The problem that nobody is talking about, yet everyone continues keeping a close eye on, namely the trillions in commercial real estate under water, is quietly starting to reemerge. In the attached letter from the Commercial Real Estate lobby, it reminds politicians that the hundreds of billions in loans that mature in the next several years won't roll on their own, and we see the first inkling of the lobby asking congress for much more taxpayer aid, in this case in the form of Shelley Berkley's proposed legislation to "enable banks to convert troubled loans into performing assets through modest tax incentives to attract new equity capital to existing commercial real estate projects." The letter tacitly reminds that there are thousands of regional banks whose balance sheets are chock full with underwater commercial real estate (and for the direct impact of this simply observe the 100+ banks on the FDIC's 2010 failed bank list). So in case taxpayers are wondering where the next fiscal stimulus will end up going, wonder no more: "The new investments would be specifically used to pay down debt, resulting in lower loan-to-value ratios of existing loans as well as improved debt coverage ratios." As the CRE lobby concludes: "By giving lenders the ability to responsibly refinance debt and rebalance capital reserve levels, the CRE Act will provide the opportunity for additional lending capacity that will help stimulate lending to small businesses, job formation and economic growth in communities across the country." In other words, it is time for taxpayers to help purge banks of existing toxic debt, so that these same banks can resume lending like drunken sailors, in unviable commercial real estate projects just to guarantee that the next major market blow up also destroys the regional banking system, in addition to the TBTFs.
Full letter below:
Commercial Real Estate Industry Groups' Letter to Members of Congress on Community Recovery and Enhancement Act (H.R. 5943)
The undersigned commercial real estate industry associations strongly support the Community Recovery and Enhancement Act (CRE Act), important legislation introduced by Congresswoman Shelley Berkley to help incentivize equity investment in distressed commercial real estate assets and to address the pending crisis threatening community banks that currently hold significant real estate debt on their books.
According to the February 11, 2010 report by the Congressional Oversight Panel on the Troubled Asset Relief Program, small and mid-sized banks will bear the brunt of coming losses on commercial real estate loans. The report found that nearly 3,000 banks have concentrations in commercial real estate loans, including 2,115 banks with $100 million to $1 billion in total assets. Banks hold $1.5 trillion, or 45 percent, of the $3.4 trillion of commercial real estate debt in the U.S.
We believe that the CRE Act is a thoughtful and targeted solution to the current credit crisis in commercial real estate. This legislation will enable banks to convert troubled loans into performing assets through modest tax incentives to attract new equity capital to existing commercial real estate projects. The new investments would be specifically used to pay down debt, resulting in lower loan-to-value ratios of existing loans as well as improved debt coverage ratios. Importantly, the CRE Act relies upon market factors and economic incentives, rather than direct government involvement, to determine winners and losers.
Under this temporary tax incentive proposal, qualifying investments must be made before 2013 and only applies to assets purchased before 2009. At least 80 percent of the newly invested project capital must be used to reduce the outstanding balance of debt on the asset, with the balance going toward capital improvements, such as energy efficiency enhancements or leasehold improvements to attract new tenants. The new investment would qualify for a one-time 50% bonus depreciation and investors would be able to deduct any losses associated with the qualifying investment without regard to the passive loss limitations under Section 469 of the IRS Code.
We believe that this proposal has been carefully crafted and will help rebalance the debt vs. equity equation plaguing the commercial real estate and community banking industries. By giving lenders the ability to responsibly refinance debt and rebalance capital reserve levels, the CRE Act will provide the opportunity for additional lending capacity that will help stimulate lending to small businesses, job formation and economic growth in communities across the country.
International Council of Shopping Centers
National Multi Housing Council
National Apartment Association
National Association of Realtors®
Institute of Real Estate Management
Associated General Contractors
Society of Industrial and Office REALTORS®