Vickie Talley, Director of Legislative Affairs vickie@talleyassoc.com Talley and Associates, Inc. Robert Evans, Assistant Director of Legislative Affairs – rob@talleyassoc.com 25241 Paseo de Alicia, Suite 120, Laguna Hills, CA 92653 Peter Herzog, Assistant Director of Legislative Affairs – peter@talleyassoc.com Telephone (949) 380-3300 Facsimile (949) 380-3310

Legislative Affairs Update

A Report to the Board of Directors, Sponsors and Members

Committee Chair Justin McCusker • Co-Chair Stephane M. Wandel February 14, 2019

Congratulations James V. Camp Receives Honor MORE IMPORTANT than the State of the Union speech was the fact our Past President Jim Camp was honored as the Chapter President of the Year by NAIOP Corporate at the recent Leadership and Legislative Retreat in Washington, D.C. Jim has been providing service to NAIOP at the National, State and local level for many years. Most of what Jim has done over the years has been behind the scenes, but his footprint is clear. When Jim sees an issue, no matter what it might be, he is all in. Clearly the thing that gains a lot of his attention is the legislative work. His dedication to the commercial real estate industry is very strong and he fights things he believes will be harmful. It is probably fair to say that if Jim had not gotten so engaged in the dual agency fight, that bill may have passed and dual agency would be banned in California. At the SoCal level, Jim was the long-time chair of the Legislative Affairs Committee and involved in plenty of local issues. Additionally, Jim has been the very long-term Chair of the NAIOP State Council which brings all the NAIOP Chapters in California together to work on common issues and to try to assist each other. This is a brief overview of Jim’s dedicated service! Again, congratulations, Jim. Well deserved.

Joining Jim at the Leadership and Legislative Retreat were So Cal members President Elect Pamela Westhoff, Membership Vice Chair Andy Bratt, Corporate Board Member Tom Wulf, Legislative Committee member Kevin Ivey, chapter Marketing and Communications Christina Hong, Legislative Affairs Director Peter Herzog and CBPA’s Matthew Hargrove. The SoCal delegation met with five members of congress and/or their staffs including two newly elected Representatives Harley Rouda and Katie Hill. Important Issues Discussed with Congress Members Information packets were left with Representatives that provided detailed information on NAIOP’s positions on key priority issues including Tax Policy, Energy Efficiency and Environment, Infrastructure and Transportation. Also delivered to lawmakers was a summary of NAIOP SoCal Regional Issues, which included information on Realistic Approach to Federal Clean Air Standards, California’s Infrastructure, Transportation and Goods Movement, and Poverty and Lack of Middleclass Jobs. Copies of these position papers are attached for the Board’s review. Big Mistake – Tax Bill Changes 15 Year Depreciation to 40 Years! While in Washington NAIOP members were updated on what is being referred to as a drafting error in the tax bill regarding Qualified Improvement Property (QIP). For tax purposes, building owners have been able to write-off the improvements to the interior portion of a building over 15 years. This was a bipartisan agreement when this was changed from 39 years a few years back. However, when the change was adopted it was not made permanent and has to be approved by Congress each year. Due to a typo or drafting error the current statute assigns QIP an appreciation life of 40 years instead of 15. NAIOP Corporate is working with members of Congress and allied business groups to get this error corrected. However, everything is difficult in today’s D.C. environment. A detailed description of this issue and NAIOP’s position is included in the Tax Policy position paper attached.

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Vickie Talley, Director of Legislative Affairs - vickie@talleyassoc.com Talley and Associates, Inc. Robert Evans, Assistant Director of Legislative Affairs – rob@talleyassoc.com 25241 Paseo de Alicia, Suite 120, Laguna Hills, CA 92653 Peter Herzog, Assistant Director of Legislative Affairs – peter@talleyassoc.com Telephone (949) 380-3300 Facsimile (949) 380-3310

Page Two Rex Hime for California Senate District 1 Everyone knows by now that CBPA’s Rex Hime is running for a special election to fill the unexpired term of a resigned Senator in District 1. All NAIOP members are encouraged in joining NAIOP SoCal’s Political Action Committee in supporting Rex’s campaign with a generous contribution and signing up as an endorser of his campaign. This is a very competitive race and Rex needs all of our support. In the March 26, 2019 primary election Rex needs to finish in the top two out of six candidates. Once that is accomplished, he just needs to come in number one in the June 4, 2019 election. For more information on the race, to contribute and endorse visit his website at: www.rexhime.com. Los Angeles County Public Arts Tax Your Thoughts and Comments Would Be Helpful We have been trying to work with the Los Angeles Arts Commission and Planning Department staff for some time on their push to require all new development in Los Angeles County to hire an artist to create a unique piece of art, contribute to artistic activities or pay an in-lieu fee of 1% of the construction cost of the project. This was actually supposed to be approved by the Planning Commission late last summer, but we have slowed it down. The County staffs claim they want our input which we have freely given, yet they still have not revised the art ordinance at all. It also appears likely the Planning Commission will approve some type of art ordinance. So, we are considering calling the County staff bluff, and actually doing a redline version with lots of changes, such as a lower cost, excluding industrial for safety reasons, not requiring an artist, incentives, having all processing costs and maintenance covered by the 1%, for example. We would appreciate your input if this sounds like a good strategy and any suggestions that might help make the art ordinance palatable. NAIOP SoCal Forming an Issues Political Action Committee Our chapter currently has what is referred to as a General-Purpose Political Action Committee (PAC). This committee can be used to make contributions to candidates and issues, but is limited to the amount that can be contributed to issues. For this reason, NAIOP SoCal is in the process of establishing an Issues PAC so that we are in a position to raise funds to help in the campaign to fight Statewide Split Roll when it is on the ballot in 2020. We need a few passionate commercial property/business owners to serve on the committee. If you are interested in serving on this new PAC or know someone who you would like to recommend, please contact Director of Legislative Affairs Vickie Talley – vickie@talleyassoc.com – (949) 380-3300. This is not a large time commitment, but it is a very important one! FACTS ARE IMPORTANT - Prop. 13 Is Good for ALL Californians “The California Schools and Local Community Funding Act” is a special interest backed statewide ballot initiative that is qualified to appear on the November 2020 ballot. The measure attacks Proposition 13 and raises costs on California’s working families, small businesses, consumers and seniors. If passed it will require business property taxes to be reassessed to current market value – CREATING A SPLIT ROLL. It is an attack on Proposition 13. Jon Coupal of the Howard Jarvis Taxpayers Association outlines why Prop. 13 is Good for All California:

• Prop. 13 limits the tax rate on all real estate in California to 1% of the value of the property and limits annual property tax increases to 2% per year of assessed value.

• Renters benefit because Prop. 13 makes property taxes predictable and helps reduce upward pressure on rents. • Business owners benefit because Prop. 13 helps owners’ budget and invest in their businesses – creating jobs. • Local government and schools benefit because Prop. 13 provides a reliable and stable growing revenue source –

even when real property values drop, property tax revenues go up. • Neighborhoods benefit due to the fact that it helps to stabilize neighborhoods as residents are no longer driven

out by unaffordable tax increases.

For the complete text of Coupal’s article: www.hjta.org/california-commentary/by-all-means-lets-educate-the-voters-about-proposition-13/ • Information on Split Roll visit Californians To Stop Higher Property Taxes: www.stophigherpropertytaxes.org

Happy Valentine’s Day!

NAIOP SoCal ~ Southern California Regional Talking Points February 2019 Congressional Meetings

Realistic Approach to Federal Clean Air Standards Needed Everyone admits that Southern California has made dramatic strides in cleaning up its air quality. The decrease in emissions is very impressive and obvious, and emissions are at an all-time low. Yet the South Coast Air Quality Management District (SCAQMD) staff has said we cannot achieve the current air quality standards. This is because nearly 90% of the emissions in our region come from mobile sources, (trains, planes, ships, cars and trucks) which are under the jurisdiction of the State and Federal governments. Yet, we are told we must achieve something that we cannot possibly accomplish. This is not realistic. Southern California is committed to working to achieve cleaner air, but we cannot be held responsible for mobile sources. Changes are necessary.

1. Our region should be provided credit for the state and federal sources we do not control in analyzing our attainment issue.

2. The Clean Air Act should require State and local air quality regulatory agencies to prove the necessary technology is available to implement, and economic feasibility, of any rules or regulations. We currently face rules for which the technology does not exist and/or sufficient funding is not available. This is totally unrealistic.

3. The Clean Air Act should not allow State and local air quality regulatory agencies to use so-called Indirect Source Rules (ISRs) that attempt to make stationary sources, buildings, responsible for mobile source emissions. How can commercial PROPERTIES be responsible for something we do not have any control over?

4. The deadline to meet the new 70 ppb ozone attainment level should be extended for our region, and the standard should not be lowered any further.

California’s Infrastructure • Transportation and Goods Movement California’s transportation infrastructure needs massive improvements to keep up with transporting the necessary goods to its growing population and the movement of goods through the state to the rest of the nation. Solely due to its location and large ports, Southern California is critical to moving the needed, and wanted, goods and supplies to the rest of the country. So, having an effective goods movement system is a national issue. In order to meet current and future transportation demands:

1. Southern California needs at the very least, its fair share of Federal transportation funds. 2. According to Caltrans, it currently takes 17 years to get a major infrastructure project completed. That cannot

be allowed to continue. The California Environmental Quality Act (CEQA) is at least, if not more, stringent than the National Environmental Protection Act (NEPA) in environmental protection. Thus, California projects should be made exempt from NEPA. Also, we need to expedite Federal approvals and permitting of infrastructure projects. Federal agencies need prompt timelines to act on permit requests, and if they do not act, then the project should be deemed permitted.

3. Support the use of public-private partnerships, and new tax incentives that encourage private investments for infrastructure improvements.

4. Create a national infrastructure bank.

Poverty and Lack of Middle Class Jobs Must Be Made A Top Priority California now has the highest poverty level of any State in the nation. Approximately Twenty Percent (20%) of the entire state population lives below the Federal poverty line. In just the four county Southern California area (Los Angeles, Orange, Riverside and San Bernardino Counties) the number of people living in poverty is staggering, nearly 3 million people and about 25% of all the children in the region are in poverty. It would seem the extent of poverty is something that should be viewed as a crisis. We believe the best way to reduce poverty is through developing good quality jobs, not more government programs. While there has been a lot said about job growth, when one looks at the details it is clear the so-called job growth has been in the lowest paying jobs, not middle class jobs. The middle class jobs lost in the last recession have not returned, especially those that were being provided to people with a high school or less education level, which falls especially hard on the minority communities. So, creating quality middle class jobs is also a social justice issue. At the Federal, State and local levels there needs to be a serious, realistic discussion about how to remove barriers to job growth, and incentivize the development of middle class jobs or the above facts will not change, except maybe to worsen for California.

FOR MORE INFORMATION, CONTACT:Aquiles SuarezVice President for Government Affairs suarez@naiop.org | 703-904-7100

TAX POLICY

naiop.org/advocate

NAIOP VIEWPOINT

Commercial real estate businesses rely on certainty in the tax code when making long-term investment decisions, including those involving tenant leasehold improvements and buildouts. Congress sought to incentivize increased capital investment in buildings by making shorter depreciation periods for Qualified Improvement Property (QIP) a permanent feature of the tax code rather than through temporary extensions.

A drafting error in the 2017 tax bill requires writing off these improvements over a much greater period of time than originally intended, dramatically increasing the after-tax cost of going forward with these projects.

Many businesses are delaying investing in building improvement projects until Congress addresses the issue, hurting job growth.

Congress should pass technical corrections legislation early in 2019 to fix the QIP drafting error, thereby providing certainty and enabling the increased investment and job growth originally intended.

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QUALIFIED IMPROVEMENT PROPERTY

• Qualified Improvement Property is defined as any improvement to an interior portion of a nonresidential building, excluding an elevator or escalator, changes to the internal structural framework, or enlargement of the building. QIP includes leasehold and tenant improvements.

• These improvements to commercial office and industrial properties, restaurants, retail, and other leasehold spaces are often the largest investments made by firms with real property holdings, after the land

and building themselves.

• Congress intended to make permanent shorter depreciation periods for QIP, which would reduce the after-tax cost of these improvements, provide added certainty and predictability to encourage long-term investment, and foster job growth and economic opportunity in the real estate, construction and other industries.

• Because of a drafting error in tax legislation, businesses are now required to write off the cost of these expenditures over a much longer time period, leading to a considerable increase in the after-tax cost of making improvements.

• The mistake is most accurately characterized as a clerical error, rather than the result of a misguided policy. It has been identified by the Joint Committee on Taxation as one of only three provisions in the bill that require a true technical correction in order to have the statute reflect legislative intent.

• Firms nationwide are delaying or even cancelling leasehold renovation projects, causing a ripple effect across the real estate, construction, retail, restaurant and manufacturing industries.

• The U.S. Treasury Department has stated that the issue cannot be remedied through regulation or Internal Revenue guidance, but requires a statutory change. Consequently, Congress should pass technical corrections legislation early in 2019 to address the error and enable businesses to go forward with investment decisions.

OUR POSITION: Establishing a reasonable cost recovery period for Qualified Improvement Property (QIP) has long been a point of bipartisan agreement in Congress. While the Tax Cuts and Jobs Act intended to make permanent a 15-year payback period for these expenditures, an error in the bill instead forces businesses to recover these costs over 39 years (or, for certain real estate firms, 40 years versus the intended 20-year period). Congress should pass legislation that remedies this mistake and restores the original intent of the legislation.

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ENERGY EFFICIENCY AND ENVIRONMENT

2355 DULLES CORNER BOULEVARD, SUITE 750, HERNDON VA 20171 | 703-904-7100

FOR MORE INFORMATION, CONTACT:Alex FordDirector of Federal Affairsford@naiop.org | 703-904-7100

naiop.org/advocate

NAIOP VIEWPOINT

ENERGY EFFICIENCYFederally-mandated energy-efficiency targets ignore differences between local markets. Energy-efficiency legislation should rely on incentive-based and voluntary approaches to drive market changes. Improving energy efficiency is an important consideration in modern commercial real estate markets. Voluntary and incentive-based programs, such as EPA’s Portfolio Manager, encourage increased energy efficiency in the private sector and should be continued.

ENVIRONMENTOpponents of development sometimes use the Endangered Species Act (ESA) only to delay development projects, without the existence of a true threat to an endangered species.Commonsense reforms to the ESA are needed to prevent abuse of the law and to incentivize voluntary conservation efforts.

ENERGY EFFICIENCY

• Local economic conditions, tenant preferences and project development costs determine which energy-efficiency measures can realistically be absorbed in a given market. Arbitrary nationwide energy mandates that ignore local market conditions would create disincentives to new development where the costs cannot be absorbed.

• NAIOP supports legislation that takes a sensible approach to incentivizing energy efficiency without imposing new mandates. Federal legislation that encourages states to update energy-efficiency codes must include provisions for realistic payback schedules and requirements that the provisions be technologically and economically feasible.

• Portfolio Manager, part of EPA’s Energy Star program, is a voluntary program that enables owners to track and monitor a building’s total energy usage. Eliminating the program would cause confusion and compliance challenges in states, cities and municipalities that require building owners to use Portfolio Manager to comply with local energy-efficiency ordinances. Congress should therefore ensure continued funding of this program.

ENVIRONMENT

• The ESA should not be used solely to delay or stop development projects that pose no threat to an endangered species. Abusive delaying tactics should be curbed to the greatest extent possible. Individuals found to have intentionally reported false or fraudulent species sightings should face fines or further legal sanctions.

• Voluntary conservation programs – including Species Recovery Agreements and Habitat Reserve Agreements – allow the federal government to partner with private landowners to promote conservation of endangered species. These longstanding practices should be formally codified and further incentivized by establishing grant programs for private parties and state and local governments to facilitate implementation of such agreements.

OUR POSITION: Federal legislation advancing building code efficiency goals should be based on economic and technological feasibility. Incentive-based and voluntary approaches to advancing energy efficiency, such as EPA’s Energy Star Portfolio Manager, should continue. NAIOP supports commonsense reforms to the Endangered Species Act (ESA), which codify and incentivize voluntary conservation efforts, and curb abuse of the Act by reducing instances of false reporting.

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FOR MORE INFORMATION, CONTACT:Aquiles SuarezVice President for Government Affairs suarez@naiop.org | 703-904-7100

INFRASTRUCTURE AND TRANSPORTATION

naiop.org/advocate 2355 DULLES CORNER BOULEVARD, SUITE 750, HERNDON VA 20171 | 703-904-7100

• The availability of modern and efficient infrastructure systems is a major factor in real estate development and investment decisions. The success of commercial real estate projects is largely dependent on access to quality roads, ports, rail and other infrastructure systems.

• Strategic, long-term investments in infrastructure systems lead to increased opportunities for commercial real estate development and result in stronger job creation and economic growth for our communities.

Funding criteria for project selection should be transparent and consistently applied.

• Direct federal investment, particularly for projects of national importance, is needed. Priority should be given to major infrastructure projects that have economic impact beyond their localities and affect all or major regions of the country.

• Public sector investment policies should be based on revenue sources that are predictable, reliable and sustainable to ensure that needed maintenance and repair of existing infrastructure occurs on a timely basis.

• New and innovative ways to fund infrastructure development should be pursued. These include policies that increase the participation and contributions of the private sector, such as increased flexibility for and increased use of P3s.

• Expansion of ports and increased freight rail capacity are needed to relieve congestion. The federal government should work with states to develop strategies that encourage development of warehouses and other distribution facilities along trade corridors to meet future growth demands.

• Regulatory obstacles that unnecessarily deter investment in infrastructure projects should be eliminated. Permitting and approval processes should be streamlined to improve project delivery times and reduce costs.

• States and localities should be afforded greater flexibility over the approval process for projects that have a federal-funding component.

OUR POSITION: NAIOP supports increased funding and investment for our nation’s infrastructure and transportation systems. Direct federal support and investment is needed in particular for projects of national importance. We support expanded use of public-private partnerships (P3s) for infrastructure development, continued federal funding for maintenance and repair, and a streamlined regulatory environment for major infrastructure projects.

NAIOP VIEWPOINT

The United States ranks below major industrialized countries in the quality of its infrastructure. Increased investment in infrastructure systems is needed to maintain our long-term economic competitiveness.Increased private sector participation in the financing of major infrastructure projects, including expanded use of public-private partnerships (P3s), would provide new and flexible funding sources to offset the cost of these investments to the taxpayer.Efforts to streamline regulatory and administrative approvals for major infrastructure projects must be continued in order to reduce costs and speed project completion.

States should have greater regulatory and administrative flexibility over local infrastructure projects that receive federal funding.

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