Author: Trey Jackson

Industry Requests TALF Expansion to Include a Broader Range of Commercial Real Estate Assets, CMBS; Congressional Efforts Seek to Address Pandemic Business Interruption Insurance Policies

Posted on by Trey Jackson

U.S. Capitol Dome with flag

Six real estate industry organizations, including The Real Estate Roundtable, wrote to federal regulators on April 14 to communicate the urgent and growing need to include a wider range of investment grade commercial real estate debt instruments in the Fed’s Term Asset-Backed Securities Loan Facility (TALF) credit facility. Currently, TALF eligible collateral is limited to triple-A rated tranches of outstanding (legacy) commercial mortgage backed securities (CMBS), commercial mortgage loans and newly issued collateralized loan obligations.  (TALF letter, April 14)

  • The TALF, previously used during the 2008 financial crisis, was relaunched on March 23 in response to the Covid-19 crisis to “enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.”  (Fed news release, March 23)
  • Immediately after the TALF was relaunched, an industry coalition on March 24 urged the Federal Reserve, Treasury, and Federal Housing Finance Agency to expand the TALF to include non-agency CMBS – including legacy private-label conduit and single-asset single borrower (SASB) assets. The coalition, which includes The Roundtable, stated the inclusion of private-label assets would stabilize asset prices and shore up the balance sheets of market participants.  (Joint Industry letter, March 24)
  • On April 9, the Federal Reserve announced that it would broaden the range of TALF eligible collateral to include triple-A rated tranches of both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations. However, the updated term sheet excludes single-asset single borrower (SASB) CMBS and commercial real estate collateralized loan obligations (CRE CLOs).
  • According to the April 14 letter, “Commercial and multifamily real estate assets that were perfectly healthy just weeks ago now face massive stress and a wave of payment and covenant defaults. As the economy shuts down and American workers face massive layoffs, it is now clear that many tenants will not be able to meet their debt obligations. This will soon cascade through the over $4 trillion commercial real estate debt market and exponentially increase the pressure on the financial system.”

To bolster the health of the CMBS market, the industry coalition recommends the following investment grade instruments be added as eligible TALF assets:

  • Legacy and new issuance, investment grade, non-agency CMBS;
  • Investment grade Agency Credit Risk Transfer (CRT) securities;
  • Legacy and new issuance Single-Asset, Single-Borrower (SASB) CMBS;
  • Commercial real estate (CRE) collateralized loan obligations (CLOs); and
  • U.S. commercial real estate (CRE) first mortgage loans (which have capital charges equivalent to investment grade/NAIC CM 1 and 2 and loans in good standing, or can obtain a rating agency letter confirming that the pledged loan is rated at least single-A).

The coalition letter explains that a broader, deeper, and more effective TALF would complement and minimize the direct lending that will be required of the Federal Reserve’s other credit facilities, which are supported by the $454 billion provided under the CARES Act.

The coalition also notes that expansion of the TALF’s scope and the Fed’s further support of the highly illiquid non-bank financial sector would forestall further disruption and economic dislocations in the commercial real estate sector.

Pandemic Risk Insurance Coverage

Two preliminary legislative proposals in Congress seek to address increasing requests for the property and casualty industry to extend business interruption (BI) insurance policies to cover pandemic risk related claims – and the general lack of pandemic risk commercial insurance availability.

  • A recent effort in the House led by Rep. Carolyn Maloney (D-NY) seeks to develop the Pandemic Risk Insurance Act of 2020 (PRIA), which would create the Pandemic Risk Reinsurance Program. PRIA would seek to create “a system of shared public and private compensation for business interruption losses resulting from future pandemics or public health emergencies.”  (Rep. Maloney Dear Colleague letter, April 10 Roundtable Weekly)
  • Rep. Maloney’s pandemic program would be prospective – not retrospective.  “Like the Terrorism Risk Insurance Act (TRIA), the federal government would serve as a backstop to maintain marketplace stability and to share the burden alongside private industry,” according to Maloney.
  • In the Senate, Sen. Steve Daines (R-MT) is working on a broader concept that is both retrospective and prospective.  Known as the  Workplace Recovery Act, the measure would provide direct retrospective reimbursement through a Federal Automated Security Trust program to every business for operating losses, limited to 90% of past revenues.
  • The Senate proposal would also establish a new government-funded business interruption insurance add-on for every privately administered commercial insurance plan to protect against future national pandemics.
  • The National Association of Insurance Commissioners issued a statement recently warning that such efforts “would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.” (NAIC statement, March 25)

As with terrorism risk insurance, The Roundtable is working with policymakers and stakeholders to help develop an effective risk insurance program that addresses the economic impact of the current pandemic crisis and provides the economy with the coverage it needs to deal with future pandemic risks. 

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Real Estate Roundtable Members Stanley Chera and Mayer Greenberg Pass

Posted on by Trey Jackson

In Memoriam -- Real Estate Roundtable Members

Real Estate Roundtable members Stanley Chera and Mayer Greenberg, both from New York, passed away this month. 

  • Stanley Chera founded Crown Acquisitions with Isaac Chera Sr. and built it over a span of three generations to include  ownership interest in dozens of retail and office properties throughout North America, including trophy buildings in Manhattan.  He was a member of The Roundtable since 2015.
  • President Trump called out Mr. Chera at a 2019 rally in Grand Rapids, Michigan, as “one of the biggest builders and real estate people in the world.”
  • Mayer Greenberg, a real estate tax attorney with Kramer Levin was also a member of The Roundtable and an active member of its Tax Policy Advisory Committee (TPAC).  He  advised domestic and foreign investors on the tax implications of complex commercial transactions, including joint ventures, mergers, acquisitions and other business restructurings.
  • Before joining Kramer Levin Naftalis & Frankel LLP in 2019, Mr. Greenberg was a partner with Stroock & Stroock & Lavan LLP. 

Roundtable President and CEO Jeffrey DeBoer said, “We are saddened by the loss of two well-established professionals in commercial real estate who participated in The Real Estate Roundtable for several years.  Both Stanley Chera and Mayer Greenberg were generous with their time and expertise in helping their colleagues, the industry and our organization grow and adapt to rapid changes in the policy and business landscape.  We will miss them and we extend our sincere condolences to their families.” 

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High Demand Depletes Small Business Loan Program as Congress Negotiates More Funding; President Trump Announces “Guidelines to Open Up America Again”

Posted on by Trey Jackson

Small Business Administration Report on the Paycheck Protection Program - April 13, 2020

The Small Business Administration (SBA) yesterday announced that the Covid-19 Paycheck Protection Program (PPP) hit its $349 billion limit after successfully processing more than 1.6 million loans since the program launch on April 3.  The PPP – funded by the Coronavirus Aid, Relief, and Economic Security (CARES) Act for small businesses struggling with the economic shocks of the pandemic – was quickly depleted as Congress continued negotiations over how to replenish funding.   (Wall Street Journal, April 16)

  • “The SBA has processed more than 14 years’ worth of loans in less than 14 days. By law, the SBA will not be able to issue new loan approvals once the programs experience a lapse in appropriations,” according to a joint statement by the Treasury and SBA.”
  • The urgent need for Congress to move quickly to authorize additional funding for the PPP is detailed in an April 15 letter to policymakers from more than 250 industry and business groups, including The Real Estate Roundtable.   
  • The SBA this week also released its first report on loan approval details since launching the program.  Through April 13, the SBA report shows 49,000 real estate businesses and 115,000 construction businesses were approved for PPP loans.  (SBA PPP Report) See The Wall Street Journal, April 15, “Where the Stimulus Loans for Small Businesses Are Going”)
  • The Roundtable on April 8 also submitted an 8-Point Plan to clarify and improve the Payroll Protection Program (PPP) to policymakers. A coalition letter from national real estate organizations also seeks clarifications and confirmation on real estate businesses’ eligibility for the PPP.  See April 16 letter to the Treasury and SBA. 
  • Updates to the PPP rules and guidance are available via the Treasury Department’s website (April 15 FAQ update here) and the Small Business Administration’s Covid-19 resource webpage.
  • Congressional Republicans this week have emphasized that additional PPP funding should be limited to $250 billion solely for small businesses – while Democrats want to add an additional $100 billion for hospitals, $150 billion for state and local governments and more food assistance funds. (The Hill, April 16)
  • Due to coronavirus health concerns the House and Senate are currently scheduled to return to Washington on May 4.   Until then, both chambers need unanimous support to pass an additional funding package.

Re-Opening the U.S. Economy

  • President Trump yesterday announced “Guidelines to Open Up America Again” that delegates final decisions for states to lift stay at home orders or business restrictions to governors once certain criteria are met.   States would first need to demonstrate their COVID-19 cases are on downward trajectory over a 14-day period, while also establishing a system for testing health care workers before they can proceed to a phased opening.  (Guidelines document and Wall Street Journal, April 16)

President Trump on April 14 also announced the formation of various “Great American Economic Revival Groups” to gain insight on combating the economic impact of the coronavirus from leading business executives representing various economic sectors.  Among the 200 leaders from industry sector groups are 10 members of The Real Estate Roundtable.  (Full list, White House news release and  Bisnow, April 15)

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IRS Guidance Ensures Real Estate Businesses Benefit from Phase Three Tax Relief

Posted on by Trey Jackson

IRS Building

This week, the IRS issued two revenue procedures that will help real estate businesses maximize the amount of tax relief they receive under the “Phase 3” CARES Act. The IRS actions are consistent with recent Real Estate Roundtable recommendations.

Partnership Amended Returns

  • The CARES Act included several provisions designed to generate deductions in prior years that can be “monetized” today, through the filing of amended tax returns, to help businesses stay afloat during the current economic turmoil.  As the Senate Finance Committee summary noted, “[t]hese changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.”  
  • In the understandable rush to enact the CARES Act, Congress did not have an opportunity to consider fully how provisions in the legislation would interact with various aspects of existing tax law and regulations.  In particular, under the partnership audit regime enacted in 2015, partnerships are no longer permitted to file amended tax returns.
  • In a letter on April 4, Roundtable President and CEO Jeffrey DeBoer urged the Treasury Department and IRS to use its regulatory authority to allow partnership to file superseding tax returns that could replace returns filed in 2018 and 2019. 
  • IRS Rev. Proc. 2020-23, released on Wednesday, allows partnerships to file amended returns for those years, effectively providing the relief The Roundtable requested.  

Business Interest Limitation

  • The Tax Cuts and Jobs Act created a new limitation on the deductibility of business interest, but allows real estate businesses to elect out, which most did in 2018.  The election is irrevocable, and the price of the election is longer cost recovery periods for real property and improvements.  The CARES Act liberalized the limitation on the deductibility of business interest for tax years 2019 and 2020.  However, the law did not allow real estate businesses to go back and change their election out of the regime.
  • In its April 4 letter, The Roundtable asked the IRS to allow real estate businesses to revoke elections made in 2018 and 2019.  This afternoon, the IRS issued the requested relief in Rev. Proc. 2020-22.

Like-Kind Exchanges

  • In addition to the actions related to the CARES Act, the IRS has provided relief to taxpayers having difficulty completing like-kind exchanges due to the COVID-19 pandemic.  In late March,  The Roundtable and 21 other national real estate organizations requested relief from the strict statutory deadlines that apply for identifying replacement property and closing on like-kind exchange transactions.  Under IRS Notice 2020-23, like-kind exchange deadlines that would otherwise fall between April 1 and July 14 are extended to July 15.

Opportunity Zones

  • Relief from the various deadlines and compliance testing dates for Opportunity Zones during the pandemic is a Roundtable priority.  IRS Notice 2020-23 provides that if a taxpayer’s 180-day period to invest gain in an opportunity fund would have expired between April 1 and July 14, 2020, the taxpayer now has until July 15, 2020 to make the investment.   

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House Democrats Propose Pandemic Risk Insurance Program Modeled on TRIA; Senate Attempts to Break Stalemate on “Phase 4” Coronavirus Relief Package

Posted on by Trey Jackson

Capitol_Dusk_rooftop_475w

House Financial Services Committee Democrats this week proposed a federal reinsurance program for pandemic risks as part of the next round of congressional coronavirus relief.   (HFS Committee memo)

  • An April 6 memo from the committee’s majority Democratic staff states the recently enacted CARES Act was only a down payment on the relief needed to fully address the historic negative health and economic effects of COVID-19.  For the next congressional package, the memo recommends policy proscriptions focused on both the crisis and the recovery that includes “Pandemic Risk Insurance.”
  • The draft package’s reinsurance program proposal would be “similar to the Terrorism Risk Insurance Program for pandemic risks in order to promote the availability and affordability of insurance coverage that includes pandemic risks.”
  • Whether existing business interruption insurance policies have virus and bacteria-related exclusions is a growing issue between closed businesses and their insurers.  (BGov and Insurance Insider, April 9)
  • Rep. Carolyn Maloney, (D-NY), chairwoman of the House Oversight and Reform Committee and a senior member of Financial Services Committee, circulated a letter this week informing colleagues in the House that she is “… developing the Pandemic Risk Insurance Act of 2020, to create the Pandemic Risk Reinsurance Program, a system of shared public and private compensation for business interruption losses resulting from future pandemics or public health emergencies.”
  • Rep. Maloney’s note explains, “An ounce of prevention is worth a pound of cure. The Pandemic Risk Insurance Act (PRIA) would be an important step in our prevention efforts against future pandemics by both requiring insurance companies to offer business interruption insurance policies that cover pandemics, and creating a Pandemic Risk Reinsurance Program to ensure that there is sufficient capacity to cover these losses and protect our economy in the event of a future pandemic. Like the Terrorism Risk Insurance Act (TRIA), the federal government would serve as a backstop to maintain marketplace stability and to share the burden alongside private industry”
  • Rep. Maloney’s pandemic program would be prospective – not retrospective.
  • The current TRIA program would be triggered if losses from certified acts of terrorism attack exceed $200 million across all affected insurers.  The establishment of the federal terrorism backstop – and its multiple reauthorizations over the years – has been a top policy priority for The Real Estate Roundtable since the 9/11 attacks. (Roundtable TRIA webpage) 
  • John Doyle, president and CEO of the insurance unit of Marsh & McLennan Companies Inc., offered in a March 30 letter to Congress and the White House to help create a federal pandemic backstop.  Doyle wrote, “The basic framework of a pandemic risk insurance program would be to structure a risk sharing model between policyholders, insurers and the federal government.” 

The Roundtable is working with policymakers and stakeholders to help develop an effective pandemic risk insurance program that addresses the current crisis and provides the economy with the coverage it needs to address future pandemic risks.  

Senate Attempts to Develop a Phase 4 Coronavirus Relief Package

Senate Republicans and Democrats this week failed to reach agreement on “Phase 4” coronavirus legislation that would quickly follow and expand the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed on March 27.  Republicans sought more funding for the Paycheck Protection Program (PPP) for small businesses impacted by COVID-19, while Democrats emphasized any follow up measure to the “Phase 3” CARES Act should include increased funding for hospitals and local governments.  (Akin Gump, April 9 and Deloitte, April 10)

  • Negotiations between congressional leaders and the White House over a Phase 4 package are ongoing.  With the Senate in pro forma session on Monday, there is a chance for a deal to be reached over the weekend.
  • The Senate and House are currently scheduled to return for regular business the week of April 20.  Health concerns for Members of Congress and their staff cast doubt on when they can return to Washington to consider legislation. The only way for Congress to currently vote on and send legislation to President Trump is by using the unanimous consent process, which can be blocked by any single member.
  • Rep. Thomas Massie (R-KY) last month forced hundreds of his colleagues to return to the Capitol to pass the CARES Act.  He warned on April 8 that he may again block unanimous consent for a Phase 4 coronavirus bill if it is not held with a roll call vote. (The Hill, April 8)

President Trump wrote on Twitter March 31 that a larger infrastructure should be included in the next coronavirus relief bill.  “With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill,” President Trump wrote. “It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4.”

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Roundtable Unveils 8-Point Plan to Improve the PPP; Roundtable Member Discusses Successful PPP Funding

Posted on by Trey Jackson

8 Point Plan to Reform the Payroll Protection Program -- The Real Estate Roundtable

The Real Estate Roundtable on April 8 submitted an 8-Point Plan to clarify and improve the Payroll Protection Program (PPP) to congressional leadership, Treasury Secretary Steven Mnuchin and Small Business Administrator (SBA) Jovita Carranza.  (Roundtable Letter and 8-Point Plan)

  • The Roundtable supports the intent of the PPP in the CARES Act, and the efforts to get SBA loans to struggling individuals, families and businesses as soon as possible.
  • The CARES Act passed by Congress and signed by President Trump on March 27 established the PPP to provide financial assistance to “any” business concern that has 500 employees or less, or meets small business size standards used by SBA for its existing loan program.  Larger companies sized-out of the PPP might obtain credit support through the Federal Reserve’s new Main Street Lending Program, and its expanded Term Asset-Backed Loan Facility (TALF). (See story above for more details)
  • The Roundtable’s recommendations detailed in the “8-Point Plan to Reform the PPP” would significantly help avoid potential calamitous economic consequences for small businesses.
  • The letters to Congress, Treasury, and SBA transmitting the 8-Point Plan warn of foreclosures by lenders upon building owners who go into mortgage default because rents are not being paid to cover debt service.  The Roundtable’s plan thus supports use of PPP loans to help businesses pay rents and other operating expenses.
  • The Roundtable letter urges Congress and the Administration’s agencies to enact 8 improvements as swiftly as possible to clarify, streamline and improve the process.
  • Additionally, a coalition including The Roundtable today wrote to Fed Chair Jay Powell, Treasury Secretary Mnuchin and SBA Administrator Carranza to request additional guidance on current business affiliation rules as part of the PPP.  (Coalition affiliation rules letter, April 10)
  • Among its requests, the coalition urges the policymakers to allow small businesses supported by venture capital, angel capital and private equity firm investors to access critical funding that would help retain workers and jobs during the economic fallout of this health crisis.

Since the SBA launched the program last Friday by making borrower  applications available on-line, demand for PPP loans has been intense. Challenges have included a massive influx of traffic that has brought website application sites down, confusion over specific application packages, and the technology used to process loans and approve lenders. (The Hill, April 9 and Wall Street Journal, April 10)

Roundtable Member’s Successful PPP Experience

A successful example this week of PPP funding is profiled in an interview recorded today by Roundtable President and CEO Jeffrey DeBoer with Roundtable member Albert Dwoskin, President and CEO of A.J. Dwoskin & Associates, Inc.   (Watch the interview here)

  • Mr. Dwoskin’s company, facing a sudden halt in rental payments due to the pandemic, immediately sought PPP funding to stabilize its capital needs and retain more than 100 employees.  “The application went in on Tuesday and was funded on Friday. We didn’t expect that,” Dwoskin says in the interview.
  • Dwoskin’s Vice President of Accounting & Finance Natalia Ostroveanu, also details the PPP loan process. “J.P. Morgan had a question as part of their review … because the number of employees on the application was different than what the report from ADP showed.  And once I explained to them the reason for that number, they were okay with it and that was yesterday morning.  Today, this morning, we already received the funds,” Ostroveanu states.

Since the SBA launched the program last Friday by making borrower  applications available on-line, demand for PPP loans has been intense. Challenges have included a massive influx of traffic that has brought website application sites down, confusion over specific application packages, and the technology used to process loans and approve lenders. (The Hill, April 9 and Wall Street Journal, April 10) 

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Federal Reserve Launches $2.3 Trillion in New Credit Facilities, Expands TALF to Existing AAA CMBS and Commercial Mortgage Loans

Posted on by Trey Jackson

Federal Reserve Building DC

The Federal Reserve yesterday announced the establishment of $2.3 trillion in new credit lending facilities in an effort to restore liquidity and steady economic shocks from the Covid-19 pandemic. These actions include the expansion of its Term Asset Lending Facility (TALF) to include AAA-rated commercial mortgage-backed securities (CMBS) and commercial mortgages as eligible collateral.  (Fed news release and TALF term sheet, April 9)

  • The Fed’s Term Asset Lending Facility – previously used during the 2008 financial crisis and relaunched on March 23 – will now accommodate non-agency CMBS issued before March 23, 2020; any issuance after that date is ineligible.  All collateral must also be AAA-rated and located in the U.S or its territories. The TALF will support up to $100 billion in credit, which is backed by $10 billion in credit protection from the Treasury Department. (TALF term sheet)
  • Under the TALF, static collateralized loan obligations (CLOs) are also eligible collateral, yet CMBS securities related to single-asset single-borrower (SASB) and commercial real estate collateralized loan obligations (CRE CLOs) are not eligible at this time.
  • The terms and conditions for commercial mortgages to be included as eligible collateral in the TALF have yet to be announced. (TALF term sheet, April 9)
  • While the Fed’s recent actions are welcome, an industry coalition, including The Roundtable, continues to advocate for the inclusion of CRE collateralized loan obligations (CLOs) and Single Asset, Single Borrower (SASB) CMBS in the TALF. (Joint Industry letter, March 24)
  • The Federal Reserve also announced $600 billion for purchasing loans in two new “Main Street” facilities. The Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF), which will purchase 95% participations in new 4-year loans to businesses that have up to 10,000 employees or up $2.5 billion in 2019 annual revenue. Borrowers with more than 10,000 employees but less than $2.5 billion in 2019 revenue may potentially qualify.
  • The Fed’s new credit facilities also include $500 billion for short-term municipal bonds and additional funding for the central bank’s purchases of larger investment grade businesses and capital markets securities.
  • Fed Chair Jay Powell commented on yesterday’s actions during a webinar.  “Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers that are available only in very unusual circumstances—such as those we find ourselves in today—and only with the consent of the Secretary of the Treasury.”  He added, “I would stress that these are lending powers, not spending powers.  We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.”
  • During Q&A after his remarks, Chairman Powell acknowledged severe liquidity concerns faced by mortgage servicers as the pandemic has resulted in widespread forbearance on mortgage payments.  Powell referred to the mortgage market as “at the very center of our economy” and stated, “We’re watching carefully the situation with the mortgage servicers and I will just tell you that we certainly have our eyes on that as a key market.”  (S&P Global, April 9)
  • On April 4, a broad coalition financial industry and affordable housing advocates, including The Roundtable, urged government regulators to provide a source of liquidity to mortgage servicers in need of additional capacity to support homeowners and renters impacted by COVID-19. (Coalition mortgage servicers letter)
  • While this week’s actions could provide up to $2.3 trillion in loans to support the economy, the Treasury and the Fed have not yet committed the full $454 billion allocated for credit support to lending facilities under the recently-enacted Coronavirus Aid, Relief, and Economic Security Act (CARES).  Therefore, more loan programs or an expansion of these now existing loan programs could be forthcoming. (Roundtable Weekly, March 27).
  • This week’s massive Fed intervention also includes the creation a Paycheck Protection Program Lending Facility (PPPLF) to support the Small Business Administration’s Paycheck Protection Program (PPP) – established under the CARES Act.  This facility will extend credit to eligible financial institutions that originate PPP loans to small businesses, taking the loans as collateral at face value.  (See story below on The Roundtable’s 8-point reform plan for the PPP).
  • Yesterday’s actions by the Fed recognize that businesses vary widely in their financing needs – and input from lenders, borrowers, and other stakeholders until April 16 is welcome through a Federal Reserve feedback form.

The Fed’s response to the pandemic is the focus of an April 8 Chicago Economic Club discussion moderated by Roundtable Chair Debra Cafaro (Chairman and Chief Executive Officer, Ventas, Inc.) with Charles Evans, President and CEO of the Federal Reserve Bank of Chicago. (Watch interview on Youtube)

As part of the rapidly evolving developments related to the COVID-19 pandemic, The Real Estate Roundtable continues to be proactive on all policy fronts in Washington to provide insight and recommendations to lawmakers and regulators.  The Roundtable depends on the input and expertise of its dedicated members, including those serving – now remotely – on the organization’s Real Estate Capital Policy Advisory Committee (RECPAC).

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Roundtable Requests Industry Regulators to Suspend Mark-To-Market Accounting Rules and Suspend New CECL Accounting Standard to Prevent Exacerbating Economic Crisis

Posted on by Trey Jackson

FASB logo

The Real Estate Roundtable this week submitted two requests to the Financial Accounting Standards Board (FASB) and securities regulators to prevent exacerbating the destructive economic repercussions of the coronavirus crisis. The first letter urges the immediate suspension of “mark-to-market” accounting rules (FAS 157).  The second letter encourages the expansion a provision in the CARES Act that suspends the new Current Expected Credit Losses (CECL) for banks – by including non-banking financial institutions and insurance companies. (Mark-to-Market letter, March 31 and CECL letter, April 1)

  • On March 31, The Roundtable addressed the mark-to-market – or “fair value” – rules in a comment letter to regulators.  Measuring an asset at fair value records it at a price it would obtain in an orderly market instead of the asset’s original purchase cost.  During unfavorable or volatile markets, the method does not accurately represent an asset’s true value.  (BGov, March 31)
  • When the market-based measurement no longer accurately represents the underlying asset’s true value, a company should not be forced to calculate the selling price of these assets or liabilities during unfavorable or volatile times, such as today’s COVID-19 crisis.
  • The Roundtable letter explains that the mark-to-market rules will further exacerbate the growing financial crisis. As many tenants will not be able to meet their debt obligations, liquidity in credit and capital markets has frozen, and the value of asset-backed securities collateral (including commercial mortgage-backed securities, or CMBS) is now set to decline.
  • “In light of these events, it is important for the Financial Accounting Standards Board (FASB) to take action to immediately suspend mark-to-market accounting. It is simply not possible to properly value assets in illiquid and non-functioning markets,” the letter states.
  • During the financial crisis of 2008-2009, the FASB voted on and approved new guidelines that  allowed for asset valuation to be based on a price that would be received in an orderly market rather than a forced liquidation.  The Roundtable letter encourages the FASB to take similar action now.
  • On April 1, The Roundtable wrote to the FASB and the Securities and Exchange Commission (SEC) urging the regulators to expand the suspension of  the new Current Expected Credit Losses (CECL) accounting standard during the current COVID-19 crisis beyond banks – to include all companies, including non-bank financial companies and insurance companies. (Roundtable CECL letter, April 1)
  • The CARES Act allows federally insured financial institutions to delay the implementation of the CECL standard.  Additionally, federal banking regulators recently issued an interim final rule allowing lenders to delay the estimated impact on regulatory capital. 
  • The new CECL standard changes the way banks calculate reserves on assets, requiring banks and nonbanking finance companies to estimate the expected loss over the life of a loan. For real estate, there is concern that this new standard will exacerbate the current liquidity crisis.
  • While CECL is expected to have the greatest impact on banks (which typically have extensive financial instrument portfolios), even non-banking entities are very likely to hold financial instruments within the scope of CECL.
  • U.S. commercial and multifamily real estate encompasses approximately $16 trillion in income-producing assets, supported by over $4 trillion in debt – mostly provided by commercial banks, life companies and commercial mortgage backed securities (CMBS).
  • Therefore, it is important to apply this CECL suspension to non-bank finance companies, including life companies who also play a significant role in providing essential liquidity to the commercial real estate industry. The Roundtable letter encourages the FASB to suspend application of the new CECL standard for all companies.  

The Roundtable’s Real Estate Capital and Credit Policy Advisory Committee (RECPAC) will continue to provide expertise and insight into policy steps that will help support the restoration of necessary market liquidity resulting from the COVID19 crisis. 

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Phase 4 Congressional Package May Provide Additional Direct Relief; Roundtable Urges New Pandemic Recovery Fund and Clarifications to Small Business Loan Issues

Posted on by Trey Jackson

 

House Speaker Nancy Pelosi (D-CA)

Leading policymakers floated ideas on a “Phase 4” coronavirus relief package this week immediately after the CARES Act (Phase 3) was signed into law last Friday.  (Roundtable Weekly, March 27)

  • House Speaker Nancy Pelosi (D-CA) adjusted her messaging from earlier in the week that another massive legislative package should include economic recovery projects such as infrastructure improvements.  Today, she emphasized Phase 4 should provide additional direct payments to individuals and expanded loans for businesses. (CNBC, April 3)
  • “I think right now we need a fourth bipartisan bill—and I think the bill could be very much like the bill we just passed. So I’d like to go right back and say ‘let’s look at that bill. Let’s update it for some other things that we need,’ and again put money in the pockets of the American people,” Pelosi told CNBC’s Squawk on the Street today.  She added, “While I’m very much in favor of doing what we need to do to meet the needs of clean water, more broadband and the rest of that,that may have to be for a bill beyond this.”
  • On March 31 a broad-based business coalition, including The Real Estate Roundtable, urged President Trump and congressional leaders to establish a COVID-19 Business and Employee Continuity and Recovery Fund.  (Coalition comment letter, March 31)
  • The proposed Recovery Fund would provide additional liquidity for impaired industries and businesses to avoid an unprecedented systemic, economic crisis.  The coalition states the establishment of the Fund is necessary to supplement lending expansion efforts included in the $2.2 trillion CARES Act.  (Roundtable Weekly, March 27)
  • The coalition letter states, “Without broad-based and expeditious federal action, long-term damage to the financial markets, rampant unemployment, and irreparable harm to communities are almost certain.”
  • Additionally, Roundtable President and CEO Jeffrey DeBoer yesterday wrote to Treasury Secretary Steve Mnuchin and Small Business Administration (SBA) Adminstrator Jovita Carranza urging the release of important clarifications to small business loan issues included in last week’s CARES Act.  (Payroll Protection Program letter, April 2)
  • The Payroll Protection Program (PPP) included in the CARES Act provides an additional $367 billion to SBA to assist small businesses and contains a number of provisions aimed at granting temporary regulatory relief.  (Top-line overview of the program and PPP Interim Final Rule)
  • The April 2 letter recommends 13 principles and clarifications to PPP based on questions from Roundtable members who are trying to determine whether their businesses are eligible under the new loan program.  The letter requests that Congress’s intent should be implemented by providing as much loan assistance as possible to as many small businesses as possible.
  • Late yesterday, Treasury issued an update to its PPP Borrower Application Form. (Treasury Dept Assistance for Small Businesses webpage and The Roundtable’s Coronavirus webpage resources.)
  • Today, the launch of the Payroll Protection Program was met with widespread reports about chaotic attempts to use the PPP portal – unprepared banks not accepting applications; confusion about the need to revise loan applications; and the SBA website  crashing from heavy demand.  (Politico, April 2 and Axios, April 3)
  • However, GlobeSt reported today that anecdotal examples show retail tenants are taking a positive stance in negotiations with landlords.   “Tenants and landlords are being proactive and cooperative with each other, although there have been exceptions with some tenants engaging in hardball with their landlords,” according to the April 3 article.

For the business community, a number of financial programs are available from the CARES ACT, depending on how many workers are employed by a given business concern. See Roundtable summaries of provisions that target:

As negotiations begin on a framework for a Phase 4 relief package between the House of Representatives and the Administration, the Senate is scheduled to return from recess on April 20.  The Roundtable will remain engaged at all levels and offer timely policy alerts as the coronavirus crisis continues to unravel.

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Roundtable Launches Covid-19 Call to Action, Intensifies Legislative and Regulatory Outreach; Debuts Video Blog on Pandemic Policy Efforts

Posted on by Trey Jackson

Jeff DeBoer Video Blog 1 x475 edit

The Real Estate Roundtable today debuted a Covid-19 Video Alert, detailing how the industry has switched into high gear, focused on legislative and regulatory policies aimed at repairing frozen liquidity conditions that threaten the entire American economic system.  (Watch Covid-19 Call To Action)

  • The Roundtable’s Chair, Debra Cafaro (Chairman of the Board and Chief Executive Officer of Ventas, Inc.) and President and CEO Jeffrey DeBoer present the organization’s wide-ranging, intensive efforts with policymakers and regulators in Washington, all aimed at stabilizing the far-reaching economic shockwave unleashed by the pandemic.
  • The Roundtable’s Board of Directors has quickly responded to the crisis by charting a policy advocacy course in Washington – matched by immediate action by Roundtable policy advocacy committees, which have recently analyzed and worked on multiple policy recommendations in the tax and capital & credit areas.
  • Today’s video blog features Cafaro and DeBoer launching the industry call to action.  DeBoer states, “It is the view of The Real Estate Roundtable that our industry, each one of us, must become much more active and aggressive in pointing out the dangers that lurk ahead. We must communicate the connectivity of our industry to jobs, pension and 401K returns, communities and more.”  He adds, “When economic hardships strike, our industry has historically worked tirelessly to help find a positive path forward. We must do that again.”
  • DeBoer explains how the nationwide cessation of income brought on by the outbreak, which now presents new, significant obstacles to economic recovery once the coronavirus is brought under control.
  • He also notes how the severe interruption of residential and commercial rental and mortgage payments – along with eviction moratoriums and a growing rent holiday advocacy movement – is contributing to dysfunction in the credit markets and freezing liquidity.  DeBoer explains how this market freeze will eventually disturb the expected income of millions of people living on pensions and other retirement funds.
  • “The financial system must facilitate positive action to allow issues to be worked out without penalty and without temporarily following strict enforcement guidelines that were written for normal times but that now threaten, in a pro-cyclical way, to make credit markets worse,” DeBoer states.
  • The vlog continues with reports from three Roundtable policy specialists on:

The Coronavirus Aid, Relief and Economic Security (CARES) Act expansion of the Small Business Loan Program, which attempted to begin today, and the urgent need to change and clarify its qualification rules;

Regulatory forbearance efforts and new credit facilities recently established by the Federal Reserve, including the Term Asset-Backed Securities Loan Facility (TALF);

Tax measures passed in the CARES Act, including a new a five-year carryback period and temporay repeal of the 80% limitation for net operating losses (NOLs) from 2018, 2019 and 2020.  Other tax priorities discussed included administrative relief for like-kind exchanges and a tax exemption for debt forgiveness.

Future video blog reports will feature Roundtable senior policy staff, Roundtable member guests and Members of Congress. We will continue to inform and engage policymakers and CRE stakeholders about how Washington is responding to the industry – and how The Roundtable and its  industry trade association partners plan to meet the challenge ahead, together. 

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