all sizes are able to claim refunds for taxes paid up to five years earlier, expanded from an original 2 year limit. In the original legislation, only businesses with annual gross revenues under $15 million could claim the refunds, and the five year expansion applied to only 2008.

IREM Members Meet With HUD, Rural Housing Service, And Treasury
In November, the Federal Housing Advisory Board met in Washington, DC with staff from HUD and the Rural Housing Service. RHS received sufficient money for rental assistance, and vouchers. They also received an increase in Preservation money ($25m) – which is still a pilot program. IREM pledged to work with RHS to make the preservation program permanent. The Board also discussed property audits and management fees.

The HUD meeting focused on the ongoing problem with HAP payment delays. HUD is aware of the program and trying to do its best to catch up. Depending on the budget, they were anticipating additional delays after the New Year. Subsequent to our meeting, Congress passed an omnibus appropriations bill, funding all program through FY10. The Board asked about REAC and property inspections. HUD indicated that some changes to the REAC program and enforcement were expected soon and we would be pleased with the results. At our meeting HUD announced they would be eliminating the reporting requirement for ARRA (stimulus) funds.

In December, the Board held a telephone conference with the Department of Treasury regarding Low Income Housing Tax Credits. Topics focused on annual recertification waivers, student housing, and 8823 enforcement.

The next meeting Board will be held in the spring. However, IREM staff meets often with HUD and RHS staff during the year to address issues of importance.

For a complete set of minutes, click here and provide your email address.

Voluntary Emergency Preparedness National Standard Law - Update
Under H.R. 1, the “Implementing Recommendations of the 9/11 Commission Act of 2007,” Congress mandated the Department of Homeland Security (DHS) to set up a program for certifying private sector entities as meeting a “voluntary” national standard for emergency preparedness. The statute, passed in 2007, mandates DHS adopt a voluntary 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 commercial real estate. In order to carry out its certification program, DHS is required to select a qualified non-governmental entity to accredit qualified third parties who actually perform the certification of real estate.

DHS intends to adopt three standards for its emergency preparedness program (PS-Prep), which include: National Fire Protection Association (NFPA) 1600, British Standard 25999-2:2007, and ASIS SPC. 1-2009. So far IREM staff and a special workgroup of IREM members have reviewed proposed revisions to the existing NFPA 1600 standard. Upon the review, IREM sent a letter to the National Fire Protection Association with the following comments:

The regulations in NFPA 1600 are complicated and difficult to understand. It is unclear what it will take for a building to be in compliance with the standard.
IREM members feel that compliance with the NFPA 1600 should remain voluntary.
Each property is unique; therefore, a single, uniform standard is not appropriate for all types of property.
Mandatory state and local building codes already exist to provide a standard of safety.
Additionally, many property managers already have an emergency preparedness plan in place.

On September 18, 2009, IREM received a response to its concerns from the National Fire Protection Association. In its response, NFPA agreed that each property is unique and NFPA 1600 standard was specifically written to not be overly prescriptive, and it could be used by both large and small public and private organizations. Additionally, the standard is designed to be compatible with building, line safety, and fire protection codes, and is also compatible with occupational safety, health, and environmental regulations. NFPA agreed that compliance with NFPA 1600 is voluntary.

Although implementation of the three standards chosen by DHS are voluntary under existing law, IREM is concerned this 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 any of the three standards selected by DHS in evaluating its insurability and creditworthiness. IREM will continue to encourage voluntary standards that are not onerous on real estate professionals.

IREM October 2009 Legislative Forums
During the Legislative Forums at the October meetings, IREM members briefed colleagues on issues with potential impact for the commercial real estate industry. These issues include:

Transportation

Falling revenues due to decreased sales tax income taxes have created significant budget shortfalls for state governments. Cumulative shortfalls have reached into the hundreds of billions of dollars. One result of decreased revenues has been a lack of funds to address transportation infrastructure issues. States do not have adequate funds to add or repair vital transportation infrastructure. Funds from the American Recovery and Reinvestment Act have greatly improved states’ ability to address transportation issues; however those funds will run out in 2011, leaving states with the challenge of making up the difference. Likely sources for revenue will include increased taxes and fees.

Health Care

Currently, the number one priority for Congress is health care reform. A number of options are being debated in the Senate, with the inclusion or exclusion of a public option remaining critical to negotiations. Proposals to fund health care reform include a variety of options, however the most likely funding source will be increased taxes on the wealthy, medical practitioners, and existing “high end” health insurance plans.

Energy Efficiency

Included in the American Reinvestment and Recovery Act were funds to be allocated to property owners and managers who modified their properties in order to make them more energy efficient. Not only do energy efficiency save money in energy costs, they also create eligibility for tax credits.

State Budgets

State budgets are facing a financial crisis of their own as revenues have dropped dramatically since the start of the recession. In order to fund revenue shortfalls, states are adopting new and increased taxes and fees, and will likely continue to raise taxes in order to fund operations. While funds from the American Reinvestment and Recovery Act have provided some relief, those funds will run out next year and states will be faced with the difficulty of finding revenue elsewhere.

State Budget Shortfalls
Despite hopes that the worst economic recession since the Great Depression would end quickly, the US economy continues to struggle. As the recession continues, budget shortfalls have affected every sector of the economy. While government entities are typically shielded from many of the economic challenges faced by the private-sector, the economic downturn is having an enormous effect on state budgets. High unemployment, decreased sales tax revenues, decreased income tax revenues, and increased costs have combined to create gaping budget holes for most states, and cumulative shortages are in the hundreds of billions of dollars.

Unlike the federal government, states are not permitted to run budget deficits. Therefore, they must balance their budgets prior to the start of their fiscal year. Budgets are balanced according to projected revenues and projected costs. Fluctuations in actual revenue and expenses can severely alter the financial outlook for the states.

In order to reconcile a collective $158 billion in revenue shortfalls prior to the beginning of the FY2010 business cycle, 48 states employed a strategy of spending cuts combined with tax and fee increases. As of October 1, 2009, all 50 states had begun their FY2010 business cycles. Despite their previous efforts, 35 states are facing $32 billion in new revenue shortfalls this fiscal year.

Addressing the mid-year shortfalls has led many state governors and legislatures to take unpopular actions to minimize losses and stem the financial bleeding. These actions include tapping into cash reserves, layoffs, tax and fee increases, and service cuts, to name a few. For example, New York Governor David Paterson is ordering December’s $750 million in aid payments to schools, local governments, and health insurers to be withheld in order to alleviate a cash crunch after the legislature failed to sufficiently cut spending.

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

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

IREM will continue to monitor the national fiscal condition and advocate for fiscal policies that are in members’ best interests.

Scrap Metal Dealers To Drop Lawsuit Against Memphis Ordinance
Rising prices of scrap metals such as copper and aluminum have led to an increase in thefts of metal which are then sold to scrap metal recyclers – costing municipalities and building owners thousands of dollars in infrastructure repairs. To combat this problem, many states have taken action by setting regulations on scrap metal buyers, requiring them to identify sellers and keep detailed records of purchases.

Some cities such as Memphis have gone beyond their state laws to pass their own scrap metal ordinances. The Memphis ordinance includes a “tag-and-hold” provision whereby scrap metal dealers are required to keep the items they purchase for up to 10 days to give police time to track down any stolen materials. However, a coalition of scrap metal companies and the Tennessee Scrap Recyclers Association filed a lawsuit in federal court seeking an injunction preventing enforcement of the new laws. The federal court dismissed the case on June 24, 2009.

Subsequently, the scrap metal dealers appealed the ruling to the state circuit court. However, the scrap metal dealers agreed to drop their appeal after the Memphis City Council passed an amendment earlier this month to expand its existing scrap metal tag-and-hold ordinance to include telephone wire and cable, copper tubing, metals that have owner identification on them, catalytic converters, chain-link fences, and railroad spikes.

Are You Ready To Head To The Hill?
Mark your calendar! On May 5, 2010, IREM Members joined by members of the CCIM
Institute will bring the issues that affect commercial real estate to Capitol Hill. The IREM & CCIM Institute Orientation and Capitol Hill Visit Day event are held in conjunction with the IREM Leadership and Legislative Summit. Last year, over 275 IREM and CCIM Institute Members participated in over 225 meetings with their legislators, educating them on commercial real estate management and investment issues.

If you are active in legislative issues, or if you just want the opportunity to make your voice heard on Capitol Hill, you will not want to miss this exciting opportunity!

An Orientation will be held at the JW Marriott Hotel in Washington D.C. on Tuesday, May 4. At the Orientation, legislative staff will explain the issues affecting the industry and what to expect when meeting with members of Congress. Participants will receive essential materials to take with them to the Hill. Time is also provided for members to meet with their delegation and role play. Members will head to Capitol Hill on Wednesday, May 5.

More information on the 2010 Capitol Hill Visit Day event will be available in the coming weeks on: www.irem.org/capitolhill. To register for the Leadership and Legislative Summit and/or the Capitol Hill Visit Day event, visit www.irem.org/lls. The Capitol Hill Visit Day event is open to all IREM Members, at no charge, regardless of whether or not they are attending the Summit. If you have questions regarding the event please call the IREM Legislative Liaison toll-free at (800) 837-0706, ext. 6021.