The Good, the Bad and the Government

DeBoer began with the traditional warning: "I'm here from Washington [DC] and I'm here to help." The dominating issue at hand in commercial real estate, DeBoer pointed out, is value and how this will be handled through enacted programs and legislation.

As DeBoer says he explained to government officials, "Commercial real estate debt is like vintages of wine. There are good vintages and bad vintages." Real estate value in the country measures at roughly $6.5 trillion, which currently is split almost 50/50 between debt and equity, he explained, whereas it used to be around $1 trillion of debt--meaning it tripled over the last year or so. About 83% of that debt comes from banks and CMBS. And the clock is ticking for a resolution, since about $1.2 trillion will come due between 2010 and 2011, DeBoer said, highlighting the problem, since "sources of capital are gone when debt has come due."

The issue begs the question: How does CRE close the bid-ask gap? DeBoer said the Real Estate Roundtable was focusing on a few key points, which it was recommending to the government:

1. Federal Credit Agency for commercial real estate. DeBoer indicated the necessity for a credit facility that acted as a "credit card for financing new originations;"
2. Stop Banking Coagulants. TARP was originally supposed to do this, he points out, but was shifted to shoring up companies. DeBoer feels the government needs to find a way to facilitate workouts and extensions of loans to CMBS;
3. Changing mark-to-market rules. They are pro-cyclical, DeBoer explained, and as banks continue to mark down assets, it raises capital on the other side of the equation causing the banks not to lend;
4. Help refinancing of new loans coming due, since there is little equity. DeBoer looks to loosening tax restraints on foreign investors, incentivizing investment in US equity;
5. Doing away with the growing notion of a tax hike on carried interest, which is a higher return to a general investor that is positively disproportionate to the original investment, essentially a reward for taking on risk.

   Schechner

   Schechner expanded on the notion of how TARP, TALF and, eventually, PPIP can work to the favor of CRE with some guidance. He notes that TALF, as it stands, is not yet addressing the "wall of maturities" which are "non-financeable" and will arrive by 2011. There will be a "TALF 2.0" to address these issues, he surmised, but it has not been completely worked out yet at the governmental level. The "good news" is that Washington acknowledges the on-coming problems within commercial real estate.

   While not rushing to victory quite yet, TALF is working out the kinks, Schechner pointed out, as there has been a tightening of spreads, which is "going in the right direction." The CMBS impact, he explained, is positive so far as it has had a rallying effect on REIT buyers and putting a "floor" on valuations. The valuations might be lower than some companies want, Schechner conceded, but at least there is a floor.

The PPIP, of course, is still working itself out in the public eye. The idea is to facilitate an injection of new capital into the market which will create price discovery and restart lending by loosening capital, Schechner said. Some of the unresolved issues, however, deal with the auctioning off of a pool of debt. The banks themselves do not need to accept a sale for any price during any point of the bidding process, and there is some question as to how to arrive at the right price.

Knakal

However, "[Massey Knakal] sees this as a manifestation of supply constraint, [rather than] waning demand," he explained. The factors hitting these markets were directly linked to available financing, Knakal expounded, while the larger deals were bereft of enough capital, regional banks were filling in for the major banks on these smaller deals.