Four years after the Dodd-Frank Wall Street Reform and Consumer Protection Act was drafted to help clean up the financial industry, it’s the smaller, local banks that claim to be feeling the impact most. The approximately 200 new rules being implemented are only half of the 398 regulations that will be put into place thanks to Dodd Frank—the most sweeping piece of legislation since the Great Depression, and which will require oversight from several federal agencies. This year is seeing the implementation of new mortgage lending requirements as well as the 800-page Volcker Rule, which prohibits banks that receive deposit insurance from involvement in risky investments and proprietary trading for their own accounts. The new lending requirements for mortgages, car loans, home equity loans, personal loans and the like mean that banks now must double-check all documentation. That includes verifying salary figures with an applicant’s workplace, as well as verifying tax returns with the IRS. Industry experts say the extra documentation adds approximately a week to each mortgage process, not to mention hiring new mortgage loan officers and compliance officers as well as installing new technology and running stress tests for banks with more than $10 billion in assets. For big banks, it’s easier to absorb these additional costs, but they can make or break small banks and credit unions, which feel that it isn’t fair to be treated the same way as multibillion-dollar national banks. One complaint about Dodd-Frank is that small banks and credit unions are being Dodd-Frank has caused some smaller banks to focus on commercial lending instead of mortgages, because the new rules have yet to hit commercial lending. However, according to industry experts, the new regulations could eventually spread to small business lending, since business lending is what funds consumer lending. Real estate developers are currently watching to see if Dodd-Frank’s risk retention of securitization provision or the Volcker Rule begin to hit hard. Both have the potential to reduce commercial real estate lending and increase borrowing costs, which could slow down the sector's recovery.

On February 26, 2014, the Chairman of the House Ways and Means Committee, U.S. Rep. David Camp (R-MI), issued a draft of the Tax Reform Act of 2014 (TRA 2014). According to the broad tax overhaul proposal, investment profits generated by private equity would be taxed at a higher rate. Currently, private equity investment profits, AKA carried interest, are being taxed as capital gains and therefore at a significantly lower rate than regular income—which has been criticized by several lawmakers over the past 10 years, and most recently, by President Obama. Rep. Camp wishes to raise the tax on carried interest from the current 23.8 percent to 35 percent. He also proposes that carried interest be treated as regular income. To top it all off, he wants to see the top income tax rate lowered from 396 percent to 25 percent, and a 10 percentage point tax surcharge added for carried interest. This would create a 35 percent tax rate for private equity executives. Critics of the current policy say private equity dealmakers make their income not from passive investment but from active management of their portfolio companies, and that carried interest profits aren’t proportional to the comparatively low amounts of capital that are invested in each deal. The congressional Joint Committee on Taxation says the proposed plan would generate $3.1 billion in revenue from 2013 through 2023. Not surprisingly, the private equity industry lobby isn’t happy about Rep. Camp’s proposal and is calling it unfair. And both Sen. Harry Reid (D-NV), the Senate majority leader, and Sen. Mitch McConnell (R-KY), the Senate minority leader, says there’s no way TRA 2014 will become law. In any case, gains on an individual’s invested capital would be exempted from the higher rate. And the commercial real estate industry need not worry: the proposed higher rate would not apply to real estate development either.

The Marketplace Fairness Act is proposed legislation to enable state governments to collect sales taxes and use taxes from remote retailers with no physical presence in their states. Identical versions of this bill were introduced in both the House of Representatives and the Senate. The current bill, the Marketplace Fairness Act of 2013, was introduced simultaneously on February 14, 2013, in the House as HR.684 and in the Senate as S.336. It was then introduced a second time in the Senate as S.743 on April 16, 2013, and passed there on May 6, 2013. All three bills are identical. According to the bills, all online retailers who do not qualify for the Small Seller Exemption will be required to collect sales tax starting on the first day of the calendar quarter that is a minimum of 180 days after the date of the enactment of the Marketplace Fairness Act—which could be as soon as July 1, 2014. On that date, sales tax collection will be required on all sales shipped to the Streamlined Sales and Use Tax Agreement’s (SSUTA) 23 “full member” states, namely: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming. To qualify for the Small Seller Exception, a retailer must have less than $1 million in total remote sales to customers in states where a seller does not have physical or economic presence within the United States within the preceding calendar year. If the Marketplace Fairness Act becomes law, online retailers will be required to collect sales tax as if they were local brick-and-mortar stores. The purpose of the bill is to level the playing field for local businesses that have been required to collect sales tax all along and have been at a price disadvantage to online retailers—in some states, from 5 percent to 10 percent. Smaller online retailers that hover around the $1 million mark in total remote sales are concerned about losing their competitive edge and having to take on the cost of adopting new technology to ensure compliance. But brick-and-mortar stores are applauding the proposal.

In 2010, the Basel III rule was designed to require banks to hold 4.5 percent of common equity (raised from 2 percent in Basel II) and 6 percent of Tier I capital of “risk-weighted assets” (Basel II required 4 percent). Basel III also introduced a “mandatory capital conservation buffer” of 2.5 percent and a “discretionary counter-cyclical buffer,” to allow national regulators to require an additional 2.5 percent of capital during high-credit growth periods. In July 2013 the new Basel III rules called for U.S. banks, savings associations, bank holding companies and savings and loan companies with more than $500 million in assets to maintain higher capital levels. In October 2013, the Federal Reserve approved an interagency proposal for the U.S. version of the Basel Committee on Banking Supervision’s Liquidity Coverage Ratio (LCR), to apply to U.S. banks and other financial institutions. The U.S. LCR proposal is tougher than the Basel Committee’s version, especially when it comes to larger bank holding companies, by requiring those with over $250 billion in consolidated assets or more in on-balance sheet foreign exposure (along with non-bank financial institutions) to hold enough high quality liquid assets to cover 30 days of net cash outflow. Plus, regional firms with $50 billion to $250 billion in assets would be subject to a modified LCR, requiring them to hold high quality liquid assets to cover 21 days of net cash outflow. The Basel III capital accord, which is a voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk, is set to be 100 percent in place throughout the globe by 2019 (and 60 percent in place by 2015). Its goal is to prevent another global financial crisis by requiring banks to hold a significant amount of capital in reserve against future potential losses. But aspects of proposed U.S. rules (finalized by regulators in July 2013) could potentially reduce banks’ real estate credit capacity and raise the cost of borrowing. The Real Estate Roundtable supports striking a balance between “appropriate safety and soundness” and “adequate credit capacity” and is advocating that the regulators monitor Basel III’s impact on commercial real estate lending and report all credit shortfalls to the sector. According to Federal Reserve data, the banking sector has provided approximately 50 percent of the $3 trillion of outstanding commercial real estate debt. However, the Washington Post reports that the new rules released in July 2013 “may result in allocation of bank capital away from real estate and higher financing costs. As a result, developers may find future projects less attractive.”

The Terrorism Risk Insurance Act’s (TRIA) looming expiration on December 31, 2014 poses the threat of exposure as well as a credit crunch for commercial real estate, according to the Real Estate Roundtable (RER). TRIA was enacted in 2002 (and subsequently extended), in the wake of 9/11, to protect the U.S. economy from the effects of another catastrophic terrorist attack. The act ensures that American policyholders—both large or small businesses—can purchase insurance coverage to manage the risk of terrorism, continue to expand their businesses and protect their workers and their properties. There are four bills pending—three in the House of Representatives and one in the Senate—with bipartisan support for each. The first is HR.508, a five-year extension introduced by Rep. Michael Grimm (R-NY), with 88 co-sponsors. There are also two separate proposals in the House for a 10-year reauthorization of TRIA: HR.2146, by Rep. Michael Capuano (D-MA), with 55 cosponsors, which extends TRIA through 2024 and would require the President’s Working Group on Financial Markets to report in 2017, 2020 and 2023 on its findings; and HR.1945 by Rep. Bennie Thompson (D-MS), which has seven co-sponsors and extends TRIA through 2024 and revises the definition of an “act of terrorism” to mean any act certified by the Secretary of Homeland Security in concurrence with the Secretary of the Treasury as meeting the criteria for such an act. In addition, the bipartisan seven-year extension bill S.2244 was recently introduced in the Senate by Sen. Chuck Schumer (D-NY) with 12 co-sponsors. Sen. Schumer’s proposal would increase insurer co-pays from 15 percent to 20 percent for losses above the $30 million threshold and increase the recoupment amount by $10 billion to $37.5 billion. According to a recent study by the RAND Center for Terrorism Risk Management Policy, TRIA is at “almost zero cost to taxpayers” and, in fact, taxpayers would be better off if TRIA is once again extended. But conservative groups say TRIA was only meant to be a temporary program, and because the risk of terrorism has decreased, it is no longer necessary. “The U.S. is now out of crisis mode,” reports the Heritage Foundation on its Web site, “and the insurance industry has had plenty of time to develop the tools and gather the data it needs to assess the risk of terrorism and price insurance accordingly.” Real Estate Roundtable argues that, since a viable private sector marketplace for terrorism risk insurance coverage still doesn’t exist, letting TRIA expire would leave policyholders—and taxpayers—unprotected and vulnerable. In addition, since terrorism insurance is required by lenders as part of most loan covenants, TRIA is critical to ensuring the continued availability of credit for the commercial real estate industry. RER argues that even when real estate isn't directly targeted by terrorists (2013 Boston Marathon bombings; 2010 attempted Times Square bombing) or isn't considered terrorism per se (2012 Aurora, Colo., mall movie theater shooting) it is vulnerable to collateral damage. Plus, reasons RER, terrorism is still a threat, as much as we would like to believe the terrorist era is over. As recently as September 2013, Al-Qaeda leader Ayman al-Zawahiri called for more attacks on U.S. soil to "bleed America economically." And the United States is not alone in providing a terrorism risk insurance program: 22 other nations do the same.

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) has been roundly criticized within the commercial real estate industry for discouraging foreigners from investing in American commercial real estate, thus stopping the inflow of new equity capital to address ongoing refinancing challenges within the sector that could be used to improve infrastructure and energy efficiency—and thus create jobs. FIRPTA requires foreign nationals who dispose of U.S. property interests to pay U.S. tax on any gains realized in the disposition. That means administrative complications for both the sellers and the buyers of these real estate assets, who must administer withholding taxes. FIRPTA is considered discriminatory because it also requires foreign investors to file a U.S. income tax return in the year in which they sell their property interest. In 2007 the Internal Revenue Service also began subjecting “liquidating distributions” from certain REITs to FIRPTA tax. Foreign investors find that FIRPTA is yet another U.S. tax cost to bear, and therefore they are less likely to invest in U.S. real estate. (Instead, says the Real Estate Roundtable (RER), they are steered toward China or India.) Meanwhile, foreign nationals who hold other investments in the United States—for instance, corporate stocks—are not required to pay U.S. capital gains tax upon selling these assets. The Association of Foreign Investors in Real Estate recently conducted a survey that confirmed that FIRPTA revision could drive significantly more foreign investment in U.S. commercial property markets. In particular, reports RER, this could lead to investment beyond the “gateway” markets. In 2013 bipartisan FIRPTA legislation was reintroduced by Reps. Kevin Brady (R-TX) and Joseph Crowley (D-NY) as well as Senators Robert Menendez (D-NJ) and Mike Enzi (R-WY). If this legislation is passed, it will raise the amount that a foreign investor can invest in a REIT before being subject to FIRPTA from five percent to 10 percent, as well as exempt liquidating distributions from domestically controlled REITs from FIRPTA tax by reversing IRS Ruling 2007-55.

The 2010 Environmental Protection Agency’s (EPA) Lead Renovation, Repair and Painting Rule (RRP) requires that firms performing such projects that disturb lead-based paint in homes, childcare centers and preschools built before 1978 must be certified by EPA, use certified renovators trained by EPA training providers and follow EPA safety work practices. On April 17, EPA and the Department of Justice announced that Lowe’s Home Centers agreed to implement a corporate-wide compliance program at its more than 1,700 stores to ensure that its contractors hired to perform work minimize lead dust from renovation activities. Lowe’s will also pay a $500,000 civil penalty—the highest ever for violations of the federal RRP rule—to settle allegations that contractors it hired for home projects violated the lead-paint rule. On April 25, EPA invited small businesses to participate as consultants on a Small Business Advocacy Review Panel as EPA considers steps to reduce lead-based paint exposure from the renovation, repair and painting of public and commercial buildings. So far, the ruling has only applied to single-family homes and multifamily buildings as well as childcare centers and preschools. The National Center for Healthy Housing calls the new ruling “the most important federal lead regulation since the HUD Lead-Safe Housing Rule a decade ago. It has the potential to ensure the widespread use of lead-safe work practices in homes and child-occupied facilities and may be extended to public and commercial buildings in the future.” Future program initiatives and actions include, In May, EPA will publish a “framework document” regarding its current consideration over whether RRP should be extended to commercial projects. “We are continuing our analyses in this area to get a better handle on the effects of lead exposure from renovations in public and commercial buildings, which will help us determine the severity and breadth of this issue,” Tanya Hodge Mottley, director of the National Program Chemicals Division at the EPA, told the Web site Remodeling (remodeling.hw.net). “We are very interested in feedback on how much lead dust is created during renovation activities, whether non-workers are present, and what they can do to minimize risks.” A proposal regarding RRP in commercial structures is due by July 2015.

The Energy Savings and Industrial Competitiveness Act is also known as the bipartisan Shaheen-Portman Senate bill (S.1392) on energy efficiency, sponsored by Sen. Jeanne Shaheen (D-NH) and Rob Portman (R-OH). According to a report by the nonpartisan American Council for an Energy-Efficient Economy, the bill would save businesses and consumers approximately $13.7 billion annually in energy costs, as well as cut 533 metric tons of carbon emissions and increase America’s energy independence, by spurring the use of energy-efficiency technologies in the commercial, industrial and residential sectors. The bill, which would also foster the creation of up to 164,000 jobs by 2030, uses an array of low-cost tools to reduce barriers for private sector energy users and drive the adoption of off-the-shelf energy-efficiency technologies. If passed, the Shaheen-Portman bill would have a direct impact on the commercial real estate industry. The bill proposes to strengthen national model building codes to make new commercial buildings as well as new homes more energy efficient while working with states and private industry to make the code-writing process more transparent. It would also kickstart private sector investment in building efficiency upgrades and renovations by creating a Commercial Building Energy Efficiency Financing Initiative, and train the next generation of workers in energy-efficient commercial building design and operation through university-based building training and research assessment centers. But even though the Shaheen-Portman bill is a fairly uncontroversial and bipartisan bill that’s supported by business and much of the commercial real estate industry—including the Real Estate Roundtable—it is likely to fail in the Senate, thanks to arguments over Republican-submitted amendments. On Wednesday, May 7, Senate Majority Leader Harry Reid blocked five Republican amendments to the Shaheen-Portman bill, including ones to speed up natural gas exports and oppose EPA regulations on future power plants. Since the amendments aren’t getting attached to the bill, Republicans rejected the offer to vote in favor of the bill in return for a binding Senate vote on Keystone XL. Now, bill will move to a procedural vote to end debate on the legislation next Monday, May 12, which will require 60 votes—a tally that it appears won’t be met. This is the second time that disagreements over Republican amendments have stalled the Shaheen-Portman bill. It first failed last September after being sidetracked over debates on Obamacare and the Keystone XL pipeline. When it was reintroduced in February, it initially appeared that it would get the votes it needed to pass.