Commercial Legislation And Regulatory Subcommittee National Association of REALTORS® 2006 REALTORS® Conference & Expo Hilton New Orleans Riverside Marlborough Room Friday, November 10, 2006 & Sunday, October 1, 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 ANDCONFLICT OF INTEREST POLICY
Ownership Disclosure Policy
1. When NAR has an ownership interest in an entity and a member has an 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**, orwith 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 aconflict 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 ofthe 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 anytrust, 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 Midyear Meeting Minutes
2006 Committee Goals
Purpose: To identify and analyze emerging legislative and regulatory issues that impact commercial real estate; monitors and analyzes current and prospective housing issues affecting FHA and Rural Housing Service multifamily housing programs and recommends appropriate policy; to develop, communicate, and advocate public policy which benefits the business interest of our commercial members while protecting and enhancing the right to own, use and transfer real property.
Liaison: Cynthia Shelton
Staff Contacts: Tom Heinemann (202) 383-1090
Goal: Educate members on the Tenant in Common marketplace, define a role for real estate professionals in the sale of TIC securities,a
- Hopefully the Securities and Exchange Commission (SEC) will respond favorably to NAR’s efforts to define a role for real estate professionals in the brokerage of TIC securities before the end of the year. Over the past two years, NARhas been in an on-going dialogue with the SEC on the benefits (increased due diligence, consumer protections etc), and the necessity (compliance with state real estate laws) of allowing real estate professionals to participate in and derive compensation from TIC securities transactions. If the SEC does respond favorably, the subcommittee and the TIC working group will need to provide further education to NAR’s commercial members.
Action Item: This may be discussed at the meeting and willbe shared with the Federal Taxation Committee.
“The sale of Tenant in Common interests are fundamentally real estate transactions and as such NAR believes that consumers are best served by having the opportunity to use and rely on the expertise of real estate professionals, REALTORS®, and the protections of state real estate laws. In some instances the sale of Tenant in Common interests may also constitute the sale of securities. In such cases, securities professionals must also be involved to advise consumers on the securities issues as well as to comply with applicable state and federal securities laws.”
- Terrorism Insurance: At the end of 2005, Congress passed the Terrorism Risk Insurance Extension Act which extends the federal terrorism reinsurance backstop an additional two years, and thus ensured the continued availability of terrorism coverage. TRIEA is expected to expire at the end of 2007—this pending sunset has already spurred several Congressional hearings on the ability of insurers and reinsurers to provide terrorism coverage in the absence of a federal backstop. The President’s Working Group on Financial Markets has concluded that TRIEA has stabilized the insurance markets, and potentially impeded the growth of the reinsurance market—but cannot separate the difficulty in determining terrorism risk from the market intrusion of a federal backstop. It is likely that some form of legislation extending some type of federal backstopwill be enacted next year.
- Commercial Insurance: Many commercial members are being impacted by rising property and casualty insurance rates, or by the exit of insurers in key markets. Because of this trend, which appears to be pronounced in the Gulf States, NAR, along with several other real estate trade groups, have engaged the RAND Corporation to get an assessment of the breadth and depth of the problem and to recommend policy solutions. Congress has begun considering several pieces insurance legislation that has the potential to dramatically alter the insurance landscape, that could including: 1) creating an optional federal charter, or 2) establishing a natural disaster backstop it is likely that these insurance reform bills will be a top legislative priority in the new Congress. The sub-committee will consider a recommendation to the property rights, land use and environment committee to expand NAR’s Natural Disaster policy to include commercial.
Action item: This will be referred to the Land Use, Property Rights and Environment Committee.
Modify the following statement from NAR’s natural disaster policy:
“The goal of any federal natural disaster program should be the promotionof available and affordable homeowner and commercial property insurance in disaster-prone areas.”
- Commercial Lending: With the pending implementation of the Basel II Accords, and the concern of federal regulators that many smaller banks have high concentrations in commercial real estate lending, NAR will work with the appropriate regulators to ensure that changes in regulatory capital (that is the amount banks are required to hold in reserve to as risk mitigation measure) doesnot impact the availability of capital for commercial borrowers.
III. Policy Issues and Discussion
1. Property and Casualty Insurance: Issues facing Commercial REALTORS® Guest speaker: Lloyd Dixon, RAND Institute
Bio for Lloyd DixonThe intensity of natural disasters in recent years has made the acquisition of adequate homeowners’ insurance very difficult in some areas. Insurers are declining to write policies, canceling existing policies and increasing premiums on existing policies. Recently, Hurricanes Katrina and Rita have refocused attention on this issue.
REALTORS® supports the promotion of available and affordable homeowners' insurance in disaster-prone areas.
Homeowners’ insurance is required for obtaining a mortgage. If a potentialhomebuyer is unable to purchase insurance, because it is either unavailable or unaffordable, the sale will not be completed.
Several bills have been introduced in the House and Senate that take different approaches regarding natural disaster insurance. However, no one approach has emerged as a front-runner. Congress is not likely to enact legislation before it adjourns in 2006. On March 2, NAR hosted a roundtable meeting with Reps. Ginny Brown-Waite (R-FL) and Clay Shaw (R-FL). Additionally, on September 18 NAR hosted a symposium on natural disaster policy to help identify federal solutions. NAR will continue to work with interested stakeholders to build a strong coalition and momentum supporting natural disaster insurance legislation when the110th Congress convenes in 2007. 2. Update: Tenant in Common Work GroupTICs (tenant in common interests) are fractional interests or co-ownership in real estate. The ownership structure, in 2002, qualified as a validoption 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 distinction between a securitized TICand 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 securitiesregulation, including the requirement that persons promoting the purchase of them have the necessary securities license. Because securitized TICs also involve the ownership of real property interests, their sale is also subject to state 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 securitized TIC 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 securities regulations and arguedto the SEC that it is in the investor’s best interest to have the benefit of a real estate professional advising them on the real estate aspects of a securitized TIC.
NAR’s Commercial Legislation and Regulatory Subcommittee adopted the following policy statement in 2006:
“The sale of Tenant in Common interests are fundamentally real estate transactions and as such NAR believes that consumers are best served by having the opportunity to use and rely on the expertise of real estate professionals, REALTORS®, and the protections of state real estate laws. In some instances the sale of Tenant in Common interests may also constitute the sale of securities. In such cases, securities professionals must also be involved to advise consumers on the securities issues as well as to comply with applicable state and federal securities laws.”
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 two education 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 of securitized 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. 3. SEC Update
4. ARELLO (Association of Real Estate LicenseLaw Officials)
IV. Legislative and Regulatory Outlook
1. Perspectives on the Election
2. Updates on:
Terrorism Insurance
At the end of 2005, Congress passed theTerrorism Risk Insurance Extension Act (TRIEA), which extended 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. TRIEA is set to sunset at the end of 2007, thus setting the stage for another effort to either extend the federal program or create a suitable alternative.
NAR supported the extension of the make-available provision of TRIA through 2007.
Terrorism insurance availability is critical to financing commercial real estate development, particularly in 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 Congress in 2007 will likely consider legislation extending TRIEA in some form or another. In September, the PWG released a report which provided evidence that the terrorism insurance market had improved and that affordable coverage was available, but did not make any recommendations asto the programs future. Recognizing the political difficulties encountered in 2005 to extend the federal reinsurance backstop, NAR supports the creation of a federally sponsored reinsurer that would be privately funded.Basel Accords & Commercial Real Estate Lending GuidanceFederal regulators are taking a close look at the commercial real estate lending practices of financial institutions and will be revising the way institutions determine the amount of capital they are required to hold to mitigate defaults. These regulatory efforts are occurring on three fronts:
(1) Basel II: Basel II, an international accord agreed to by the central banks of the 10 largest economies, creates two categories for commercial real estate: Income Producing Real Estate (IPRE), and High Volatility Commercial Real Estate (HVCRE). Loans in the IPRE category are given more favorable treatment than under current practice, while HVCRE loans are treated less favorably. NAR has argued that theHVCRE category should be modified to take into account equity raised through presales or put up by the developer for acquisition development and construction loans.
(2) Basel 1-A: Basel II provides more favorable treatment of commercial real estate than Basel 1. Basel 1-A seeks to level the inequities created by the Basel II accord to level the playing field in some areas of lending. NAR urged the Federal Regulators to consider implementing the same categories of commercial real estate lendingas in Basel II and to recognize the different performance characteristics of each class of commercial real estate.
(3) Guidance on Commercial Lending: In addition to modifying the way banks determine regulatory reserves, regulators are revisingthe commercial real estate lending guidance. The new rules will attempt to prevent banks from becoming concentrated in commercial real estate that may leave them especially vulnerable to cyclical market downturns. However, NAR noted that the proposed guidance fails to take into account the role of diversity in local markets and classes of commercial real estate in their risk management recommendations.
Through its policy supporting the flow of capital to commercial real estate, NAR expressed concern that the combined effect of the Basel Accords and the proposed guidance may have a dampening effect on commercial real estate lending and as a result depress property values and the commercial real estate markets.
The combined effect ofthe Basel Accords and the proposed guidance may cause banks to pull back, or increase costs, on commercial lending. This could slow commercial real estate development and limit brokerage activity.
Over the next year, the federal regulators willfinalize rules governing the implementation of the Basel Accords and issue guidance on risk management practices of banks on commercial real estate lending. Both the House Financial Services Committee and the Senate Banking Committee have held hearings on Basel over the past year and have specifically raised the issue of how commercial real estate is treated. It is likely that oversight will continue in the Congress as these regulatory initiatives are implemented.
Multifamily IssuesCongress 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 mortgage insurance programs. Also withinHUD, 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-familyhousing 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.
NAR and its affiliate, The Institute of Real Estate Management (IREM), are 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 the exception for those properties with low income housing tax credits) do not serve a “public purpose.” However, we argue that all FHAprograms have a strong public purpose, providing a key source of affordable rental housing for individuals and families 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.
Prior to adjourning for midterm elections, the House passed two housing affordability bills supported by NAR – H.R. 6115 and H.R. 5503. H.R. 6115, the“Market-to-Market Extension Act,” sponsored by Deborah Pryce (R-OH), would extend the Mark-to-Market program for Section 8 project-based housing for one year. Essentially the program decreases rents in Section 8 properties by allowing property owners to restructure their debt. The Mark-to-Market program was established in 1997 to preserve project-based Section 8 housing, while reducing costs to the federal government. More than 2,200 properties have gone through the Mark-to-Market process, preserving units for more than 188,000 families. Housing & Urban Development (HUD) estimates additional properties could be preserved through this process. Also passed, H.R. 5503, the “FHA Multifamily Loan Limit Adjustment Act,” sponsored byGary Miller (R-CA), would increase the multifamily loan limits in high-cost areas to 170 percent above the base limit and give HUD the discretion to increase the limit to 215 percent on a case-by-case basis. H.R. 5503 provides adequate assistance to families who do not have access to subsidized housing. Both bills now move to the Senate where action is uncertain.
Additionally, 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 isprimarily 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. H.R. 5039 was not addressed prior to the House adjourning for the midterm elections and it is unlikely this measure will be voted on once the House returns in late November.
V. Information Sharing of State and Local Activity
