Economic forecasts for commercial real estate in the coming year are a little more optimistic than a year ago, and many commercial markets can expect gradual improvement through 2005. Also contributing to the general improvement is the impact of legislation passed on Capitol Hill this year. Among the bills approved by Congress and supported by the National Association of Realtors are provisions that are important to the growth of the commercial real estate industry. All were priorities of NAR's legislative efforts this year.

Congressional action has impacted four areas of concern: leasehold, brownfields, energy and FHA multifamily. Here's a synopsis:

Leasehold. Reductions in the cost-recovery period for leasehold improvements have long been a goal of NAR lobbying efforts. As of now, temporary provisions for leasehold improvements allow building owners or tenants—not both—to deduct 30% of the cost of leasehold improvement. The provision applies to improvements made between Sept. 11, 2001, and Sept. 11, 2004. Improvements that are not complete but are subject to binding contract on that latter date will continue to qualify for the 30% deduction, as long as they are placed in service before Jan. 1, 2005.

Earlier this year, Congress passed some additional provisions sought by NAR and its affiliate, the Institute of Real Estate Management, that make agreements entered into on or after May 6, 2003, eligible for a 50% bonus through Dec. 31, 2004. If binding contracts are in place but the improvement is not completed as of that date, the bonus will continue to apply through Dec. 31, 2005.

Brownfields. In late November, the House unanimously approved a one-year extension of several expiring tax provisions, including one that allows property owners to deduct brownfield cleanup costs in the year they are incurred. The Senate is expected to approve only a six-month extension.

Generally, site preparation costs incurred by real estate developers are not currently deductible but must be capitalized into the basis of the land. A special exception to this rule permits environmental cleanup costs associated with so-called "brownfields" to be deducted in the year the costs are incurred.

Cleaning up brownfields not only allows a tax deduction but also improves the environment. The construction of NAR's new building in Washington, DC, is a great example. NAR's new building, being built on a brownfields site that was cleaned up by NAR, not only returns previously toxic land to the marketplace but also re-energizes the area. The design of the building also beautifies the neighborhood a mere two blocks from the US Capitol. When the new building is finished, it will be the first certified "green" building in the nation's capital and a shining example of environmental soundness. Members will be justifiably proud.

Energy. The House has passed the comprehensive energy reform bill, which includes a number of tax-credit provisions for real estate. The bill, still pending in the Senate, contains a number of real-estate friendly provisions, including grants for energy-conserving improvements for assisted living and a commercial-property tax credit for installation of energy-efficient devices.

FHA Multifamily. Both the Senate and House have passed legislative versions increasing the FHA multifamily loan limits in high-cost areas. The bill would create more opportunities for private development of affordable housing in the nation's neediest cities. Before adjourning, the Senate included the increased FHA loan limits as an amendment to the American Dream Downpayment Act, which now must be approved by the House.

Banks in Real Estate. The House adopted language in the 2004 fiscal-year appropriations bill to prohibit the Treasury Department from finalizing a regulation that would allow big banks to enter the real estate brokerage and the leasing and management business. A joint conference committee has retained that language in the final bill, which now awaits final approval in both houses.

NAR continues to gather support for bills in both houses that would make the ban permanent. Those bills, H.R. 111 and S. 98 (The Community Choice in Real Estate Act), have 241 and 23 cosponsors respectively. We will continue this fight until we've won.

Walt McDonald is 2004 president of the Washington, DC-based National Association of Realtors, which represents more than 972,000 members involved in all aspects of the commercial and residential real estate industries. He is also broker-owner of Walt McDonald Real Estate in Riverside, CA.

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Four-Pronged Battle on Capitol Hill

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