House Republicans continued their divided struggle this week to identify a new Speaker after removing Kevin McCarthy (R-CA) last week. Meanwhile, Congress faces increasing pressure to pass foreign aid for Israel and Ukraine, followed by a spending bill to avoid a partial government shutdown on Nov. 17. When House GOP leadership is eventually elected, pending real estate-related tax proposals in the lower chamber may depend on whether policymakers are able and willing to expand the scope of negotiations over a bill to fund the government. (Roundtable Weekly, Oct. 5)
Speaker Search
The House has been unable to pass legislation without a Speaker since Oct. 5. Today, House Republicans nominated Rep. Jim Jordan (R-Ohio) for Speaker, although he will need to be elected with 217 votes from all Representatives, included the divided GOP caucus. (The Hill, Oct. 13)
Also today, four centrist Democrats offered to give Acting Speaker Patrick McHenry (R-NC) “temporary, expanded authorities” to bring urgent funding bills to the House floor for votes. The letter, led by Rep. Josh Gottheimer (D-N.J.), is an offer to Republicans who may also support empowering McHenry to act on spending bills. (Politico and Democrats’ letter to McHenry, Oct. 13)
The letter proposes authorities for the Speaker Pro Tempore to introduce legislation on the following:
Foreign aid emergency supplemental funding for Ukraine and Israel;
Extending current continuing resolution through January 11, 2024, to prevent a
looming government shutdown; and,
Committee and floor consideration of remaining FY24 appropriations bills.
CRE Issues
Recent media interviews featured Roundtable leadership discussing industry challenges that will also be addressed by RER members, lawmakers and regulators during The Roundtable Fall Meeting in Washington next week.
On Oct. 6, Roundtable Chair John Fish (Chairman & CEO, SUFFOLK) talked about developments in remote work, housing costs, interest rates, and construction supply on Bloomberg’sThe Tape podcast. (Scroll to 30:00 to begin Fish interview)
Roundtable Board Member Kathleen McCarthy (Blackstone Global Co-Head of Real Estate) appeared on CNBC’sHalftime Report 28 to discuss sector variation in commercial real estate, creating value in a dislocated environment, and more. “Different sectors are traveling at different speeds,” said McCarthy, who addressed activity in data centers, logistics, and student housing.
Roundtable President and CEO Jeffrey DeBoer discussed a range of policy issues facing the industry on Sept. 26 as part of a Marcus & Millichap webcast, “A Conversation with Lloyd Blankfein, Former Chairman and CEO of Goldman Sachs, on the Economy and Commercial Real Estate with Insights from Industry Leaders.” Marcus & Millichap President and CEO Hessam Nadji and former Chairman and CEO of Goldman Sachs Lloyd Blankfein led the webcast discussion on economic issues, including Federal Reserve policy impacting the commercial real estate market. CRE industry leaders Tom McGee, President and CEO of ICSC and Sharon Wilson Géno, President of NMHC also joined the conversation.
Recent CRE research shows an increasing number of colleges and universities are acquiring office buildings for adaptive reuse. Meanwhile, an overall surge in U.S. office-conversion projects scheduled for completion this year represents more than double the average annual pace. Federal, state and local conversion-incentive programs could play an important role going forward. (New York Times, Oct. 3 and CBRE, Rise in Office Conversions May Help to Reinvigorate Cities, Sept. 27)
Conversion Trends
Data from JLL cited in this week’s New York Times article shows dozens of U.S. institutions of higher education have bought office buildings since 2018—including 49 four-year private schools and 16 four-year public institutions—often for conversion to academic use.
Separately, CBRE research published Sept. 27 shows that a surge in office-conversion projects in major U.S. cities this year (nearly half of them in the multifamily sector) may help urban economies recover after the pandemic-induced shift to hybrid working. (Commercial Property Executive, Oct. 2 and GlobeSt, Sept. 29)
The CBRE report shows that 60 million square feet of office conversions are planned or in progress in 40 U.S. markets, which represents 1.4 percent of the nation’s office inventory. The report also notes that, despite a variety of government incentive programs, adaptive reuse is not a panacea for problems facing the U.S. office market, especially in a high interest rate environment.
Role of Policy
An Oct. 16 discussion during The Roundtable’s Fall Meeting in Washington, DC will address policy initiatives impacting building conversions, and other challenges facing CRE, during The Roundtable’s Fall Meeting in Washington, DC.
The Roundtable strongly supports policies that provide incentives for office-to-residential conversions. Last Dec, The Roundtable urged the Biden administration to support “legislation to facilitate the increased conversion of underutilized office and other commercial real estate to much-needed housing.” (RER letter to President Biden, Dec. 12, 2022 and Roundtable Weekly, Aug. 11, 2023)
This week, Roundtable Senior Vice President Chip Rodgers joined a group of business groups’ representatives to brief the staff of the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, and the Subcommittee on Capital Markets.
The Oct. 2 briefing emphasized the need for policymakers to address dislocations in the office market by 1) incentivizing the conversion of outmoded office properties to residential use to help meet the nation’s housing needs; and 2) requiring federal government workers return to their offices.
Federal government programs will incentivize local jurisdictions to pursue office-to-residential conversions, according to CBRE. Federal incentives also aim to encourage financing mechanisms to build and preserve more housing, while reducing land-use and zoning restrictions for affordable and zero-emissions housing. (CBRE, Sept. 27)
A Real Estate Roundtable property conversions working group has worked with lawmakers for several months on draft legislation to create a tax credit for converting older commercial buildings to housing.
The possibility of an end-of-year tax package faces an uncertain path and timeline as House GOP policymakers consider new leadership in the wake of this week’s historic vote to remove Kevin McCarthy (R-CA) as Speaker. Another layer of unpredictability is government funding, which is scheduled to expire Nov. 17 following last week’s passage of a continuing resolution to avert a partial government shutdown.
House Measures
In June, the House Ways and Means Committee approved a proposed tax legislative package along party lines that includes measures on business interest deductibility and bonus depreciation. The bill stalled due to differences in the GOP caucus over a boost in the $10,000 deduction cap on state and local taxes (SALT). (Roundtable Weekly, June 16)
Prospects for the Ways and Means tax package, other expired provisions such as the expanded child tax credit, and pending real estate-related tax proposals may depend on whether Congressional leaders are able and willing to expand the scope of negotiations over a bill to fund the government. (Roundtable Weekly, Sept. 29)
On Oct. 17, The Roundtable’s Fall Roundtable Meeting will feature a discussion on Inflation Reduction Act (IRA) incentives impacting CRE. (See Roundtable Clean Energy Tax Incentives Fact Sheet, July 31)
Last week, Treasury issued new guidance that provides clarity for single and multifamily home builders seeking to qualify for the expanded energy efficient home credit (45L). (Treasury news release, Sept. 27 and Tax Notes, Sept. 28)
Also last week, Treasury provided new information on the process for taxpayers to apply for bonus tax credits for solar and other renewable investments made in low-income communities or in low-income housing developments. (See The Roundtable’s chart, “Base” and “Bonus Rate” Amounts Relevant to Commercial and Multifamily Buildings, May 25).
For more information on energy tax incentives available to real estate under the Inflation Reduction Act, see The Roundtable’s Clean Energy Tax Incentives Fact Sheet, July 31)
This week, the White House’s climate policy chief announced the imminent release of voluntary, uniform federal-level criteria for “Zero Emissions Buildings.” The “ZEB” definition could bring much-needed consistency to help CRE owners and investors establish long-term goals for buildings that align with varying climate programs adopted across numerous jurisdictions and international frameworks. (Washington Post, Sept. 28)
A CRE coalition of real estate organizations including The Roundtable sent a Sept. 14 letter to US-EPA supporting development of standard methods and metrics for buildings and tenants to quantify their emissions.
Federal standards, definitions, and tools “are the North Star though which local governments can inform their law-making, and this helps bring some sense and order to the otherwise conflicting patchwork of climate laws and frameworks developed by states, cities, and NGOs,” said Roundtable Sustainability Policy Advisory Committee (SPAC) Chair Tony Malkin (Chairman, President, and CEO, Empire State Realty Trust). (Roundtable Weekly, Sept. 15)
A Climate Priority for CRE
Roundtable Senior VP and Counsel Duane Desiderio was quoted yesterday in the Washington Post and Popular Science about how CRE executives welcome the idea of a single federal standard. “A workable, usable federal definition of zero-emission buildings can bring some desperately needed uniformity and consistency to a chaotic regulatory landscape,” Desiderio said. (Roundtable Weekly, Sept. 15)
Yesterday, The White House also released a National Climate Resilience Framework in anticipation of an eventual White House Climate Resilience Summit. The Framework identifies climate resilience principles and specific actions to expand and accelerate progress towards six objectives that includes, “Expand adoption of the latest consensus-based building and energy codes and high-performance standards.” (White House Fact Sheet, Sept. 28)
The Roundtable will continue to work with our partner organizations and develop comments on the ZEB definition upon its anticipated release next month.
# # #
Not all real estate assets will be able to reach a level of “zero emissions.” But an overarching and workable term—developed with feedback from industry and other stakeholders—can bring greater uniformity and consistency to:
Related federal programs like EPA’s anticipated “NextGen” building label – to serve as a transition point toward ultimate zero emissions (Roundtable Weekly, March 3);
A CRE coalition of real estate organizations including The Roundtable sent a Sept. 14 letter to US-EPA supporting development of standard methods and metrics for buildings and tenants to quantify their emissions.
Federal standards, definitions, and tools “are the North Star though which local governments can inform their law-making, and this helps bring some sense and order to the otherwise conflicting patchwork of climate laws and frameworks developed by states, cities, and NGOs,” said Roundtable Sustainability Policy Advisory Committee (SPAC) Chair Tony Malkin (Chairman, President, and CEO, Empire State Realty Trust). (Roundtable Weekly, Sept. 15)
A Climate Priority for CRE
Roundtable Senior VP and Counsel Duane Desiderio was quoted yesterday in the Washington Post and Popular Science about how CRE executives welcome the idea of a single federal standard. “A workable, usable federal definition of zero-emission buildings can bring some desperately needed uniformity and consistency to a chaotic regulatory landscape,” Desiderio said. (Roundtable Weekly, Sept. 15)
Yesterday, The White House also released a National Climate Resilience Framework in anticipation of an eventual White House Climate Resilience Summit. The Framework identifies climate resilience principles and specific actions to expand and accelerate progress towards six objectives that includes, “Expand adoption of the latest consensus-based building and energy codes and high-performance standards.” (White House Fact Sheet, Sept. 28)
The Roundtable will continue to work with our partner organizations and develop comments on the ZEB definition upon its anticipated release next month.
# # #
Not all real estate assets will be able to reach a level of “zero emissions.” But an overarching and workable term—developed with feedback from industry and other stakeholders—can bring greater uniformity and consistency to:
Related federal programs like EPA’s anticipated “NextGen” building label – to serve as a transition point toward ultimate zero emissions (Roundtable Weekly, March 3);
A CRE coalition of real estate organizations including The Roundtable sent a Sept. 14 letter to US-EPA supporting development of standard methods and metrics for buildings and tenants to quantify their emissions.
Federal standards, definitions, and tools “are the North Star though which local governments can inform their law-making, and this helps bring some sense and order to the otherwise conflicting patchwork of climate laws and frameworks developed by states, cities, and NGOs,” said Roundtable Sustainability Policy Advisory Committee (SPAC) Chair Tony Malkin (Chairman, President, and CEO, Empire State Realty Trust). (Roundtable Weekly, Sept. 15)
A Climate Priority for CRE
Roundtable Senior VP and Counsel Duane Desiderio was quoted yesterday in the Washington Post and Popular Science about how CRE executives welcome the idea of a single federal standard. “A workable, usable federal definition of zero-emission buildings can bring some desperately needed uniformity and consistency to a chaotic regulatory landscape,” Desiderio said. (Roundtable Weekly, Sept. 15)
Yesterday, The White House also released a National Climate Resilience Framework in anticipation of an eventual White House Climate Resilience Summit. The Framework identifies climate resilience principles and specific actions to expand and accelerate progress towards six objectives that includes, “Expand adoption of the latest consensus-based building and energy codes and high-performance standards.” (White House Fact Sheet, Sept. 28)
The Roundtable will continue to work with our partner organizations and develop comments on the ZEB definition upon its anticipated release next month.
# # #
National Climate Advisor, Ali Zaidi, stated in yesterday’s keynote address at the Greenbuild 2023 conference in Washington, D.C. that the proposed federal ZEB definition will be released next month.
Zaidi noted The Real Estate Roundtable in his comments as an important group for addressing the need to transform buildings at scale.
When the U.S. Department of Energy (DOE) announces the proposed ZEB definition it will kick-off an anticipated 30-day public comment period. The Environmental Protection Agency (EPA) ENERGY STAR program is coordinating closely with DOE. A final ZEB definition could be published by the end of this year.
Federal Consistency is Essential
DOE’s ZEB definition would not be mandatory on the private sector. It will be a voluntary, aspirational guideline at the federal level.
However, a definition from the U.S. government can finally build a uniform understanding of what it takes for a building to achieve “zero emissions” over time, along a realistic and achievable pathway.
Not all real estate assets will be able to reach a level of “zero emissions.” But an overarching and workable term—developed with feedback from industry and other stakeholders—can bring greater uniformity and consistency to:
Related federal programs like EPA’s anticipated “NextGen” building label – to serve as a transition point toward ultimate zero emissions (Roundtable Weekly, March 3);
A CRE coalition of real estate organizations including The Roundtable sent a Sept. 14 letter to US-EPA supporting development of standard methods and metrics for buildings and tenants to quantify their emissions.
Federal standards, definitions, and tools “are the North Star though which local governments can inform their law-making, and this helps bring some sense and order to the otherwise conflicting patchwork of climate laws and frameworks developed by states, cities, and NGOs,” said Roundtable Sustainability Policy Advisory Committee (SPAC) Chair Tony Malkin (Chairman, President, and CEO, Empire State Realty Trust). (Roundtable Weekly, Sept. 15)
A Climate Priority for CRE
Roundtable Senior VP and Counsel Duane Desiderio was quoted yesterday in the Washington Post and Popular Science about how CRE executives welcome the idea of a single federal standard. “A workable, usable federal definition of zero-emission buildings can bring some desperately needed uniformity and consistency to a chaotic regulatory landscape,” Desiderio said. (Roundtable Weekly, Sept. 15)
Yesterday, The White House also released a National Climate Resilience Framework in anticipation of an eventual White House Climate Resilience Summit. The Framework identifies climate resilience principles and specific actions to expand and accelerate progress towards six objectives that includes, “Expand adoption of the latest consensus-based building and energy codes and high-performance standards.” (White House Fact Sheet, Sept. 28)
The Roundtable will continue to work with our partner organizations and develop comments on the ZEB definition upon its anticipated release next month.
A partial government shutdown looks likely to begin after midnight on Sept. 30 as House and Senate policymakers pursue different short-term funding bills amid hardened resistance from conservative Representatives to pass any continuing resolution (CR) without certain concessions. (The Hill’s live updates and ABC News Sept. 29)
Lapse in Program Funding
A lapse in funding could impact the industry by suspending the National Flood Insurance Program (NFIP), the Securities and Exchange Commission’s (SEC) rulemaking on climate disclosure, and the Treasury Department’s expected guidance on the energy efficient commercial buildings deduction under section 179D. (New York Times, Sept. 28 – “Government Shutdown May Hurt Home Sales in Flood-Prone Areas”)
Additionally, Senior White House Adviser John Podesta on Sept. 26 said a shutdown would delay billions to implement the Inflation Reduction Act, including Treasury guidance on how to distribute the measure’s tax credits. (Bloomberg, Sept. 26 | Roundtable Clean Energy Tax Incentives Fact Sheet, July 31 | Roundtable Weekly, July 28)
Shutdown Uncertainty
Government agencies are preparing to furlough employees for an uncertain amount of time. The most recent shutdown lasted 34 days from December 2018 to January 2019, and cost the economy approximately $3 billion (equal to 0.02% of GDP) according to the Congressional Budget Office. (Government Executive, Sept. 29 and Reuters, Sept. 25)
The shutdown would also come amidst a flurry of regulatory rulemakings impacting commercial real estate capital markets. During a House Financial Services Committee hearing on Sept. 27, Rep. Andy Barr (R-KT) questioned SEC Chairman Gary Gensler (above) on the “perfect storm of regulations” that could further impair liquidity for commercial real estate capital markets. (Watch 1:27 video clip of the exchange | Committee Hearing Memorandum, Sept. 22)
The Roundtable’s Fall Meeting on Oct. 16-17 (Roundtable-level members only) will address numerous regulatory proposals impacting CRE, and assess the state of the economy and capital markets in the wake of a potential shutdown.
Approximately $5.65 billion in commercial real estate loans have been modified with extensions in 2023, with nearly 73% of the total from the office sector, according to a recent Trepp report. The rise in loan extensions—sparked by higher interest rates, lower valuations, and remote work—also come at a time when commercial mortgage-backed securities (CMBS) have been subdued. (Trepp CRE Research Report)
Modification Trend
Trepp reported that term increases of 1-12 months comprised the largest share (37%) of extensions. The largest quarter upon maturity came in Q2 2023, when $957 million in loans were extended.
Office properties comprised 72.9% of the total $3.2 billion in loan extensions, or roughly $2.4 billion. Trepp stated, “Of all property types, the office sector faces the steepest refinancing challenges as office properties are struggling with occupancy and financial performance in the post-pandemic era.” (Trepp CRE Research Report)
The increase in modifications follows a joint policy statement from federal regulators in June that encouraged financial institutions to work with borrowers on pending loan maturities. (Agencies’ joint statement, June 29 and National Law Review, July 9)
Roundtable Advocacy
In March, The Roundtable had originally requested that federal regulators accommodate commercial real estate borrowers and lenders as the industry continued to endure a difficult time of historic, post-pandemic transition—and enthusiastically welcomed the Agencies’ subsequent, joint action. (Roundtable Weekly, June 30 and Roundtable letter to regulators, March 17)
During a Sept. 26 Marcus & Millichap webcast, Roundtable President and CEO Jeffrey (above) said, “We’re seeing some impact. Trepp put out a report about loan modifications and extensions. Time is the most important aspect for the most challenged part of our industry, office. We have to let time settle in and let businesses and employers determine how they want to use office space going forward.”
Additionally, bipartisan legislation (H.R. 5580) introduced in the House last week would reduce the tax burden on a borrower that can arise when a troubled commercial real estate loan is modified as part of a debt workout. The Tenney-Higgins bill would build on existing tax provisions by effectively deferring cancellation of debt (COD) income. (Roundtable Weekly, Sept. 22)
The legislation, introduced by Reps Claudia Tenney (R-NY) and Brian Higgins (D-NY), could help smooth the transition to a healthy and stable post-pandemic real estate market. The Roundtable’s DeBoer was quoted in support of the House legislation by GlobeSt,Connect CRE, and Commercial Observer.
Capital and credit policy issues facing CRE, especially office assets, will be among the topics discussed during The Roundtable’s Oct. 16-17 Fall Meeting (Roundtable-levelmembers only) in Washington.
Bipartisan legislation introduced this week by a group of House policymakers would update and amend the Opportunity Zones (OZs) program. The Roundtable-supported bill (H.R. 5761), if enacted, would extend the tax deferral date for OZ investments from the end of 2026 to the end of 2028, expand transparency and reporting requirements, and authorize investment structures that permit an Opportunity Fund to own and operate multiple real estate assets. (House OZ bill text)
Roundtable Support
Reps. Mike Kelly (R-PA), above, —chairman of the Ways and Means Subcommittee on Tax—along with Dan Kildee (D-MI), Carol Miller (R-WV), and Terri Sewell (D-AL) introduced the bill on Sept. 27. The bill is similar to legislation (H.R. 7467 and S. 4065) introduced in the last Congress. (Rep. Kelly news release, Sept. 29)
Roundtable President and CEO Jeffrey DeBoer welcomed the Opportunity Zones Improvement, Transparency, and Extension Act. “Opportunity Zones have delivered on their promise to create new economic opportunities in low-income communities. Real estate developments spurred by the Opportunity Zone tax incentives are expanding the supply of affordable housing and creating vibrant commercial centers where small businesses can reside, jobs can grow, and the local tax base can expand.”
“Unfortunately, certain OZ incentives have already expired. The new legislation would strengthen the program’s integrity and ensure Opportunity Zone investment continues into the future. Congress should act quickly to enact these measures,” said DeBoer.
2023 OZ Reforms
The OZ program, created in the Tax Cuts and Jobs Act of 2017, designated low-income census tracts where qualifying investments are eligible for reduced capital gains taxes, channeling investment into areas prioritized by states and local communities.
This week’s legislation includes a 2-year extension of the initial capital gains deferral period for prior gain that is rolled into an opportunity fund by an investor. (Legislative text for H.R. 5761 | Roundtable comment letters: Dec. 21, 2021 and May 14, 2020)
The 2-year extension from the end of 2026 until the end of 2028 will allow OZ investors to benefit from a partial step-up in basis that reduces their tax liability on their prior gain if their opportunity fund investment is maintained for at least five years.
Additionally, the bill would facilitate fund-of-fund investment structures that allow opportunity funds to own and operate efficiently more than one asset. Similar to traditional real estate funds, the structure would allow an opportunity fund to sell a property and reinvest the proceeds in another qualifying Opportunity Zone investment without triggering a taxable event for the fund’s underlying investors, provided the investors themselves have not disposed of their interest.
Other provisions would establish robust OZ reporting requirements, mandate Treasury to produce certain studies and reports on the OZ program, sunset high-income OZs, and create a new $1 billion fund for states to support business activities in OZs
Prospects for the 2023 bill are uncertain, but the legislation is a likely candidate for consideration if, and when, House and Senate Leaders sit down to negotiate an end-of-year tax package that focuses on expired provisions—such as the expanded child tax credit, the expensing of R&D costs, and bonus depreciation.
Bipartisan legislation (H.R. 5580) introduced in the House this week would reduce the tax burden on a borrower that can arise when a troubled commercial real estate loan is modified as part of a debt workout. The legislation, introduced by Reps Claudia Tenney (R-NY) and Brian Higgins (D-NY), could help smooth the transition to a healthy and stable post-pandemic real estate market.
Restructuring CRE Loans
“From the tax law to banking regulation, housing policy, and other areas, public policy has always encouraged the restructuring of unsustainable loans to help businesses turnaround and help taxpayers get back on their feet,” said Real Estate Roundtable President and CEO Jeffrey DeBoer.
During the height of the pandemic, the federal government extended lifelines to businesses (PPP loans), suspended the repayment of federal debts, and imposed foreclosure moratoria on federally backed loans. Emergency legislation expressly excluded the forgiveness of federal loans from cancellation of debt (COD) income.
“In the case of commercial real estate, the full economic consequences of the pandemic are still unfolding. Remote work and other challenges facing cities have put stress on certain real estate assets, such as office buildings. Debt workouts between lenders and borrowers are a critical part of the solution. Workouts can ensure that these properties continue supporting jobs and economic activity,” said DeBoer.
“Congress, COVID, and COD” addressed the discharge of indebtedness issue in Tax Notes on July 27, 2020. The article was written by Roundtable Tax Policy Advisory Committee (TPAC) member Donald Susswein (Principal, RSM US LLP) and Roundtable Senior Vice President & Counsel Ryan McCormick.
Cancellation of Debt (COD) Income
The Tenney-Higgins bill would build on existing tax provisions by effectively deferring COD income. For over 30 years, a provision of the law (section 108(c)) has allowed noncorporate taxpayers to defer tax when a loan used to buy, construct, or improve real estate used in a trade or business is modified. To qualify for the provision, the taxpayer must have depreciable basis in the property. The taxpayer’s basis is reduced by the amount of COD income, resulting in smaller depreciation deduction and larger capital gain when the property is eventually sold.
The Tenney-Higgins bill would expand on the current law COD income rules in the case of loans secured by nonresidential real property that were incurred before March 1, 2022 and are discharged in 2023-2026.
The Roundtable commends the leadership of Reps. Tenney and Higgins, both members of the tax-writing House Ways and Means Committee, above. The bipartisan bill was cosponsored by Reps. Mike Lawler (R-NY) and Pat Ryan (D-NY).
The Roundtable and its industry partners will continue working with House and Senate tax-writing committees to address gaps in the COD income rules and encourage loan restructurings that revitalize properties, save jobs and local tax bases, and strengthen the health and vitality of surrounding communities.
Roundtable President and CEO Jeffrey DeBoer will discuss a range of policy issues facing the industry on Sept. 26 as part of a Marcus & Millichap webcast, “A Conversation with Lloyd Blankfein, Former Chairman and CEO of Goldman Sachs, on the Economy and Commercial Real Estate with Insights from Industry Leaders.” Marcus & Millichap President and CEO Hessam Nadji and former Chairman and CEO of Goldman Sachs Lloyd Blankfein will lead the live webcast discussion on economic factors, including Federal Reserve policy, impacting the commercial real estate market. DeBoer, Tom McGee, President and CEO of ICSC and Sharon Wilson Géno, President of NMHC will join the conversation as CRE industry leaders. (Register here) # # #
More than two dozen Republicans on the House Financial Services Committee, led by Chairman Patrick McHenry (NC), recently urged banking regulators to withdraw a sweeping set of proposed changes that would significantly increase capital requirements for large banks. The federal Agencies’ proposal—known as the “Basel III Endgame”—represents the final stages of the global regulatory response to the 2008-09 financial crisis. (Bloomberg Government, Sept. 14)
Proposed Agencies’ Rulemaking
In July, the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly approved the 1,100-page proposed rulemaking, which would substantially revise the regulatory capital framework for banking organizations with total assets of $100 billion or more.
The Agencies’ proposal would have a long phase-in period and have not impact community banks. (CNBC, Fed news release, and Interagency Overview of the Notice of Proposed Rulemaking for Amendments to the Regulatory Capital Rule, July 27)
Fed Chairman Jerome Powell voted for the proposal, but noted a significant tone of caution. Powell stated, “Raising capital requirements also increases the cost of, and reduces access to, credit … threatening a decline in liquidity in critical markets and a movement of some of these activities into the shadow banking sector. I look forward to hearing from all stakeholders on how best to strike that balance,” (Federal Reserve Board Chair Powell statement, July 27)
The House Committee Republicans’ letter claims the scope and process of the banking regulators’ plan is flawed, while noting how the proposal was opposed by some members on the Federal Reserve and FDIC Boards. The letter concludes, “Given those fatal problems with your Basel III Endgame proposal, we urge that it be withdrawn. The proposal should be replaced with one based on sound, objective analysis supported by data.”
A subsequent hearing on Sept. 19 held by the House Financial Services Subcommittee on Financial Institutions and Monetary Policy—“A Holistic Review of Regulators: Regulatory Overreach and Economic Consequences”—explored the interaction and economic impact of recent federal regulatory proposals, including the Basel III Endgame, new and expanded long-term debt requirements, and changes to resolution plans.
Subcommittee Member William Timmons (R-SC), expressed concern during the hearing about how the Basel III capital requirements may exacerbate the strain on bank capital availability. He emphasized “… the fact that billions of dollars of commercial real estate projects must be refinanced the next 36 months, and not all those projects will be profitable when their mortgage payments more than double and banks are prevented from extending additional credit due to increases in capital requirements and an unfavorable interest rate environment.” Rep. Timmons added, “That is the looming crisis that we need to be preparing for, not further restricting capital availability.” (CQ, hearing transcript)
Impact on CRE
The proposed changes would increase capital requirements for the nation’s largest banks by as much as 20%, with far broader indirect impacts on bank counterparties and customers and the broader financial markets. The Agencies’ rulemaking could significantly affect available liquidity for commercial real estate transactions, impact asset values, and hinder economic growth. (Roundtable Weekly, July 28)
Mortgage Bankers Association (MBA) President and CEO Robert Broeksmit testified during the Sept. 14 House Financial Services Committee hearing. “MBA strongly opposes certain provisions of the proposal that undermine the mortgage market and takes exception to the extremely scant economic analysis regarding how the changes will affect the economy, single-family housing market, and commercial real estate finance markets,” Broeksmit testified. (MBA Newslink, Sept. 19)
Real Estate Roundtable President and CEO Jeffrey DeBoer stated in a March 2023 comment letter to Fed Vice Chair Michael Barr and other key regulators, “At this critical time, it is important that the Agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values. A deflationary spiral must be avoided at all costs. As recent events are only amplifying the contraction of credit, it is important for the Agencies to take measures to maintain sufficient liquidity levels and support positive economic activity.”
The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) has established a working group on Basel III that is developing comments, due by Nov. 30, on the Basel III Endgame proposal.
Yesterday, the Florida Department of Commerce proposed a positive clarification to a recently enacted law impacting foreign real estate investment, with implications for similar laws in several other states. The clarification responds to a Roundtable request on Sept. 5 urging the Florida Real Estate Commission to consider specific concerns before implementing the new state law, which could impair capital formation and hinder the important role that legitimate foreign investment plays in U.S. real estate, the broader economy and job growth. (Roundtable letter, Sept. 5 and Roundtable Weekly, Sept. 8)
Section 203
The proposed rule published on Sept. 21 addresses the implementation of Florida Senate Bill 264 (SB 264), Section 203, signed into law on May 8. The new law aims to limit and regulate the sale and purchase of certain Florida real property by “foreign principals” from “foreign countries of concern.” The Florida Real Estate Commission will implement the new law. (SB 264 text).
Section 203 of the bill prohibits investment in real property near military installations and critical infrastructure. Importantly, the de minimis exemption has been re-drafted, which (1) fixes earlier drafting errors to the Registered Investment Advisor exemption, and (2) introduces a new category of de minimis interests that categorically exempts passive indirect investment. (See highlighted areas in the Notice of Proposed Rule)
The proposed rule clarification remains subject to change during a 21-day public comment period and may include a formal hearing.
Section 204
Broader prohibitions in another area of SB 264—Section 204—generally preclude Chinese investors from acquiring “any interest” in any Florida real property anywhere in the state. Since the de minimis language and relevant statutory text are almost identical across Sections 203 and 204, The Roundtable is hopeful that similar language will be adopted during the rulemaking process for Section 204.
The Sept. 5 letter from Roundtable President and CEO Jeffrey DeBoer notes that approximately $1.5 trillion of U.S. commercial real estate debt will come due in the next three years. Foreign equity investments in U.S. assets are often an important source of capital as commercial real estate owners seek to restructure, refinance or sell their properties.
DeBoer urged the Commission to “carefully consider the impact of your agency’s interpretation and implementation efforts of this new law so that it does not prohibit major investments in the state, which are safe from control by foreign countries of concern and promote growth without sacrificing the security or economic interests of Florida.” (Roundtable letter, Sept. 5)
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