Red is for Commercial

Announcer (00:04): Welcome to the advocacy scoop, the podcast that takes you inside the advocacy work of the National Association of REALTORS® connecting 1.5 million members with their advocates in Washington for a front row seat to the fight for public policy that strengthens the ability of Americans to access property ownership.

Patrick Newton (00:25): Alright, hello everyone and welcome back to the Advocacy Scoop podcast. I'm Patrick Newton, NAR's Director of Advocacy Communications, and this is episode six of our podcast that takes you inside the advocacy work of the National Association of REALTORS®. And as always, I'm here with my co-host and fearless leader, Chief Advocacy Officer, Shannon McGann. I got it out that time without stumbling. That's such a long title. Welcome, Shannon.

Shannon McGahn (00:46): Great to see you Patrick. Episode six. We're half a dozen episodes in and we have so much to cover.

Patrick Newton (00:52): I know. And this one is we're throwing some love to our commercial members, which I've titled Red is for commercial. We actually do have a color scheme as our members know, residential is blue and commercial is red. That has nothing to do with politics. Realtor party is purple.

Shannon McGahn (01:06): How many times we have to explain that you have red hats and blue hats. Is this for Republicans and Democrats? No, no, but if you want it to be okay, fine. Take whichever color you would like. But yes, red for our commercial members, which represent a huge part of our membership and we are in fact the largest commercial real estate organization with 165,000 members who transact in commercial real estate or "resimercial" residential and commercial affiliate members.

Patrick Newton (01:33): I've learned a new word. Wait, let me say that again... resimercial?

Shannon McGahn (01:37): resimercial. Exactly.

Patrick Newton (01:38): I know one movie about house flipping the money pet.

Shannon McGahn (01:41): Well, the funny thing is, is that where all of those movies are filmed are in commercial spaces.

Patrick Newton (01:46): I mean that's correct. There you go!

Shannon McGahn (01:47): It touches everything that we do. The entire, any aspect of the economy where you work, where you live is all impacted by the commercial real estate sector.

Patrick Newton (01:55): That's right. Well, an economic impact of commercial real estate, as you said, is massive. And we have so much in-house research on this. We put out a lot of reports on commercial and also we have government statistics and from the Federal Reserve, the commercial real estate market valued at $22.5 trillion, give or take. And so that's huge.

Shannon McGahn (02:13): That is absolutely huge. And when we see the commercial market, when we're going to Capitol Hill, we talk often about all of the issues that impact commercial real estate in particular things in the tax space, economic growth space. But there are many different types of commercial real estate that are impacted here. So, office properties, we are seeing all types of different policies that are impacting office properties as we'll get into here in a little bit. But as folks are not going into the office as often as they once did, post pandemic multifamily properties, which is the development increase in inventory and multifamily properties is a huge concern as we are trying to impact inventory and bring down housing costs and just making sure that there's more developed over the next few years. Retail properties, the demand for retail spaces remained pretty low post pandemic. So, we're looking at how we can see impacting retail properties and increasing the use of and transfer of in the commercial real estate market. Industrial properties, that's another huge sector that is impacted post pandemic with industrial spaces decelerating. But, we are represented by SIOR and all of our friends within the commercial real estate space who are working on developing those industrial properties and making sure that those are being developed post pandemic. And then my favorite of the properties of course

Patrick Newton (03:30): Hotel?

Shannon McGahn (03:31): Hotel, yes. Yes.

Patrick Newton (03:33): I was going to say retail but...

Shannon McGahn (03:35): I'll say hotel retail.

Patrick Newton (03:36): It's a retail inside of a hotel.

Shannon McGahn (03:39): Exactly. And that's an area that has been showing improvement, definitely getting more expensive as I travel around the country and see that hotels are in very high demand and occupancy rates have stabilized and think looking at the back before the pre pandemic levels so that recovery is coming in that space for sure.

Patrick Newton (03:56): Well, our bread and butter of course, us being in the advocacy group here at NAR, we advocate for some issues that are very specific to commercial. There's been some big ones in recent years and of course 1031 like-kind is probably the biggest. And we've talked about 1031 on earlier episodes of the podcast. But that's one of those issues that doesn't go away. And, I like to say every time a president comes into office and propose something and they've got to find a way to at least pretend how to pay for it. And 1031 looks like a sweet pot of money on paper. And we've been doing massive education on that and for years we've defended like-kind for more than a decade.

Shannon McGahn (04:32): Very successfully too. And that is the number one issue that I hear when we are speaking directly with you our commercial members, is what is going to be the fate of 1031 like-kind exchange. Because this is like you said, Patrick, it's always on the chopping block in the budget in potential tax bills.

Patrick Newton (04:47): Yeah. And so a quick background here, Shannon from Evan is that TCJA threatened to repeal 1031 for both real estate and personal property. NAR along with the 1031 coalition persuaded the Republicans that the real estate part of 1031 was essential. And, so the TCJA only repealed 1031 for personal property. The GOP was thinking 1031 was not needed because they were proposing to expense all real estate immediately instead of depreciating it. And they thought in a world of full expensing, 1031 just wouldn't be needed. So, we convinced them otherwise it wasn't about revenue back in 2017 as it is now.

Shannon McGahn (05:24): And there have been several attempts to include it as a potential pay for other larger pieces of legislation, or to include it in the budget as something that could potentially go. And, we had that opportunity, which we've discussed in one of our previous advocacy wins podcast, but we had that opportunity at the last Congress as the Ways of Means committee was potentially looking at 1031 being on the pay for list and going into that markup, we had spent solid year advocating directly with members of the Ways and Means committee on the importance that 1031 plays in community development and the fairness that it doesn't mean that you are not paying that tax, it just means that you are deferring it until a final sale so that you are able to take the proceeds of one sale and wrap it up into the other. And, once we explained all of that, not only was it defeated, it didn't even come up. There was no amendment, there was no debate, it was nope, that's not on the table anymore. We understand that. But that doesn't mean that as the Tax Cut and Jobs Act is expiring, several other provisions are expiring. And, the next Congress, we will take that up. We would very well expect the 1031 could be discussed again.

Patrick Newton (06:29): And that's where you shine and where our advocacy team shines because that came up in a markup and, for our listeners, a markup is when the committee in Congress does jurisdiction -- it sits down and writes the bill and puts what's in it. And that's no more talking points, no more general bias statements. This is where you put pen to paper and that's where the threat is and that's where you all are on the ground in the committees, meeting with members and that type of thing. Now, when 1031 comes out in the president's budget, that's not quite such a threat because the president's budget is a messaging document and every year the budget comes out and 1031 is in it. And we get lots of emails and calls and we were like, don't worry, this happens every year. "The president proposes, the Congress disposes it" is the lingo in DC. So, the president's budget is just a messaging document, but the markup that is where you all...

Shannon McGahn (07:21): Rubber hits the road right there. And once something gets through a markup, it is very, very difficult to change course. And, so we have been fully prepared and speaking with our members and in commercial, "resimercial," and residential because it's used throughout the country and something that we've had bipartisan support, bicameral support, and we will continue those efforts.

Patrick Newton (07:42): Can we just say Resa mech merch? Isn't that what the kids do now? They shorten everything. I don't know...

Shannon McGahn (07:47): Try to make Resimerch.

Patrick Newton (07:49): So that's 1031. A huge commercial issue that we're always on top of. Another issue that's come up in recent years opportunity zones, and I think a very good friend of the REALTORS®, a senator from South Carolina was put in a lot of work on opportunity zones.

Shannon McGahn (08:06): Senator Tim Scott, instrumental in the development of Opportunity Zones and that is another one that was part of the Tax Cut and Jobs Act. And, so we follow that in the implementation of Opportunity zones and ensuring that those qualified opportunity zones that that funding is there. We work on that, the Neighborhood Homes Investment Act, which is kind of like opportunity zones, but for developing property that is not all commercial, but some of it can be multifamily or residential too. So, that one is still pending in the Congress with bipartisan support that we're working to push through. But Opportunity Zones is one that we were successful in getting in as part of TCJI.

Patrick Newton (08:38): And, I saw I was on my way to work this morning and on the side of the highway there was a big sign and federal opportunity zone investment on a piece of commercial property. And I was like, there you go, my job in real life right there on the side of the road. So, opportunity zones, we're big fans of that. But all the talk the past couple of years, because we are in a housing supply crisis, especially affordable housing, which has been almost our just laser focus for the past couple of years is conversion. So, we have empty office space, we need more residential units and it's sort of like light bulb, let's convert, let's do some conversions. But it's way more complicated than it sounds.

Shannon McGahn (09:16): Exactly, exactly. That is one of the number one questions that we get from the administration from Capitol Hill is "how is this going to work in practice?" Folks are very supportive of it with the hybrid and remote work arrangements that we've seen just overall less demand for office space. You go here in downtown DC and places where that used to be packed for lunch, not as busy because you just don't have as many people in the office. But having these empty office spaces or retail spaces are having a huge impact on cities and their economies and the people who work there just a declining value of properties. They're seeing property taxes for 75% of their tax revenue, huge charitable trust and McKinsey and others. So, whenever those folks say something, you know that those are right, exactly. You need to invest about $900 billion in commercial real estate.

(10:04): And the challenge is how do you incentivize that type of investment? We are working on a piece of legislation called the Revitalizing Downtowns and Main Streets Act that is supported by a bipartisan group of members. We're getting co-sponsors. We're out there talking about this on Capitol Hill. This will help to create jobs and reduce housing costs by encouraging the private sector to convert those commercial properties that are being underutilized or vacant into housing. And that would establish a temporary tax cut for commercial to residential property conversions. And, that would help with spraying affordable housing, saving energy and just revitalizing cities. But there are a lot of concerns about this that we are addressing that it is very expensive to do. So, look at our beautiful building here. We have a great building on Michigan Avenue in Chicago and here right by the Senate side in Union Station.

(10:52): There are two bathrooms on this floor and not even that, there's restrooms. So, the ability to convert and put into apartments and have plumbing and have all of the wiring and everything that you need to live and not just to work somewhere is going to be very expensive. So, how do we create those tax incentives to get more developers in there and understand that they can do that in order to convert to residential property. So, those are all in the works and we've had very great success in working with our coalition partners. The Real Estate Roundtable has been absolutely fantastic on this issue. We have our own organizations with CCIM and SIOR and others and IREM and others. And, so we are continuing to get more co-sponsors and support for this. And then we're also seeing this happen at the state and local level too where mayors and state officials are looking into their own incentives for conversions.

Patrick Newton (11:39): So, 1031 conversion opportunity zones, these are some big wins, some big things we're working on. We've got lots of regulatory wins. If you want to delve into that, go to nar.realtor/advocacywins and they're woven into all of our documents a lot of our commercial wins. And, you could just have a regulatory nerd fest if you want to do that. And Brian Green, our vice president of policy advocacy and his team are always on top of the regulatory side of all this. But when it comes to supply and conversion, I mean it all runs through the tax code. And, we have here on staff Evan Liddiard who is our longtime tax guy, we need to come up with a better nickname for him than the tax guy because he is so much more than that. He coined this funny thing a few years ago, his "Ugly 11" and this came about when the president had put out his build back better plan, which actually ended up being multiple pieces of legislation. But when you have a plan that large, there's always things in it you like and there's always things in it you don't like. And, so as you always say, what you keep from becoming law is sometimes more important than what you get passed into law. So, he has, can you name the Ugly 11?

Shannon McGahn (12:43): I love that, Evan. He loves alliteration and is always very clever in how he comes up with these. So, I don't want to take the credit for it. But yes, Evan's Ugly 11. So, I think top on that list was that that legislation would've limited 1031 Like-Kind Exchange and got that out. It would've increased the top capital gains rate.

Patrick Newton (13:00): Out.

Shannon McGahn (13:01): Out. See you later. It would've taxed unrealized gains at death out. It would have had carried interest taxed as ordinary income or simplifying this. And we have all of this available on our website, but these are very complex tax issues that have been debated that did not make it in. So, that one's out. A huge one that is going to come up as part of the Tax Cut and Jobs Act, the provisions that are expiring in the next year, is the limit of 199A. That's the 20% qualified business income deduction. That is a huge one. That was arguably one of the most important provisions of the Tax Cut and Jobs Act for all NAR members including commercial or residential, "resimercial." But there are still folks who want to either eliminate that, or limit it to those making less than $400,000 per year. And, we are trying to have it extended as is. So, that's another big one on the "Ugly 11."

Patrick Newton (13:52): Also, the 3.8% net investment income tax. That one is out. And in fact, Shannon, all of Evan's Ugly 11 were considered to be on the table at one point, but none were enacted.

Shannon McGahn (14:05): The other tax increases they've tried to do is increase corporate income tax rates, got that one out. Changes on tax rules for multinational corporations. They changed that 3% SUR tax on income above 5 million. These are all massive tax implications that impact every single business working here, but especially in the real estate business. So, I think folks often are wondering when we are on Capitol Hill and we're discussing these important issues with policy makers, what committees we're talking to, all of these go before the Ways and Means committee and that is a very solid group of members who we communicate with and have great relationships with and talk to their staff on a regular basis and who understand in a bipartisan way the impact that many of these tax increases would have on commercial real estate and the economy at whole.

Patrick Newton (14:48): And, I do want to mention that the expanded low income housing tax credit and the Neighborhood Homes Investment Act both made it into the Build Back Better Bill, but that did not pass this proposed. It actually morphed into the Inflation Reduction Act, which did become law and the low income housing tax credit and the Neighborhood Homes Investment Act provisions were not included in that. Both are pieces of legislation we are still working on and are part of the conversation. And, in fact they are top asks in our legislative talking points at Flyin.realtor. So, you can go to Flyin.realtor and look those over. But Shannon, you know all the minute details of how these things work through the committee process and become law because you were the staff director at the financial services committee.

Shannon McGahn (15:30): So, that's the ways and means wait list committee. So, we love the financial services committee, it's my favorite committee.

Patrick Newton (15:36): And that job, as Joe Ventrone would say, that's A BFD.

Shannon McGahn (15:40): He used to work at that committee too when it was called banking back in the 19th hundreds at the banking committee.

Patrick Newton (15:44): I think I just took our rating from clean to explicit.

Shannon McGahn (15:47): Are we going to have to cut that out?

Patrick Newton (15:49): But that was a big deal. The Financial Services committee writes financial policy and the Ways and Means does writes the tax code, right?

Shannon McGahn (15:55): Exactly. Exactly. And ways and means is especially effective because any tax bill has to originate in the house. So, you can't just say, oh, Senate has this great bill and they passed it and here you go. But something that is very important to remember for next year is that there's this process called reconciliation, which is a budget procedure that says, okay, this is what our top line budget numbers are and these are the policies that we have to put in place to meet those numbers. And, during that process you can have tax policy that gets through the Senate with a simple majority vote instead of having to go through the filibuster option. So, you can with a very slim majority of one party or the other, have massive tax implications based off of this budget procedure. There's a reason why tax bills are done once every 30 years. It's because there's a lot that could be at stake and a lot that can change. So, with the expiring provisions of the tax cut and Job Act, we're expecting all of these types of provisions to come back up next year and we have to go right through the ways and means committee again.

Patrick Newton (16:53): And we're going to be all hands next year for tax reform. And all of this comes up again. And as you like to say, whenever you have split government that's actually balanced government, we've said that before on the podcast, but it's easier when there is divided government situations like this than versus one party having complete control because that's when tax provisions or other provisions that might not be in the best interest of the majority of the country kind of slip through.

Shannon McGahn (17:18): Right. And then that's also where the importance of the relationships and the research that we bring to these policy debates. Our research team, Patrick quote, the Fed, just because we can't quote Dr. Lawrence Yoon and Dr. Jessica Laz all the time, but the reports that they have put out on the commercial real estate market on our overall 1.5 million members and the entire real estate economy is quoted by the White House, Capitol Hill, major news publications all the time. The other areas as we're looking into next year and all of that research is seeing who's going to have the gavel, who is going to be in control of these committees, the Senate Finance Committee or the House Ways and Means committee. And, that's where you see the political arm of NAR get involved there too through RPAC, which is the largest political action committee in the country and has a 98% success rate from the last cycle in candidates who were supporting. So, helping to determine who we're supporting, what the components look like of the House and the Senate, what's happening at the state and local level as well. So, RPAC is going to be very busy this year looking into all of these issues and determining which candidates to support and at what level. And, that type of support is very important to who controls what gavels.

Patrick Newton (18:30): And these are ongoing battles. We're going to be sitting right here 10 years from now, talking about 1031.

Shannon McGahn (18:35): I'll predict that in 10 years they're going to say, remember when we had problems with 1031? And it turns out that that's been this engine that's driving economic growth and more and more support for it. I think they'll realize that the juice is not worth the squeeze on 1031, but it's kind of like whack-a-mole. Whenever one issue goes away, something else is going to pop up in its place.

Patrick Newton (18:51): And we have all the research and data to support it because that's what we do. That's who we are. Alright, well we're getting to that time. It's closing time and it's August in DC it's really, really hot. And what else happens in August in DC Tell me something behind the scenes.

Shannon McGahn (19:09): So I've been in DC for 25 years now and most people try to get out in August. Congress leaves, people try to go visit their families if they're not from here, maybe go to a beach house and just kind of get up. But what we do at NAR is prepare more talking points to take back to the districts. So, please be on the lookout at Flyin.realtor where we have an all new set of updated talking points that are ready for our FPCs (federal political coordinators) who are spending time with their members of Congress while they're back in the district. We love those meetings or those contacts because whenever members are home, they're usually just in a better mood because they're not here in the swamp sweating hopefully. And, that's when we have opportunities to meet with their district staff and to deliver a lot of the research that we discuss on what is happening directly in their districts. So, Flyin.realtor, that's Patrick, that's your legacy of many.

Patrick Newton (20:03): Maybe.

Shannon McGahn (20:04): So, this is when we fly into the districts not flying out here and we'll do several events. The advocacy team, the government advocacy team flies around and attends many of these meetings too. So, we'll be hitting the road in this hot August. All

Patrick Newton (20:15): Alright. Fresh talking points. Congress is headed home, but they're armed with the latest and greatest from Shannon and the advocacy team at NAR. Alright, well thank you all for listening. Heading into the autumn, we're going to have lots of great content about the upcoming election and about RPAC. We're going to delve a little bit deeper into that. Shannon's going to talk about Rpac while eating hot wings.

Shannon McGahn (20:34): I would love to do that. Can you really do one of those?

Patrick Newtown (20:38): Have you ever seen that?

Shannon McGahn (20:41): I have. I actually would be really good at that. And, also we'll have some more updates too as we go into our C-5 Conference where we talk about all things commercial and networking. I think Dan Marino going to be speaking in September at C-5, so we'll have an update soon after that.

Patrick Newton (20:51): Great. Well thank you so much and we'll see everybody next time. So, that's the scoop. Thank you to everyone listening to this podcast. Please be sure to subscribe and share wherever you get your podcast. And meet us right back here for more advocacy scoop next time.

Announcer (21:05): REALTORS® are members of the National Association of REALTORS®.