While much of the commercial real estate industry’s interest in government policy has centered on TALF and PPIP, recently announced regulatory reform may warrant greater attention.

“The debate on what happens to the banks, with accounting reform and regulation, will affect commercial real estate in one way or another,” said Priya Dayananda, director of federal government affairs for KPMG, at the company’s conference on public policy, held today in Manhattan.

Since President Barack Obama unveiled the latest piece of his banking reform plan last week, everyone in the financial community has been clamoring to determine how they will be affected. The proposal, crafted by former chairman of the Federal Reserve Paul Volcker, would partly revive the Depression-era Glass-Steagall Act, reining in the size of banks and their risky behavior.

One such “risky behavior” under review is proprietary trading operations, which involves banks owning, investing or sponsoring a private equity or hedge funds to turn a profit. Considering that private equity has been a source of capital for commercial real estate, limits or the abolishment of prop trading could further squelch liquidity.

“The Administration wants to institute firewalls between these entities because they feel the [capital] used should not derive from consumer money,” Dayananda said.

This measure is merely a sliver of the Administration’s larger Financial Services Regulatory Reform, which began working its way through Congress last fall. The legislation essentially fills regulatory gaps by consolidating some agencies, creating new ones and granting greater power to existing regulators.

“The question is what is it going to cost to adhere to all of this new regulation,” asked James H. Low, partners in KPMG’s financial services division. He suggested that if financial institutions have to pony up for compliance, registration and other regulatory fees, they would likely further retreat from lending or pass that cost off to consumers.

Low also questioned the implications of other aspects of the legislation, namely the reclassification of private pools of capital. The proposal recommends that advisers to private pools of capital–hedge funds, venture capital funds and private equity funds–with more than $150 million worth of assets under management be required to register with the Securities and Exchange Commission. This would subject such pools to regulatory reporting, record-keeping and mandatory disclosure to investors; pretty much baring their soul. And to top that, these pools would have to adhere to higher capital, liquidity and risk management standards.

“The SEC is trying to define who falls under this [category] and commercial real estate may not be carved out,” Low said.

The commercial industry may be in for another surprise with the plan to funnel more capital into the growing inventory of floundering community banks, which hold a lot of commercial mortgages on their books. Low said the stress tests on smaller banks conducted during the summer revealed that of the 900 plus banks examined, some 600 or more were under-funded. Now, if these institutions receive more capital, it will likely come with more regulation.

“If the government gets involved with funding community banks, the government can come up with ways to restructure commercial loans,” said Low, adding that this is coming down the pike in six to eight months. He and Dayananda stressed that Congress is under great pressure to act on all of this financial reform and push it through before the campaign season gets fully underway this summer. The Administration is well aware of the potential shake-up in leadership on the Hill–if the Republicans take the House this year all of this legislation will die.

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