Author: Trey Jackson

John C. Cushman, III—Cushman & Wakefield’s chairman of global transactions, real estate industry titan for 60 years, and one of the founding members of The Real Estate Roundtable—passed away yesterday.

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• Real Estate Roundtable Chair John Fish (Chairman and CEO, SUFFOLK) said, “As a founding member of The Roundtable, and later as a member of our Board of Directors, John Cushman consistently helped us with his knowledge, his relationships and his voice. John’s legacy will live on in the real estate industry and in the countless communities he touched.”
• “The loss of John Cushman is a sad day,” said Jeffrey DeBoer, Roundtable President and CEO. “John’s personable and passionate approach to life was unique and inspiring. His sharp focus on structuring real estate transactions to meet the needs of business tenants and building owners was unparalleled. Time and again he rallied the industry to support positive economic and job growth initiatives. He made an enormous contribution to the commercial real estate industry—and to The Real Estate Roundtable’s advocacy efforts. The Roundtable, and I personally, will deeply miss him. We will always remember him as a generous, kind, and thoughtful friend.”
• Cushman & Wakefield Executive Chairman Brett White said, “John was an extraordinary businessperson and global citizen who significantly impacted Cushman & Wakefield, the commercial real estate industry and broader community.”
• The Cushman family stated, “John’s successes in commercial real estate were extremely notable but his positive impact on so many careers are what mattered to him even more. John always valued the importance of giving back and was a staunch supporter of many philanthropic efforts. His contributions to so many organizations will contribute to his legacy.” (John Cushman’s community involvement)

An Exemplary Career

(John Cushman with Jeffrey DeBoer at a Real Estate Roundtable meeting)

• Over the course of his career, John Cushman played an essential role in advancing Cushman & Wakefield to its position as one of the top commercial real estate firms in the world. Prior to his becoming chairman of global transactions and co-chairman of the Board of Cushman & Wakefield, John was acknowledged as the top office-leasing broker in the United States. (List of clients and assignments)
• He began his career in 1963 in New York City with Cushman & Wakefield, founded by his grandfather John Clydesdale Cushman and his great uncle Bernard Wakefield. In 1967, he moved to Los Angeles to open Cushman & Wakefield’s first office in Southern California. In 1965, as President of the Western Region, he was responsible for 60% of Cushman & Wakefield’s offices in the United States.
• John and his twin brother, Louis B. Cushman, started their own firm in 1978, Cushman Corporation Realty, which they grew from two offices to operations in 11 US cities with over 200 employees. In September 2015, Cushman & Wakefield merged with DTZ, with the newly formed organization retaining the storied Cushman & Wakefield name. In 2017, John served as chairman of the Centennial Committee for Cushman & Wakefield’s 100th anniversary.
• Cushman & Wakefield is now among the largest real estate services firms with 52,000 employees in over 400 offices and approximately 60 countries. In 2022, the firm had revenue of $10.1 billion across core services of property, facilities and project management, leasing, capital markets, and valuation and other services.

The Cushman family respectfully asks that individuals who would like to make a gesture in John’s honor visit a national park site or make a donation to the National Park Foundation on behalf of John C. Cushman, III.

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The Real Estate Roundtable on Wednesday wrote to Treasury Secretary Steven Mnuchin regarding the new limitation on business interest deductibility created in the Tax Cuts and Jobs Act, including rules that allow taxpayers to continue fully deducting interest related to commercial real estate debt. (Roundtable letter, Feb. 21)

The Feb. 21 Roundtable letter urges that Treasury clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.

The exception for interest allocable to a real property trade or business reflects policymakers’ understanding that limits on the deduction for interest expense could have enormous negative consequences for property values, real estate markets, and economic growth.  (Reference: Real Estate Forum, Jan/Feb 2018, Decoding The New Tax Bill)

The Feb. 21 comment letter requests clarification to ensure the real estate exception operates as intended for common real estate ownership arrangements – focusing on the scope and application of the exception for an electing real property trade or business. 

The letter urges that Treasury clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.  

As relevant examples, the letter describes four common scenarios where the financing of a real property trade or business occurs through a tiered structure.  The letter demonstrates why treating the interest expense of an upper-tier entity as properly allocable to the real property trade or business of a lower-tier entity is consistent with the legislative intent and conforms with existing tax rules and principles.  

The letter also addresses the allocation of indebtedness within entities, requesting that Treasury guidance apply the tracing rules found in existing authorities, which are already used for purposes of the passive loss rules.  

During a Feb. 20 tax conference, both Treasury’s Deputy Tax Legislative Counsel Krishna Vallabhaneni and Deputy Assistant Secretary for Tax Policy Dana Trier said a notice on language limiting interest expenses under the new tax law will be issued soon. (Bloomberg Law, Feb. 20).  

This week’s letter is a follow-up to a Jan. 18 Roundtable letter, which identified several areas where Treasury rulemaking would reduce uncertainty and facilitate continued investment. [Roundtable Weekly, Jan. 19]   

As Treasury and Congress continue to focus on implementation and technical corrections to the new tax law, The Roundtable and TPAC will play an active role in seeking appropriate clarifications affecting the most significant changes to the tax code in more than three decades.

The bipartisan Cyber Diplomacy Act (H.R. 3776) will advance America’s public and private efforts to safeguard cyberspace and enhance the nation’s economic competitiveness in a global digital economy.  That is the message sent by The Roundtable, U.S. Chamber of Commerce and five other national trade organizations in a joint letter last week to Senate Majority Leader Mitch McConnell (R-KY), Minority Leader Chuck Schumer (D-NY) and all other U.S. Senators. (Joint Letter, Sept. 26)

The  Roundtable and six other national trade organizations sent a Sept. 26 joint letter on cybersecurity policy to all members of the U.S. Senate. (Joint Letter)

• The bill – introduced by House Foreign Affairs Committee Chairman Ed Royce (R-CA) – passed the House in January, was reported out of the Senate Committee on Foreign Relations in June and is currently under consideration by the Senate.
• H.R. 3776 would task the State Department with establishing a unified Office for Cyberspace and Digital Economy, which would consolidate efforts relating to international cybersecurity, internet access, internet freedom, digital economy, cybercrime, deterrence, and international responses to cyber threats.  (The Washington Times, Sept. 27)
• The Sept. 26 joint letter states, “We believe that a focused, centralized, and appropriately placed office led by an ambassador-rank official would aid U.S. cybersecurity and digital economy efforts. We believe that enactment of this bill would send a powerful message that the U.S. intends to preserve and protect a secure, reliable, and open internet.” 
• The cybersecurity issue is a key focus of The Roundtable’s Homeland Security Task Force (HSTF), which encourages measures to address the global cyber threat and effective information sharing..

The Roundtable’s Homeland Security Task Force will discuss cyber security and other issues affecting real estate during its upcoming meetings at FBI offices in New York (Oct. 18) and Washington, DC (Nov. 13).

 

The Real Estate Roundtable’s support for a federal proposal that would implement modified capital rules for High Volatility Commercial Real Estate (HVCRE) loan exposures is detailed in a  Nov. 26 comment letter to three banking agencies.  The Agencies — tasked with developing a rule consistent with Section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) to clarify the capital treatment of HVCRE Acquisition, Development, or Construction (ADC) loans — invited comments on their Notice of Proposed Rulemaking. (Roundtable Weekly,  May 25)

The  Real Estate Roundtable’s support for a federal proposal that would implement modified capital rules for High Volatility Commercial Real Estate (HVCRE) loan exposures is detailed in a  Nov. 26 comment letter  to three banking agencies..

• The Roundtable’s comment letter to the Office of the Comptroller of the Currency; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation states the current implementation proposal “more realistically aligns the requirements for HVCRE loans on commercial real estate projects with the actual periods of development or construction risk.”  The letter also notes that when the final proposal is implemented, it “will aid economic growth and job creation, while maintaining adequate capital levels to manage the risks associated with ADC lending.”  (Roundtable Comment Letter, Nov. 26)
• The changes to the capital rules address key deficiencies in the agencies’ prior regulations governing the criteria for HVCRE or HVADC loans by providing the following modifications and clarifications:
• The 15% equity requirement would be revised to expressly include contributed land/property at the appreciated  land value as determined by a FIRREA appraisal and bank review (versus the cost basis under the current rule).
• Clarifies that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don’t trigger the capital penalty.
• A new exemption would be added to the HVCRE rule covering acquisition/refinancing loans for performing income producing properties.
• Allows borrowers to use internally generated capital in the project and, once the development/construction risk period has passed, outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).
• All ADC loans made prior to January 2015 would be grandfathered and do not have to satisfy current HVCRE exemption criteria.
• Banks would able to withdraw HVCRE status prior to the end of an ADC loan’s term.
• Roundtable President and CEO Jeffrey DeBoer also suggests in the letter that periodic industry forums be held on the implementation of the capital rules. “This feedback would allow the Agencies to appropriately address any possible unintended economic consequences resulting from the regulation by supervisory personnel or by the institutions they supervise that might threaten the soundness of the banking system or the stability of the real estate lending market,” DeBoer added.
• The Roundtable’s letter is supported by The American College of Real Estate Lawyers (ACREL) and The American College of Mortgage Attorneys (ACMA).  (Joint Letter of Support, Nov. 27)

The Agencies’ HVCRE proposal was one of the issues discussed at this week’s meeting of The Roundtable’s Real Estate Capital Advisory Committee (RECPAC).  Since 2015, The Roundtable’s HVCRE Working Group and industry coalition partners have played a key role in advancing specific reforms to the HVCRE Rule.  (Roundtable HVCRE Comment Letter, March 2).

The Real Estate Roundtable on Tuesday wrote to the Treasury Department and IRS about the new limitation on business interest deductibility enacted in the Tax Cuts and Jobs Act of 2017 (TCJA).  The provision allows qualifying businesses to continue fully deducting interest related to commercial real estate debt.  (Roundtable comment letter, Feb. 26)

The Roundtable’s Feb. 26 letter on business interest deductibility.

• Roundtable President & CEO Jeffrey DeBoer sent the  detailed comments as Treasury officials work to finalize proposed regulations implementing TCJA’s new section 163(j), which limits the deductibility of business interest to no more than 30% of modified, adjusted taxable income.  Section 163(j) includes a critical exception for real estate.
• On December 28, 2018 Treasury published proposed regulations clarifying that partner-level debt may qualify for the real estate exception-if the debt is allocable to a partnership engaged in a real property trade or business (RPTOB). 
• DeBoer notes in The Roundtable’s Feb. 26 letter, “In light of the clear legislative intent to enact a broad real estate exception and its importance to the health and stability of real estate markets, the final Treasury regulations should build on the proposed rules and not limit unnecessarily the ability of a real property trade or business (RPTOB) to elect out of the provisions of section 163(j).”
• DeBoer adds, “No issue in tax reform is more important to the health and stability of U.S. commercial real estate than the new rules related to the taxation of business-related borrowing.  U.S. commercial real estate is leveraged conservatively with roughly $14 trillion of total property value and $4 trillion of debt.”

The letter includes detailed comments on several 163(j) implementation issues and makes the following recommendations:

The need to preserve the deduction for income-producing real estate was at the center of Jeffrey DeBoer’s testimony and exchanges with Senate Finance Committee members before final passage of the 2017 tax overhaul law. (Roundtable Statement for the Record, Sept. 19, 2017 and video clips).

 

• The real estate exception should extend through all “tiered” investment structures. 
• The real estate exception should apply fully to non-rental activities. 
• Treasury regulations should not “whipsaw” corporations/REITs through conflicting definitions of a “trade or business” that can effectively block their ability to use the real estate exception. 
• Treasury regulations should modify the anti-abuse rule for related-party leases. 
• The small business exception should not prevent otherwise eligible partners from qualifying for the real estate exception. 
• Debt allocation rules should not undercount real estate assets for purposes of the real estate exception.
• Treasury regulations should confirm that senior housing constitutes a real property trade or business.

The economic consequences of changes to the deductibility of business interest expense, and particularly the potential impact on real estate, was a central focus of lawmakers during consideration of the historic tax overhaul in 2017.  The need to preserve the deduction for income-producing real estate was at the center of DeBoer’s testimony and exchanges with Senate Finance Committee Chairman Orrin Hatch – and other members of the committee – during the last congressional hearing on business tax reform prior to votes on the TCJA.  (Roundtable Statement for the Record, Sept. 19, 2017 and video clips).  

The Real Estate Roundtable yesterday asked the U.S. Treasury Department and IRS to reduce the risk of market disruption by clarifying the tax treatment of financial contracts that replace the expiring London Inter-bank Offered Rate (LIBOR) with a substitute reference rate.  Over $200 trillion of LIBOR contracts are outstanding, including roughly $1.3 trillion of commercial real estate debt. (Roundtable LIBOR letter, June 6)

The Real Estate Roundtable yesterday asked the U.S. Treasury Department and IRS to reduce the risk of market disruption by clarifying the tax treatment of financial contracts that replace the expiring London Inter-bank Offered Rate (LIBOR) with a substitute reference rate. (Roundtable LIBOR letter, June 6).

• The United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced in 2017 that it is phasing out the global borrowing index by the end of 2021.  LIBOR will need to be replaced in both new agreements and innumerable existing legacy contracts.
• Several factors may necessitate or accelerate parties’ adoption of alternative reference rates on existing contracts well before the end of 2021.  To facilitate the transition, the Federal Reserve Bank of New York in 2018 began publishing an alternative U.S. benchmark to work alongside LIBOR – the Secured Overnight Financing Rate (SOFR).  (See: A User’s Guide to SOFR  and SOFR: A Year in Review)
• However, several issues may be contributing to the reluctance of market participants to use SOFR, including the absence of necessary internal infrastructure to support its accounting and trading, and the lack of tax guidance. 
• Roundtable President and CEO Jeffrey DeBoer noted in the comment letter, “If the terms of a debt instrument are significantly modified, for Federal income tax purposes there is a deemed exchange of the old debt for a new (modified) debt instrument.”  Without relief, this deemed exchange could trigger the recognition of taxable gain or loss for the lender, or debt discharge income for the borrower.
• “Moreover, the tax consequences of the deemed exchange can arise without generating actual cash to pay any ensuing tax liability,” wrote DeBoer. 
  

  Randal Quarles – the Fed’s vice chairman in charge of financial regulation – reiterated the urgency of moving forward on the transition to SOFR.

• The Roundtable’s June 6 comments recommend that a safe-harbor rule confirm that a replacement index or formula identified by regulators, broad industry groups, or similar objective sources-or by the parties themselves in good faith-is not considered an alteration or modification of the original instrument.  The Roundtable letter states, “Instead, the replacement should be treated for Federal tax purposes as a continuation of the instrument’s original terms.”
• This week, Randal Quarles – the Fed’s vice chairman in charge of financial regulation – reiterated the urgency of moving forward on the transition to SOFR:  “I believe that the ARRC has chosen the most viable path forward and that most will benefit from following it, but regardless of how you choose to transition, beginning that transition now would be consistent with prudent risk management and the duty that you owe to your shareholders and clients …. With only two and a half years of further guaranteed stability for LIBOR, the transition should begin happening in earnest.”  (Bloomberg, June 3)
• The Wall Street Journal reported last July that companies were adopting SOFR sparingly –  despite regulators urging banks and traders to stop launching new Libor-based contracts ahead of the 2021 deadline. (WSJ, July 12 and Roundtable Weekly, July 13, 2018) 

The Roundtable letter was developed by a task force that included Tax Policy Advisory Committee (TPAC) Chairman Frank Creamer Jr., TPAC member Don Susswein, and chair of the Real Estate Capital Policy Advisory Committee (RECPAC) Working Group on LIBOR, Joseph Philip Forte.  On June 11, at The Roundtable’s Annual Meeting in Washington DC, Joseph Forte will lead a RECPAC discussion on real estate’s concerns with the LIBOR transition. 

Bipartisan legislation that would require private sector companies to report ransomware attacks to federal authorities was advanced this week by the Senate Homeland Security and Governmental Affairs Committee. A broad, 37-member coalition that includes The Real Estate Roundtable on Oct. 4 provided detailed suggestions to Senate and House congressional committees about provisions that should be included in any bill that would impose a compulsory cyber incident notification program on the business community. (Cybersecurity coalition letter and Committee mark-up)

Why It Matters

• The Cyber Incident Reporting Act (S. 2875) – sponsored by Committee Chairman Gary Peters (D-MI) and Ranking Member Rob Portman (R-OH) – would require certain owners and operators of critical infrastructure operators to report hacks within 72 hours and ransom payments within 24 hours to the Cybersecurity and Infrastructure Security Agency (CISA).  Organizations failing to do so would potentially banned from doing business with the federal government. (The Hill, Set. 28 and PoliticoPro, Oct. 5)
• The committee also approved the Federal Information Security Modernization Act of 2021 (S. 2902), which would require agencies and contractors to report on cyberattacks.
• The congressional bills aim to update the Federal Information Security Modernization Act, signed into law in 2014. Sen. Portman noted two reports on issued by the Homeland Security Committee since 2019 that found massive cybersecurity shortcomings at several federal agencies.
• The Senate Homeland Security Committee’s leadership may seek to merge their legislation may with a bill (S. 2010) from the Senate Intelligence Committee. Sen. Peters said he may also seek to include S. 2875 in House-passed defense policy legislation (H.R. 4350), which also includes language requiring cyber incidents. (BGov and PoliticoPro, Oct. 5)

Private Sector Concerns

• The business coalition’s Oct. 4 letter to the Senate Committees on Intelligence, Homeland Security and Government Affairs and the House Committee on Home  recommended several provisions that should be central to a mandatory reporting regime, including:
  • Establish a prompt reporting timeline of not less than 72 hours. Legislation should reflect an appropriate, flexible standard for notifying government about significant cyber incidents.
  • Attach reporting to confirmed cyber incidents. Businesses need clarity in reporting requirements, which should be targeted to well-defined and confirmed cyber incidents.

  • Confine reports to significant and relevant incidents .A list should be limited in reach—particularly excluding small businesses using existing federal rules—and risk based.

  • The business industry comments recommended that federal cybersecurity reporting legislation should also include robust liability protections; consistent federal reporting requirements; restrictive government use of reported data; and guarantee substantial input from industry to protect the rulemaking process. 

Identifying Critical Infrastructure

• In the House, a separate bill that would identify systemically important infrastructure was introduced Oct. 5 by Homeland Security Committee Ranking Member John Katko (R-NY), Rep. Abigail Spanberger (D-VA) and Rep. Andrew Garbarino (R-NY). (Katko one-pager on the bill)
• The bill would authorize CISA to prioritize infrastructure operators considered so crucial to the U.S. economy, public health and national security that a disruption to their operations due to a cyberattack would be considered debilitating. (Katko news release, Oct. 5) 

The Roundtable’s Homeland Security Task Force continues to work with key law enforcement and intelligence agencies and the Real Estate Information Sharing and Analysis Center (RE-ISAC) on protective measures that businesses can take to create infrastructure resistant to physical damage and cyber breaches.  

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A broad-based business coalition that includes The Real Estate Roundtable urged Treasury Secretary Steven Mnuchin on Wednesday to issue guidance clarifying certain provisions included in tax overhaul legislation enacted last year — including the cost recovery period for qualified improvement property (QIP).  ( Coalition letter , Aug. 22)

A broad-based business coalition that includes The Real Estate Roundtable urged Treasury Secretary Steven Mnuchin on Wednesday to issue guidance clarifying certain provisions included in tax overhaul legislation enacted last year — including the cost recovery period for qualified improvement property (QIP).  (Coalition letter , Aug. 22)

• An unintentional drafting mistake in the tax law has resulted in a significantly longer 39-year cost recovery period for new, qualified nonresidential interior improvements.  Congress intended to allow the immediate expensing of qualified improvements, or provide a 20-year recovery period in the case of taxpayers electing out of new limitations on the deductibility of business interest.  
• The drafting error affects leasehold improvements, expenditures made to improve common spaces in shopping centers and office buildings, and other interior improvements to nonresidential structures.  The longer cost recovery period effectively increases the after-tax cost of upgrading and improving commercial real estate.   (“Correcting the Drafting Error Involving the Expensing of Qualified Improvement Property ” –  The Tax Foundation , May 30)     
• The August 22 letter includes 283 signatories, who state the delay in correcting the  QIP provision is delaying some store and restaurant remodeling projects, and causing some retailers to decline opportunities to purchase or lease new store locations that would require substantial improvements.  
• The coalition letter further explains, “These decisions not only deny communities the jobs associated with substantial construction projects, but also deny our communities the opportunity to bring new, permanent jobs to an otherwise abandoned store or to revitalize a declining mall. The delayed investment in remodeling projects is also causing a decline in sales by manufacturers that supply products used in remodels, like energy-efficient lighting and plumbing supplies.”  
• The coalition urges Secretary Mnuchin “to issue guidance that will facilitate the intent of the law and eliminate the imposition of large additional tax compliance and accounting burdens on taxpayers, as well as associated tax enforcement burdens on the Internal Revenue Service.”  
• Last week, all Republican members of the Finance Committee and Chairman Orrin Hatch (R-UT) wrote to Treasury and the IRS, requesting “guidance that is consistent with the congressional intent” of the new tax law regarding QIP expensing and two other tax policy areas.  (Roundtable Weekly, Aug. 17)    

Roundtable President and CEO Jeffrey DeBoer stated, “In 2015, Congress voted overwhelmingly to permanently extend the 15-year recovery period for certain property improvements.  By passing tax reform, Congress intended to consolidate those changes.  Treasury should now use its authority to provide taxpayers with relief until a technical corrections bill is enacted.  Treasury guidance will remove taxpayer uncertainty, unlock investment, and spur job-creating property upgrades and renovations.” 

Following the Nov. 6 mid-term elections, a “Lame Duck” session of Congress is expected to consider various tax policies of importance to commercial real estate.   

Several tax issues of importance to real estate may be in play during the November “Lame Duck” congressional session, including  condo tax accounting rules; technical corrections; the cost recovery period for qualified improvement property (QIP);and tax extenders.

• As part of a potential year-end omnibus spending bill to fund the government, tax policies that may be addressed include condo tax accounting rules; technical corrections; the cost recovery period for qualified improvement property (QIP); and tax extenders.  (Roundtable Weekly, Oct. 12) 
• Current condo tax accounting rules require multifamily developers of buildings with five or more residential units to recognize income and pay tax on their expected profit as construction is ongoing — well before pre-sale transactions are closed and full payment is due from the buyer.  This mismatch of cash flow and tax liability prevents income tax deferment until a condo building is finished.   Home builders of single-family homes, townhouses and row houses are not subject to this accounting rule restriction. 
• A House bill introduced last summer by Reps. Carlos Curbelo (R-FL) and Joe Crowley (D-NY) aimed to correct this disparity.  Although the Fair Accounting for Condominium Construction Act (H.R. 3659) stalled in 2017, it could serve as a template for inclusion in year-end tax legislation.  The Real Estate Roundtable supports lawmakers’ efforts to pass H.R. 3659. 
• Other congressional efforts to ensure that development accounting rules treat condos like other residential construction included a 2016 letter from 10 members of the Senate Finance Committee urging regulatory corrections to former Treasury Secretary Jack Lew. 
• Roundtable President and CEO Jeffrey DeBoer on April 7, 2017 sent a letter to Treasury Secretary Steven Mnuchin   outlining eight regulatory actions the Treasury Department could take to stimulate new real estate investment, job creation, and economic growth.  Among the recommendations addressed in the letter are tax accounting for new condominium construction; the Foreign Investment in Real Property Tax Act, tax treatment of private real estate funds and partnership tax rules. 

Last week, an article on the condo tax accounting issue in The Real Deal included a quote from Roundtable Senior Vice President & Counsel Ryan McCormick, who commented on the outlook for correcting the current rules.  “Legislation may be the most likely route, in light of all the work ongoing at Treasury with tax reform,” McCormick said.

A business coalition that includes The Real Estate Roundtable on March 5 wrote to the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) to urge a delay in the implementation of the proposed Current Expected Credit Loss (CECL) accounting standard, which may begin to reduce aggregate bank lending as early as next year. (Coalition Letter, March 5)

The March 5 coalition letter cites a 2018 KPMB survey showing companies are struggling to make certain accounting, modeling and data decisions to be in compliance with CECL. (KPMG, Financial institutions feeling the crunch in countdown to CECL implementation)

• The new CECL model will change the way banks calculate reserves on assets, requiring certain financial institutions to estimate the expected loss over the life of a loan beginning in January 2020.  For real estate, there is concern is that banks may reduce lending volumes as they build up additional capital reserves to be in compliance with CECL. 

• The accounting rule change was issued by the Financial Accounting Standards Board (FASB) in June 2016 as a result of the 2008 financial crisis.

• The regulatory change in how banks estimate losses in their allowance for loan and lease losses (ALLL) will require substantial changes in data analytics and financial methodologies.  The March 5 coalition letter cites a 2018 KPMB survey showing companies are struggling to make certain accounting, modeling and data decisions to be in compliance with CECL.  (KPMG, Financial institutions feeling the crunch in countdown to CECL implementation)

• According to Trepp’s Looking at Historical CRE Losses for CECL, “To benchmark and fine-tune loss methodologies for CECL, the key for banks will be a four-letter word: data.  Unfortunately, many banks have very little in the way of granular historical data, and a number of those that do have good data have taken few to no losses in their history. This has made it difficult for those banks to effectively model future losses.”  (Trepp article by Joe McBride, April 21, 2017)

• To avoid unintended economic consequences, the coalition states in its letter, “We believe it is important to delay implementation of CECL in order to allow for time to conduct a quantitative impact analysis and to consider potential alternatives, while allowing for post-issuance field testing. Time for further assessment will also allow regulators to better understand and address the key consequences of any proposal for capital and other regulatory purposes.”

The 8 signatories to the coalition letter are the U.S. Chamber of Commerce, American Bankers Association, Bank Policy Institute, The Real Estate Roundtable, Commercial Real Estate Finance Council, Mortgage Bankers Association, National Association of Realtors, Credit Union National Association and National Association of Federal Credit Unions.