Agenda Summary 2006 Commercial Legislation And Regulatory Subcommittee National Association of REALTORS® 2006 Midyear Legislative Meetings & Trade Expo Omni Shoreham Diplomat Wednesday, May 17, 2006 9:00 AM - 10:30 AM
Chair: Bob McMillan (AL) Vice Chair: Blaine Walker (UT) Committee Liaison: Cynthia Shelton (FL) Committee Executive: Tom Heinemann (DC)
I. Call to Order
Ownership Disclosure Policy
1. When NAR has an ownership interest in an entity and a member hasan ownership interest* in that same entity, such member must disclose the existence of his or her ownership interest prior to speaking to a decision making body on any matter involving that entity.
2. If a member has personal knowledge that NAR is considering doing business with an entity in which a member has any financial interest**, or with an entity in which the member serves in a decision-making capacity*, or wit, then such member must disclose the existence of his or her financial interest or decision making role prior to speaking to a decision making body about the entity.
3. If a member has a financial interest in, or serves in a decision-making capacity for, any entity that the member knows is offering competing products and services as those offered by NAR, then such member must disclose the existence of his or her financial interest or decision-making role prior to speaking to a decision making body about an issue involving those competing products and services.
After making the necessary disclosure, a member may participate in the discussion and vote on the matter unless that member has a conflict of interest as defined below.
Conflict of Interest Policy
A member of any of NAR’s decision making bodies will be considered to have a conflict of interest whenever that member:
1. Is a principal, partner or corporate officer of a business providing products or services to NAR or in a business being considered as a provider of products or services (“Business:); or
2. Holds a seat on the board of directors of the Business unless the person’s only relationship to the Business is service on such board of directors as NAR’s representative; or
3. Holds an ownership interest of more than 1 percent of the Business. Members with a conflict of interest must immediately disclose their interest at the outset of any discussions by a decision making body pertaining to the Business or any of its products or services. Such members may not participate in the discussion relating to that Business other than to respond to questions asked of them by other members of the body. Furthermore, no member with a conflict of interest may vote on any matter in which the member has a conflict of interest, including votes to block or alter the actions of the body in order to benefit the Business in which they have an interest.
________________________________________ *Ownership interest is defined as the cumulative holdings of the member, the member’s spouse, children, siblings and to any trust, corporation or partnership in which any of the foregoing individuals is an officer or director, or owns, in the aggregate, at least 50% of the (a) beneficial interest (if a trust), (b) stock (if a corporation) or (c) partnership interests (if a partnership).
**Financial interest means any interest involving money, investments, credit or contractual rights. II. Approval of Annual Conference and Expo Minutes
III. Policy Issues and Discussion
A. Update: Tenant in Common Work Group TICs (tenant in common interests) are fractional interests or co-ownership in real estate. The ownership structure, in 2002, qualified as a valid option for 1031 tax deferred exchange purposes and since then, the TIC industry has grown exponentially.
TICs are generally brokered in two ways, as a real estate offering and as a securitized offering. The distinctionbetween a securitized TIC and a non- securitized TIC largely depends on how active investors are in the management of the property, and the extent to which the sponsor retains an interest in the property. When TICs are securitized they are subject to federal and state securities regulation, including the requirement that persons promoting the purchase of them have the necessary securities license. Because securitized TIC also involve the ownership of real property interests, their sale is also subject tostate real estate license laws, which require a real estate license to engage in the promotion and sale of real estate.
The Securities and Exchange Commission and the National Association of Securities Dealers have oversight of the securitizedTIC industry. Their current rules make explicitly clear that non-broker dealers, including real estate professionals, cannot be compensated for their participation in a sale of a security. NAR has highlighted the conflict between state laws and securitiesregulations and argued to the SEC that it is in the investors’ best interest to have the benefit of a real estate professional advising them on the real estate aspects of a securitized TIC.
In November, 2004, NAR's Board of Directors approved the following information item that enabled NAR to 1) educate members on what they need to know 2) work to secure a role of real estate professionals in the brokerage of securitized TIC interests.
The Committee may recommend action on thefollowing item(s):
“That NAR affirm that tenant in common transactions are real estate transactions that may or may not be securitized. NAR believes that the consumer is best served by the expertise of real estate professionals, the protections of state real estate laws, and applicable state and federal securities laws.”
PROS: 1. Affirms the work of the TIC work group supporting the belief that the customer is best served by a real estate professional advising themon a securitized TIC transaction. 2. Affirming that t a real estate professional acting as a buyers agent in a securitized TIC transaction can provide another layer of due diligence, thus increasing the soundness of a tenuous marketplace.
CONS: 1. Increased visibility on this issue may lead to unwarranted attention to this issue from legislators who may want to take a closer look at 1031 exchanges.
Some are concerned that the TIC market reopens the door to unduly aggressive syndicating.
Currently, there is a lot of confusion among REALTORS® about the TIC market place. More than a few REALTORS® have participated in securitized TIC transactions only to find that they could not be compensated for their work. Furthermore, a number of REALTORS® may not be aware of the risks investors might face in purchasing a securitized or non securitized TIC. Because this industry is growing rapidly, and is viewed as an attractive option for investors, NAR published twoeducation pieces on the TIC industry, one geared for commercial real estate professionals, and another geared for the general practitioner.
NAR is in discussions with the SEC on defining a role for real estate professionals in the brokerage ofsecuritized TIC interests, whereby they can provide real estate services and derive compensation. NAR believes that it is in the consumer's best interest to work with a real estate professional in identifying any real estate investment opportunity, including a securitized TIC interest.
SEC Update
ARELLO (Association of Real Estate License Law Officials)
NASAA (North American Securities Administrators Association)
B. Enhancing the Flow of Capital to Commercial Real Estate Real estate mortgages are bundled and securitized through Qualified Special Purpose Entities (QSPE) when they are sold on the secondary market. Because investors expect loans to perform on the terms by which they were issued, investors generally expect the loans to be passive. However, some servicer flexibility is allowed to permit borrowers to reposition their property or to modify the terms of the loan to meet changing economic conditions. The issue is how much flexibility should be permitted? The large four accounting firms have asked the Financial Accounting Standards Board (FASB), which developed the rules governing QSPE's, to more clearly define the rules governing servicer flexibility. NAR, along with partners in the Capital Consortium, are concerned that if FASB takes a narrow view on servicer flexibility, securitization could become less popular, thus reducing the flow of capital to real estate.
NAR supports efforts to enhance the flow of capital to real estate.
Some may believe that QSPE rules require complete loan servicer passivity to ensure that the terms by which the loan was securitized are met.
If FASB revises its QSPE rules to narrow servicer flexibility, servicers would be less likely to allow borrowers to modify their property to address changing economic conditions, and would also have limited ability to change the terms of a loan to account for a change in a borrower's economic circumstances. A narrow view of QSPE's could threaten the attractiveness of securitizing a loan, thereby harming the mortgage backed securities market and reducing the flow of capital to real estate.
FASB has initiated a study to determine what, if any, modifications should be made to QSPE rules. Issues that FASB examine are: Waiver of the due-on-sale clause, which permits a servicer to allow the assumption of a collateralized loan obligation by a new primary obligor upon the sale ofthe collateralized property. The substitution of collateral in which the servicer permits a borrower who has secured a loan with different pieces of property to remove one piece of property as collateral and substitute another. The permitted activities of a servicer in connection with events leading up to potential foreclosure, deciding to foreclose, and activities pertaining to operating the property during foreclosure, which on average is two years for commercial real estate. NAR and members of the Capital Consortium are working to address these concerns.
FASB
Basel Accords
Proposed Guidance on Commercial Real Estate Concentrations
C. Update: OCC Decisions Expanding Authority of Banks to Develop Real Estate In December 2005, the Office of the Comptroller of the Currency (OCC) announced it was authorizing national banks to invest in real estate projects involving the development of office buildings, hotels, residential condominiums, and windmill farms. OCC is the principal federal banking regulator for national banks. The OCC actions represent a marked departure from what is permitted by the National Bank Act, the OCC’s regulations, and previous OCC rulings regarding the types of real estate activities in which national banks may engage. The new rulings represent the OCC’s continued efforts to dramatically expand the real estate powers of national banks.
NAR is strongly opposed to the OCC actions and on January 27, 2006, sent a letter to Comptroller John Dugan explaining in detail the basis for our objections. OCC has set in motiona process that will inevitably lead to national banks becoming actively involved in real estate development and brokerage activities. This will result in inherent conflicts of interest when real estate developers seek financing for competing projects. Moreover, federal subsidies give banks an unfair advantage when competing with other developers. These activities also will markedly increase the risk exposure of national banks, threaten the safety and soundness of the banking system, and lead to authorization of banks becoming real estate brokers.
In addition, permitting national banks to engage in real estate activities undermines the long-standing, Congressionally-mandated separation between banking and commerce. The lessons learned from thesavings and loan scandal of the 1980s and the sluggish Japanese economy, where banks are intertwined with real estate and commercial enterprises, are two dramatic examples of negative consequences of mixing banking and commerce.
NAR believes the potential problems would occur in the context of national banks and has not taken a position against the limited real estate activities, authorized by law, engaged in by a few state banks, credit unions, and thrifts.
OCC and the banks argue that the rulings are consistent with law, regulation, and precedent and that the investments are either necessary to accommodate the bank's business or, in the case of windmills, the functional equivalent of a loan.
Federal subsidies give banksaccess to cheap sources of capital, which gives them an unfair advantage over REALTORS® and others involved in real estate development. Expanding the authority of banks to develop real estate could lead to the OCC giving banks the authority to brokerreal estate as well.
Allowing banks into real estate development lets them compete unfairly with real estate professionals. For example, a bank could take a real estate professional’s application for financing to develop a piece of property and use the information to develop a competing proposal that cuts out the real estate professional.
Investing in real estate can be a risky venture as markets change. The OCC should not expand the authority of banks to invest in real estatedevelopment because it creates the risk that, as in the savings and loan scandal in the 1980s, REALTORS(r) and all other taxpayers will be forced to bail out the banks.
NAR has raised its concerns about the OCC rulings with OCC Comptroller John Dugan, Chairman Ben Bernanke of the Federal Reserve Board, Treasury Secretary John Snow, and acting Chairman Martin Gruenberg of the Federal Deposit Insurance Corporation. NAR is also communicating its strong objections to Members of Congress, urging Members to communicate their objections directly to OCC, and suggesting that Congress take action to rein in the inappropriate expansion of banks into real estate development.
IV. Legislative and Regulatory Update
A. Discussion of Multifamily Issues: Congress is considering several proposals to extend and reform federal multifamily programs. HUD's FY07 budget included a proposal to increase the mortgage insurance premium (MIP) on FHA multifamily mortgageinsurance programs. Also within HUD, the authority to restructure federally-assisted multifamily mortgages under the Mark-to-Market program expires at the end of this fiscal year. Lastly, the Rural Housing Service is looking to restructure the 515 federally-assisted multifamily rural properties in a program similar to mark-to-market, which would reduce rents, and allow owners to restructure their mortgages to provide funds for rehabilitation and repair.
NAR recognizes the need to maintain the viability of federal multi-family housing programs and to increase the availability and affordability of rental housing. NAR encourages the removal of policy and program disincentives that inhibit owner participation in the development of new rental housing or the preservation of existing safe and affordable rental housing.
There are those who do not believe the private market can meet the demand for housing without federal intervention.
NAR and its affiliate, The Institute of Real Estate Management (IREM), is involved in the ownership and management of federally-assisted properties in recognition that affordable rental housing is the first step on the housing ladder for many Americans.
FHA insurance programs help finance the construction, rehabilitation and improvement of rental housing in communities across the nation. The budget proposal to increase mortgage insurance premiums are said to offset administrative costs of the programs because the affected programs (with theexception for those properties with low income housing tax credits) do not serve a “public purpose.” However, we argue that all FHA programs have a strong public purpose, providing a key source of affordable rental housing for individuals andfamilies throughout the country. We believe these new fees will cause fewer properties to be built or rehabilitated and will result in an increase in rents for tenants. NAR signed onto a coalition letter opposing this fee increase.
HUD's “Mark to Market Program” was authorized in 1997 under the Multifamily Assisted Housing Reform and Affordability Act (MAHRA) as part of an effort to address the expiration of rental subsidy contracts under the Section 8 project-based programs. Thisprogram allows for the restructuring of mortgages on projects with above-market rents, to reduce such rents in exchange for an extended affordability term of thirty-years. HUD has preserved over 3000 projects as part of this program. The authority to restructure expires on September 30, 2006. We urge Congress to extend this program for five years, to allow an additional 1000 properties to complete this process. This issue is expected to be considered in the Appropriations process in Congress.
Congressman Geoff Davis (R-KY) has introduced H.R. 5039, the “Saving American’s Rural Housing Act of 2006.” This legislation would create a Mark to Market-type program for the rural housing 515 multifamily insurance program. The 515 portfolio is very important to rural communities, where affordable rental housing can be scarce. However, this housing is primarily older stock and in desperate need of rehabilitation. A program like that proposed in HR 5039 would allow these mortgages to be restructured so owners could obtain monies to revitalize these properties. A markup of this legislation is expected in the House Financial Services Committee in late May.
B. Terrorism Insurance: Congress recently passed the Terrorism Risk Insurance Extension Act (TRIEA), which extends the federal terrorism insurance backstop program for an additional two years, but also increases reliance on the insurance sector to cover more of the losses stemming from a terrorist attack. TRIEA does this in three ways: 1) increases the trigger point at which the federal government will provide assistance from $5 million in 2005, to $50 million in 2006, and $100 million in 2007; 2) increases the insurer deductible from 15% in 2005, to 17.5% in 2006, and 20%in 2007; and 3) mandates the President's Working Group on Financial Markets (PWG) to develop long term recommendations by September 30th, 2006.
While NAR was successful in keeping terrorism insurance coverage affordable and available with theextension of TRIA, NAR must remain vigilant to ensure that the long term solutions being considered will ensure continued availability and affordability of terrorism coverage.
NAR supported the extension of the make-available provision of TRIAthrough 2007.
Critics believe that the federal government should not be in the business of bailing out the insurance industry.
Terrorism insurance availability is critical to financing commercial real estate development, particularlyin densely populated areas that are perceived to be terrorist targets. Furthermore, if buildings are financed with terrorism coverage, any expiration or dramatic price increase for that coverage may (1) place the loan in technical default and increase the lender's risk, and (2) decrease the value of the building because the losses attributable to a terrorist attack would no longer be covered or (3) reduce the profitability of the building.
The PWG will need to issue a report to the President recommending long term solutions for the continued availability and affordability of terrorism insurance by September 30th, 2006. It is likely that Congress will take up legislation based on those recommendations in 2007.
V. Information Sharingof State and Local Activity
A. Subcommittee members discuss commercial related activities that are occurring in their locality that could necessitate federal review/ action in the future
