This Month: NMHC WASHINGTON UPDATE

COMMERCIAL REAL ESTATE LENDING GUIDANCE FINALIZED

On December 6, federal regulators published a new rule for lenders with concentrations of commercial real estate (CRE) loans, including multifamily mortgages. A draft rule was issued in January 2006 in response to growing concerns that banks were easing underwriting standards for CRE loans to a degree that could trigger future problems in the banking system.

NMHC/NAA’s analysis of the final rule, which is largely improved from the draft, suggests that it should not restrict credit access for apartment firms. Importantly, the rule does not set "hard limits" on CRE lending and does not change bank reserve requirements. Instead, it establishes triggers based on portfolio size and CRE loan growth to identify banks that require additional regulator scrutiny. Extra oversight would be triggered whenever an institution's total land, construction and development loans equal 100 percent or more of its total capital or if these loans plus loans secured by multifamily or commercial properties equal 300 percent or more of total capital and the CRE portfolio has grown by more than 50 percent over a 36-month period.

Despite the improvements made in the final rule, Representative Barney Frank (D-MA), incoming Chairman of the House Committee on Financial Services, said he remains concerned that the oversight thresholds could hinder lending activities, in particular multifamily lending, which Frank sees as critical to meeting the nation’s housing need. It is unclear if Frank intends to make more of the issue next year. The final rule is posted on NMHC’s web site at.

CONGRESS ADJOURNS, FINISHES TAX BILL,
LEAVES OTHER PRIORITIES INCOMPLETE

Tax Bill Passes. In one of its final acts before adjourning for the year, Congress passed a $45 billion catch-all package of bills (H.R. 6111) addressing everything from health care to oil drilling to extending several expired or expiring tax incentives. The bill includes several NMHC/NAA high-priority items and one negative change in the law for the apartment industry.

The bill extends and expands a provision allowing the immediate expensing of environmental cleanup costs. The provision, which actually expired at the end of 2005, is extended retroactively through 2007 and now makes petroleum cleanup costs eligible for expensing. In addition, as NMHC/NAA urged, Congress agreed to a one-year extension of the energy efficiency tax incentives enacted in 2005 for buildings. The provision extends the deduction to property placed in service prior to January 1, 2009. NMHC/NAA had pushed for the extension to accommodate larger, more comprehensive energy efficiency upgrades that could not be completed in the original two-year time frame allowed.

On the downside, however, the package also includes a provision opposed by NMHC/NAA to allow a limited deduction for the cost of private mortgage insurance (PMI) for certain taxpayers. In recent years, NMHC/NAA have repeatedly blocked other attempts to pass this new and unnecessary homeownership incentive. Unfortunately, our earlier successes could not withstand a last-minute rush by lawmakers to turn a targeted non-controversial tax extender bill into a massive tax bill filled with all sorts of tax changes sought by special interest groups. Republicans seized their last chance to force their pet projects onto the "must pass" bill before losing majority control of Congress. Democrats, meanwhile, joined the frenzy, racing to pass their favorite amendments before new fiscal austerity rules go into effect in the new Congress that will require new spending programs or tax provisions to be "paid for" with budget cuts elsewhere.

Despite this temporary setback, NMHC/NAA believe the impact of the PMI deduction will be very limited. In response to concerns raised by NMHC/NAA, the measure is only in effect for one year, and it only applies to taxpayers with incomes up to $100,000 who itemize their tax deductions. As a practical matter, many taxpayers in this income range simply elect the standard deduction rather than itemize, thus rendering the incentive moot. The legislative struggle over the PMI incentive will continue into the new Congress, since its backers are expected to seek permanent status for the provision. NMHC/NAA are already working with key members of Congress to oppose such an extension. In addition, the "pay-as-you-go" rules expected in the next Congress will force PMI proponents to develop a way to finance or "pay" for any extension. Finally, we expect the new Congress to have greater understanding and appreciation of the importance of renters and rental housing in the overall national housing policy.

APPROPRIATIONS BILLS

The 109th Congress adjourned on December 9 without completing work on 10 of the 13 FY 2007 appropriations bills, including the HUD funding bill. Lawmakers passed a third continuing resolution (CR) to keep the government funded until February 15, but on December 11, Democratic appropriators announced that they will seek to pass a year-long CR when they take over next year so they can focus instead on the FY 2008 budget process. A CR for the rest of the 2007 Fiscal Year will mean that the funding of the Section 8 program will remain essentially flat. It will give us more time to work with the relevant congressional committees to seek a higher level of funding and other beneficial changes.

COUNTERFEIT SPRINKLER NOTIFICATION

Apartment firms should be aware of the latest in a number of counterfeit sprinkler issues.  The most recent news concerns sprinkler heads designed to resemble Globe Fire Sprinkler Corporation sprinklers.  The counterfeit heads have “Globe” and the Underwriters Laboratories (UL) mark on them.  They are pendent-type heads identified with a product model number of GL 5651.  The deflector is marked with: SSP, cULus in a circle, GL 5651, 2005, 1550F/680C.  The only visible difference between the authentic and counterfeit sprinklers is the screw head; the counterfeit sprinklers have a slot-head screw and the legitimate sprinklers have a hex-head screw.  UL is recommending that the counterfeit sprinklers be replaced by qualified service personnel and returned to the place of purchase.

2006/2007 CODE DEVELOPMENT HEARINGS

NMHC/NAA secured several preliminary victories during the ICC’s September hearings to consider changes to the 2009 IBC.   If approved by the full membership in May 2007, these changes would allow apartment developers new flexibility in how they design their individual units.  One change, for instance, increases the occupant load for apartments from 10 to 24.  That proposal was approved after NMHC/NAA provided data confirming that the size of an apartment is not related to the building’s occupant load; larger apartments simply have larger rooms and more bedrooms, not more people.  That change will allow apartment units up to 4,000 square feet to have a single exit; current code requires two exits for units greater than 2,000 square feet.

There were three sprinkler-related changes that are beneficial to apartments.  One increases the dead-end corridor limit from 20 feet to 50 feet in buildings protected with an NFPA 13 sprinkler system.  Another would increase the common travel distance inside of the apartment unit from 50 feet to 125 feet if the dwelling unit has an NFPA 13 or 13R sprinkler system.  A third would eliminate the requirement that elevators be accessible from an area of refuge or horizontal exit if the building is protected with an NFPA 13 or 13R sprinkler system.  (Another approved change further clarified this by stating that an area of refuge is not required in apartment buildings.)  These changes were also supported by NMHC/NAA-provided data on sprinkler performance.  Specifically, we demonstrated that apartments have a 96 percent sprinkler activation performance reliability compared to an overall 89 percent average for all occupancies.  New NFPA data covering fire losses for the past 12 years support an older Operation Life Safety report that there have been no civilian or firefighter deaths in buildings protected with an NFPA 13R sprinkler system.
Other changes recommended for approval include:  (1) Section 509 Special Provision concerning mixed occupancies to allow R (residential) occupancies in the lower levels where the code now only permits assembly with less than 300 occupants, office or mercantile; (2) a revised definition of “Level of Exit Discharge” to clarify that it is the lowest story, not the lowest horizontal plane at which an exit terminates; and (3) only requiring handrails in dwelling units when there are more than three risers instead of the current code provision requiring handrails when only one riser is present.  All of these victories are preliminary, however, since they must still be approved by the full membership next May.

Reprinted courtesy of Apartment Age