Economic Stimulus Package and Treasurey Financial Stability Plan
THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009
CCIM Spring Meeting in Ft Worth April 21 -24, 2009
Economic Stimulus Package and Treasury Financial Stability Plan
Impact on Commercial Real Estate
April 23, 2009
Adrian A. Arriaga,CCIM,CIPS
2008 Chairman
NAR Commercial Legislative & Regulatory Policy Subcommittee
FEDERAL INITIATIVES TO ADDRESS CRISIS IN COMMERCIAL MARKETS
TALF
The Financial Stability Plan, announced by Treasury Secretary Timothy Geithner on February 10th, included a major expansion of the Term Asset-Backed Securities Loan Facility (TALF) to include commercial mortgage-backed securities (CMBS). The TALF had been announced in November 2008 to address the credit shortfall in the consumer (credit card), auto, student loan, and small business credit markets.
Originally, TALF was funded with $20 billion from Treasury’s Troubled Asset Recovery Program (TARP) that would support $200 billion in lending by the Federal Reserve Bank of New York to investors to purchase asset-backed securities. The Financial Stability Plan increased this amount to $200 billion, which would support up to $1 trillion in lending by the Federal Reserve Bank of New York to investors for purchases of asset-backed securities, including AAA-rated CMBS. Inclusion of CMBS in TALF is expected to help restore activity in the CMBS markets, which has been a major source of financing for commercial real estate.
Treasury’s decision to expand the initial reach of the TALF program to include CMBS is essential given the crisis situation currently facing the commercial real estate markets. The broader financial crisis has permeated through the world’s capital markets and has severely curtailed commercial lending activity. This problem is negatively impacting the $6 trillion commercial real estate market, which is financed in part through more than $3 trillion of debt. With virtually no CMBS market and hundreds of billions of dollars of commercial real estate loans expected to mature in 2009, current conditions indicate insufficient credit capacity to refinance this wave of loan maturities. With no liquidity, commercial borrowers face a growing challenge of refinancing maturing debt and the threat of rising delinquencies and foreclosures.
As a further measure to address the problem of banks' toxic assets and restore stability and confidence to the stalled credit markets, the Treasury and the Federal Reserve are creating a lending program that is targeted at the broken market for “legacy” securities tied to residential real estate, commercial real estate, and consumer credit.
Expansion of TALF for Legacy Securities
The intention is to incorporate this program into the previously announced TALF, which may total as much as $1 trillion. Through this expansion, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency AAA rated residential mortgage-backed securities (“RMBS”), commercial mortgage-back securities (“CMBS”) and ABS. Borrowers will need to meet certain eligibility criteria. Detailed terms of the program (lending rates, loan sizes, etc) have not yet been released. As with securitizations backed by new originations of consumer and business credit already included in the TALF, the provision of leverage through this program should give investors greater confidence to purchase these assets, thus increasing market liquidity.
PPIP
The Treasury, utilizing funds from the original $700 billion Troubled Asset Relief Plan (TARP), will fund the PPIP. The PPIP will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The TARP funds from Treasury will be used to provide equity capital for new investment funds, matched with investments from private investors such as private equity and hedge funds. That public and private equity would be leveraged with credit from the Federal Deposit Insurance Corporation (FDIC), in the case of loan purchases, and the Federal Reserve’s Term Asset Backed Securities Loan Facililty (TALF), in the case of securities.
Mark-to-Market
The mark-to-market rules have prompted a groundswell of complaints from commercial real estate investors and lenders who say that the accounting policy has resulted in the devaluation of performing assets and forced companies to value the assets at fire-sale prices. To address this issue, the Capitol Markets Subcommittee of the House Financial Services Committee held a hearing on mark-to-market accounting on Thursday, March 12th. Representatives from the SEC and FASB came under fire from both Democrats and Republicans calling for an immediate investigation and adjustment of the FAS 157, the current mark-to-market rule. In discussing the effects of the interpretation of this fair value accounting rule on the balance sheets of lending institutions, both lawmakers and industry representatives called for clarification of the fair value guidelines in order to give better guidance to investors struggling to value assets in today's market conditions.
The Federal Accounting Standards Board (FASB) met quickly following the hearing and voted to provide additional guidance for entities seeking help in determining whether a "market for an asset is not active and when a price for a transaction is not distressed". Staff drafted and the
Federal Accounting Standards Board (FASB) met on Tuesday, March 17th, and approved the issuance of two proposed staff positions (FSPs) -
1. Proposed FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed
2. Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments
On March 31st, a letter was submitted by NAR President Charles McMillan to the FASB in support of its draft guidelines to provide clarity and guidance to address problems with "mark-to-market" accounting. Marking the value of securities to market when the markets are dysfunctional has severely impaired liquidity in the commercial and residential mortgage markets, without accurately reflecting the value of the securities. There is widespread support for the FASB guidelines, which were officially approved at the April 2nd Board Meeting. Based on comment letters, the final FSP includes some revisions and further clarifications (details outlined at http://www.fasb.org/action/sbd040209.shtml )
COMMERCIAL REAL ESTATE PROVISIONS IN H.R. 1
“THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009”
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H.R. 1, the “American Recovery and Reinvestment Act of 2009,” passed the House on February 13, 2009, by a vote of 246 - 184. Later that day, the Senate also passed the bill by a vote of 60 - 38. The President signed the bill on February 17, 2009. The bill is a $780 billion package, with roughly 35% of the package devoted to tax cuts (mostly for 2009) and the rest to spending intended to occur in 2009 and 2010.
Commercial real estate is impacted in primarily three areas of theAmerican Recovery and Reinvestment Act of 2009: green building and energy efficiency, business tax incentives, and investment in transportation and infrastructure.
Green Building and Energy Efficiency:
· State Energy Program Funds: Commercial property owners seeking funds or tax breaks to offset the cost of energy efficiency upgrades will need to apply through city and state government programs, which will receive funds under the stimulus bill. States receiving funds are "encouraged to use federal funds for existing energy efficiency and renewable energy program".
· Renewable Energy Loan Guarantees: Creates a temporary program to provide loan guarantees for renewable energy systems, electric power transmission systems that begin construction by September 30, 2011. This Department of Energy loan guaranty program for renewable energy projects would benefit commercial property owners seeking to invest in alternative energy systems for onsite power generation.
· Brownfields:$100 million for competitive grants for evaluation and cleanup of former industrial and commercial sites - turning them from problem properties to productive community use.
Business Tax Incentives: (Of benefit to commercial real estate in as much as these provisions are intended to support those small businesses that occupy office space, retail space, warehouse space, etc.)
· Extension of Bonus Depreciation: Businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Last year, Congress temporarily allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write-off fifty percent of the cost of depreciable property acquired in 2008 for use in the United States. The bill would extend this temporary benefit for capital expenditures incurred in 2009.
· Extension of Enhanced Small Business Expensing:In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write-off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Until the end of 2010, small business taxpayers are allowed to write-off up to $125,000 (indexed for inflation) of capital expenditures subject to a phase-out once capital expenditures exceed $500,000 (indexed for inflation). Last year, Congress temporarily increased the amount that small businesses could write-off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold for 2008 to $800,000. The bill would extend these temporary increases for capital expenditures incurred in 2009.
· 5-Year Carryback of Net Operating Losses for Small Businesses: Under current law, net operating losses may be carried back to the two taxable years before the year that the loss arises and carried forward to each of the succeeding twenty taxable years after the year that the loss arises. For 2008, the bill would extend the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less.
Infrastructure Investment:
The bill also includes major increases in spending on transportation and infrastructure. Under the stimulus package, states and local governments would play a significant role in project selection and funds allocation, particularly in the areas of transportation and infrastructure. In order to create jobs and advance the economy, the stimulus bill sets out to quickly fund “shovel ready” projects through existing transportation and transit programs. According to the administration, the stimulus legislation specifically includes a total of $144 billion for state and local relief and $111 billion for transportation and science with each state receiving different levels of funding based on their current fiscal condition, economy and transportation ready projects.
CCIM Spring Meeting in Ft Worth April 21 -24, 2009
Report by Manfred Chemek CO WY CCIM Chapter legislative affairs committee chair 2010 and legislative for 2010. Report dated 4-27-09
Report from the legislative affairs subcommittee:
Legislative affairs has approval to subsidize CCIM members traveling to the Capitol Hill visits similar to IREM. But with this years budget problems that will be delayed for one year. CCIM and IREM will work together to see there are no future schedule conflicts for Hill visits as there where this year.
In 2010 CCIM spring meetings will be in New Orleans April 18-21, Capitol Hill visits will be May 4-5.
In 2011 CCIM will have their spring meetings in Bethesda, MD and will coordinate Capitol Hill visits while in Bethesda.
The joint CCIM, IREM Lobbying efforts are producing results for the commercial real estate industry and the public. During the committee meetings I spoke briefly with Ronald L. Myles, CCIM (1986 CCIM President) from Denver. He felt we should use the information to attract the large houses in Denver back as active CCIM members by showing them what CCIM is doing on a legislative level to benefit them. Chapters, like the CO WY CCIM Chapter where encouraged to form a legislative affairs committee and have a chair or contact person who will coordinate and disseminate information on TARP Money and other legislative items. This will also give us additional points for the president’s cup. I am willing to volunteer.
Some highlights regarding the Economic Stimulus Package and Treasury Financial Stability Plan.
See the synopsis compiled by Adrian Arriaga, CCIM, CIPS April 23, 2009 on our Chapter web site.
The current bill package includes $6.3 billion for water and brown fields improvements. $4.5 Billion for government Buildings. $48 Billion for Highways. $18 Billion for light rail.
TALF Term Asset – Backed Securities Loan Facility Plan was expanded to include commercial mortgage backed securities (CMBS) and increased the funds from $ 20 Billion to $ 200 Billion to come out of TARP. This should now support about $ 1 trillion in lending as opposed to $200 Billion in lending.
This is expected to help restore lending activity in commercial real estate. The problem, as we all know, has very negatively impacted the $ 6 trillion commercial real estate market which is financed by more than $ 3 trillion in debt. This should help to refinance the loan maturities coming up in 2009.
PPIP Public Private Investment Program will utilize funds from TARP to generate $500 Billion to 1 Trillion to be used to provide equity capital for new investment funds, matched with investments from private investors and hedge funds to purchase loans.
Market to Market, to change the current accounting rules so assets could be given a fair value. CCIM Staff drafted two proposals which along with a letter from NAR President Charles McMillan, CIPS where submitted to the FASB (federal Accounting Standards board).
The American Recovery and Reinvestment Act was passed and signed by the President into law Feb 17, 2009. The $780 Billion package has roughly 35% devoted to tax cuts, mostly in 2009 and the rest spending in 2009 and 2010. Commercial real estate is impacted primarily in 3 major areas, green building and energy efficiency, business tax incentives and investment in transportation and infrastructure.
Green Buildings and Energy Efficiencies.
Commercial property owners seeking funds or tax breaks to offset upgrades will need to apply through city and state government programs which will receive the funds from the US Government.
Business tax incentives.
Extension of bonus depreciation. Can write off 50% of cost of depreciable property acquired in 2008 and 2009. Extension of small business expensing. Small business may write off expenses in the year of acquisition rather than over time. We heard stories of small businesses who found this to be a quick source of new capital, since they could not get bank loans. They applied for these tax credits immediately and received from $250,000 to $800,000 in funds from the government in the first quarter of 2009.
the same was true of 5 year carry back of net operating losses for small business. Under current law you can only carry back 2 years. Now you can for 5 years.
Leasehold improvements extended 15 years. Passive loss re indexed from $100,000 to $186,000 and from $150,000 to 287,000.
Infrastructure Investments
The bill includes major increases in spending on transportation and infrastructure. This includes $ 144 billion for state and local projects. We have seen some of these take effect in Colorado already.
This ends my report.
Submitted by Manfred Chemek, CCIM, CIPS 4/27/2009
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