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Challenges Facing Commercial Real Estate: A Five Point Plan to Liquidity Clifton E. (Chip) Rodgers, Jr. The Real Estate Roundtable Washington, DC

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Presentation on theme: "Challenges Facing Commercial Real Estate: A Five Point Plan to Liquidity Clifton E. (Chip) Rodgers, Jr. The Real Estate Roundtable Washington, DC"— Presentation transcript:

1 Challenges Facing Commercial Real Estate: A Five Point Plan to Liquidity Clifton E. (Chip) Rodgers, Jr. The Real Estate Roundtable Washington, DC

2 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

3 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 The Real Estate Roundtable

4 Roundtable Agenda Year of Living Dangerously Critical Issues –Restoring Liquidity –Filling Equity Gap –FIRPTA, ECI –Carried Interest –Sustainability –Infrastructure –Card Check

5 The Real Estate Roundtable 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

6 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 The Real Estate Roundtable

7 Source: JPMorgan Asset Management Commercial Real Estate Debt and Equity Investment-grade, income-producing real estate $6.7 trillion as of June 2008 Total Debt $3.5 trillion Total Equity $3.2 trillion

8 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-Q4 1998-Q4 2008-Q4 CMBS Banks

9 CMBS Issuance Billions of dollars 1Q 2Q 3Q 4Q 2008 Source: Commercial Mortgage Alert

10 Billions of dollars Commercial Real Estate Debt Maturities Including secured and unsecured debt Source: Goldman Sachs and REIT filings The Real Estate Roundtable

11 Foreign Investment In US Real Estate Source: Real Capital Analytics

12 Required Equity for Commercial Real Estate Debt Maturities 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.

13 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 The Real Estate Roundtable

14 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 The Real Estate Roundtable

15 Renewed Liquidity Essential The Real Estate Roundtable

16 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 The Real Estate Roundtable

17 “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 The Real Estate Roundtable

18 Fed Liquidity Programs 1.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) The Real Estate Roundtable

19 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 The Real Estate Roundtable

20 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 The Real Estate Roundtable

21 Term Asset Backed Securities Loan Facility Potential Size of TALF Asset Specific Haircut AAA-Rated ABS / CMBS $900 billion Funded by Federal Reserve $100 billion Funded by TARP Funded by Investor  Supports revival of credit markets  Collateralized lending to AAA investors - opportunity for levered funds  Catalyze new issuance of ABS, CMBS  Tighten spreads  Restore credit flows to key sectors of the economy The Real Estate Roundtable

22 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 The Real Estate Roundtable

23 Super Duper CMBS Treasury Spread TALF Announced 12/01/08 TALF Terms Amended 02/06/09 First TALF Funding Announced 03/03/09

24 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 The Real Estate Roundtable

25 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 The Real Estate Roundtable

26 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 The Real Estate Roundtable


28 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 The Real Estate Roundtable

29 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 The Real Estate Roundtable

30 Five Point Plan 3.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”) The Real Estate Roundtable

31 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 Real Estate Roundtable

32 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 The Real Estate Roundtable

33 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 The Real Estate Roundtable

34 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 The Real Estate Roundtable Climate Change Legislation

35 “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 The Real Estate Roundtable Livability Agenda

36 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 The Real Estate Roundtable


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