Although we are well positioned on our two most critical public policy issues--terrorism risk insurance and the taxation of carried interests--anything can happen in coming days, as lawmakers with competing pressures and agendas enter into final negotiations with each other and the Bush administration.

If we continue to aggressively communicate our policy perspectives, both inside and outside Washington, we can end 2007 with a long-term extension of the terrorism risk insurance program; we can maintain the current capital gains tax treatment for real estate partnership carried interests; and we may secure a longer-term extension of energy efficiency and renewable fuel tax credits for commercial buildings.

Here, then, is a closer look at the issues:Carried Interest and the AMT

House legislation approved in November would pay for temporary Alternative Minimum Tax (AMT) relief by permanently raising the tax rate on general partners' carried interest--by about 150%. If enacted, carried interest would no longer be treated as capital gain (subject to a 15% rate), but would instead be taxed at the 35% ordinary income tax rate, and would be subject to FICA taxes.

The "extenders" package attached to the House AMT/carried interest bill includes real estate-backed provisions to extend 15-year leasehold improvement depreciation and brownfields cleanup cost expensing.

Senate Republicans have blocked Democrats from bringing the original House AMT bill to the floor. (Several Democratic senators also have strong reservations about the carried interest proposal, citing its potential effects on real estate and the economy.) As a fallback, the Senate in early December approved a "clean," one-year AMT "patch"--without the onerous House carried interest tax hike as a revenue raiser, and without the House tax extenders and their offsets.

Now that the two chambers have acted, further talks are needed to hammer out a bicameral compromise. However, House leaders are as adamant about paying for AMT relief through tax increases (and adhering to congressional "pay-as-you-go" rules) as Senate Republicans are about not offsetting AMT relief. In response to the Senate's AMT bill, House Ways and Means Committee Chairman Charles Rangel (D-NY) pushed through the House on a partisan vote a new AMT-only proposal with offsets. Carried interest was not included in this bill. Despite this House action, it's unlikely the Senate will accept the new Rangel bill.

While this is encouraging for real estate, victory is still not certain. Although increasingly unlikely, the House could still prevail on the matter of offsets in subsequent talks between the two chambers. Additionally, while President Bush has vowed to veto any AMT bill with carried interest as a revenue raiser, this tax hike proposal could still be revived as part of a large, end-of-year "omnibus" bill containing "must do" items such as AMT relief and funding for federal government operations.

Real estate executives concerned about this issue should contact their elected representatives and urge them to abandon this ill-conceived, onerous proposal once and for all (i.e. in the context of the current debate as well as a potential revenue raiser in the future).

This proposal will hurt large and small real estate partnerships across the country; slow real estate transactions (particularly those involving greater risk, such as brownfields redevelopment projects); encourage debt financing; and threaten jobs. It is particularly a bad idea given the current uncertainty over the economy and ongoing spillover from the subprime mortgage market mess.

Terrorism Insurance
With the Terrorism Risk Insurance Act (TRIA) scheduled to expire Dec. 31, the real estate industry and its legislative allies have been pressing Congress for some time to adopt a long-term extension of the program, in order to protect economic and homeland security and keeps markets functioning amid ongoing terrorist threats against the US.

The House approved a 15-year TRIA extension in September that would add coverage for domestically sponsored acts of terrorism; require insurers to make coverage available for so-called "NBCR" (nuclear-biological-chemical-radiological) risks; and add group life insurance coverage. It also includes a "reset provision"--strongly supported by real estate and New York's congressional delegation--that would decrease deductibles for terrorist attacks over $1 billion and decrease the trigger after such events.

The seven-year TRIA extension approved unanimously by the Senate last month--the result of significant, hard-won bipartisan compromise--includes coverage for domestically sponsored acts of terrorism as well as three important study provisions. Specifically, the US Comptroller General would be required to report to Congress on (1) unique terrorism insurance capacity constraints in specific markets, and (2) availability and affordability of NBCR coverage. The President's Working Group on Financial Markets would be required to report to Congress on long-term availability and affordability of terrorism risk insurance.

The House has since approved a second TRIA bill incorporating the Senate's seven-year time frame and other changes to the original House bill. But with the White House steadfastly opposed to House provisions that would expand the current program, it is our expectation that the Senate version will ultimately prevail and be signed into law.

Energy
Real estate-related issues are also in play in the context of energy legislation approved by the House and Senate earlier this year. After months of delays, the Democratic leadership recently agreed on a compromise that would, among other things, raise fuel economy standards, require utilities to produce a portion of their electricity from renewable sources, and extend current tax incentives for energy efficiency, solar and fuel cell technologies in commercial buildings.

The compromise bill cleared the House but stalled in the Senate, where Republicans objected to proposed language to roll back favorable tax provisions for the oil and gas industries and mandate renewable energy targets for utilities. After failing to get a revised tax package through the chamber, Senate Democrats stripped the tax title from the bill. The scaled-down measure has now cleared the Senate with widespread support and is expected to be signed into law by President Bush.

The real estate-related energy tax incentives dropped from the bill enjoy bipartisan support and will likely be revived when Congress reconvenes next year. If enacted, these provisions would extend the $1.80 per square foot energy-efficient commercial buildings deduction; 30% business credit for solar and fuel cell investment; and create a new 10% investment tax credit for combined heat-and-power [CHP] property.

On energy independence and the related issue of global warming, real estate can and should play a constructive role. Since most "green building" investment remains focused on new construction, creative approaches--including meaningful incentives--are needed to encourage energy efficiency retrofits in existing buildings, and to unleash the full potential for CO2 reductions from the US real estate sector.

Toward that end, the Roundtable supports House legislation that would allow utilities to meet a certain percentage of their "renewable portfolio standard" (RPS) requirements by purchasing energy-efficiency credits from end users, including building owners. Such an approach would treat energy efficiency as the so-called "fifth fuel"--complementing coal, nuclear energy, natural gas and renewable energy. We have also urged Senate sponsors of greenhouse gas "cap and trade" programs to consider this House provision as a guide in crafting a mechanism for "crediting" real estate companies for their green building investments.

Clearly, there is much at stake for real estate and the economy in these policy proposals--now awaiting final action in our nation's capital. As always, we must remain vigilant, informed, and prepared to make sure real estate's voice is heard in Washington on key policy matters.

Jeffrey D. DeBoer is president and CEO of the Real Estate Roundtable, a Washington, DC commercial real estate policy organization. He may be contacted at info@rer.org. Views expressed here are the author's solely.

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Real Estate Issues at Stake in Congressional End-Game

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