willis real estate and hotel practice symposium real ... · pdf filereal estate and the 2012...
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Copyright © 2012 Holland & Knight LLP. All Rights Reserved
Willis Real Estate and Hotel Practice SymposiumReal Estate and the 2012 Elections
Chicago, June 13-14, 2012
Peter FriedmanHolland & Knight, LLC
Tuesday, June 19, 2012
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Special Thanks
Thank you to Chip Rodgers with the Real Estate Roundtable for contributing material for this
presentation
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Senior Vice President and Executive Director
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• Toxic Politics / Dissatisfied Electorate
• The Fate of ObamaCare
• Pension Attention
• Struggling Economy
• Big Pending Issues -- No Consensus
• 2012 Elections
• The Badgers
Part One: The Way Things Are
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Rep. Joe Wilson (R-SC) to Obama: “You lie!”
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Rep. Joe Wilson (R-SC) to Obama: “You lie!”
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We are not in Kansas anymore…
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We are not in Kansas anymore…
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Approval Ratings• Obama’s Approval in May 2012− Approval: 47% − the same as George W. Bush’s in May of his re-election year. (Gallup)
• Congressional Job Approval– Approval: 17%– Disapproval: 75%
• Supreme Court Approval− Approval: 44%− 66% approval in 1980s− 50% approval in 2000
• Is the country headed in the right direction?− Right Direction: 33.4%− Wrong Track: 58.8%
Source: Real Clear Politics6
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Honesty and Ethics Test
Only 7% think Members of Congresshave high honesty and ethics standards.
Source: Gallup
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Honesty and Ethics Test
Only 7% think Members of Congresshave high honesty and ethics standards.
Source: Gallup
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Real Estate AgentsLawyers
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Polarized Political Parties
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• Overall level of congressional polarization in 2010 was the highest ever recorded.
• Every Senate Democrat compiled a voting record more liberal than every Senate Republican
• Every Senate Republican compiled a voting record more conservative than ever Senate Democrat.
Source: National Journal
Most Conservative Democrat Sen. Ben Nelson (NE)
Most Liberal Republican Sen. Susan Collins (ME)
Where are the moderates?
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Supreme Court Ruling on Health Care Law
Patient Protection and Affordable Care Act
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Supreme Court Ruling on Health Care Law"For years what we've heard is the biggest problem on the bench was judicial activism or a lack of judicial restraint -- that
an unelected group of people would somehow overturn a duly constituted and passed law.
"Ultimately, I'm confident that the Supreme Court will not take what would be an unprecedented, extraordinary step of overturning a law that was passed by a strong majority of a democratically elected Congress.
- President Obama at a Rose Garden press conference
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Supreme Court Ruling on Health Care Law"For years what we've heard is the biggest problem on the bench was judicial activism or a lack of judicial restraint -- that
an unelected group of people would somehow overturn a duly constituted and passed law.
"Ultimately, I'm confident that the Supreme Court will not take what would be an unprecedented, extraordinary step of overturning a law that was passed by a strong majority of a democratically elected Congress.
- President Obama at a Rose Garden press conference
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Remember the “Grimace”
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Remember the “Grimace”
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Remember the “Oath”
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Remember the “Oath”
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Pension Attention
• Unfunded Liabilities
• “Legal” Pension Abuse
• Unsophisticated Focus on Asset Mix
• Reform
• Illinois
• Real Estate Impact
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Struggling Economy
• Anemic job growth -- Persistent high unemployment
• $1.327 trillion national deficit
• CBO = Federal debt = 70% of GDP (40% in 2008)
• Real estate and housing market
• Uneven business growth (big v. small)
• Treasuries
• Euro-Mess
• No Clear Path
• Tight credit (big looming maturities) / CMBSSource: Real Estate Roundtable
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Maturities Loom $1.4 trillion of commercial real estate loans -- held by banks and others -- to mature through 2014
• Many commercial real estate loans will not qualify for refinancing at maturity without significant equity infusions
• As such, “re-equitizing” mountain of commercial real estate loans made during the boom remains a serious challenge
Source: Real Estate Roundtable
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Commercial Real Estate Values Decline – Est. $1.5 Trillion Equity Gap
$6.7 trillion in June 2008 - $5.2 trillion in December 2010
Total Debt
$3.5 trillion
Total Equity
$3.2 trillion
20102008
3.3
2.0Total Debt
$3.3 trillion
Total Equity$1.4
trillion
2009
Source: Real Estate Roundtable
Total Equity$2.0
trillion
Total Debt
$3.2 trillion
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Source: Federal Reserve Flow of Funds Accounts of the United States; Real Estate Roundtable
Commercial Real Estate Debt Growth
$1.04 trillion $1.3 trillion
$3.5 trillion
1988-Q4 1998-Q42008-Q4
CMBS Banks
Banks Thrifts Insurance Government CMBS Other
By source of funds
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CMBS Issuances
Source: Commercial Mortgage Alert Source: Commercial Mortgage Alert; Real Estate Roundtable
0
40
80
120
160
200
240
5849
74
52
7893
169
206
230
123 12
30
19992002
20052008
2011
3
Billions of Dollars
CMBS
Issu
ance
s
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DC Gridlock
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Big Pending Issues -- No Consensus
• Debt ceiling…again• Budget Control Act; 2013 Sequestration• Expiring Bush tax cuts, payroll tax cut, alternative minimum tax, unemployment benefits• FY 2013 Appropriations
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Text
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Expiring Tax Provisions• Bush-era tax cuts are set to expire at the end of 2012
• President Obama says he will not extend Bush rates for the “rich,” households earning over $250,000, but he will allow rates to continue for the “middle class”
• Republicans will fight to extend all Bush-era tax cuts temporarily, if not permanently
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Bill Clinton two weeks ago:
…the economy is “in recession” and delaying changes in the Bush tax cuts is “probably the best thing to do right now.”
Bill Clinton a week ago:
“I’m very sorry for what happened. I thought something had to be done on the fiscal cliff before the election. I support [Obama’s] position [on the Bush tax cuts], and I think on the merits, upper-income people will have to contribute to long-term debt reduction.”
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2012 Elections: Congress• Democratic majority in the Senate• Republican majority in the House, with “Tea Party” supporters pushing
own agenda– 62 representatives, all Republicans, in Tea Party Caucus
• All attention is focused on campaign season− Triple Witching Hour: House, Senate and POTUS
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“Think Congress is a big, dysfunctional, polarized mess?
Just wait: It’s going to get worse.” -Politico
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2012 Elections: CongressTurnover Perspective
HouseLast decade has seen an average freshman class size in the 50s1949: Biggest freshman class of 118 people2010: Freshman class size was 96 (87 Republicans, 9 Democrats)
– 75 of the Republican Freshmen were endorsed by “Tea Party” groups– Republican Party gained control of the most House seats since 1938
SenateLast decade has seen an average of 11 Senators in each Freshman class40 current Senators weren’t in the Senate before 2006
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Gridlock Convincing Members to RetireCasualty List
Senior members, such as 12-term Jerry Costello (D-IL), 15-term Dan Burton (R-IN), and 16-term Barney Frank (D-MA) have announced retirement. This makes way for another large class of freshmen.
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House Senate15 Democrats 6 Democrats
12 Republicans 3 Republicans
1 Independent
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Retiring Senators
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Daniel Akaka (D-HI) 3 terms
Chair of Indian Affairs
Jim Webb (D-VA) 1 term
Chair of Armed Services and Foreign Relations
Subcommittees
Kent Conrad (D-ND) 4 terms
Chair of BudgetChair of Finance Subcommittee
Olympia Snowe (R-ME)3 terms
Ranking Member on Small Business
Ranking Member on Commerce, Science and
Transportation Subcommittee
Ben Nelson (D-NE) 2 terms
Chair of Ag, Approps and Armed Services
Subcommittees
Joe Lieberman (I-CT) 4 terms
Chair of Homeland SecurityChair of Armed Services
Subcommittee
Jon Kyl (R-AZ) 3 terms
Ranking Member on Finance and Judiciary
Subcommittees
Herb Kohl (D-WI)4 terms
Chair of Approps and Judiciary Subcommittees
Kay Bailey Hutchison (R-TX) 3 terms
Ranking Member on Commerce, Science and Transportation
Ranking Member on Approps Subcommittee
Jeff Bingaman (D-NM) 5 terms
Chair of Energy and Natural ResourcesChair of Finance Subcommittee
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And the Staff (Kids Are Doing This Stuff)
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High turnover and lack of experience in congressional offices are leaving staffs increasingly without policy and ins:tu:onal knowledge, leaving a vacuum that usually is filled by lobbyists.
Most Senate staffers have worked in the Capitol for less than three years. For most, it is their first job ever. In House offices, one-‐third of staffers are in their first year, while only 1 in 3 has worked there for five years or more.
Washington Times, June 6 2012
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House Prospects
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Current House: 241 Republicans | 194 Democrats
Source: Real Clear Politics
• 1 Representative appointed to Senate• 12 Representatives running for Senate• 2 Representatives running for other office• 27 Representatives retiring • 7 Representatives defeated in primary• 6 Representatives resigned• 1 Representative died – Donald Payne (D-NJ)
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Senate Prospects
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Source: The Cook Political Report
• 10 Senators retired, leaving open seats (6 D, 3 R, 1 Ind)• 1 Senator defeated in primary – Dick Lugar (R-IN), 6 terms• 1 Senator resigned – John Ensign (R-NV)
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2012 Elections: Obama vs. RomneyMessage could go one or two ways:
President runs in weak economy against a turn-around specialist
– or –
President runs in a pretty decent recovery against a Wall Street plutocrat
Source: Real Estate Roundtable
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Is Bad Unemployment Bad for the President? • 8.2% unemployment, compared to 9.7% unemployment before
2010 Elections
• Since 1948, only one incumbent president has won reelection with joblessness over 7 percent
– Ronald Reagan in 1984
• However, no incumbent seeking reelection has lost with unemployment falling for two years prior to the vote
• The relative direction of the economy, rather than the absolute level of unemployment, may most determine voter perception of President Obama’s economic track record
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If Election Was Today? • Real Clear Poli,cs Poll Average: General Elec,on-‐ Romney vs.
Obama (6/11/2012) Obama: 46.3% (221 electoral college votes)Romney 45.3% (170 electoral college votes)
• Gallop (March 2012) -- 47 % Republican Candidate / 47 % Democratic Candidate
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The Badgers
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Part Two: Critical Issues Facing Real Estate
• Carried Interest• Terrorism Risk Insurance Act (TRIA)• Foreign Investment in Real Property Tax Act (FIRPTA)• Filling Equity Gap • Enhancing Liquidity under Dodd Frank• Corporate Tax Reform• Immigration• Environmental / Energy
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Carried Interest
“How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a
lower rate than their secretaries?“- President Obama
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Carried Interest
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Carried Interest
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Carried Interest
• A revenue raiser (aka “Carried Interest Fairness Bill of 2012”)
• Proposed in American Jobs Act of 2011
• President’s FY 2012 Budget ($15 billion over 10 years)
• Passed House (HR 3996 )(110th Congress) -- 216 to 193
• Passed House (HR 6275) (110th Congress) -- 233 to 189 (10 republicans plus 223 democrats)
• Proponents sell issue as “loophole” closer aimed at hedge funds and private equity managers
• In reality, nearly 50% of all partnerships in America are CRE
• Confiscatory tax hike hits CRE partnerships past and future - large and small – includes “enterprise value” and family-owned partnerships
• Retroactive Effect (interest granted prior to change)
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Terrorism Insurance (TRIA)
• Terrorism Risk Insurance Act of 2002 (TRIA)
• Terrorism Risk Insurance Extension Act of 2005 (TRIEA)
• Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA)
• December 31, 2014 Sunset
• No Focus
• Tough Optics
• Coalition Dispersed and Preoccupied
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The Equity Gap
Source: Real Estate Roundtable
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FIRPTA Reform
One approach to filling equity gap is to encourage capital from foreign investors by revising Foreign Investment in Real Property Tax Act (FIRPTA) and
• Foreign Investment in Real Property Tax Act (FIRPTA) discourages non-U.S. investors from investing in U.S. real estate
• H.R. 2989 introduced by Rep. Kevin Brady (R-TX)• S.1616 introduced by Sen. Robert Menendez (D-NJ)• Reverse IRS 2007-55; increase 5% to 10% exception
Source: Real Estate Roundtable
Tuesday, June 19, 2012
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Direction Change Needed for National Policy Measures needed that will: • Encourage capital formation • Facilitate equity investment in real estate • Restore vitality to the asset backed securities markets –
particularly CMBS• Help banks continue to clear their balance sheets of
toxic assets • Encourage lending and enhance liquidity
Source: Real Estate Roundtable
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Dodd Frank Wall Street ReformCredit and Capital Market Issues
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Tuesday, June 19, 2012
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Dodd Frank Wall Street Reform• Targeted at every aspect of financial services sector –
from small banks to giant Wall Street firms, insurance industry
• 2,300 page law that tasks 11 federal agencies to implement some 243 new formal rule-makings, adding a myriad of new regulations – feeding climate of uncertainty
• Impact of new law reverberating across financial services industry and economy
• Intended to fix “too big to fail”
Source: Real Estate Roundtable
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Dodd Frank FailingsWhat Dodd Frank fails to do: • Enhance credit capacity • Repair ABS/CMBS markets• Encourage capital formation • Aid economic expansion • Repair shattered U.S. housing finance system—a
mechanism essential for a robust economic recovery• Provide Federal Reserve with new tools for economic
stabilization
Source: Real Estate Roundtable
Tuesday, June 19, 2012
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Primary Dodd Frank Concerns• Risk Retention• Volcker Rule• Investor Registration• OTC Derivatives Reforms
Source: Real Estate Roundtable
Tuesday, June 19, 2012
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Basel IIIConcerns about impact Basel III could have on U.S. banking system:• Requiring banks to hold far more capital to prevent
financial disaster could further exacerbate credit challenges for real estate and broader credit capacity
• Liquidity rule won’t go into effect until 2015• In response to complaints from lenders, financial
regulators agreed to fine-tune standards, where needed, by 2013
• Federal Reserve small lenders June 8 announcement
Source: Real Estate Roundtable
Tuesday, June 19, 2012
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Lease AccountingNew lease accounting approaches being considered for lessees and lessors • Would re-characterize income producing real estate
business as a financing business• Lessors fear that proposed standard will force lessees to
push for shorter term leases without renewal options – change fundamentals of CRE cash flow model
• Failure to match policy with economic reality• Should reflect economic activity, not drive it
Source: Real Estate Roundtable
Tuesday, June 19, 2012
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Lease Accounting• New standard originally slated for June 2011 with
effective date of 2013 • In July, FASB announced their intention to re-expose
their revised proposals for a common leasing standard• FASB would like more examples of lease transactions
affected by new standard• Economic study released to aid Congressional outreach
Source: Real Estate Roundtable
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Corporate Tax Reform Alternative
• Supporters claim that the Buffett Rule “is something that will get us moving in the right direction toward fairness”
• Rather than overhauling the tax code, Buffett Rule simply adds another layer
• Tax hike will result in a shift of portfolio allocation to more tax exempt instruments
• Less investment capital available to American business and real estate
• If imposed, Buffett Rule wouldn't result in any significant increase in tax yield
• JCT estimates rule would generate $46.7B in revenues over next decade
• Represents less than 1% of the $6.4 trillion in deficits projected during that time
Buffet Rule
Source: Chip Rodgers
Tuesday, June 19, 2012
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GSE ReformGSE reform remains stalled, 5 years into the financial crisis• Administration proposed broad-based plan that would wind down
GSEs with 3 options
• Seeking consensus on how to bring private capital back into this market
• Legislative proposals have begun to emerge:
– 2 comprehensive House bills, 2 comprehensive Senate bills, some 8 piecemeal House bills
• However, enactment of any of these bills appears unlikely in the near future
Source: Real Estate Roundtable
Tuesday, June 19, 2012
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Immigration• Not pressing issue for Congress – too many other deadlines
• Will likely be a part of presidential candidate stump speeches
Romney did announce his new Hispanic Steering Committee last week
• Consists of at least six supporters of the Development, Relief and Education for Minors (DREAM) Act
– proposed legislation that would provide path to citizenship for some illegal immigrant youths
– Romney opposes DREAM Act
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Add source or notes here
EnergySenate • Energy Savings and Industrial Competitiveness Act (ESIC Act)• Federal energy code for buildings• Improved provisions from pervious cap and trade legislation
House• Arctic and off-shore drilling• Keystone XL pipeline
Incentives for Building Retrofits• Loan guarantees• Tax incentives• PACE financing programs• Green appraisal standards• Building Labeling, Rating, and Energy Initiatives
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Add source or notes here
Environmental• Water Policy
• US Supreme Court CWA Decisions (Sackett v. EPA and PPL v. Montana)
• Regulator activity on “waters” and “wetlands.”
• Lead paint in commercial buildings
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Add source or notes here
InfrastructureNew Transportation Funding Bill (“Moving Ahead for Progress in the 21st Century Act” (MAP-21)
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IT COULD BE WORSE
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We Could be Greece
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We Could be Greece
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Copyright © 2012 Holland & Knight LLP. All Rights Reserved
Discussion and Questions
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Holland & Knight’s Presence
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Holland & Knight’s Real Estate Practice Group is one of the most experienced and well-respected practices in the U.S. With a 100-year tradition of providing counsel in real estate law, we are a dedicated and experienced team with more than 240 real estate professionals.
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Biography
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Peter Friedman is the head of Holland & Knight's Chicago Real Estate Group. Mr. Friedman represents private and public sector clients in all phases of real estate acquisition, finance, development, zoning, entitlements and land use matters. He counsels property owners, pension funds, private equity firms, tenants, and developers in a variety of real estate and transactional projects.
Mr. Friedman also represents numerous local and state government agencies, municipalities and counties on all aspects of real estate, development, and public law. He serves as the Village Attorney in Oak Brook and Lake Bluff, Illinois. He represents the State of Illinois on real estate matters for significant public infrastructure projects. He also serves as General Counsel to the Chicago Association of Realtors and as special outside counsel to the Illinois Emergency Management Agency and its Division of Nuclear Safety.
Mr. Friedman served as a judicial clerk to the Honorable Suzanne B. Conlon, judge of the U.S. District Court for the Northern District of Illinois. Prior to that, he worked for five years on the staff and as legislative director for Congressman John Porter (IL-10) in Washington, D.C.
Tuesday, June 19, 2012