2007 Commercial Legislation And Regulatory Subcommittee National Association of REALTORS® Midyear Legislative Meetings & Trade Expo Omni Shoreham Diplomat Room Wednesday, May 16, 2007 9:00 AM - 10:30 AMChair:Blaine Walker, CCIM, UT Vice Chair:Adrian Arriaga, CIPS, CCIM, TX Committee Liaison:Alan Huffman, CPM, KS Committee Executive:Tom Heinemann, DCI. Call to Order NAR Ownership Disclosure & Conflict 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 anyfinancial interest**, or with an entity in which the member serves in a decision-making capacity, 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 tothat 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. Tenants in Common -- Panel discussion on how real estate professionals may advise on TIC securities transactions and derivecompensation.
NAR is working to 1) educate members on the Tenant in Common marketplace, and 2) define a process by which real estate professionals may be compensated in the brokerage of Tenant in Common securities. Tenant in Common is a form of co-ownership in real estate. In 2002, the IRS provided guidance on how the TIC ownership structure, which is often used by sponsors to attract investors to own a partial interest in real property, may be used in section 1031 tax deferred like-kind exchanges. Since then, the industry has grown rapidly. TIC interests have been sold through two distribution channels – on a real estate platform, and on a privately placed securities platform. Though TICs are real estate, securities laws and regulationsprohibit securities broker dealers from either directly or indirectly compensating non broker dealers.The subcommittee adopted the following statement: “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 inCommon 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.”NAR will continue communicating with the SEC in order to change provisions and allow REALTORS® to be more involved in Tenant in Common transactions and eliminate the questions and gray-area.NARis hopeful that the SEC will respond favorably to NAR's request to allow real estate professionals to advise on TIC securities transactions by the fall. A favorable resolution from the SEC will allow real estate professionals to represent their clients’ real estate interests in the brokerage of TIC securities.
B. Terrorism Insurance-- Following the terrorist attacks of September 11, 2001, insurers backed out of the terrorism insurance market. This prompted Congress to create a federal reinsurance backstop program in the Terrorism Risk Insurance Act of 2002, which also mandated that insurers make terrorism coverage available along with its property and casualty lines. As the bill was set to expire in 2005, it was evident that insurers wereunable to provide terrorism coverage without the federal backstop and the reinsurance market had not yet developed enough capacity to cover insured losses. In December 2005, Congress passed the Terrorism Risk Insurance Extension Act (TRIEA), which extended the federal terrorism insurance backstop program for an additional two years, but also increased reliance on the insurance sector to cover more of the losses stemming from a terrorist attack. TRIEA is expected to expire at the end of 2007, again creating the possibility that terrorism coverage will become unavailable. NAR is working to ensure that a permanent terrorism coverage solution is in place by the end of the year.Because of the importance of terrorism insurance coverage to commercial real estate, NAR supports the continued availability and affordability of coverage.Terrorism Insurance is critical for the financing of numerous commercial real estate transactions, particularly those in high risk areas. Over 80% of outstanding multifamily and commercial mortgage debt is subject to terrorism coverage. Thus when a commercial real estate transaction is negotiated, terrorism insurance is a key component. The expiration of TRIEA has the potential to significantly slow commercial real estate markets.
If TRIEA were to expire without an appropriate replacement, terrorism coverage may become extremely costly or simply unavailable. In cases where terrorism insurance premiums rise significantly, the increase often cannotbe passed through to the tenant. In the retail and multifamily sectors, specifically, a jump in terrorism insurance premiums can reduce the value of commercial properties. If terrorism insurance becomes unavailable, the financing is thrown into technicaldefault. .
Addressing the long term issues surrounding the continued availability of terrorism coverage has been identified as a top priority of both the Senate Banking Committee and the House Financial Services Committee. Currently, the only bill introduced in the Senate is S. 74, introduced by Senator Schumer (D-NY) and referred to the Committee on Homeland Security and Governmental Affairs. C. Basel Accords – Update. The basic concept behind the Basel Accords was to strengthen the international banking system and to level the playing field for industrial nation banks and developing nation banks. The Basel Accords, among other things, would institute rules concerning risk-based capital requirements (how much capital much be kept to cover depositors investments). Since this directly affects how much banks can then offer as loans, including mortgages, this has become a concern of REALTORS®.The commercial real estate market is healthy, and the underwriting standards of commercial real estate loans have improved significantly since the savings and loan crisis of the late 1980s and early 1990s. Significant modification of the capital requirements may impact the flow of capital to commercial real estate. Furthermore, modifications have the potential to 1) shift the flow of capital from one sector of commercial real estate to another, and 2) give the larger Basel II banks, which have more favorable capital standards, a competitive advantage over Basel 1A banks which have more restrictive standards.The Federal Reserve and the other federal bank regulators are proposing changes to capital requirements for banks (including thrifts). The Basel II capital framework would only apply to the 10-20 largest banks, and would attempt to align bank capital to risk through the application of complex formulas and each bank’s own historical data on loan performance and losses. The Basel I-A standard would be a new optional capital standard for the rest of the banking industry.The Basel Accords determine the method by which banks set their capital reserves for different types of lending. The Basel Accords revise the way commercial and residential real estate lending is treated. The changes could significantly curtail the flow of capital to real estate and harm the commercial and residential property market and property values.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 the HVCRE category should be modified to take into account equity raised through presales, or equity put upby the developer, for acquisition development and construction loans.
Basel 1-A:Basel 1-A seeks to level the inequities created by the Basel II accord so as not to give larger banks a competitive advantage in some areas of lending. NAR urged the Federal Regulators to consider implementing the same categories of commercial real estate lending as in Basel II.NAR supports the objective of aligning capital rules with risk and seeks to protect and enhance the flow of capital to commercial and residential real estate by making sure that the capital rules do not require excessive capital to be held for real estate loans.
During the 109th Congress the House Financial Services Subcommittee on Capital Markets and the Senate Banking Subcommittee on Securities and Investment held hearings on the Basel Accords. Based off of these hearings, regulators are still developing final rules. The 110th Congress will likely continue to hold hearings onthe Basel Accords to gauge the impact these regulatory initiatives will have on the American economy, including the real estate industry. Nonetheless, no hearings or dates have been announced as of yet. IV. Legislative and Regulatory Update
A. Tax Update B. Multifamily
V. Information Sharing of State and Local Activity
Subcommittee members discuss commercial related activities that are occurring in their locality that could necessitate federal review/ action in the future
