Agenda Summary2007 Commercial Legislation & Regulatory Subcommittee National Association of REALTORS® 2007 REALTORS® Conference & Expo Venetian Resort Hotel Casino Marcello 4505-4506 Level 4 Tuesday, November 13, 2007 9:00 AM - 10:30 AM
II. Approval of Minutes, Conflict of Interest statementOwnership Disclosure Policy
1. When NAR has an ownership interest in an entity and a member has an ownership interest* in that same entity, such membermust 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 whicha 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. Holdsa 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 inthe 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.
III. Discussion: NAR's Exemption Request before the Securities and Exchange Commission on TIC Securities.
TICs (tenant in common interests) are fractional interest 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 distinction between 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 thatpersons 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.
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.
NAR is in discussions with the SEC on defining a role forreal estate professionals in the brokerage of securitized TIC interests, whereby they can provide real estate services and derive compensation. NAR’s main focus is getting formal recognition from the SEC allowing REALTORS® to work in all areasof TICs. REALTORS® can advise on non-securitized TICs as long as the transaction cannot be interpreted as a sale of a security under the Supreme Court’s “Howey Test”. If the REALTOR® is found to have sold an unregistered security, they can face significant problems and may not be covered under errors and omissions coverage. The “Howey Test” is based off a ruling where the court determined that a security is where there is an investmentof money in a common enterprise with profits to come solely from the efforts of others. In order for the TIC to be non-securitized the investor must have a vote in the overall management of the property, but may not directly manage the property. So when a stock is purchased you are investing money, but have no control over the company, which classifies that stock as a security. In a TIC, as long as you have a vote/partial control on how the overall management of the propertyis done, the property is not currently classified as a security. IV. Discussion: Regulation of the 1031 Exchange Industry Speaker, Hugh Pollard, Past President of the Federal Exchange Accommodators
C.A.R. Policy:That C.A.R., in conjunction with NAR, look into the issue of accommodators/qualified intermediaries of 1031 exchanges and how to safeguard exchanging taxpayers and our industry members vis-à-vis thepractice of accommodators/qualified intermediaries.If a real estate investor utilizes a 1031 exchange, the profits from the sale of one property are directly used to purchase a second property and capital gains taxes are deferred until that property is sold. However, the business of 1031 exchange accommodators is largely unregulated at the federal and state levels of government with hundreds of independent exchange accommodators across the country. In March, a Santa Barbara law firm filed a lawsuit charging two exchange accommodators, Qualified Exchange Services and Southwest Exchange, of stealing more than $95 million from 130 investors in 12 states. As a result of this type of incident, the California Legislature and some in Congress are considering if there needs to be legislation that would require the licensing of exchange accommodators, as well as requiring a fidelity bond and errors and omissions insurance.Congresswoman Eshoo is following the issue and if she feels a national response is necessary, has indicted she would be willing to introduce legislation. NAR is currently working with the Federation of Exchange Accommodators (FEA), which is the governing association for many of the accommodators on the issue. The FEA is looking to tighten their regulations and set new requirements. Additionally, NAR has formed an internal and informaltask force that will explore issues such as risk management for real estate professions who make accommodator referrals, new disclosure requirements for accommodators, increased fiduciary standards and whether these reforms need to be done on the state or federal level.V. Legislative Update: Terrorism Insurance, Surplus Lines of Insurance, Carried Interests, Housing Policy, Forced Access.
Terrorism Risk InsuranceIn response to the attacks of September 11, 2001, the Terrorism Risk Insurance Act (TRIA) became law and the Terrorism Risk Insurance Program was established under the U.S. Treasury Department. Due to the terrorist attacks, it became extremely difficult (if not impossible) for owners of commercial properties at risk to obtain insurance; many insurance companies even began to insert terrorism exclusions into their insurance policies. The creation of this program meant that terrorism exclusions on existing insurance policies were removed and all policyholders had the ability to secure coverage for terrorism risk.On September 19, 2007 the House passed H.R. 2761, the Terrorism Risk Insurance Revision Extension Act, by a vote of 312-110. H.R 2761 extends the provisions found in the original TRIA for 15-years and creates coverage for nuclear, biological, chemical and radiological (NBCR) attacks. Additionally, H.R. 2761 calls on the Treasury Department to giveupdates on the terrorism insurance market every two years, including its impact on commercial real estate, and establishes a blue-ribbon commission for making recommendations on a long-term private market solution.H.R. 2761 reduces the threshold for triggering the reinsurance backstop from $100 million to $50 million and also reduces the deductible for terrorist attacks over $1 billion.On November 1, 2007, the Senate Banking, Housing, and Urban Affairs Committee passed their version of TRIA reauthorization, S. 2285. The Senate version would extend TRIA for seven (7) years, but does not include language that would add coverage for a nuclear, biological, chemical or radiological attack. Additionally, the Senate version maintains the TRIA trigger at its current level of $100 million and does not include group life insurance coverage.Surplus Line of InsuranceNAR, at its mid-year meetings, adopted policy that supports the streamlining of state regulations governing non-admitted and surplus lines of insurance. These lines of insurance are not-admitted to do business in a state by insurance regulators, and can often only be accessed once it is demonstrated that state admitted carriers are unable to provide adequate coverage.On June 25, 2007, the House passed H.R. 1065, the Non-Admitted and Reinsurance Reform Act of 2007, introduced by Rep. Moore (D-KS). H.R. 1065 would: 1) apply the regulatory authority of the insured's home state over non-admitted lines of coverage, and 2) allows the purchasers easier access to surplus/non-admitted lines of coverage by waiving State due diligence requirements.These due diligence requirements often require purchasers to find several declinations from admitted insurers before going to the non-admitted market. Conceptually, this should make it easier for commercial property owners to obtain surplus insurance, such as catastrophe, in states where insurers have left the admitted state markets.Often, commercial property owners who have properties in multiple states have had difficulty obtaining property and casualty coverage from surplus and non-admitted providers because each state has differing regulations that govern when a property owner may obtain coverage from a non admitted provider. For example, some states require that a property owner be declined three times by an admitted carrier before obtaining coverage from a non admitted or surplus carrier. Streamlining the regulation of non-admitted and surplus lines of coverage would pre-empt those requirements and make it easier for property owners with property in multiple states to obtain surplus or non admitted coverage by making clear that only those regulations of the insured's home state apply to all of the insured's non-admitted or surplus insurance policies.H.R. 1065 is being touted bysome members of Congress as a first step in reforming insurance regulation, while others say that this legislation is necessary to ensure surplus insurance coverage in states where admitted insurers have left the market, and need not be part of an insurance reform effort.Carried InterestC.A.R. Policy: C.A.R. took no policy at our October meetings on carried interest. Both the taxation and the Federal Issues Committee choose not to take policy on the issue.Attention became focused on carried interest partially due to a private equity firm, Blackstone, having an IPO and announcing the extraordinarily large amounts of profits that Blackstone was able to realize using carried interest. This prompted Congress to examine the practice of carried interest and whether or not it should continue at capital gain rates or be changed to normal income rates, which is what current legislation is attempting to do.The House has introduced H.R. 2834, which is currently in the House Ways & Means Committee with 23 cosponsors. H.R. 2834 would eliminate taxing carried interest at capital gain rates (currently 15%) and instead tax them at the standard income rates (currently up to 35%). The Senate has introduced S. 1624, which is currently in the Senate Committee on Finance with four (4) cosponsors. S. 1624 currently focuses on private equity groups and does not specifically include real estate carried interest in the language of the bill, but it is expected that this will be amended in the future to include real estate and mirror H.R. 2834.Under most real estate partnerships when a private equity partnership is developed there are two categories of participants. There is the general partner (GP) and the limited partner(s) (LP). The LPs are the ones who contribute the capital to fund the projects. The GP either puts up a small (usually 1-2%) amount of capital, or none, but handles the financial dealings of the partnership and brings their expertise and experience to the project. This includesfinding the property, taking care of the leasing, paying the taxes, and more. They are not simply day-to-day property managers, but handle all the financial aspects of the partnership and the property.When that property is sold, the profits are divided, primarily among the LPs. However, there is a common practice in partnerships, including real estate partnerships, that gives the GP a portion of the profits. This is separate from his annual management fee which covers his salary and overhead. This part of the profit is known as carried interest. The carried interest (which can be up to 20% of the profit from the investment) is part of the setup of the partnership and is done to give the GP an incentive to push for the success of the partnership venture and is a return on their “sweat equity”.Housing PolicyForced AccessOn October 31, 2007, theFederal Communications Commission (FCC) voted unanimously to ban exclusive access contracts between video service providers and apartment building owners, asserting this “will foster greater competition in the market for delivery of multi-channel video programming” and increase choice and programming for consumers residing in multiple dwelling units (MDUs) and other real estate developments. However, a coalition of national real estate trade groups and The Real Estate Roundtable asserts that the new policy will have the opposite effect, depriving property owners of a valuable tool for negotiating the best possible deal for residents in terms of cost, customer service, and products.The proposal came amid growing consumer complaints about increases of up to 95 percent in cable rates between 1995 and 2005. The FCC’s decision to propose the ban was also influenced by the entry of large incumbent local exchange companies (ILECs) — such as Verizon — into the “video marketplace,” since this offered the potential for greater competition and lower cable prices. In pushing for the new ban, Verizon argued that exclusive agreements between some apartment building owners and existing cable providers were impeding competition. In 2000, the FCC banned exclusive contracts between office building owners and common carriers but did not extend that prohibition to residential properties. The Commission also shelved a “forced access” proposal that would have dictated the terms and conditions by which office building owners accommodate telecom firms seeking access to their property. NAR has been lobbying to extend these exemptions and to allow for the exclusive contracts; this new ruling overturns both of these exemptions.
