APARTMENT INDUSTRY LEGISLATIVE AND REGULATORY REPORT. June 2014

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1 APARTMENT INDUSTRY LEGISLATIVE AND REGULATORY REPORT June 2014 The National Multifamily Housing Council (NMHC) and the National Apartment Association (NAA) Legislative and Regulatory Report is a government affairs update on the issues that we are currently advocating for on behalf of members. Specifically, this report provides a detailed update, where appropriate, on key issues outlined in the larger 2014 NMHC/NAA policy priorities document, including housing finance reform, immigration reform, flood and terrorism insurance, tax reform, environmental and energy issues, and more. HUD SECRETARY Obama Taps Castro to Lead HUD: President Obama nominated San Antonio Mayor Julian Castro to become HUD secretary on May 23. Julian Castro would replace current HUD Secretary Shaun Donovan who Obama has named director of the Office of Management and Budget (OMB). Castro is widely considered one of the Democratic Party s rising stars and has been mentioned frequently as a potential vice-presidential running mate for Hillary Clinton. Donovan is likely to continue to influence federal housing policy in numerous ways as head of OMB. FINANCE AND CAPITAL MARKETS Housing Finance Reform: Appropriate treatment of multifamily in housing finance reform is the single most important factor to ensuring that the apartment industry can meet the nation s growing housing demand. NMHC/NAA are working to preserve a federal guarantee for multifamily mortgages and the availability of consistently reliable and competitively priced capital in all markets during all economic cycles. On May 15, the Senate Banking Committee approved the Johnson-Crapo housing finance reform bill. The legislation lays out critical distinctions between single family and multifamily financing. Importantly, Title VII retains many of the successful components of the existing multifamily programs and includes key provisions that we advocated for on behalf of the industry. The next step for Johnson-Crapo is a vote by the full Senate in the months remaining before the fall election. Many observers believe the bill faces significant challenges in reaching the Senate floor, and that if it is passed by the Senate, substantial differences between the House and Senate positions would have to be resolved. This series of hurdles likely pushes housing finance reform to the 114th Congress. Regardless, we will continue to work with lawmakers to ensure liquidity in the multifamily mortgage market.

2 HUD Multifamily Reorganization: HUD s multifamily field offices provide mortgage insurance to HUD-approved lenders nationwide, facilitate multifamily housing projects and administer rental assistance programs. NMHC/NAA serve in a key consultant role for HUD on multifamily policies and issues, including the agency s multifamily reorganization and consolidation effort. The reorganization will eliminate over 40 office locations throughout the nation and alter certain internal processes for multifamily programs. We are helping to limit the impact of the reorganization of HUD s multifamily field offices in the apartment industry, providing guidance to the HUD secretary and FHA commissioner in order to help ensure improvement in processing consistency and efficiency. HUD announced on April 4 that the planned transformation of its multifamily housing group is moving ahead with one key change for now asset management employees will continue to operate in existing offices around the country. HUD Spending Bill: Apartment owners, renters, and local communities benefit from rental assistance programs. NMHC/NAA are urging lawmakers to provide full funding for rental assistance programs, which are already seriously underfunded, in FY The House approved funding legislation on May 21. Although the legislation would increase funding overall for the Section 8 housing voucher program, there is concern that changes to PBRA funding will require Public Housing Authorities (PHA) to implement cost savings measures in the future. We are part of a coalition of real estate groups that have sent letters to both the House and Senate in April expressing support for fully funding HUD s PBRA program. However, as the government continues to implement cost savings measures, it is vital that the multifamily industry prepare for future budget shortfalls by proactively meeting with local PHAs to develop contingency plans. BUSINESS OPERATIONS Flood Insurance: The 2012 Biggert-Waters Flood Insurance Reform Act extended the National Flood Insurance Program (NFIP) for five years in order to return the program to solvency. However, as reforms were implemented, many policyholders experienced significant price increases when they renewed their policies, transferred properties or were mapped into a riskier flood zone. Given federal requirements for apartment owners to purchase flood insurance, NMHC/NAA support work by Congress that backs measures to ensure the NFIP program can continue to operate long term. On March 21, President Obama signed into law the Homeowner Flood Insurance Affordability Act of The legislation reinstates the grandfathering provisions of the NFIP, allowing properties to maintain their current rates under certain conditions even when a new map reflects higher risk. It also permits the transfer of a subsidized rate to a new owner at a property s sale for one year before gradually increasing premiums each year until reaching an actuarial rate. We continue to monitor the regulatory implementation of these and other provisions of the Act and to educate the industry on these changes. 2

3 Terrorism Insurance: Apartment owners are required by lenders to have a terrorism insurance policy in place on existing and future development projects. NMHC/NAA, and our policyholder partners in the Coalition to Insure Against Terrorism, are actively advocating for an extension of the Terrorism Risk Insurance Act (TRIA). The Terrorism Risk Insurance Program was first enacted in 2002 after insurers incurred $32 billion worth of claims from the 9-11 attacks. Congress renewed the law in 2005 and in The current program that guarantees government reimbursement to insurers covering a terrorism attack after the industry s aggregate losses exceed $100 million is set to expire at the end of this year. If it is allowed to expire, borrowers will be in technical default of their loan and will most certainly face other economic uncertainties. On June 3, the Senate Banking Committee approved a seven-year extension of the program by a bipartisan and unanimous vote. This measure could come up for a full Senate vote in June or early July. In the House, Financial Services Committee Chairman Jeb Hensarling, R-Texas, and Representative Randy Neugebauer, R- Texas, are working on a proposal to further reduce the government s exposure as a re-insurer for terrorism risk insurance. In the end, the House and Senate will have to resolve the differences between their proposals. We remain committed to supporting legislation that ensures the continued availability and affordability of terrorism risk insurance products. Patent Trolls: The real estate industry including apartment owners and operators have been the target of patent infringement allegations by so-called "patent trolls" threatening meritless legal action for the alleged unlicensed use of patented products or technologies. NMHC/NAA are in strong support of legislation under debate in Congress to address meritless patent claims for alleged unlicensed use of technologies involving WiFi and web-based platforms, among other claims that have targeted real estate companies. The Senate Judiciary Committee scheduled consideration of patent reform legislation on May 8, but moved to table the bill shortly after calling it up. In coordination with a number of organizations representing various real estate sectors, we sent a letter to the Senate on April 28 urging approval of legislation and we will continue to monitor related progress. Data Security: Apartment owners and operators need to collect personally identifiable data, such as the name, address and Social Security Number of residents, prospective residents and employees. NMHC/NAA are supporting reasonable efforts to safeguard a consumer s personal information, without imposing difficult notification requirements, unless a real threat of identity theft exists. Congress is working to replace the patchwork of privacy and data breach laws, enacted by 46 states and the District of Columbia, with a national standard for all businesses that collect personal consumer information. The requirements of state laws vary and sometimes conflict, creating a significant compliance challenge for businesses. A national standard may also not be ideal for those that have adapted to their state laws and are concerned about more rigid national standards. Data breach and cyber security have been the focus of high-profile Senate Committee hearings recently on Capitol Hill, including a hearing on March 26 on the breach of at least 40 million Target customers personal information last year. Another committee hearing held on April 2 detailed how the private sector could protect information and prevent cyber-attacks without congressional involvement. The outlook for future action is currently uncertain. We are following this issue carefully, ensuring that any proposal or measure that advances in Congress is reasonable and does not impose overly burdensome compliance obligations on apartment firms. 3

4 Telecommunications: Apartment owners and managers increasingly rely on Internet-based platforms to communicate with residents, provide smart building amenities and implement operations systems from revenue management to maintenance. Reliable broadband service can also have a significant impact on resident satisfaction and apartment owners ability to attract and retain residents. NMHC/NAA are advocating for the industry s interests as the Federal Communications Commission (FCC) and Congress consider a range of telecommunications issues that could impact apartment owners, managers and residents, including the availability of solutions for providing adequate coverage. We continue to review the FCC s net neutrality proposal that would prohibit Internet providers from blocking or slowing access to websites and web-based platforms. The FCC voted 3-2 on May 15 to move forward with considering the proposal. HOUSING POLICY Military Housing: The Department of Defense s (DoD) FY 2015 budget request limits Basic Allowance for Housing (BAH) increases to below the rate of inflation, which impacts housing options for military families and reduces critical funding stability for apartment owners in and around military installations. NMHC/NAA are urging Congress to oppose any changes to the BAH that would undermine the long-term stability of the Military Housing Privatization program. We continue to advocate for the DoD to fully study the impacts of a BAH reduction and for them to consult with private-sector stakeholders throughout the process before modifying the program. In May, the House openly defied the Obama Administration s plans to roll back military compensation by broadly rejecting the DoD proposal to slow the growth of the BAH in its FY 2015 defense spending bill. This move by the House was notably different from the Senate s legislation, which would move forward with changes to the program, limiting increases to below the rate of inflation. The House bill deferred consideration of compensation matters until a related comprehensive review is completed in February We were successful in including language calling specific attention to the impacts on the BAH in this review process. Disparate Impact: HUD s 2013 disparate impact final rule creates uncertainty about potential liability risks for legitimate apartment operations practices like resident screening, section 8 voucher program participation and practices, and other industry practices. NMHC/NAA are pursuing both legal and regulatory strategies aimed at mitigating the impact of HUD s disparate impact final rule on apartment operations. A group of our members met with key HUD leadership on April 30 to express concerns about the uncertainty created by the final rule in relationship to the potential risk of liability for what have been considered legitimate business practices. Ultimately, they stressed the need for additional clarification on rental practices that otherwise might be considered unlawful under the disparate impact theory. The group was informed that HUD is currently working on additional guidance for impacted industries, which is expected to be released as early as this summer. 4

5 HUD Spending Bill: Apartment owners, and, more importantly, residents benefit from rental assistance programs. NMHC/NAA are urging lawmakers to provide full funding for rental assistance programs, which are already seriously underfunded, in FY The House approved funding legislation on May 21. The bill falls short on funds for the Section 8 Project-Based Rental Assistance (PBRA) program. And, although the legislation would increase funding overall for the Section 8 housing voucher program, there is concern that cuts to PBRA will require Public Housing Authorities (PHA) to implement further cost savings measures. We are part of a coalition of real estate groups that have sent letters to both the House and Senate in April expressing support for fully funding HUD s PBRA program. However, as the government continues to implement cost savings measures, it is vital that the multifamily industry prepare for future budget shortfalls by proactively meeting with local PHAs to develop contingency plans. Section 8: Apartment owners, and, more importantly, residents nationwide benefit from the project-based Section 8 rental subsidy program. NMHC/NAA are concerned with changes related to how property rents are set in HUD s Section 8 Renewal Guide Proposal. The changes would set subsidy limits that do not reflect market conditions, are based on outdated information, and are not adjusted for current economic realities. Specifically, instead of using Fair Market Rent as a basis of comparison for the rents set in a comparability study, HUD has proposed to compare rents based on zip-codelevel median gross rents from the Census Bureau s American Community Survey. If those rents differ by more than 10 percent, HUD has the ability to commission a third-party comparability study, and set rents from that study without an owner s appeal. Research commissioned by the NMHC/NAA and our industry partners shows that the new benchmark will likely require more HUD-commissioned third-party studies, actually causing HUD s costs to rise, and resulting in fewer affordable housing units. We joined a coalition of real estate groups in providing the comments on the renewal guide, as well as a copy of our industry research, on May 14. TAX POLICY Tax Reform: Apartment owners, operators and developers pay taxes when they build, operate, sell, or transfer communities to their heirs, leaving a lot at stake when it comes to reform. NMHC/NAA are supporting the enactment of pro-growth tax reform that does not disadvantage apartment owners and renters relative to other asset classes. House Ways and Means Committee Chairman Dave Camp, R-Mich., unveiled a sweeping tax reform proposal on February 26. On the Senate side, new Finance Committee Chairman Senator Ron Wyden, D-Ore., has a long-time interest in tax reform, but has used the initial months of his chairmanship to focus primarily on extending tax provisions, so-called tax-extenders, that expired at the end of last year (see below for additional details on tax extenders). Although the House and Senate are not expected to advance comprehensive legislation this year, Camp s reform proposal is likely to be the subject of Ways and Means Committee hearings. The Finance Committee is also expected to hold hearings. 5

6 Tax Extenders: Apartment owners, operators and developers would benefit from the renewal of bonus depreciation and Low-Income Housing Tax Credit and energy-efficiency tax incentives that expired at the end of NMHC/NAA are actively urging lawmakers to extend tax incentives that expired in 2013, including bonus depreciation, the flat 9 percent Low-Income Housing Tax Credit, and the Section 179D and 45L energy-efficient tax incentives. The House is moving expiring tax provisions on an individual basis and has not yet considered those related to the Low-Income Housing Tax Credit or energy. The House approved legislation on May 29 to make permanent bonus depreciation. The measure allows firms, including multifamily operators, to immediately deduct 50 percent of new equipment purchases as opposed to having to depreciate the entire expense over a period of years. The provision is currently awaiting action by the full House. Meanwhile, the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act is pending in the Senate, seeking to renew expired tax provisions, including bonus depreciation, 179D and 45L, for two years, through Notably, the Act also extends the flat 9 percent Low-Income Housing Tax Credit and, for the first time, provides for a minimum four percent credit for acquisitions. The full Senate, however, has yet to break a logjam and pass it due to a disagreement between Republicans and Democrats over which amendments may be considered. Ultimately, current divisions between the House and Senate over whether expiring tax provisions should be extended permanently, instead of on a short-term basis, is likely to delay final legislation until after the November elections. EMPLOYMENT, LABOR AND IMMIGRATION Immigration Reform: Apartment owners, operators and residents would be directly impacted by immigration reform due to the fact that one in five renter households are headed by an immigrant and immigrants comprise up to 22 percent of the construction workforce. NMHC/NAA are supporting comprehensive federal immigration reform. We continue to work closely with policymakers to ensure immigration reform provides legal clarity for employers, does not overly burden property owners with enforcement requirements, and promotes efficient labor markets for construction and property operations. House Republicans and Democrats remain unable to agree on a comprehensive bill. House Republicans have been the focus of immigration reform advocates since the Senate passed a bipartisan comprehensive reform bill in June Outside of Washington signs of frustration are clear with reports that the lack of progress on reform could impact both parties in the 2014 mid-term elections. 6

7 Criminal Background Checks: Apartment owners and operators need to retain the ability to consider the criminal histories of employees and job applicants to help protect the safety and security of both residents and community staff. NMHC/NAA are working to ensure that apartment companies are able to check criminal histories of employees and job applicants. The Obama Administration and some members of Congress have indicated concerns about the use of criminal arrest and conviction records by employers in hiring and other employment matters. The Equal Employment Opportunity Commission (EEOC) claims it does not prohibit criminal background checks, but seeks to prevent discrimination related to how the information is used. The House plans to hold a hearing to address the EEOC s regulatory and enforcement priorities on June 10. ENERGY AND ENVIRONMENT Energy-Efficiency Legislation: Apartment owners and residents benefit from energy-efficient apartment buildings that reduce energy consumption costs and also further the goal of national energy independence. NMHC/NAA are working to ensure that energy measures moving through Congress promote building energy-efficiency, without imposing burdensome building codes or building energy rating programs. On May 12, the Senate fell short of the 60 votes needed to advance the popular, bipartisan Shaheen-Portman energy-efficiency bill, likely ending the legislation s chances of passage this year. The House has taken a different approach to energy legislation, choosing to take-up individual proposals in lieu of a larger package. One bill, the Energy-Efficiency Improvement Act of 2014, passed by an overwhelming majority on March 5. The bill would extend the Energy Star rating to commercial buildings within mixed use properties through a Tenant Star energy program even if the building itself does not meet the Energy Star requirements. Although specific building code metrics to establish energy-efficiency targets have not been included in these bills, NMHC/NAA has continued to advocate for legislation to clarify the role of the Department of Energy (DOE) as a technical advisor in the code development process not an advocate for specific policy outcomes. Additionally, we believe DOE should provide technical assistance to the states for the training of code officials. Lastly, we support a requirement that the building energy code be evaluated for cost-effectiveness with a 10 year payback on investment. Clean Water Act (CWA) Expansion: Apartment owners and operators would be impacted by a significant increase in costs associated with permitting requirements if an Environmental Protection Agency (EPA) and Army Corps proposal to reauthorize the Clean Water Act is finalized a move effectively federalizing local land use planning. NMHC/NAA are opposing the overly broad expansion of the CWA by the EPA, which would essentially subject all bodies of water to federal jurisdiction. EPA and the Army Corps of Engineers are seeking comments on a far reaching proposed rule to amend the scope of waters subject to federal jurisdiction. 7

8 While many property owners are familiar with the current permitting process for developments that impact wetlands, the proposal could increase the size of the area that would need protection, requiring an expansion of activities that are covered by federal permits and would, in some cases, require an additional level of federal permits for some activities that have traditionally been regulated at the state level. The rule will increase development time and result in additional project costs. It will also complicate efforts to perform wetland banking, reduce the size of a developable parcel that is considered to have a significant nexus to a water of the U.S., may sweep voluntary best-practices practices such as rain gardens into federal regulation, and will likely result in federal regulatory agencies assuming further control of local land-use planning. Due to the highly technical nature of the many points the agencies are seeking information from stakeholders on, NMHC joined in a request to extend the current 90-day comment period beyond the upcoming July 21 deadline. Better Buildings Challenge: Apartment owners benefit from the Better Buildings Challenge, which helps multifamily partners committed to meeting their energy-efficiency goals. NMHC/NAA are urging policymakers to find a way around the legal and technical obstacles that prevent more property owners from participating in the Better Buildings Challenge. HUD recently announced the availability of $1.5 million of direct technical assistance as part of the Better Buildings Challenge to help multifamily partners committed to meeting their energy-efficiency goals. The assistance is available to market-rate properties that participate in the program and could be used for a range of purposes, including diagnostic assessments, construction review, financing and portfolio planning. However, a primary obstacle for property owners participating in the Better Buildings Challenge is the lack of accurate, whole building utility data, which is essential for benchmarking their properties through tools such as the EPA Portfolio Manager. Several cities have successfully implemented programs to share data and the Department of Energy s Data Accelerator program seeks to build on those experiences. RESEARCH Census and American Community Survey Data: Apartment advocates and policymakers will be forced to rely on outdated and less reliable data that may or may not accurately reflect current conditions. NMHC/NAA use a variety of the U.S. Census Bureau s products, including the decennial Census and the American Community Survey (ACS) for numerous purposes, including estimating the economic impact of the apartment industry, as well as providing our members with the latest data about the industry. The full House approved the U.S. Census Bureau s FY 2015 budget on May 30, which reduces the necessary funding levels for both 2020 Census planning and the administration of the ACS. In addition, language was added on the House floor that would make participation in the ACS voluntary, reducing the reliability of the survey and likely making it more expensive because increased effort would need to be made to ensure a representative sample. We joined with a coalition of real estate groups in sending a letter to the House in May urging full funding and support for continuing to make responses to the ACS mandatory. In anticipation of Senate action in the coming weeks, we also sent a letter to the Senate Appropriations Committee in May encouraging them to support funding. Unfortunately, the House approved their legislation reducing the Census budget and the reliability of ACS. The Senate was scheduled to address the issue the week of June 2. 8

9 BUILDING CODES Model Code and Standard Development: Apartment owners and operators are directly impacted by codes and standards for apartment construction and affordability, including structural design, energy performance, fire protection, accessibility and green building. NMHC/NAA continue to work with code consultants and collaborate with other industry representatives to improve existing code provisions and oppose unnecessary escalations in construction costs. There is also ongoing pressure to expand accessibility requirements through building codes. The ANSI A117.1 accessibility standard, used as the reference for accessible design in the national model codes, is undergoing a major revision that could change the basic requirement for accessible apartment design, including clear floor space, turning circles and reach ranges. The updated standard will be referenced in the 2018 ICC codes and apply to construction when the local jurisdictions adopt the 2018 codes. The major concern at this time is the application to existing buildings undergoing renovations or change of occupancy. The question now being discussed concerns scoping, which in the past has been included in the building code. The building code scoping provisions detail when and where the accessibility provisions apply. The ANSI A117.1 accessibility standard details the accessibility technical requirement on what is required to make a building accessible. In July, the related accessibility committee will meet with a major focus on the scoping issue and whether it should be included in the standard versus being part of the building code. Please visit for extensive and detailed information on building codes and standards. NMHC Legislative and Regulatory Team: Cindy Chetti, Senior Vice President, Government Affairs Kim Duty, Senior Vice President, Public Affairs & Industry Initiatives Betsy Feigin Befus, General Counsel Matthew Berger, Vice President, Tax Lisa Blackwell, Vice President, Housing Policy David Cardwell, Vice President, Capital Markets Jeanne McGlynn Delgado, Vice President, Business Operations & Risk Management Policy Jim Lapides, Vice President, Strategic Communications Eileen Lee, Vice President, Energy and Environmental Policy Ron Nickson, Vice President, Building Codes Sarah Yaussi, Vice President, Industry Communications Paula Cino, Senior Director, Energy and Environmental Policy Kimble Ratliff, Director, Government Relations Michele Anapol, Manager, Policy and Advocacy Communications Julianne Goodfellow, Manager, Government Affairs 9