Kristen Thall Peters was selected as the guest editor of the Real Estate Edition for the Contra Costa Lawyer Magazine which was published in June. Kristen is also the President of the Real Estate Section of the Contra Costa County Bar Association. A handful of experts in the real estate field in Contra Costa County were selected as contributors to the magazine, including, Cooper, White & Cooper’s own Kathleen Carpenter, Chairman of the Firm’s Home Builder Practice Group, who wrote the following article. This is an excerpt of from Contra Costa Lawyer magazine.*
Decades ago, Groucho Marx observed, “It isn’t so much that hard times are coming; the change observed is mostly soft times going.” The American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”), passed by Congress and signed into law by the president on February 17, 2009, includes a number of provisions specifically intended to “revitalize” our economy. The bill itself is a mind-numbing 1588 pages in length and provides an infusion of about $800 billion into our economy. The purpose of this brief article is to preview some of the key provisions benefiting the homebuilding, real estate and related construction industries, along with noting some key resources that provide more in-depth information in order to keep up to date in this evolving arena.
Where is the Money Going?
The $787 Billion Economic Stimulus Package – February 2009
- $288 billion: – “tax relief”
- $144 billion: – state and local municipalities
- $111 billion: – infrastructure and science
- $81 billion: – poor and unemployed
- $59 billion: – health care
- $53 billion: – education and training
- $43 billion: – energy
- $8 billion: – other
The $275 Billion Mortgage Stimulus Package – February 2009
- $200 billion: – more help for Fannie Mae and Freddie Mac
- $75 billion: – direct assistance to homeowners in distress
How Will The Money Create Jobs to Improve Infrastructure?
The Stimulus Act includes an approximately $150 billion investment in our nation’s infrastructure. Much of the $150 billion is being directed toward construction projects. For instance, approximately $40 billion will be allocated to the repair and maintenance of roads, bridges, dams, ports, rail, airports, and water systems. Most of these funds will be distributed to state departments of transportation or to federal agencies who will decide how the money will be spent, but there is hope that the funding of these projects may decrease the amounts required by homebuilders in the future to offset impacts of development prior to obtaining entitlements for the construction of new homes.
Funds will also be allocated to individual states for various projects, including modernization, renovation, and repairs of facilities at public schools and institutions of higher education. In addition to potentially decreasing the amounts required by homebuilders in the future, the infusion of cash into our schools also has the prospect of increasing property values and, thus, sales prices of new homes.
One of the most concise summaries of information comes from The Associated General Contractors of America website, which provides a state-by-state stimulus impact chart. (http://www.agc.org/cs/industry_topics/construction_economics/ state_by_state_stimulus_impacts).
Energy Efficient Communities and the Creation of Green Collar Jobs
A very significant part of the Stimulus Act includes allocation of money to promote energy efficiency in both existing and new construction. For example, the Stimulus Act allocates funds to make federal and local government buildings more energy efficient and establishes a program to competitively award funds to make energy efficient improvements (including upgrading insulation, windows and furnaces) to HUD-sponsored housing. The Stimulus Act also provides $6.3 billion to state and local governments to make investments in energy efficiency.
The most interesting and creative use of the Stimulus Act funds for home builders may be those uses that extend beyond the tax incentives for making investments to increase energy efficiency and into energy production. With the landscape already in motion creating “green” communities all over the state, there is also a plethora of tax credits and incentives for the actual production of alternative energy sources. The incentives to make direct investments in energy-related projects are bringing into reality the creation of the mixed-use, urban or suburban community designed to include a compact power clean “facility” capable of providing renewable energy and perhaps even clean processing of all the waste produced on site. In areas where development is surrounded with farmland, neighboring rural areas traditionally used only for food-source crops may become increasingly popular as a source of localized energy production for new communities.
Are There Already Signs of Life in Housing?
The Stimulus Act has many provisions designed to give a boost to the real estate and housing industry. Some direct investments will be made to help various communities that have been hit hardest by high foreclosure rates. It also includes numerous other provisions designed to boost the housing industry, such as increasing and expanding the tax credit for first-time homebuyers with incomes up to $75,000 for single taxpayers and $150,000 for married couples, to 10% of the home’s purchase price up to $8,000 for homes purchased during 2009. Moreover, this tax credit is different from prior tax credits in that it does not have to be repaid so long as homebuyers use the home as a primary residence for at least three years. It also allows state housing finance agencies to help buyers at closing by advancing the credit as a loan.
The Stimulus Act also extends a previously-enacted law that increased loan limits to $729,750 for FHA, Fannie Mae and Freddie Mac mortgages through 2009, which will help homebuyers in “high-cost” markets (an appropriation of $2 billion in HOME Investment Partnerships Act funding for affordable housing projects).
In fact, as of April 22, banks were struggling to keep up with the mortgage demand from first time homebuyers seeking to obtain these new credits. (See http://www.abc.net.au/news/stories/2009/04/ 20/2547788.htm.)
In California, we currently have an additional tax credit equal to either 5% of the purchase price or $10,000 (whichever is less) for new home purchases by qualified buyers who — on or after March 1, 2009, and before March 1, 2010 — purchase a qualified principal residence that has never been occupied. Application must be made within seven calendar days after the close of escrow via fax only. Although, at the time of this writing, no tax credits had yet been allocated by the FTB, applications for approximately one-third of the credit had been received but not yet processed. (See http://www.ftb.ca.gov/individuals/New_Home_Credit.shtml.)
In another effort to help the housing industry, the president proposed the Homeowner Affordability and Stability Plan to modify the loans of certain at-risk borrowers who are struggling to make their mortgage payments.
One Notable Tax Benefit
There are a myriad of provisions included in the Stimulus Act that may also benefit the real estate and construction industry. For example, the Stimulus Act includes: (1) an extension through 2009 of the special bonus depreciation provision allowing depreciation of one-half of the cost of eligible property placed in service; (2) an extension through 2009 of the $250,000 limit for Section 179 expensing for new or used equipment placed in service during a particular tax year (in 2010, the Section 179 expensing limit will revert to $133,000); and (3) for eligible business taxpayers with average gross receipts of less than $15 million over the three tax years prior to 2008, an extension of the two-year carry back of net operating losses to five years for losses generated from a tax year beginning or ending in 2008.
Don’t Think “Show Me the Money,” It’s Here Now
Keep in mind that many of the provisions in the Stimulus Act were designed to make an almost immediate impact on the construction and real estate industries, and are already being put to use. Any company failing to examine how its business can take advantage of the Stimulus Act may miss these critical opportunities. For example, shares of Genworth Financial Inc. lost nearly a fifth of their value on April 13 after the insurance company missed a key deadline, rendering it ineligible to participate in the government’s $700 billion financial rescue program.
With the immediate impact sought to be achieved by the Stimulus Act, practitioners should be familiar with it and be prepared to advise their clients of its impacts and effects. In addition, because the Stimulus Act is so broad, the team to advise your clients may need to be experienced in a wealth of different areas and outside consultants. Fortunately, members of the Contra Costa County Bar Association are a very congenial and knowledgeable group of lawyers, making the task of forming alliances within our community an easy one.
*This article originally appeared in the June 2009 issue of Contra Costa Lawyer, the official magazine of the Contra Costa County Bar Association. Reprinted with permission.