12/19/2008

Industry Lobbies for Fed Facility, Eased Rules

Worried that many borrowers will be unable to refinance maturing loans next year, the commercial real estate industry is lobbying decision-makers in Washington for financial and regulatory relief.

The Real Estate Roundtable, an industry group, is pressing the Federal Reserve and the U.S. Treasury Department to broaden the bailout of the financial system to include commercial mortgages. It is also proposing a sweeping agenda of regulatory, accounting and tax changes that would provide relief for borrowers. Among the proposals: permitting automatic extensions of performing commercial MBS loans.

Much of the effort is being spearheaded by developer William Rudin, a member of the trade group's board, who has been calling government officials in Washington for several weeks. "We're trying to make people aware of the magnitude of the problem," he said.

As the credit crunch has deepened with no hint of a rebound in sight, owners who have watched the values of their properties plunge have become increasingly worried about how they will refinance maturing loans. "They're staring down the barrel of maturity defaults," said one leading real estate attorney in New York. "They're looking at a disaster."

Using back-of-the-envelope calculations, the Roundtable estimates that roughly $400 billion of secured and unsecured commercial real estate debt, including credit facilities, is scheduled to mature next year. Other analysts think a range of $150 billion to $250 billion is more likely.

Whatever the case, everyone agrees that the number is huge and that there aren't enough lenders able or willing to meet the demand. That is setting the stage for a possible cascade of defaults.

"In today's marketplace, it's hard to imagine there are very many loans that aren't in jeopardy," said Jeffrey DeBoer, president of the Roundtable. "We hope that policymakers can come to a conclusion about how to proceed before the markets get any worse." Rudin has seen some progress in making officials aware of problems unfolding in commercial real estate, but notes a hesitancy to take action. "People are aware, but everybody is waiting for the new administration to come in," he said. "We would argue that it's better not to wait, but to get this on the table now."

Rudin, president of Rudin Management of New York, is motivated not by his own predicament, but rather by the woes of his industry, he said. His firm, which controls a high-end portfolio of two dozen commercial and residential properties in Manhattan, doesn't have any large loans coming due next year.

The Roundtable, whose membership is made up largely of property owners (60%) and lenders (24%), is urging federal officials to take five key steps:

*Create a credit facility that investors could tap to finance the acquisition of newly issued senior CMBS, similar to the Term Asset-Backed Securities Loan Facility (TALF) that the Fed set up last month to spur consumer lending.

*Amend Remic procedures to permit loan extensions for CMBS borrowers current on payments.

*Revise tax rules to encourage foreign investment in U.S. real estate.

*Modify accounting rules, including mark-to-market requirements, that the group sees as fueling a downward spiral in CMBS valuations.

*Reject proposed tax changes that would burden real estate owners.

Borrowers with maturing portfolio loans may have less to worry about than borrowers that tapped the CMBS market. "They know that their current lenders will have no choice but to extend the loan," said one veteran real estate owner. "And the worse the market gets, the more that will be true."

He added, however, that public companies could have a tougher time finding fresh loans than private borrowers. "The reason banks extend loans is to leave a problem alone, quietly, in the hopes that it will get better later on," he said. "But it's easier for that to happen with a private company. Everybody watches the public companies. The banks can't quietly extend a loan to them because everyone will know and scrutinize it."

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