Congress: The 2010 outlook for multifamily.
* Ensuring the industry's continued access to capital as lawmakers undertake financial regulatory reform and the possible restructuring of Fannie Mae and Freddie Mac.
* Securing workable and cost-effective building energy efficiency standards in energy and climate change legislation.
* Opposing proposals to triple the taxation on a general partnership's promote (or "carried interest"). At NMHC's Annual Meeting in January, the one issue Republican Karl Rove and Democrat Howard Dean agreed on during their point-counter-point interview was that raising taxes on carried interest (the promote) for real estate partnerships is a bad idea.
* Opposing the Employee Free Choice Act ("card check"). Card Check would disproportionately increase the political power of unions at considerable cost to employees and businesses during a severe economic recession and sustained period of job loss.
* Advancing our Balanced Housing Policy initiative to secure a housing policy that more explicitly recognizes the importance of rental housing.
Treasury Expands Fannie, Freddie Support
The U.S. Treasury Department on Dec. 24 issued an important announcement confirming its unlimited support for Fannie Mae and Freddie Mac through 2012 and easing the portfolio limits on the mortgage giants. Before the announcement, the retained portfolio of each firm was capped at $800 billion and each was required to reduce their portfolios by 10 percent per year beginning in 2010. Now, the portfolio reduction requirement applies to the portfolio caps ($900 billion) and not the actual size of the portfolio at the end of 2009 ($771.5 billion for Fannie Mae and $761.8 billion for Freddie Mac).
This means the companies will not have to take immediate steps to reduce their portfolios and could even expand them. Additionally, the Treasury announced that it was committed to providing the Government Sponsored Enterprises (GSEs) with unlimited financial support through 2012, removing a prior limit of $200 billion per company.
The announcement makes it clear that the federal government intends to back the GSEs in whatever capacity is necessary to maintain their housing finance activities. This should provide added certainty to the multifamily housing market that the GSEs will continue to be able to provide capital to the sector.
NAA/NMHC's GSE Task Force met in early January to continue its work to develop a policy framework for GSE reform that specifically includes the needs of the apartment sector. At the request of the Treasury Department, following the Dec. 15 meeting with Treasury Secretary Timothy Geithner, NAA/NMHC submitted a brief statement outlining the impact of GSE reform on multifamily mortgage liquidity.
While GSE reform legislation is not likely until 2011 or 2012, work will begin in 2010. The House Financial Services Committee is likely to hold its first hearing on the topic in March and the Obama Administration is expected to release its guiding principles in February as part of its FY 2011 budget proposal.
NAA/NMHC are working closely with the stakeholders to ensure that they understand the multifamily perspective and the important differences between the GSEs' single-family business and their multifamily business.
Congress Fails to Act on Estate Tax
A one-year scheduled repeal of the estate tax went into effect on Jan. 1 after lawmakers failed to reach a compromise on estate tax reform before year's end. Repeal is a potentially adverse event for heirs of commercial real estate, however, because it also repeals "stepped-up basis" tax rules.
Under stepped-up basis, the tax basis is reset to reflect the fair market value of the property at the time of death. Under the carryover basis rules in effect during the repeal, the tax basis of inherited property is the same as the original owner's basis, including any depreciation allowances claimed by the donor in prior years. As a result, estates that contain real property could often suffer more under full estate tax repeal than they would if the estate tax were preserved, because they will be subject to larger capital gains tax bills.
In 2010, capital gains tax will apply to appreciated assets above $1.3 million (or above $4.3 million for property transferred to a spouse). In 2011, the pre-2001 estate tax law will be reinstated ($1 million per person exemption, 55 percent tax rate, stepped-up basis tax rules).
Before Congress adjourned for 2009, the House of Representatives passed legislation (H.R. 4154) permanently extending the 2009 law ($3.5 million per person exemption and 45% tax rate) and preserving stepped-up basis, but the Senate was unable to pass an estate tax bill.
Senate supporters of more generous estate tax relief apparently felt that allowing the estate tax to expire (and rollover basis rules to go into effect) on Jan. 1 would give them more leverage to force a more generous compromise in early 2010. Some leading Senators are pushing for a lower 35 percent maximum rate with an increased $5 million exemption level.
Congress is expected to address estate taxes in 2010 as full repeal is unacceptable to proponents of the tax, and its "springing back" at the high 55 percent rate in 2011 is unacceptable to its opponents. The most likely outcome is compromise legislation with a tax rate of 35 percent to 45 percent and an exemption level of $3.5 million to $5 million.
It is unclear, however, whether any tax law change can be retroactively applied, as some legislators have said they intend to do. NAA/NMHC have long urged Congress to permanently extend the 2009 estate tax laws and to retain stepped-up basis tax rules.
Apt.-Related Tax Incentives Expire
A number of tax incentives of interest to apartment firms expired at the end of the year when the Senate failed to pass a tax extenders bill. They include the Tax Credit Exchange Program (TCEP) for states that participate in the Low-Income Housing Tax Credit (LIHTC) program, the new markets tax credit, the credit for construction of new energy-efficient homes (Section 45L), the 50 percent bonus depreciation provision (Section 168), the increase in small business expensing limits (Section 179) and the immediate expensing of "brownfields" environmental remediation costs (Section 198).
The House passed its tax extenders bill (HR 4213) on Dec. 9. The Senate is expected to take up a tax extenders bill in early 2010. Congress is expected to make the extensions retroactive to Jan. 1, 2010, as it has done in past years.
Draft FCC Order Affects Cable, Video
NAA/NMHC have learned that a draft order before the Federal Communications Commission (FCC) would allow exclusive contracts between apartment properties and private cable operators and direct broadcast satellite providers. In 2008, the FCC banned exclusive access agreements with franchise cable firms and other carriers that provide video service under Section 628 of the Communications Act (47 U.S.C. Section 548).
Importantly, the draft is expected to allow bulk-billing and exclusive marketing arrangements between properties and video providers.
It is unclear when the FCC might vote on the draft, which is not publicly available. NMHC and NAA appealed the 2008 ban in federal court. Although the court ruled in favor of the FCC and let stand the 2008 order, the case served as a preemptive challenge to the FCC's authority to further regulate contracts under the Communications Act.
Balanced Housing Policy Gains Traction
NAA/NMHC's effort to secure a more balanced housing policy continues to gain traction among key policymakers. Most recently, U.S. Department of Housing and Urban Development Secretary Shaun Donovan told a housing conference that "if this crisis has taught us anything, it's that it is long past time we had a balanced, comprehensive national housing policy--one that supports homeownership, but also provides affordable rental opportunities."
NAA/NMHC Testify on Fair Housing
NAA/NMHC testified on proposed Fair Housing legislation before a key House subcommittee on Jan. 20. The bill (HR 476, the Housing Fairness Act) was introduced by Rep. Al Green (D-TX) and creates a National Fair Housing Testing Program to be administered through qualified fair housing enforcement organizations. It also increases funding to the existing Fair Housing Initiatives Program (FHIP), which provides funding to state and local fair housing groups to educate and test compliance with anti-discrimination laws.
The testimony is available at http://tinyurl.com/4td5kr. NAA/NMHC urged Congress to conduct a comprehensive review of existing testing practices to assess their effectiveness, efficiencies and fairness in reducing the level of discrimination prior to enhancing current programs and funding levels.
NAA/NMHC Issues Census Guidance
NAA/NMHC have issued a guidance document to help apartment managers understand their responsibilities relating to the 2010 Census. Apartment firms can expect Census enumerators to visit their communities in an effort to get residents who have not responded by the April 1 deadline to complete the form.
Participation in the Census is required by law, so property managers are advised to provide Census enumerators with reasonable access to requested individual apartments. This includes allowing enumerators to knock on apartment doors, or, where present, buzz apartment call boxes. Enumerators may have to return to the property several times to secure interviews, and these repeat visits should be accommodated.
Census employees may also visit apartment properties outside of the 2010 Census as part of several other surveys sponsored by the Census Bureau, some of which are mandatory and require the same level of property access as the Census and some of which are not. For information, visit http://tinyurl.com/4td5kr.
Regulatory Reform Exempts CMBS
Commercial real estate secured a significant victory in the debate over financial regulatory reform when the House of Representatives exempted commercial mortgage-backed securities (CMBS) for risk-retention language. The House-passed bill (HR 4173, the Wall Street Reform and Consumer Protection Act of 2009) requires companies that sell mortgage-backed securities to retain at least 5 percent of the credit risk. However, it grants regulators the flexibility to allow a third-party investor--or B-piece buyer--to satisfy the requirement.
HR 4173 also would require the Federal Reserve and financial regulators to examine the combined impact of new retention requirements and new accounting standards (FAS 166 and 167) on credit availability, and to report to Congress with specific recommendations prior to any rulemaking on the retention.
The Senate has yet to consider a bill, although Senate Banking Chairman Chris Dodd (D-CT) has released draft legislation (Restoring American Financial Stability Act) that imposes an even higher retention amount of 10 percent.
NAA/NMHC will continue to follow this issue and will advocate against any provisions that would unnecessarily restrict credit to the apartment sector.
FDIC Addresses Accounting Standards
The Federal Deposit Insurance Corporation (FDIC) on Dec. 16 issued a rule giving banks more time to implement major new accounting rides for securitizations. Beginning in 2010, new accounting standards issued by the Financial Accounting Standards Board (FASB)--FAS 166 and FAS 167--will make substantive changes to how banks account for securitized assets that are currently excluded from their balance sheets.
Specifically, they will require financial institutions to bring most securitizations, including commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities, onto their balance sheets, which will result in higher minimum regulatory capital requirements for banks.
Information compiled by NAA/NMHC Joint Legislative Staff: Senior Vice President for Government Affairs Jim Arbury; Vice President of Housing Policy Lisa Blackwell; Vice President of Capital Markets and Technology David Cardwell; Vice President of Business Operations and Risk Management Policy Jeanne McGlynn Delgado; Vice President of Communications Kim Duty; Vice President of Tax Jennifer Gray: Vice President of Employment Policy and Counsel Betsy Feigin Befus; Vice President of Energy and Environmental Policy Eileen Lee; Vice President of Building Codes Ron Nickson; and Chief Economist Mark Obrinsky.