Federal Legislative Priorities Update

Federal Legislative Priorities Update:

Flood Insurance Passes House and Senate

March 2014

 On March 4, 2014, the United States House of Representatives passed the Homeowner Flood Insurance Affordability Act (H.R. 3370), which seeks to roll back some of the changes made to the National Flood Insurance Program (NFIP) as a result of the Biggert-Waters Flood Insurance Reform Act of 2012.  After successful negotiations to resolve differences between the original Senate version and the House version of the legislation, the Senate voted 72-22 on March 13, 2014 in favor of approving the House version.  The Homeowner Flood Insurance Affordability Act mandates that premiums cannot increase more than 18 percent per property annually. Additionally, residences that were built to meet all the flood zone codes will retain that status and not be reclassified under new flood zone maps.  The newly approved legislation will avoid unintended consequences of the Biggert-Waters Act and the negative impact it would have had on the real estate market. Tenant Star Program Update

March 2014

 On March 5th, the United States House of Representatives passed H.R. 2126, or the “Energy Efficiency Improvement Act”  Bill included language for the Better Buildings Act and the Tenant Star progam  Tenant Star would connect the tenant and owner of commercial buildings to work together on improving energy efficiency. Investments to cost-effective energy savings measures have great potential of success when a partnership forms and the benefits are not exclusive to one party.

179D Energy Efficient Commercial Building Tax Deduction

February 2014 –  Section 179D of the Internal Revenue Code encourages increased energy efficiency efforts in commercial and large multifamily properties.  The 179D tax deduction expired on December 3, 2013.  The 179D deduction provides a one-time accelerated depreciated for commercial, large multifamily, and agency-owned properties. Those who qualify, including owners of energy efficient commercial or large multifamily buildings built or retrofitted since December 31, 2005 and architects and engineers of energy efficient municipal buildings (LEED certified for example), would be able to save $1.80 per square foot in tax deductions.  IREM joined a coalition of nearly fifty stakeholders to urge legislators to extend this critical tax deduction.  In an effort to restore the important 179D tax deduction, the coalition sent a letter (a coalition letter was sent in October, 2013 as well) to Senator Max Baucus, Chairman of the Senate Committee on Finance, explaining the crucial role the section 179D tax deduction plays in making energy efficiency goals achievable.  The letter urged reconsideration of the Cost Recovery Draft, which was released by the Finance Committee last November and repeals the section 179D tax deduction. Because the section 179D tax deduction provides an effective incentive for energy efficiency, the coalition is seeking to ideally have the deduction included in any comprehensive tax reform proposals, or as a more practical solution, be granted an immediate multi-year extension. Disparate Impact Housing Theory

January 2014 -  On February 8, 2013 a final rule was published by the Department of Housing and Urban Development (HUD) which established a national standard for determining whether a particular housing practice violates the Fair Housing Act (“Act”).  A case involving the disparate impact housing theory made it to the U.S. Supreme Court. The Supreme Court was set to hear arguments in early December regarding the case, Mt. Holly Gardens Citizens in Action v. Mt. Holly. The case focused on the question of whether or not the Fair Housing Act would permit the government to establish discrimination using statistical analysis instead of if the discrimination was intentional.  Unfortunately, the Mt. Holly case will not be heard by the Supreme Court as the parties involved in the Mt. Holly case came to a settlement in mid-November. This was a key opportunity for real estate managers and investors, and other industries to get clarification on how the housing theory impacts their business. IREM will continue to monitor this issue and report updates when necessary. Credit Risk Retention

January 2014 -  The Institute of Real Estate Management signed onto a joint comment letter with 15 real estate and financial organizations regarding the recently re-proposed rule on credit risk retention or qualified residential mortgage (QRM). The letter was sent to the Federal Reserve System, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Department of Housing and Urban Development, the Department of the Treasury, and the Federal Housing Finance Agency in response to a request for comment on the proposed rule on credit risk retention.  The joint proposed rule seeks to enact section 15G of the Securities Exchange Act of 1934 (15. U.S.C. 78o-11), as added by section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). In 2011 the agencies released an initial proposal that received much pushback from various industries. The agencies re-released the proposal taking into account those comments and recommendations on August 27, 2013, and comments on this draft were due on October 30, 2013.  Credit risk retention proposed rules would apply to all forms of assets that can be securities, including commercial real estate (CRE) and commercial loans. The proposed rule defines CRE loans as those secured by five or more residential units or by non-farm, non- residential real property, with the primary source of repayment to be derived from rental income or from the proceeds of the sale, refinancing, or permanent financing of the property. More specifically, rental income is defined as “any income derived from a party who is not an affiliate of the borrower, or who is an affiliate but the ultimate income stream for repayment comes from unaffiliated parties (for example, in a hotel, dormitory, nursing home, or similar property).” Regarding land development and construction loans, loans on raw or unimproved land, and unsecured loans are excluded.  According to the proposed rule, a qualifying commercial real estate (QCRE) loan must meet certain requirements for assurance of repayment, property value, and risk management to be exempt from the risk retention requirements. Consistent with the first draft, the re- proposal would pose a five percent risk retention minimum requirement to all securitized transactions that are within the scope of section 15G.  The letter acknowledges improvements in the risk retention proposal language since the first proposal in 2011, but it also highlights the need for changing and clarifying problematic sections of the rule. The letter points out the following issues: 1. Restriction on Cash Flows to Eligible Horizontal Risk Retention Interest (EHRI): May significantly limit cash flow to horizontal risk retention holders because of restrictions connecting CMBS payments to principal repayment. (Note: The term “horizontal risk retention” is when a sponsor has a 5% “first-loss” of the fair value of the whole group of securitized assets. Until all other interests in the issuing unit are completely paid in full, the interest retained by the sponsor cannot receive any principal payments made on a securitized asset.) 2. Horizontal Risk Retention Interests: This can only be done on a pari passu basis, or by treating all parties equally. It’s recommended that the horizontal risk retention be allowed to be split into senior and subordinate positions as well as on a pari passu basis. 3. Qualified Commercial Real Estate (QCRE) Loans: With only 2.5 – 8% of all current mortgages consisting of conduit CMBS will actually quality for zero risk retention, it would be appropriate for the agencies to reconsider the underwriting metrics for CMBS. 4. Single Borrower, Single Credit CMBS (SBSC): QCRE eligibility requirements for SBSC should be reexamined since SBSC has experienced a loss rate of only .2%. 5. B-Piece Buyer Affiliations: The new proposal prohibits a third-party purchaser of the EHRI from being affiliated with a lender that contributes more than 10% of the loans to that specific deal. The agencies should reconsider the preclusion of B-Piece Buyers as there is no convincing reason why they are excluded. 6. 5% Quorum for Replacing the Special Servicer: This low quorum could potentially result in bond holders controlling just 2.51% of the CMBS outstanding principal replacing the special servicer. It is recommended that the agencies reconsider existing market standards for forming the quorum requirement.