BOMA Responds to Capital Credit Crisis

March 5, 2009
When will the industry hit bottom, and how low will the market go?

By late 2008, it was apparent that the commercial real estate industry wasn’t going to emerge from the recession or the capital credit crisis unscathed, and that, not only would new development and acquisitions be abruptly halted due to lack of capital, but the existing buildings with maturing debt would also be deeply impacted. The only things left to question: When would the industry hit bottom, and how low would the market go? Though these questions haven’t been definitively answered, there are numerous responses aimed at accelerating recovery and mitigating the impact for the commercial real estate industry, and Washington, D.C.-based BOMA Intl. is actively engaged in working toward a solution.

The commercial real estate industry is threatened by a lack of credit capacity from virtually any lending source. There is simply not enough capacity in the current credit environment to refinance the massive amount of commercial real estate debt maturing in 2009 and subsequent years. On Nov. 26, 2008, 12 national real estate associations, including BOMA Intl., joined together to send a letter to Treasury Secretary Henry Paulson and other key leaders detailing the urgency of the crisis in credit and confidence in our financial markets. In addition to highlighting the existing problems and anticipated exacerbation of the problem as more than $400 billion of secured and unsecured debt matures before the end of 2009, the letter also recommends some actions that the Department of The Treasury and Federal Reserve should take to stem the crisis.

"We know and understand the commercial real estate market best and, therefore, we can shed some light on the extent of the problem in our sector," the letter states. "In the midst of historically moderate vacancy rates, low loan delinquency rates, and an abundance of well-performing, cash-flowing properties, credit available to commercial real estate is now in exceedingly short supply. For many borrowers, it simply is not available. This is a problem that potentially will affect $6 trillion of commercial real estate, which is financed in part through over $3 trillion of debt. Jobs, small businesses, retirement savings, and local government tax revenues are all at stake." The real estate groups recommend an extension of the Term Asset-Backed Securities Loan Facility to guarantee, finance, or purchase highly rated, asset-backed securities collateralized by newly or recently originated commercial real estate mortgages.

One of the first priorities of the 111th Congress is to enact policy to restore balance and confidence in our economy. So that BOMA Intl. may actively advocate for policies to ease the capital credit crisis and respond nimbly to proposals as they arise, the association’s Government Affairs Committee approved a new policy position, which the Board of Governors also unanimously approved at BOMA’s Winter Business Meeting and Leadership Conference in January.

In addition, the Washington, D.C.-based Real Estate Roundtable (RER), one of BOMA’s partners on financial issues, has drafted a five-point plan to restore credit capacity for Congress:

  1. Create a new credit facility for commercial real estate debt to help address the enormous credit shortfall facing the industry.
  2. Encourage foreign capital investment in U.S. real estate.
  3. Modify accounting rules – particularly "mark-to-market" and "consolidation" rules – that are artificially devaluing CMBS assets, hurting financial institutions and exacerbating the credit crisis.
  4. Encourage banks to extend performing loans held by creditworthy borrowers that are maturing.
  5. Reject new anti-real-estate-investment taxes, such as capital gains and the proposed tax hike on carried interest.

BOMA and its National Real Estate Organizations partners will continue to communicate with Congress and President Obama’s team on the state of the industry. One approach to reconnecting commercial real estate credit markets, as outlined in the RER’s five-point plan, could involve the creation of a new loan facility similar to the Term Asset-Backed Securities Loan Facility (TALF) that would include as eligible collateral newly originated secured and unsecured loans on commercial real estate properties that have a long-term credit rating in the highest investment-grade rating category. Such a credit facility would help restore capacity and address the enormous credit shortfall facing commercial real estate. It would prevent an otherwise healthy business sector from falling victim to the credit crisis.

Such an approach is fundamentally different from the so-called bailouts of the financial and automotive industries; it’s not a direct loan or a capital investment. The credit facility structure focuses on renewing the necessary capacity in credit markets. Creating a credit facility for commercial real estate similar to what has been established for consumer, auto, and small business loans would provide credit markets with the economic confidence to reconnect in the wake of a broad dislocation and help restart the stalled economy.

For more information on this and other topics, call BOMA Intl. at (202) 408-2662 or visit www.boma.org.

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