challenges facing commercial real estate: a five point plan to liquidity clifton e. (chip) rodgers,...

Challenges FacingCommercial Real Estate:

A Five Point Plan to Liquidity

Clifton E. (Chip) Rodgers, Jr.The Real Estate Roundtable

Washington, DCwww.rer.org

http://www.rer.org/

Washington Policymakers Face Significant Challenges

• Economy – Credit Crisis, Recession, Jobs, Budget

• Global Security – War on Terror –Afghanistan, Iraq, Iran– Rise of Asia – China, India

• Sustainability and the carbon footprint– Rational energy strategy

The Real Estate Roundtable

Political Climate Shifting?• POTUS – Approve 51.8; Disapprove 41.4 • Generic Congressional – D. 42; R. 38.7• Congress – Approve 26.8; Disapprove 64• Right Direction 39; Wrong Track 53.6• Rs ahead in NJ, VA, NH, AR, DE, PA, NY• Too soon to call

Source: Real Clear Politics - RCP Average 9/12 - 10/1



Roundtable AgendaYear of Living Dangerously

Critical Issues– Restoring Liquidity– Filling Equity Gap– FIRPTA, ECI– Carried Interest – Sustainability– Infrastructure – Card Check


The Credit Crisis: Staring into the Abyss

• Real estate faces most challenging credit market environment in decades

• Credit markets remain closed to commercial real estate creating systemic risks

• Lack of liquidity has paralyzed markets• Job losses hurting property fundamentals• Economic carnage continues

Credit Market Tsunami• $6.7 trillion U.S. property market faces

worst liquidity challenge since Great Depression

• Of $3.5 trillion in commercial real estate debt, average $400 billion loans mature annually

• Credit markets remain shut down• Strategies to stop the falling knife


Source: JPMorgan Asset Management

Commercial Real Estate Debt and EquityInvestment-grade, income-producing real estate

$6.7 trillion as of June 2008

Total Debt

$3.5 trillion

Total Equity

$3.2 trillion

Source: Federal Reserve Flow of Funds Accounts of the United States

Commercial Real Estate Debt Outstanding

By source of funds

■ Banks ■ Thrifts ■ Insurance ■ Government ■ CMBS

■ Other

$1.04 trillion$1.3 trillion

$3.5 trillion

1988-Q41998-Q4

2008-Q4

CMBS Banks

CMBS Issuance

58

49

74

52

93

169

206

230

0 066

78

0

40

80

120

160

200

240

1999 2002 2005

CM

BS I

ssuan

ces

Billions of dollars

1Q 2Q 3Q 4Q

2008Source: Commercial Mortgage Alert

Billions of dollars

Commercial Real Estate Debt MaturitiesIncluding secured and unsecured debt

Source: Goldman Sachs and REIT filingsThe Real Estate Roundtable

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

03 04 05 06 07 08 YTD 09

Billio

ns

Foreign Investment In US Real Estate

Source: Real Capital Analytics

130100

170

630

0

200

400

600

800

2008/2009 2010 2011 2012+

($ in billions)

Required Equity for Commercial Real Estate Debt Maturities

Cumul. $130 $230 $400 $1,030

Note: Assumes conservative valuation decline of 20%, original LTV of 70% and refinancing LTV of 60%. Required equity increases if value decline is

higher or LTV is lower.

Commercial Real Estate Markets• Limited transactions since Sept. 2008• Pricing down 40% +/- from peak • Most recent deals had assumable debt,

seller financing, or lender facilitating sale• Cap rates have increased 300 bp +/- while

rents have declined 15%+• Loans in special servicing are growing $2-

3 billion per month


Securitization Markets Essential

• Record $1.2 trillion of private RMBS were issued in 2005 and 2006

• CMBS peaked in 2007 at $237 billion• No private new RMBS or CMBS have

been created since early 2008• Critical to restore integrity of securitization

markets


Renewed Liquidity Essential


Central Banking Principles• Central banks calm market panics by

expanding liquidity – lend into the panic• Current Fed actions focused on credit

markets, outside banking system• Immense scale of credit markets – beyond

reach of current regulatory mechanisms• Reforms necessary


“We knew how much of banking depended upon make-believe or, stated more conservatively, the vital part that

public confidence had in assuring solvency.”

- Raymond Moley, a key presidential adviser to FDR

–Restore public confidence –Assuring solvency–Giant steps to address crisis


Fed Liquidity Programs1. Term Discount Window Program

2. Term Auction Facility

3. Primary Dealer Credit Facility

4. Transitional Credit Extensions

5. Reciprocal Currency Arrangements

6. Securities Lending

7. Term Securities Lending Facility

8. ABCP Money Market Fund Liquidity Facility

9. Commercial Paper Funding Facility

10.Money Market Investing Funding Facility

11. Term Asset-Backed Securities Loan Facility (TALF)


Treasury Initiatives• EESA authorized $700 billion for TARP

– $444 billion committed – $365 billion disbursed

• Capital Purchase Program (CPP) – $250 billion to banks – Repayment of over $70 billion

• Home Affordable Modification Program • Continued capital support to GSEs and MBS

purchases


Recent Accomplishments

• Extension of the TALF through June, 2010• Key provision of “ARRA” (HR 1) provides

important COD income relief until 2014 • New Treasury guidance allows servicers

to modify securitized loans “at any time” without triggering REMIC tax consequences – permits problems to be addressed before loans default


Term Asset Backed Securities Loan Facility

Potential Size of TALF

Asset SpecificHaircut

AAA-RatedABS /CMBS

$900 billion

Fundedby

Federal Reserve

$100 billion

Funded by

TARP

Funded byInvestor

Supports revival of credit markets

Collateralized lending to AAA investors - opportunity for levered funds

Catalyze new issuance of ABS, CMBS

Tighten spreadsRestore credit flows to key

sectors of the economy


TALF Aiding Markets• TALF “has shown early success in reducing risk

spreads and stimulating securitization activity”• Responsible for $124 billion of new ABS backed

by auto leases, credit cards and small-equipment loans

• $8 billion in Legacy CMBS• New Issue CMBS eligible for TALF – June • Legacy CMBS eligible for TALF – July• TALF extended through June 30, 2010


0

200

400

600

800

1000

1200

1400

1600

07/10/08 09/07/08 11/05/08 01/03/09 03/04/09 05/02/09 06/30/09

bps

10-Yr Super Duper CMBS

Super Duper CMBS Treasury Spread

TALF Announced12/01/08

TALF TermsAmended02/06/09

First TALFFunding

Announced03/03/09

Key TALF Issues• Low leverage does not fill liquidity gap• Warehousing credit still not available • TARP restrictions create investor concerns• Fed concerns about:

– Extracting liquidity at right time– Exposure to large single borrowers

• June 30, 2010 expiration• No new CMBS model has emerged


Good News

• REITs have raised $23.3bn equity YTD and $6.7bn unsecured debt

• Banks have raised over $100bn in capital• Since February enactment of Cancellation

of Indebtedness (COD) provision, over $1 tn in debt restructuring and deleveraging


Public-Private Investment Program (P-PIP)

• Public-Private Investment Funds (PPIFs)created with 1:1 equity from private investors + USG

• Combines private capital with USG capital• Potential USG leverage up to 6:1• Private partners retain asset management

control


PPIP – A Slow Start • Legacy Securities Program

– Five firms have raised $3.07bn – Matched by USG equity – $9.02bn of additional debt capital – Total $12.27bn of purchasing power

• Legacy Loans Program– $64.2m paid for 50% equity stake in LLC

comprised of portfolio of residential mortgage loans with $1.3bn in unpaid principal balance


Five Point Plan

1. Enhance and extend the Term Asset-Backed Securities Loan Facility (TALF) program for CMBS

2. Establish federally-sponsored credit facility for originating new loans: adapt P-PIP structure; guaranty program based on FDIC insurance model; covered bonds


Five Point Plan3. Encourage foreign investment in U.S. real

estate – revise Foreign Investment in Real Property Tax Act (FIRPTA) and ECI

4. Encourage banks and servicers to extend performing loans

5. Reject new anti-real estate investment taxes (e.g., capital gains, like kind exchanges and proposed tax hike on partnership “carried interest”)


Additional Measures Needed• Credit facility concepts

– GSE for commercial real estate – Adaptation of the LLP - PPIF “new” loans– FDIC-like securitization guarantee program– Financial institutions consortium– Covered bonds – Other ideas


The Greening of Real Estate

• U.S. income property today accounts for – 40% of energy consumption – 70% of electrical energy consumption– 30% GHG emissions (indirectly)

• EPA’s Energy Star Program has – Reduced CO2 emissions by equivalent of

taking 8-12 million cars off the road annually • LEED and energy-related tax incentives


Cap and Trade

• Incentivize “green” investments by – Property owners should own and trade CO2

reductions instead of allocating 100% carbon-trading energy efficiency benefit to utilities

– Energy end users –building owners – should participate in this emerging market

– Monetizing CO2 reductions created through energy efficiency investments by users of energy such as buildings


climate change bill

• Renewed debate expected next year; possible Senate action on stand-alone bill this year

• House passed bill in June; committee-passed bill in Senate

• Both include positive incentives for energy retrofits in existing buildings

• Also contain troublesome provisions that would, in effect, nationalize building-code process

• Continue working to further moderate the code-related language in the Senate version


Climate Change Legislation

“Livability Agenda”

• Significant upgrades of aging transportation infrastructure (e.g., roads, highways, bridges)

• Forward-thinking investments in renewable energy infrastructure, mass transit, and the creation of a “smart energy grid”

• Promoting “mixed use” real estate development, transit-oriented development and other key concepts in the “smart growth” toolbox

• Consistent with our sustainability agenda


Livability Agenda

Going Forward

• Develop governmental and private sector initiatives that will restore economic growth

• Policymakers must articulate clear strategies to address contraction of credit– Priority now to restore/maintain credit flows– Other new ideas necessary to fill equity gap– Comprehensive approach to restoring job growth,

economic expansion, real estate market demand

• Continue to pursue new ideas



www.rer.org

http://www.rer.org/

challenges facing commercial real estate: a five point plan to liquidity clifton e. (chip) rodgers,...

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