WASHINGTON, DC - A report by the congressional panel charged with overseeing the Troubled Asset Relief Program (TARP) underscores the need for additional federal policy action to support economic recovery and stabilize commercial real estate markets — with the top priorities being job creation, tax policies to encourage equity investment in commercial real estate, and steps to restart secondary credit markets, so that banks can begin clearing their balance sheets of toxic assets and lend to credit worthy borrowers large and small, The Real Estate Roundtable stated today.
"This report should be a must read for any policymaker looking to understand the scope of the problem and explore potential solutions," said Roundtable President and CEO Jeffrey DeBoer, who testified before Congress last summer on the $1 trillion refinancing crisis in commercial real estate. As he explained, the crisis is being exacerbated by falling net operating income (NOI) [a result of business downsizing and high unemployment], significant property devaluation, and a growing shortage of equity capital.
"No single factor is as important to the state of the commercial real estate markets as a steady, and indeed, swift, economic recovery," the Congressional Oversight Panel (COP) asserted in its report, Commercial Real Estate Losses and the Risk to Financial Stability. "Without more people in stores, more people at hotels, more people able to afford new or larger apartments, and more businesses seeking new or larger office space and other commercial property, the markets cannot recover and the credit and term risk created by commercial real estate loans cannot abate without the potential imposition of substantial costs on lenders."
As the U.S. Senate considers jobs legislation, The Roundtable urges enactment of a fast-acting "green building" rebate proposal — "Building STAR" — to encourage energy retrofits, reduce greenhouse gases, and spur hiring in manufacturing, sales, retail and installation/construction. Another priority is extending 15-year leasehold improvement depreciation. With cash-strapped building owners being pressed to make significant lease concessions (including more capital for tenant space build-outs), they should be allowed to recover these costs over a period closely matched to the typical 7-10-year lease term.
The COP report also identifies tax issues that "complicate [loan] workouts and new investment in commercial real estate," including a 1980 law that discourages foreign equity investment in U.S. commercial property (the Foreign Investment in Real Property Tax Act). "Although many believe that billions of dollars in non-U.S. equity are waiting to be invested in U.S. commercial real estate... non-U.S. investors can be hit with double or even triple taxation on their investments in U.S. real estate," the report stated. The Roundtable views FIRPTA reform as critical to addressing the $1 trillion-plus equity gap in commercial real estate.
DeBoer said the panel's findings are consistent with The Roundtable's message of many months — that "without action, the impact of billions of dollars of maturing commercial real estate loans could undermine the economic recovery and extend an already painful recession." The findings also are consistent with The Roundtable's Q1 2010 "Sentiment Survey" of senior commercial real estate executives, who cited declining fundamentals, high unemployment, and deteriorating NOI as formidable challenges facing the sector.
The COP report correctly acknowledges that the problems facing commercial real estate have no single cause, and that there is also no single policy solution — no "silver bullet."
"We look forward to continuing to work with the panel and policymakers in Washington toward the implementation of additional public policy strategies for addressing this mounting problem," DeBoer concluded.
Source: Real Estate Roundtable