WASHINGTON, DC—Speaker of the House John Boehner stunned the political establishment on Friday morning with the news that in 30 days he would resign his leadership position as well as his Ohio seat.

To quickly recap events since Friday: it is widely assumed that

1) US Representative Kevin McCarthy, the No. 2 House Republican, will likely be voted in as the new speaker;

2) that a continuing resolution would easily be passed this week, largely as a result of Boehner's resignation heading off what looked to be an increasingly likely government shutdown on Oct.1, and;

3) per his appearance Sunday on CBS' Face the Nation Boehner plans to smooth the path for his successor. More on that in a moment.

The short run, essentially, will be fine thanks to Boehner's resignation in the face of a brewing rebellion by a hard right faction in his caucus that wanted to use the budget process and the threat of a shutdown to defund Planned Parenthood. However, other risks in the medium term have arisen because of Friday's events -- or rather, heightened these pre-existing issues.

How these events play out will affect the nation at large, of course, and certain issues important to commercial real estate will be affected as well, so let's start there.

A Continuing Resolution But Only Until Dec. 11

The stopgap spending bill that is expected to be passed this week will expire on Dec 11, which means a confrontation on these issues has only been delayed, and for not very long. So a government shutdown is still possible. A shutdown of the federal government, incidentally, is very expensive for the nation. The last one, in October 2013, shaved a 0.3 percentage point off GDP in the fourth quarter of that year, according to the Bureau of Economic Analysis. 

Another Debt Ceiling Impasse

Another far bigger concern however is the debt ceiling which the US will bump up against around the time that the continuing resolution runs out. Actually, the US has already reached the ceiling; the US Treasury Department has been using the so-called "extraordinary measures" to pay the bills. But that capacity is expected to be exhausted by December requiring Congressional action. Without it the US will begin defaulting on its financial obligations, from federal employees to domestic and foreign bondholders. This would be unprecedented and probably result in a downgrade of the US credit rating.

Now, to repeat a sad history of intergovernmental relations, this is not the first time Congress has threatened to refuse to raise the debt ceiling. The House made similar threats last year but eventually passed a "clean" debt ceiling increase -- that is, no conditions were attached. The saga that unfolded in 2012 and 2013 is too long to tell in this space; if you are interested in the back-and-forth a timeline can be found here. 

However in 2011 after a truly frightening round of brinkmanship, Congress successfully brought President Obama to the negotiation table. The deal that was hammered out, the Budget Control Act of 2011, is summarized in this Congressional Budget Office document. 

Some political and financial observers fear that with Boehner leaving, the stage is set for a repeat of 2011 -- per  Eurasia Group President Ian Bremmer's tweet -- but this time the respective sides will approach the negotiating table with their positions intractable hardened. 

 

Interest Rates Are Staying Put Now

It had been expected that while the Federal Reserve might raise rates in October,  it almost surely would by December. Unless these issues are quickly resolved (and there is a possibility they might be) somehow I don't think that the Federal Reserve Bank will raise interest rates. After all, it held back earlier this month due to uncertain global events and the sudden volatility in the equity markets.

A possible breach of the US debt ceiling looming in December is nothing short of a calamity to economists; indeed in 2011 then Fed-chair Ben Bernanke was urging Congress to raise it.

 

EB-5, Other Legislative Initiatives

All of this also means more uncertainty in the medium term for legislation that is important to the commercial real estate industry. Probably the two pieces of legislation most closely watched is the EB-5 program's renewal and federal funding for US transportation infrastructure. The continuing resolution includes a patch for EB-5 so projects are safe until then.

Transportation funding is more complicated, however.  The Real Estate Roundtable provides a good summary and prediction for what could happen to that here.  It writes:

       "Congress in late July approved and sent to the president the latest short-term patch for the Highway Trust Fund, winning more time for House negotiators to come up with a multi-year funding bill — along the lines of the one approved by the Senate. With a new HTF deadline of Oct. 29, House Republicans have been exploring the idea of pairing a multi-year infrastructure bill with some kind of international tax reform (e.g. involving "repatriated" off-shore corporate income)."

        "However, the House Transportation Committee has been having trouble reaching agreement on transportation policy issues, and the House has not yet addressed the HTF funding issue at all. Further complicating matters in this regard are recent revelations that federal infrastructure funding could last six months longer than previously expected — until June 2016. US Transportation Secretary Anthony Foxx clarified that although the cash balance of the highway account should stay above zero until next June, it will only stay above the 'prudent level' of $4 billion until November 2015."

 

On Friday evening the Real Estate Roundtable concluded that with Congress facing multiple, overlapping deadlines, there remains the possibility -- even the likelihood -- of a year-end, "catchall" bill that keeps the government funded through fiscal year 2016, while dealing with the highway reauthorization, tax 'extenders,' debt ceiling extension, EB-5, and other provisions. Over 50 tax provisions expired at the end of calendar year 2014.

Several of these provisions, such as 15-year depreciation for leasehold improvements, are longstanding features of the tax code and help support real estate investment, the Roundtable wrote. "Failure to extend these provisions by the end of the year would result in an unexpectedly higher tax burden when the tax filing season begins in early 2016."

 

 

Boehner Takes One For the Nation

But after Sunday a new possibility has emerged: Boehner pushes through a long-term budget and debt ceiling increase, aided by Democrats.

From everything written about him and by him, this would likely be anathema to Boehner; he is far more conservative than his right flank has given him credit.

But it is one interpretation of his comments on Sunday's Face the Nation. Specifically what he said (amidst some very candid talk about inter-party tensions) was "I don't want to leave my successor a dirty barn. I want to clean the barn up a little bit before the next person gets there."

Now this could well be wishful thinking and Boehner perhaps was talking about just the continuing resolution. On the other hand, no one knows better than Boehner the trauma caused by such brinkmanship – on the negotiators themselves and on the nation -- and he is no fan of the intractable positions for which his hard right flank has repeatedly called.

And there is this: Boehner is said to be a devout Catholic and he had just met with visiting Pope Francis before making his decision. I would imagine such a meeting puts politics and the sacrifices required of national leadership in their proper perspective.

Ironically, if Boehner were to push through a long-term measure for the budget, the debt ceiling and (hey, why not) a reauthorization of the US Export Import Bank, it would be his finest accomplishment as Speaker of the House, after a tenure in which he has been frustrated both by his own party and frosty relations with the President.

Incidentally it would also position the Republicans very nicely as we head into the 2016 election season.

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