A Five Point Plan to Liquidity

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18 Νοε 2013 (πριν από 3 χρόνια και 11 μήνες)

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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

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


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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

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The Real Estate Roundtable

Roundtable
Agenda

Year of Living Dangerously


Critical Issues


Restoring Liquidity


Filling Equity Gap


FIRPTA, ECI


Carried Interest


Sustainability


Infrastructure


Card Check




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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



The Real Estate Roundtable

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

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



CMBS Issuance

58
49
74
52
93
169
206
230
0
0
6
6
78
0
40
80
120
160
200
240
1999
2002
2005
CMBS Issuances
Billions of dollars


1Q 2Q 3Q 4Q


2008

Source:
Commercial Mortgage Alert

Billions of dollars

Commercial Real Estate Debt Maturities

Including secured and unsecured debt

Source: Goldman Sachs and REIT filings

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$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
03
04
05
06
07
08
YTD 09
Billions
Foreign Investment In US Real Estate

Source: Real Capital Analytics

130
100
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



The Real Estate Roundtable

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

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Renewed Liquidity Essential





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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


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“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



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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)




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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

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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


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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

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

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 Announced

12/01/08

TALF Terms

Amended

02/06/09

First TALF

Funding

Announced

03/03/09

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


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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


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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

The Real Estate Roundtable

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

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

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

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


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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

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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


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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

“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


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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

The Real Estate Roundtable

The Real Estate Roundtable

www.rer.org