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Copyright © 2012 Holland & Knight LLP. All Rights Reserved

Willis Real Estate and Hotel Practice SymposiumReal Estate and the 2012 Elections

Chicago, June 13-14, 2012

Peter FriedmanHolland & Knight, LLC

Tuesday, June 19, 2012

Special Thanks

Thank you to Chip Rodgers with the Real Estate Roundtable for contributing material for this

presentation

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Senior Vice President and Executive Director


Add source or notes here 3

• Toxic Politics / Dissatisfied Electorate

• The Fate of ObamaCare

• Pension Attention

• Struggling Economy

• Big Pending Issues -- No Consensus

• 2012 Elections

• The Badgers

Part One: The Way Things Are


Rep. Joe Wilson (R-SC) to Obama: “You lie!”

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We are not in Kansas anymore…

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Approval Ratings• Obama’s Approval in May 2012− Approval: 47% − the same as George W. Bush’s in May of his re-election year. (Gallup)

• Congressional Job Approval– Approval: 17%– Disapproval: 75%

• Supreme Court Approval− Approval: 44%− 66% approval in 1980s− 50% approval in 2000

• Is the country headed in the right direction?− Right Direction: 33.4%− Wrong Track: 58.8%

Source: Real Clear Politics6


Honesty and Ethics Test

Only 7% think Members of Congresshave high honesty and ethics standards.

Source: Gallup

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Honesty and Ethics Test

Only 7% think Members of Congresshave high honesty and ethics standards.

Source: Gallup

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Real Estate AgentsLawyers

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Polarized Political Parties

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• Overall level of congressional polarization in 2010 was the highest ever recorded.

• Every Senate Democrat compiled a voting record more liberal than every Senate Republican

• Every Senate Republican compiled a voting record more conservative than ever Senate Democrat.

Source: National Journal

Most Conservative Democrat Sen. Ben Nelson (NE)

Most Liberal Republican Sen. Susan Collins (ME)

Where are the moderates?


Add source or notes here 9


Supreme Court Ruling on Health Care Law

Patient Protection and Affordable Care Act

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Supreme Court Ruling on Health Care Law"For years what we've heard is the biggest problem on the bench was judicial activism or a lack of judicial restraint -- that

an unelected group of people would somehow overturn a duly constituted and passed law.

"Ultimately, I'm confident that the Supreme Court will not take what would be an unprecedented, extraordinary step of overturning a law that was passed by a strong majority of a democratically elected Congress.

- President Obama at a Rose Garden press conference

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Remember the “Grimace”

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Remember the “Oath”

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Add source or notes here

Pension Attention

• Unfunded Liabilities

• “Legal” Pension Abuse

• Unsophisticated Focus on Asset Mix

• Reform

• Illinois

• Real Estate Impact

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Struggling Economy

• Anemic job growth -- Persistent high unemployment

• $1.327 trillion national deficit

• CBO = Federal debt = 70% of GDP (40% in 2008)

• Real estate and housing market

• Uneven business growth (big v. small)

• Treasuries

• Euro-Mess

• No Clear Path

• Tight credit (big looming maturities) / CMBSSource: Real Estate Roundtable


Maturities Loom $1.4 trillion of commercial real estate loans -- held by banks and others -- to mature through 2014

• Many commercial real estate loans will not qualify for refinancing at maturity without significant equity infusions

• As such, “re-equitizing” mountain of commercial real estate loans made during the boom remains a serious challenge

Source: Real Estate Roundtable


Commercial Real Estate Values Decline – Est. $1.5 Trillion Equity Gap

$6.7 trillion in June 2008 - $5.2 trillion in December 2010

Total Debt

$3.5 trillion

Total Equity

$3.2 trillion

20102008

3.3

2.0Total Debt

$3.3 trillion

Total Equity$1.4

trillion

2009


Total Equity$2.0

trillion

Total Debt

$3.2 trillion


Source: Federal Reserve Flow of Funds Accounts of the United States; Real Estate Roundtable

Commercial Real Estate Debt Growth

$1.04 trillion $1.3 trillion

$3.5 trillion

1988-Q4 1998-Q42008-Q4

CMBS Banks

Banks Thrifts Insurance Government CMBS Other

By source of funds


CMBS Issuances

Source: Commercial Mortgage Alert Source: Commercial Mortgage Alert; Real Estate Roundtable

0

40

80

120

160

200

240

5849

74

52

7893

169

206

230

123 12

30

19992002

20052008

2011

3

Billions of Dollars

CMBS

Issu

ance

s


DC Gridlock

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Big Pending Issues -- No Consensus

• Debt ceiling…again• Budget Control Act; 2013 Sequestration• Expiring Bush tax cuts, payroll tax cut, alternative minimum tax, unemployment benefits• FY 2013 Appropriations

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Text


Expiring Tax Provisions• Bush-era tax cuts are set to expire at the end of 2012

• President Obama says he will not extend Bush rates for the “rich,” households earning over $250,000, but he will allow rates to continue for the “middle class”

• Republicans will fight to extend all Bush-era tax cuts temporarily, if not permanently

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Bill Clinton two weeks ago:

…the economy is “in recession” and delaying changes in the Bush tax cuts is “probably the best thing to do right now.”

Bill Clinton a week ago:

“I’m very sorry for what happened. I thought something had to be done on the fiscal cliff before the election. I support [Obama’s] position [on the Bush tax cuts], and I think on the merits, upper-income people will have to contribute to long-term debt reduction.”


2012 Elections: Congress• Democratic majority in the Senate• Republican majority in the House, with “Tea Party” supporters pushing

own agenda– 62 representatives, all Republicans, in Tea Party Caucus

• All attention is focused on campaign season− Triple Witching Hour: House, Senate and POTUS

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“Think Congress is a big, dysfunctional, polarized mess?

Just wait: It’s going to get worse.” -Politico



2012 Elections: CongressTurnover Perspective

HouseLast decade has seen an average freshman class size in the 50s1949: Biggest freshman class of 118 people2010: Freshman class size was 96 (87 Republicans, 9 Democrats)

– 75 of the Republican Freshmen were endorsed by “Tea Party” groups– Republican Party gained control of the most House seats since 1938

SenateLast decade has seen an average of 11 Senators in each Freshman class40 current Senators weren’t in the Senate before 2006

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Gridlock Convincing Members to RetireCasualty List

Senior members, such as 12-term Jerry Costello (D-IL), 15-term Dan Burton (R-IN), and 16-term Barney Frank (D-MA) have announced retirement. This makes way for another large class of freshmen.

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House Senate15 Democrats 6 Democrats

12 Republicans 3 Republicans

1 Independent


Retiring Senators

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Daniel Akaka (D-HI) 3 terms

Chair of Indian Affairs

Jim Webb (D-VA) 1 term

Chair of Armed Services and Foreign Relations

Subcommittees

Kent Conrad (D-ND) 4 terms

Chair of BudgetChair of Finance Subcommittee

Olympia Snowe (R-ME)3 terms

Ranking Member on Small Business

Ranking Member on Commerce, Science and

Transportation Subcommittee

Ben Nelson (D-NE) 2 terms

Chair of Ag, Approps and Armed Services

Subcommittees

Joe Lieberman (I-CT) 4 terms

Chair of Homeland SecurityChair of Armed Services

Subcommittee

Jon Kyl (R-AZ) 3 terms

Ranking Member on Finance and Judiciary

Subcommittees

Herb Kohl (D-WI)4 terms

Chair of Approps and Judiciary Subcommittees

Kay Bailey Hutchison (R-TX) 3 terms

Ranking Member on Commerce, Science and Transportation

Ranking Member on Approps Subcommittee

Jeff Bingaman (D-NM) 5 terms

Chair of Energy and Natural ResourcesChair of Finance Subcommittee


And the Staff (Kids Are Doing This Stuff)

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High turnover and lack of experience in congressional offices are leaving staffs increasingly without policy and ins:tu:onal knowledge, leaving a vacuum that usually is filled by lobbyists.

Most Senate staffers have worked in the Capitol for less than three years. For most, it is their first job ever. In House offices, one-‐third of staffers are in their first year, while only 1 in 3 has worked there for five years or more.

Washington Times, June 6 2012


House Prospects

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Current House: 241 Republicans | 194 Democrats

Source: Real Clear Politics

• 1 Representative appointed to Senate• 12 Representatives running for Senate• 2 Representatives running for other office• 27 Representatives retiring • 7 Representatives defeated in primary• 6 Representatives resigned• 1 Representative died – Donald Payne (D-NJ)


Senate Prospects

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Source: The Cook Political Report

• 10 Senators retired, leaving open seats (6 D, 3 R, 1 Ind)• 1 Senator defeated in primary – Dick Lugar (R-IN), 6 terms• 1 Senator resigned – John Ensign (R-NV)


2012 Elections: Obama vs. RomneyMessage could go one or two ways:

President runs in weak economy against a turn-around specialist

– or –

President runs in a pretty decent recovery against a Wall Street plutocrat



Is Bad Unemployment Bad for the President? • 8.2% unemployment, compared to 9.7% unemployment before

2010 Elections

• Since 1948, only one incumbent president has won reelection with joblessness over 7 percent

– Ronald Reagan in 1984

• However, no incumbent seeking reelection has lost with unemployment falling for two years prior to the vote

• The relative direction of the economy, rather than the absolute level of unemployment, may most determine voter perception of President Obama’s economic track record

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If Election Was Today? • Real Clear Poli,cs Poll Average: General Elec,on-‐ Romney vs.

Obama (6/11/2012) Obama: 46.3% (221 electoral college votes)Romney 45.3% (170 electoral college votes)

• Gallop (March 2012) -- 47 % Republican Candidate / 47 % Democratic Candidate

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The Badgers

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Part Two: Critical Issues Facing Real Estate

• Carried Interest• Terrorism Risk Insurance Act (TRIA)• Foreign Investment in Real Property Tax Act (FIRPTA)• Filling Equity Gap • Enhancing Liquidity under Dodd Frank• Corporate Tax Reform• Immigration• Environmental / Energy


Carried Interest

“How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a

lower rate than their secretaries?“- President Obama

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Carried Interest

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Carried Interest

• A revenue raiser (aka “Carried Interest Fairness Bill of 2012”)

• Proposed in American Jobs Act of 2011

• President’s FY 2012 Budget ($15 billion over 10 years)

• Passed House (HR 3996 )(110th Congress) -- 216 to 193

• Passed House (HR 6275) (110th Congress) -- 233 to 189 (10 republicans plus 223 democrats)

• Proponents sell issue as “loophole” closer aimed at hedge funds and private equity managers

• In reality, nearly 50% of all partnerships in America are CRE

• Confiscatory tax hike hits CRE partnerships past and future - large and small – includes “enterprise value” and family-owned partnerships

• Retroactive Effect (interest granted prior to change)

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Terrorism Insurance (TRIA)

• Terrorism Risk Insurance Act of 2002 (TRIA)

• Terrorism Risk Insurance Extension Act of 2005 (TRIEA)

• Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA)

• December 31, 2014 Sunset

• No Focus

• Tough Optics

• Coalition Dispersed and Preoccupied

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The Equity Gap



FIRPTA Reform

One approach to filling equity gap is to encourage capital from foreign investors by revising Foreign Investment in Real Property Tax Act (FIRPTA) and

• Foreign Investment in Real Property Tax Act (FIRPTA) discourages non-U.S. investors from investing in U.S. real estate

• H.R. 2989 introduced by Rep. Kevin Brady (R-TX)• S.1616 introduced by Sen. Robert Menendez (D-NJ)• Reverse IRS 2007-55; increase 5% to 10% exception



Direction Change Needed for National Policy Measures needed that will: • Encourage capital formation • Facilitate equity investment in real estate • Restore vitality to the asset backed securities markets –

particularly CMBS• Help banks continue to clear their balance sheets of

toxic assets • Encourage lending and enhance liquidity



Dodd Frank Wall Street ReformCredit and Capital Market Issues


Dodd Frank Wall Street Reform• Targeted at every aspect of financial services sector –

from small banks to giant Wall Street firms, insurance industry

• 2,300 page law that tasks 11 federal agencies to implement some 243 new formal rule-makings, adding a myriad of new regulations – feeding climate of uncertainty

• Impact of new law reverberating across financial services industry and economy

• Intended to fix “too big to fail”



Dodd Frank FailingsWhat Dodd Frank fails to do: • Enhance credit capacity • Repair ABS/CMBS markets• Encourage capital formation • Aid economic expansion • Repair shattered U.S. housing finance system—a

mechanism essential for a robust economic recovery• Provide Federal Reserve with new tools for economic

stabilization



Primary Dodd Frank Concerns• Risk Retention• Volcker Rule• Investor Registration• OTC Derivatives Reforms



Basel IIIConcerns about impact Basel III could have on U.S. banking system:• Requiring banks to hold far more capital to prevent

financial disaster could further exacerbate credit challenges for real estate and broader credit capacity

• Liquidity rule won’t go into effect until 2015• In response to complaints from lenders, financial

regulators agreed to fine-tune standards, where needed, by 2013

• Federal Reserve small lenders June 8 announcement



Lease AccountingNew lease accounting approaches being considered for lessees and lessors • Would re-characterize income producing real estate

business as a financing business• Lessors fear that proposed standard will force lessees to

push for shorter term leases without renewal options – change fundamentals of CRE cash flow model

• Failure to match policy with economic reality• Should reflect economic activity, not drive it



Lease Accounting• New standard originally slated for June 2011 with

effective date of 2013 • In July, FASB announced their intention to re-expose

their revised proposals for a common leasing standard• FASB would like more examples of lease transactions

affected by new standard• Economic study released to aid Congressional outreach



Corporate Tax Reform Alternative

• Supporters claim that the Buffett Rule “is something that will get us moving in the right direction toward fairness”

• Rather than overhauling the tax code, Buffett Rule simply adds another layer

• Tax hike will result in a shift of portfolio allocation to more tax exempt instruments

• Less investment capital available to American business and real estate

• If imposed, Buffett Rule wouldn't result in any significant increase in tax yield

• JCT estimates rule would generate $46.7B in revenues over next decade

• Represents less than 1% of the $6.4 trillion in deficits projected during that time

Buffet Rule

Source: Chip Rodgers


GSE ReformGSE reform remains stalled, 5 years into the financial crisis• Administration proposed broad-based plan that would wind down

GSEs with 3 options

• Seeking consensus on how to bring private capital back into this market

• Legislative proposals have begun to emerge:

– 2 comprehensive House bills, 2 comprehensive Senate bills, some 8 piecemeal House bills

• However, enactment of any of these bills appears unlikely in the near future



Immigration• Not pressing issue for Congress – too many other deadlines

• Will likely be a part of presidential candidate stump speeches

Romney did announce his new Hispanic Steering Committee last week

• Consists of at least six supporters of the Development, Relief and Education for Minors (DREAM) Act

– proposed legislation that would provide path to citizenship for some illegal immigrant youths

– Romney opposes DREAM Act

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EnergySenate • Energy Savings and Industrial Competitiveness Act (ESIC Act)• Federal energy code for buildings• Improved provisions from pervious cap and trade legislation

House• Arctic and off-shore drilling• Keystone XL pipeline

Incentives for Building Retrofits• Loan guarantees• Tax incentives• PACE financing programs• Green appraisal standards• Building Labeling, Rating, and Energy Initiatives

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Environmental• Water Policy

• US Supreme Court CWA Decisions (Sackett v. EPA and PPL v. Montana)

• Regulator activity on “waters” and “wetlands.”

• Lead paint in commercial buildings

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InfrastructureNew Transportation Funding Bill (“Moving Ahead for Progress in the 21st Century Act” (MAP-21)

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IT COULD BE WORSE


We Could be Greece

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Biography

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Peter Friedman is the head of Holland & Knight's Chicago Real Estate Group. Mr. Friedman represents private and public sector clients in all phases of real estate acquisition, finance, development, zoning, entitlements and land use matters. He counsels property owners, pension funds, private equity firms, tenants, and developers in a variety of real estate and transactional projects.

Mr. Friedman also represents numerous local and state government agencies, municipalities and counties on all aspects of real estate, development, and public law. He serves as the Village Attorney in Oak Brook and Lake Bluff, Illinois. He represents the State of Illinois on real estate matters for significant public infrastructure projects. He also serves as General Counsel to the Chicago Association of Realtors and as special outside counsel to the Illinois Emergency Management Agency and its Division of Nuclear Safety.

Mr. Friedman served as a judicial clerk to the Honorable Suzanne B. Conlon, judge of the U.S. District Court for the Northern District of Illinois. Prior to that, he worked for five years on the staff and as legislative director for Congressman John Porter (IL-10) in Washington, D.C.


Peter FriedmanChicago

phone number: 312-578-6566email: [email protected]


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