December 15, 2010

Senate Passes Tax Compromise Extending Rates; Swift House Action Expected By a vote of 81 to 19, the Senate today passed major tax legislation that would extend current tax rates, due to expire at the end of 2010, through the end of 2012, and which includes provisions important to the commercial real estate industry. The bill, a product of a compromise between the White House and the Senate Republican leadership, contains several elements pushed by President Obama, such as a 13-month extension of unemployment insurance, a temporary reduction in the Social Security payroll tax paid by individuals in 2011 and extensions of tax provisions from the American Recovery and Reinvestment Act. It also includes tax provisions that would set the estate tax levels at a 35 percent tax rate, with a $5 million per-person exemption level. In addition, the legislation includes a two-year patch for the alternative minimum tax (AMT). The estate tax provisions were particularly problematic for the House Democratic caucus, who expressed anger with the Obama White House and had voted not to bring the tax compromise to the floor of the House for a vote. In addition, the $859 billion cost of the legislation raised concerns among many conservative Republicans. However, the strong bipartisan vote in the Senate makes it more likely that the House will pass legislation that can be signed by President Obama prior to the end of the year. In a statement, NAIOP President and CEO Thomas Bisacquino praised the Senate action, stating that “it’s important that Congress and the administration continue to take responsible actions that prevent tax increases. Bisacquino urged the House of Representatives to “quickly pass their bill so that the legislation can move to President Obama’s desk for signature and begin to have an immediate, positive impact on the nation’s economy.” Important for real estate, the tax bill maintains the 15 percent current capital gains tax rate through 2013, as well as the current tax on dividends. In addition, the legislation includes numerous provisions that are part of NAIOP’s legislative agenda and that are of particular importance to the commercial real estate industry. At the same time, a tax increase on partnership carried interest, which NAIOP and its real estate allies fought against over the last two years, and which had been included in modified form in the most recent tax-extenders legislation offered by Senate Finance Committee Chairman Max Baucus (D-Mont.), did not make it into the final tax legislation. The carried interest tax increase had been passed by the House of Representatives on three different occasions. NAIOP and its real estate allies continued to oppose the possible inclusion of the tax increase in any final tax compromise as a revenue offset. Among the NAIOP-supported provisions that were included in the Senate passed legislation are: A two-year extension of 15-year leasehold improvement depreciation for qualified leasehold improvements. The provision had expired at the end of 2009. The Senate-passed provision would apply to tax years 2010 and 2011; A two-year extension of the brownfields remediation expensing provision. Similar to 15-year qualified leasehold improvement depreciation, the brownfields expensing provisions had expired at the end 0f 2009. The Senate passed provision applies to tax years 2010 and 2011; A two-year extension of a bonus depreciation provision that had been included in prior economic stimulus legislation. The provision allows 100 percent expensing for property placed in service after September 8, 2010, through the end of 2011. 50 percent bonus depreciation will be available for 2012. If the compromise legislation is ultimately signed by President Obama in its current form, the legislative debate on a major overhaul of the tax code will begin in earnest next year. NAIOP and its real estate allies will be fully engaged in that debate to ensure that the interests of its members, as well as the broader commercial real estate industry, are given high priority. For more information or questions, please contact Aquiles Suarez at (703) 904-7100, ext. 115. NAIOP and Industry Comment on Proposed Lease Accounting Standards NAIOP has submitted comments to the Financial Accounting Standards Board (FASB) urging that body to delay finalizing its proposed lease accounting standards, which will have major repercussions on the commercial real estate industry. Among other things, the proposed leasing standards would require tenants to capitalize all leases on their balance sheets, and include renewal options and contingent rents, for example, when calculating liability under lease agreements. Several years ago FASB and the International Accounting Standards Board (IASB) began the process of reconsidering the accounting standards for leases, and in August of this year issued an Exposure Draft setting forth their proposed standards. Since that time, NAIOP and other real estate industry trade groups, as well as other industries with members who would be affected by the changes, have been voicing concerns to FASB on the possible negative consequences of the changes. In its Comment Letter to FASB, NAIOP President and CEO Thomas J. Bisacquino expressed concern that rather than increasing transparency for investors, “the results of the proposed lease accounting standards will in fact be to increase complexity and reduce the usefulness of financial statements to investors, while leading to potentially harmful effects upon the availability of capital for our industry.” NAIOP’s concerns with the proposed standards include their effect on the duration of lease terms, the impact on the availability of capital, increased accounting complexity and subjectivity, and the increased administrative costs. NAIOP also joined with a broad coalition of industry groups in providing joint comments to FASB expressing strong reservations with the proposed leasing standards. Thirty-five trade groups, including NAIOP, the U.S. Chamber of Commerce, and associations representing insurance and financial services, among others, signed a letter setting forth specific concerns and urging a delay in implementation of final standards. Originally, FASB envisioned finalizing the leasing standards by June 2011. FASB must now review the submitted comments and determine whether more time is needed to address valid concerns. NAIOP and its industry partners will stay engaged with FASB on its lease accounting standards to ensure that the concerns of the commercial real estate industry are adequately addressed. For more information, please contact Aquiles Suarez at (703) 904-7100, ext. 115.

State Legislators Gather to Discuss Difficult Challenges In 2011 While still grappling with the political and public policy ramifications from the 2010 elections, state legislators gathered last week in Phoenix for the Fall Forum of the National Conference of State Legislatures (NCSL). Economic growth and job creation remain dominant issues heading into the 2011 legislative session as states continue to face fiscal challenges that will require difficult structural adjustments to their budgets to maintain core government functions. There was an important recognition during the forum of the impact of decisions by the Administration and Congress on state efforts to stimulate economic recovery. Economist Christopher Thornburg noted this point while addressing NCSL’s attendees on the economic challenges in recovering from the “great recession." In addition, the Standing Committee on Budgets and Revenues received an update on current federal efforts to pass certain American Recovery and Reinvestment Act (ARRA) programs and a tax package, including the Bush era tax cuts and an extension of the unemployment insurance benefits. Given the relationship between federal and state tax collections, the decisions by leaders in Washington on these issues may have a profound impact on state efforts to pass balanced budgets in 2011. As state legislatures prepare to convene this January with 29 new governors and hundreds of new state legislators, the National Governors Association (NGA) and National Association of State Budget Officers (NASBO) released its report on The Fiscal Survey of the States on December 1, predicting another difficult year for states in addressing state fiscal imbalances as the economy remains sluggish and the programs under the ARRA expire at the end of this year. While the solutions to these challenges remain complicated and politically sensitive, many states understand the need to fundamentally review and adjust the role and responsibilities of government that integrates current economic realities and have taken the first steps towards restructuring state government. The NGA’s Redesigning State Government page can provide you with initial information on what states are doing to restructure government during the current fiscal crisis. Given the efforts to make state government leaner and more efficient, NAIOP members need to remain diligent in advocating for policies before governors and state legislators on behalf of the commercial real estate industry. The political shift resulting from the 2010 election requires continued efforts to educate state leaders, particularly those elected this past November, on the important issues facing the commercial real estate industry. For more information contact Toby Burke at (703) 904-7100, ext. 116.

Recent Report Forecasts Brighter 2011 for Canadian Office and Industrial Markets The Vancouver Sun recently reported on Cushman & Wakefield’s 2011 Outlook, which foresees strengthening central and suburban demand for the country’s office and industrial markets in 2011. Central Canadian office markets outperformed initial expectations in 2010 and the report indicates that they may outperform expectations again in the coming year. The central markets are at historic low vacancy levels and heading into an expansionary cycle. Some suburban markets are impacted more heavily by the U.S. and global economies and are expected to continue to experience weak demand in 2011. However, the Canadian markets overall should see steady improvements. Pierre Bergevin, President and CEO of Cushman & Wakefield, noted, “Even though we like to temper our responses because we’ve seen cycles shift unexpectedly, it’s hard not to be impressed with the resilience of Canadian office markets and feel optimistic about what lies ahead.” Bergevin said that the industrial markets are still facing an uphill battle as they are struggling with the impact of the high dollar and unstable world markets. He noted that improvements seen in this sector in the third quarter offers evidence that industrial real estate should also expect strengthening in 2011. The report, which covered 12 major markets across Canada, said that the growth seen in 2010 was unexpected. The complete report featuring office and industrial outlook for individual cities may be found on Cushman & Wakefield’s Web site. Calgary Office Market Propelled by Strong Energy Sector Cushman & Wakefield’s 2011 Outlook cited the growing energy sector as the primary source for demand in Calgary’s office market. Bob MacDougall, senior managing director of Cushman & Wakefield in Calgary, reported that the downturn in the energy sector seen in 2008 is reversing, causing greater demand for office space in both downtown and the suburbs. The report said that the downtown office market had a vacancy rate of 11.4 percent, and is expected to rise to around 12.5 percent by fourth quarter 2011. On the suburban front, third quarter vacancy rates stood at 16.4 percent in the third quarter and are forecast to rise to 16.5 percent by the end of next year. The report also noted that vacancy rates for Calgary’s industrial market are projected to fall to 4.1 percent by the end of 2011, down from 5.1 percent in the third quarter of this year. The report illustrates that no other central North American market, outside of Washington, D.C., has seen the positive performance experienced by Calgary and Toronto during the past year. Calgary’s vacancy rates were initially forecast to reach 20 percent, but came in lower due to strong demand in the last three quarters. “The surprising turn in demand began in the spring of 2010 just after the provincial government reduced royalty taxes on energy sales, which coincided with increasing elevated oil prices,” the report noted. “Since then, a significant number of oil sands projects have come to life, igniting demand for office space by such sectors as engineering, in support of these activities. From this vantage point, it looks like 2010 could be a boom year for Calgary’s downtown market.” Building Permits Fall 6.5 percent in October September’s big gains in value of building permits across Canada were overshadowed by a larger than expected drop in October, fueled by a continuing slowdown in the country’s housing market. Statistics Canada reported that permits fell 6.5 percent during the month, missing predictions for only a four percent decline. “Current levels of building permits remain in line with levels experienced prior to the downturn. Nevertheless, we expect that the Canadian housing market is entering a softer environment. Recent data releases reaffirm this view,” said Scotia Bank economist Derek Holt. In the non-residential sector, the following figures were reported for the month of October: Industrial: $408 million for an increase of 12.2 percent Commercial: $1.65 billion for an increase of 8.8 percent Institutional: $685 million for a decrease of 20.4 percent

Register Now for NAIOP’s Real Estate Investment and Capital Markets Course Real Estate Investment and Capital Markets Course January 12 - March 2, 2011 8-week Course 2 hours each Wednesday (3 - 5 p.m. EST) This online course examines the convergence of real estate and the capital markets by covering the structure and operation of the private and public, debt and equity real estate markets, as well as derivative markets that involve real estate. It is designed for the intermediate level to senior experience level commercial real estate professional and will examine a thorough range of topics in equity real estate investment, including: private equity markets, private equity deal structuring, public and private real estate investment trusts (REITs) , problems in measuring risk and return; structuring optimal portfolios, portfolio valuation issues, valuing publicly traded real estate securities, performance evaluation and attribution and equity real estate risk management techniques. The course will also address a variety of topics in commercial real estate debt markets including: the structure of the U.S. mortgage finance system, basic mortgage math, valuation of mortgages and commercial mortgage-backed securities and risk management techniques for lenders. For more information or to register, visit NAIOP’s Center for Education.

Past Issues NAIOP Legislative News Staff President, Thomas J. Bisacquino (Ext. 104) Vice President for Government Affairs, Aquiles Suarez (Ext. 115) Vice President for Marketing, Kathryn Hamilton (Ext. 165) Legislative News Editor, Leslie Silvey (Ext. 166)

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