What has NAR done for the Commercial Practitioners Lately?

By Cindy Chandler, CCIM, CRE
2008 NAR Liaison, Commercial and Business Specialties

On February 4 & 5, I participated in the National Association of REALTORS® (NAR) Federal Policy Meetings in Washington DC. There were 1000 attendees there who are active in legislative or regulatory issues. After being fully briefed on the status of current and past issues affecting real estate, Dale Stinton, EVP of NAR, facilitated a Town Hall meeting, using a recent NAR survey. The survey polled 65,000 members and asked them to rate a number of legislative and regulatory issues as to the importance to their business. The survey was broken down many ways -- one was ratings of commercial members vs. residential members. Dale opened the meeting by explaining the survey and expressing how important it was to have the opinions of commercial real estate practitioners because commercial real estate is important to NAR.

I had already gone through the survey and marked those issues which I believed significantly impacted commercial real estate. Of the 34 issues listed, I came up with 17 -- half - and I could easily make a case for 10 more.

First, let's look at some of the activity for 2007:

• Banks in Real Estate -- Congress passed a 2 year ban. Won the battle for now but are still in the war.
• Carried Interest -- Killed in Committee but we will continue to watch.
• Appraisal/Mortgage Reform -- we were successful in getting a carve- out exempting persons engaged only in real estate from the licensing registry.
• Terrorism Insurance -- President Bush signed HR 2761 which reauthorizes this insurance backstop for 7 years.
• Flood Insurance -- NAR was able to have $220 million appropriated for flood map modernization in FY 2008.
• Natural Disaster Insurance -- Legislation passed in the House and the Senate Banking Committee. Working with Congress to get it finalized.
• Small Business Healthcare Coverage -- The issue was prominent due to NAR's efforts. This is illustrated by listening to any of the presidential candidate. NAR will continue to work toward passage of a bill which will allow affordable heath coverage.
• Freddie Mac/Fannie Mae Reform -- On February 7, 2008, the Senate and House passed an economic stimulus package which has been sent to President Bush for his signature. (It should be signed when you read this.) The economic stimulus package includes several important provisions, including increases in the loan limits for Fannie Mae and Freddie Mac and also FHA for the 2nd half of 2008.
• FHA Reform -- See above.

Now let's look at some of the key initiatives facing us this year:

Of the 34 issues rated in the recent survey, both residential and commercial responses rated the same 7 issues in the top 10. It's important to note that any issue on the list has NAR's attention. (Those with a * were not in the top 10 on residential response side's)

The top 10 issues selected by commercial responses:

1. Capital Gains Exclusion on Principal Residence
2. Mortgage Interest Deduction
3. Depreciation of Tenant Improvements *
4. Small Business Health Care Plans
5. Banks in Real Estate
6. Prevention of Abusive Lending Practices
7. Mortgage Cancellation*
8. Property Owner's Right to Pursue Takings Claim*
9. Data Security
10. Real Estate Transfer Tax

Whether commercial or residential, the responses say that we want to keep our mortgage interest deduction and capital gains treatment on our primary residence! We also want availability of affordable health care and think banks should stay out of the real estate business.

Let's look at issues NAR is tracking which affects commercial real estate (and why they do).

Abusive Lending in the Subprime Market
Sounds like a residential issue? It is, but the residential mortgage markets directly impact the secondary and capital markets and that impacts our ability to secure funds for developments, refinancing, purchases, redevelopment, etc. If you have any doubt about the relationship, remember what happened last fall to availability of funds when the subprime issue hit.

Appraisal/Mortgage Fraud
The FRB is proposing a rule that prohibits any coercing of appraisers and establishing further rules for appraisals. This impacts all real estate.

Banks in Real Estate
If banks are allowed to practice real estate brokerage and property management, they may be exempt from state license laws if they are a federally chartered institution. It also means that developers could be competing with their lender. It can limit choices in the market and create a very unlevel playing field.

Basel Capital Standards for Banks and Thrifts
The Federal Reserve and other regulators are proposing changes to the capital requirements for banks and thrifts. This could significantly reduce the liquidity and thus reduce money available for the purchase, development, redevelopment, acquisition and refinancing of commercial real estate.

Carried Interest
Killed in committee (for now). There was a proposal to treat a general partner's carried interest (sweat equity) as ordinary income rather than capital gains as it is treated now. This is a significant tax advantage for the general partner and helps offset the risk involved when creating and holding new real estate ventures.

Climate Change
Congress will be pursing legislation in 2008 to reduce greenhouse gas emissions. This will affect the cost of building and operating real estate and increase the cost of energy. We want sensible solutions.

Data Security
It is believed that data security legislation will be a priority in 2008 for Congress. While we all believe sensitive client information needs to be protected, we feel that legislation must not overly burden small firms nor preempt state laws which offer additional protections.

Depreciation-Tenant Improvements
The temporary rule permitting the cost of leasehold improvements to be recovered in 15 years vs 39 has been in place since 2004, but expired 12/31/07. A revised rule is part of the Stimulus Package passed by Congress on 2/7/08. It has been sent to President Bush for his signature. While not the same as the old rule, it allows a 50% deduction the 1st year with the balance being deducted over the remaining 38 years.

Eminent Domain
This is a state issue. Congress reacting to the public outcry on the Kelo case drafted some legislation restricting the use of eminent domain. There are no hearings scheduled so there may be no activity on this. Still, NAR will track it.

FHA Programs
This has significant economic impact on many communities across the US. FHA loan limits are too low for many communities, loan terms inflexible, etc. FHA programs have not kept pace with the marketplace. FHA is important in the mortgage marketplace. We need to be able to offer affordable housing and a stable mortgage market. Economic development representatives will tell you that it is difficult to recruit business to areas without some affordable housing. Housing availability has a direct impact on the desirability of sites/communities considered. Bill sent to President Bush for signature 2/7/08 which increases limits for 2nd half of 2008.

GSE Reform (Government Sponsored Enterprises)
Fannie and Freddie are the dominant players in the residential secondary mortgage market. The secondary mortgage market is a dominant player with the capital markets. Recently, the strict limitations on the loan amounts that GSEs can purchase has negatively impacted the liquidity in the national mortgage markets. This has negatively affected availability of funds for commercial projects. Bill to increase GSE limit for 2nd half of 2008 sent to President Bush for signature 2/7/08.

Like Kind Exchanges
Congress may wish to limit some of the practices we now have such as the use of Tenant in Common shares (TICs). Also, last year, several Qualified Intermediaries failed leaving many in a lurch with incomplete exchanges.

National Flood Insurance Program
There are bills in Congress which would phase out or eliminate subsidies for residential and commercial properties. However, one bill allows for the purchase of wind insurance through the NFIP. NAR is also advocating for funds to update FEMA maps.

Natural Disaster Policy
Insurance has become more difficult to obtain in some areas. If developers, owners or purchasers of commercial real estate cannot buy insurance or if it is priced so that it's virtually unobtainable, it creates an adverse impact on the desirability and value of commercial real estate.

Real Estate Transfer Tax
This is a state issue and there is no federal legislation proposed at this time. This is an important issue for every real estate owner because it is a tax on the owner's equity and increases the cost of transferring title. NAR has resources for cities and states to use when faced with transfer tax legislation.

Terrorism Insurance
While it has been extended for another 7 years, NAR will track availability and rating methods to insure equity in the market.

Transportation
Federal funds are set to expire in 2009. Revenues into Highway Trust Fund are not keeping up with expenditures. Legislation has not been introduced but hearings are likely to start in 2008. This affects the infrastructure in communities and thus economic development.

Water Quality Issues
In a bill introduced by the house, the term "navigable" is removed which has the effect of greatly expanding Federal jurisdiction over water in the US. This legislation has also moved into areas previously controlled by state and local governments.

Wetlands
NAR will follow legislation to insure any changes do not increase government jurisdiction or make compliance overly burdensome.

Other
There are many other issues which have an effect on sustainable communities, economic development, quality of life, affordable housing, etc. All of these affect the overall desirability of our communities and demand for all forms of real estate.

You can find more information about the survey, position papers, Issue Brief, etc. on the NAR website: