Although the tremors in the credit markets mean that a lot of attention is being paid to what happens on Wall Street, the shopping center industry also has some developments to keep tabs on inside the Beltway.
Industry lobbyists — from groups such as Real Estate Roundtable (RER), ICSC, the Institute of Real Estate Management (IREM) and the National Association of Realtors — have been busy plying their trade as lawmakers take up some key legislation. And the issues under scrutiny in Congress go beyond longtime bugaboos such as Internet taxation.
This year, union laws and a potentially damaging tax code change have kept legislative liaisons busy. And, of course, there's always terrorism insurance, which is due for another bout of discussion later this year.
The efforts focused on terrorism insurance come as lawmakers consider revisions to the Terrorism Risk Insurance Extension Act (TRIEA) of 2005. TRIEA, itself a two-year extension of legislation passed in 2002, guarantees that the federal government will help insurers cover reimbursements to policyholders affected by terrorist acts. These protections are set to expire at the end of this year. As in the past, TRIEA's supporters say that insurers won't be able to offer affordable coverage against terrorism without some kind of federal backstop.
“We feel like it's appropriate for the federal government to be providing this coverage,” says Jennifer Platt, director of federal government relations for ICSC. “A terrorism attack … is an attack on the United States.”
But there is growing sentiment that the insurance industry should have gotten its act in order by now and no longer should need backing from the federal government to provide coverage. Without a backstop, though, industry observers fear insurance costs would spike and, naturally, get passed onto property owners. Owners could face even greater risks if, lacking coverage, they are unable to secure new loans, or they default on existing financing where covenants mandate that buildings have adequate insurance coverage.
Speaking before a House subcommittee meeting on June 21, RER chairman Christopher J. Nassetta stated that more than $15 billion in real estate related transactions stalled or failed due to a lack of terrorism insurance in the period between 9/11 and the enactment of the federal backstop. Charles Achilles, IREM's vice president of legislation and research, adds that terrorism insurance became more difficult to acquire after 9/11. The debate over terrorism insurance touches about 10 percent to 20 percent of IREM's membership, he says.
ICSC and others have come together under the banner of the Coalition to Insure Against Terrorism (CIAT), which has lobbied for an extension of TRIEA. CIAT has also pushed for coverage of nuclear, biological, chemical and radiological (NBCR) attacks under the same terms as conventional risks.
For now, the coalition is satisfied. The latest incarnation of the legislation, the Terrorism Risk Insurance Revision and Extension Act (TRIREA), won approval from the House Committee on Financial Services August 1. CIAT supported TRIREA's proposed backstop trigger of $50 million, down from $100 million this year, and supports TRIREA's proposed 15-year term. ICSC says the longer extension would help to stabilize the market for terrorism insurance. Platt points out that acquiring land for commercial projects can take five to ten years.
TRIREA would also extend to NBCR attacks and include domestic terrorism. Insurers with less than $50 million in terrorism insurance premiums, however, could be exempted from offering NBCR coverage if they can prove that such an attack would likely send them into bankruptcy.
The legislation's future is far from certain, however, due to opposition from the Bush administration. The Treasury Department seeks a limited role in propping up insurers. “Adding these insurance overages to the federal reinsurance backstop sends the wrong signal to the marketplace, which instead should be encouraged to find new ways to diversify the risk of doing business,” wrote Treasury Secretary Henry Paulson in a July 25 letter to the House Committee.
The Consumer Federation of America (CFA) also opposes TRIREA. It argues insurance companies enjoy large profits and should not require help from the government. The program amounts to “a generous and unnecessary subsidy to overcapitalized insurers and large real estate developers,” the group says. CFA adds terrorism insurance gives developers fewer incentives to make buildings safer. “Why pay for antiterror devices when you have subsidized insurance?” the group asked in a letter to the Financial Services Committee.
The full House will take up the TRIREA legislation after they return in September.
Higher tax on carried interest?
The week of July 30 was a busy one for industry lobbyists. ICSC visited the Hill to follow terrorism insurance and with its partners weighed in on another contentious issue: taxation of carried interest. Carried interest is the share of profits a general partner in a limited partnership or limited liability corporation receives as compensation. Under the current tax law, this income is classified as capital gains and taxed at a 15 percent federal rate.
But legislation under consideration in the House Committee on Ways and Means would tax carried interest as ordinary income, at a maximum rate of 35 percent.
“fund employees should not pay a lower rate of tax on their compensation for services than other Americans,” said Rep. Sander Levin (D-Mich.), who introduced the bill in June. “These investment managers are being paid to provide a service to their limited partners, and fairness requires they be taxed at the rates applicable to service income, just as any other American worker.”
Though Levin singled out investment fund employees in his remarks, retail trade groups say the legislation would land a bigger blow on their constituents. “Disproportionately, this is going to impact real estate — more so than hedge funds and private equity,” says ICSC's Platt.
The “vast majority” of real estateare arranged as partnerships, says Platt. In 2005, more than 46 percent of partnership tax returns were related to real estate.
ICSC has joined RER, NAREIT and other groups to oppose H.R. 2834. The bill “would deal a blow to entrepreneurial activity,” the coalition said in a July 23 letter to House representatives, and added that it would reach “far beyond the superrich to entrepreneurs of all sizes.”
Without the prospect of realizing profits at the lower tax rate, developers will invest in fewer projects and favor building in better-off communities, says Adam Ifshin, incoming chair of ICSC's economic policy committee and cofounder and president of DLC Management Corp. Ifshin spoke July 31 before the U.S. Senate Committee on Finance on behalf of RER and ICSC.
“What H.R. 2834 proposes makes underserved and given-up-for-dead locations far less appealing to developers because those deals are harder to put together and have greater risk associated with doing them,” Ifshin said. “The net result will be to cause the greatest harm to communities that needand revitalization the most,” such as Baltimore's West Side, Newburgh, N.Y. and Spring Valley, N.Y.
Ifshin's own company could not have been built under the proposed changes, he says. Proponents of the reclassification say the question boils down to the treatment of carried interest, rather than the incentive it gives to developers. “Deferred compensation, even risky compensation, is still compensation, and it should be taxed as such,” wrote Gregory Mankiw, an economics professor at Harvard University, on his.
ICSC is asking its members in districts of representatives on the Senate Finance and House Ways and Means Committees to talk to the reps during their August work periods about the bill's potential impact on development. “No one can tell that story better than our guys that are on the ground doing it,” Platt says.
Seeking status quo on labor, energy
ICSC urged members to write Congress in opposition to an amendment to the Senate's energy legislation. Proposed by Chuck Schumer (D-N.Y.), the amendment would have set targets for national model commercial building energy codes — 30 percent energy efficiency by 2012 and 50 percent by 2022.
It would have also required states to adopt codes within two years matching the energy savings of the national standards. The amendment won backing from the Natural Resources Defense Council, an environmental advocacy group.
ICSC maintains its support of local codes. “Because each community in our country is unique, I believe that increasing the federal government's intrusion into residential and commercial building code development is a giant step in the wrong direction,” read ICSC's sample letter for members.
Schumer's amendment failed to muster enough support in the Senate. But the energy legislation passed by the House on August 4 stipulates that by 2050 all commercial buildings should create no net emissions of greenhouse gases. The legislation goes to conference between the House and Senate in September.
IREM supports voluntary modifications to retail spaces that save money and energy, such as installing energy-efficient devices and replacing incandescent lighting with fluorescent. But, like ICSC, it opposes federal building efficiency standards, explains IREM's Achilles.
Union debate expected to resurface
Earlier this year, ICSC also opposed the Employee Free Choice Act, legislation that would allow a majority of employees at a workplace to unionize by signing authorization cards, rather than holding an election. The bill stalled in the Senate in June.
“ICSC feels that workers should have the ability to have a secret ballot in the workplace, just like everyone else,” says ICSC's Platt. The group is concerned that employees might not know what they're signing when they sign the cards, she says, and adds that the bill amounted to “a power grab by the unions.”
But the AFL-CIO, which strongly backs the Employee Free Choice Act, says that the bill would allow workers to vote by election if a third of the employees favored one. The AFL-CIO argues that current labor laws give employers too much control.
The Employee Free Choice Act is “an incredibly important piece of legislation for the working class,” says Caren Benjamin, AFL-CIO media specialist. The group plans to discuss the bill with candidates for office next year and will push for its reintroduction in future sessions of Congress.