May 5, 2008 – 6:42 p.m.
As lawmakers respond to rising foreclosures and other problems in the housing market, even industries that aren’t facing an immediate crisis are along for the ride.
Real estate investment trusts, which own shopping centers, hotels, office buildings and apartment complexes, have used their lobbying clout to attach tax changes worth hundreds of millions of dollars to housing-related legislation (
The little-discussed REIT provisions would make it easier for the tax-advantaged entities to buy and sell property more quickly, benefit from foreign currency gains and own a more diverse set of assets.
The tax changes have been on the industry’s agenda for several years, long before the current crisis started. And lawmakers haven’t made a direct connection between the need for the REIT tax provisions and the housing problems. But the industry has used the credit crunch and its possible impact on REITs to further its argument for the tax changes.
The situation illustrates how the crisis continues to ripple across the economy, and how businesses are seeking help from Congress to protect themselves from further damage.
“A lot of the key policy makers were looking at this as a real estate bill broadly, not just a housing bill,” said Tony Edwards, executive vice president and general counsel of the National Association of Real Estate Investment Trusts (NAREIT).
Salazar said the changes are drawing broad bipartisan support, and Crowley said he did not anticipate that the REIT provisions would fall out of the housing legislation during a future conference committee discussion.
“That’s a very important industry,” Hatch said, “and we didn’t want to see it go down.”
The version approved by the House Ways and Means Committee could be folded into a broader housing bill for floor consideration this week. The REIT provisions would cost the Treasury $314 million between now and 2018, according to the Joint Committee on Taxation. The version passed by the Senate on April 10 as part of its response to the housing crisis would cost $294 million. House members and many policy analysts have criticized the Senate’s tax provisions for focusing on businesses and not on struggling homeowners.
Congress created REITs in 1960 (PL 86-779) as a way to give small investors access to the real estate market. They own and manage real estate, and many are traded on stock exchanges. Since then, they have boomed into a popular vehicle for investors.
If REITs follow investment rules prescribed by Congress, they can avoid a corporate-level tax and pass their profits directly to shareholders, who then pay taxes. Corporations, in contrast, pay taxes on their profits, and then their shareholders also pay taxes on any dividends received.
Although the foreclosure problem has mostly affected residential real estate, industry advocates say one key connection to REITs lies in the broader credit crunch that grew out of the housing difficulties.
Even though commercial mortgage delinquency rates are at historic lows, the frightened market psychology has spilled over from the residential sector, said Kenneth Patton, dean of New York University’s Real Estate Institute.
“Everybody’s freaked out, and they’re able to ignore actual data that says everything is OK,” he said, “and it’s affected REIT stocks as much as other people.”
Patton and industry advocates say the tax provisions would help the industry and its investors weather the current economic downturn by giving REITs more flexibility to manage their assets during a period when gaining access to new capital is difficult.
“Residential and commercial real estate markets are not two separate animals. They both feed at the same trough, I guess you can say,” said Crowley, who introduced a stand-alone REIT bill in February 2007 and has been an advocate for his home state’s financial services sector.
But the changes eventually included in the housing tax legislation were not specifically designed as a response to the foreclosure and credit problems, and the Ways and Means Committee report on the bill doesn’t connect the REIT provisions to the broader concerns.
The proposed changes are relatively technical. One would allow REITs to sell properties after two years — instead of four years — as part of qualifying for a rule that allows REITs to sell property otherwise designated for long-term investment.
Another change would help nursing homes and health care REITs. Under the legislation, REITs could lease their facilities to taxable subsidiaries, extending a rule already available to REITs in the lodging industry.
The Senate bill lacks a House provision that would allow REITs to use foreign currency gains from real estate assets as qualifying income to meet tests for maintaining REIT status.
The REIT industry has been developing this package of provisions since the last set of changes to the industry’s tax rules, which were part of a broader tax bill in 2004 (PL 108-357).
The tax changes are among the highest priorities for NAREIT, which spent $2.2 million on lobbying in 2007 and $670,000 in the first quarter of 2008, though not all of that was spent on the tax bill.
The group’s political action committee, member companies’ PACs, NAREIT board members and past presidents have contributed at least $430,000 to lawmakers and their PACs so far this election cycle, with Senate Finance Chairman
Attaching the language to the housing measures was the latest industry strategy to move the legislation. It was unable to persuade lawmakers to attach the tax provisions to the economic stimulus bill enacted earlier this year (PL 110-185).
“That was a tougher road. People at that point, the policy makers understood it. They thought it was good policy. They understood our argument that it was stimulus,” Edwards said.
But lawmakers kept that measure tightly focused on tax rebates to individuals and broad-based tax breaks for business investment.
“This time,” Edwards said, “I think people accepted the connections a lot more readily. After all, the first two words of REIT are real estate.”