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New Congress, same agenda but more uncertainty

With the U.S. economy the healthiest it's been in nearly five decades and real estate markets booming across the country, what lies ahead in the 106th Congress for the real estate industry in terms of advancing specific policy issues? Although it's difficult to forecast to what extent laws that have direct or indirect impact on real estate will be changed this year, the industry is already prepared to push ahead its 1999 agenda.

"Anything that gets passed will have to be this year because next year will become presidential election year," says Robert Landis, vice president of Government Affairs at the Herndon, Va.-based National Association of Industrial and Office Properties (NAIOP). "Not much is accomplished in the presidential election year."

Given the current political climate and bickering at Capitol Hill in the light of recent impeachment trial of President Clinton and other brewing policy differences between Democrats and the GOP, it's also too early to predict how the 106th Congress would react to real estate policy issues. The industry, however, remains optimistic.

"I'm optimistic that the new Speaker of the House has set a very conciliatory tone," Landis says. "A lot of people and staff are more optimistic than they were before. There is fresh air now."

Jeffrey DeBoer, president and chief operating officer of Washington, D.C.-based National Realty Committee (NRC), says the mid-term congressional elections in November demonstrated tremendous local, state and national interest in initiatives aimed at preserving open space, protecting natural resources and curbing the effects of suburban sprawl.

"Studies are due out this spring from the White House Council on Environmental Quality and the General Accounting Office. With [Vice President] Al Gore's high profile on this issue, it could be a high-level national debate," DeBoer says. "It presents a potential win-win for real estate - provided our industry can lead the debate, potentially through the new congressional real estate caucus."

In May last year, Representatives Phil English (R-PA) and Richard Neal (D-MA) formed the bipartisan Caucus aimed at serving as a forum for members of Congress and invited guests from the real estate industry and ensuring that congressional debates include a concern for real estate. The Congressional Real Estate Caucus is expected to gain momentum this year and play an important role in shaping real estate policies.

On its part, the real estate industry seems to have a full plate of issues on its national policy agenda this year ranging from electricity utility deregulation, endangered species, property rights/regulatory reform, and storm water permits to Superfund, wetlands, capital gains, leasehold improvements and like-kind exchanges. Other issues include preserving current flexibility and availability of the real estate investment trust (REIT) vehicle in proposing future tax policy, increasing the per capita low income housing tax credit allocation, clarification of Fair Debt Collection Practices Act, telecommunications regulations, and filling loopholes in bankruptcy procedures.

Most of these issues have strong support from various industry organizations such as NAIOP and the NRC, one of the industry's most effective and successful advocacy groups on federal legislative and regulatory issues affecting real estate.

"The overriding goal of the real estate community in Washington is to support and propose policies that will keep the economy growing," says DeBoer.

Tax reform on the table He adds that one of the major goals in 1999 will be the focus on tax reform policies ranging from capital gains to tax credits for low income housing and leasehold improvements. Although the Taxpayer Relief Act of 1997 lowered the maximum capital gains tax rate from 28% to 20% (and to 18% for assets purchased after 2000, then held five years), the industry wants more reduction.

The Economic Growth Act of 1998 (H.R. 4125), which was introduced by then Speaker Newt Gingrich, would have further reduced the top capital gains rate to 15%, but it went nowhere in the 105th Congress. It remains to be seen whether a similar legislation will be introduced in the 106th Congress.

Brownfields bogged down Efforts to reform the country's hazardous-waste Superfund program went nowhere last year and, in the process, initiatives to return brownfields to productive use were held hostage. "If brownfields and Superfund become intertwined again and bog down in Congress, the real estate industry will work to break it free and move separately," DeBoer says. "I think brownfields is likely to get the most attention this year."

Industry officials say that with Democrats less likely to give Republicans an environmental issue for the presidential election in 2000, the policy battle lines are likely to be drawn even more sharply this year on brownfields and cleanup of contaminated sites.

The Taxpayer Relief Act of 1997 provided for the temporary deductibility of brownfields clean up costs in certain targeted areas, but the industry wants that it should become a permanent part of the tax code and be broadened to encompass cleanup costs in other areas.

"There is very little incentive to move ahead to clean up contaminated sites," says NAIOP's Landis, adding that the industry needs some incentives to stimulate the revitalization of real estate suffering from the stigma and financial risks associated with contamination by oil or other hazardous materials.

Incentives could come in the form of tax relief, full deductibility of clean up costs, liability exemption of those undertaking such development activities who did not cause or contribute to the contamination of the site and relieving liability of new purchasers.

"We will need a brownfield bill that will help clean up contaminated sites. Right now, money is going to litigation and not toward clean up," Landis says. "There has been a lot of progress on the state level, and some states have really moved ahead, but we need federal legislation."

Tenant improvement rules modified He says tax issues related to tenant improvement are also on the agenda this year. Depreciation rules should be modified to recognize the true economic life of the buildings and leasehold, or tenant improvements. The industry hopes to reduce the depreciation schedule for leasehold improvements to 10 years from 39 years at present.

Rep. Clay Shaw (R-PA) introduced a measure (H.R. 3500) last year to reduce the depreciation schedule, but no hearings were held. It is anticipated that this will be reintroduced.

"We got 13 co-sponsors for the bill last year and educated other committee members over the issue, but it did not pass," Landis says. "We will push it this year again."

REITs under review Tony Edwards, senior vice president and general counsel at the National Association of Real Estate Investment Trusts, the Washington, D.C.-based national trade group of REITs, says concentration this year will largely be on tax issues, especially "permissible investments" by REITs.

In the fiscal 1999 budget, the Clinton administration proposed preventing REITs from owning securities in a C corporation that represent either 10% of the corporation's vote or value. Many REITs have invested in non-voting stock of C corporations that provide services to parties unrelated to REITs.

"The administration wanted to stop REITs from investing in taxable subsidiaries, but the 105th Congress did not act on that proposal at all. The major issue this year will be what the administration proposes in the budget for next fiscal year," Edwards says. "There is a reasonable chance that the administration will re-propose that. NAREIT's position is that it will be a step in wrong direction."

Another ownership test relates to closely held REITs. To qualify as a REIT, an entity must satisfy two tests to ensure that it's widely held: first, five or fewer individuals cannot own more than 50% of a REIT's stocks; second, 100 persons must own REIT stock. The administration had proposed last year changing the "five or fewer" test by imposing an additional requirement that would prevent any "person" (e.g. a corporation, partnership or trust) from owning stock of a REIT possessing more than 50% of the total combined voting power of all classes of voting stock or more than 50% of the total value of shares of all classes of stock.

"NAREIT agrees with that, but with some changes," he says. "Over the last year, the industry has both consolidated and contracted, and that is how a liquid market should work. REITs have become more diversified. We hope that diversification of the marketplace produces benefits to the broader economy."

He says policy makers who are considering changing the REIT vehicle should understand REIT rules have been already modified so many times over the years, making real estate investments accessible to small investors.

"Overall, the REIT vehicle is very valuable. If there are some specific abuses, we will like to work on them," says NRC's DeBoer.

Multifamily has its own issues Key legislative tax issues of concern to the apartment industry in the 106th Congress include: reductions in the capital gains tax and elimination of depreciation recapture; an increase in the Low-Income Housing Tax Credit (LIHTC) volume capfrom $1.25 to $1.75 per capita (H.R. 175) as introduced by Rep. Nancy Johnson (R-CT) on Jan. 6; and, possible administration proposals to revise REIT taxation and the "like-kind" exchange rules.

Steve Leskovitz, vice president of housing policy at Washington, D.C.-based National Multi Housing Council (NHMC), says other issues important to the apartment industry are: removing certain loopholes in bankruptcy laws, clarification of Debt Collection Practices Act and telecommunications issues.

On Nov. 20, the Federal Communications Commission issued a rule governing the placement of satellite dishes by apartment residents. The ruling prohibits owners from unreasonably restricting residents from having a satellite dish or antenna on premises that are within the leasehold and under the exclusive use or control of the viewer. Premises include balconies, balcony railings, terraces, patios, yards or gardens, but do not include outside walls, roofs, windowsills or common area balconies or stairwells.

NMHC, the American Seniors Housing Association and the National Apartment Association have already filed a petition to overturn the order. Those who have joined them in the suit include the Building Owners and Managers Association International, National Association of Realtors and NRC.

Leskovitz says that the apartment industry also wants a clarification of the federal Fair Debt Collection Practices Act (FDCPA). He says back rent collection should not be treated as debt collection under the FDCPA, which allows the debtor-resident 30 days to dispute the amount demanded and obtain verification of the debt from the debt collector.

"Rent is not debt. Property management companies are not debt collectors. They should not be treated as debt collectors," Leskovitz says, adding that the industry groups will continue to lead action on this issue.

DeBoer says the biggest risk to real estate industry will be apathy regarding policy issues and debates in Washington, D.C.

"The real estate industry could become frustrated by what may appear to be a lack of progress on key issues and tune out of the policy process altogether," DeBoer warns. "If that happens, Congress and the White House could propose laws or regulations that could destabilize real estate markets or lower asset values."

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