WASHINGTON, DC-Real Estate Roundtable CEO Jeff DeBoer testifiedin front of the Senate Small Business & EntrepreneurshipCommittee last week on the seemingly perennial challenges facingsmall- and medium-sized businesses as they seek to access capitalfor real estate investment. The problems are well known--certainlythe Roundtable has highlighted them before intheir lobbying and educational initiatives.

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Briefly, DeBoer recapped, aside from the money center banks, thebanking system remains frozen for small business lending becausemost small banks do not have significant excess liquidity to makenew loans and are in the process of deleveraging. Also, qualityloan demand is considered weak as small businesses are not, for themost part, seeking growth capital because the economy isuncertain.

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Perhaps most significant of all, Deboer said, many small banksare already heavily exposed to commercial real estate--with theattendant issue that many of these loans are coming due under wateror at high risk for default given the economy.

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DeBoer offered Congress a few paths out of this mess. First,allow banks to amortize losses attributable to commercial realestate lending over a seven- to 10-year period. “This would allowthe banks to use earnings over time to restore their capital base,while selling assets to create the liquidity necessary to resumelending,” he said.

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Second, encourage greater private equity investments in many ofthese institutions. Federal financial regulators appear to beconcerned that private equity investments in banks might putdepositors’ money at risk, DeBoer noted, pointing to the FDIC’sactions to toughen rules on private equity firms buying failedbanks by requiring higher capital ratios and prohibiting sales ofbanks for at least three years. “Yet, one might think that acompromise could be found to bring much-needed equity into thebanking system.”

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Lastly, the Treasury Department could provide a series of safeharbors that would enable certain non-US investors to increasetheir participation in the US credit markets without risk ofadverse tax consequences. This is a measure the Roundtable has beenrequesting of the Treasury, DeBoer said. In fact, the proposedguidance has been on the IRS/Treasury business plan since August2006 and several private sector groups have requested, withoutsuccess, for it to be published. “The proposed guidance wouldenhance overall credit availability for commercial real estate byrevising the effectively connected income rules under Section 864pertaining to certain investment activities in the US by non-USpersons,” he added.

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.