Capital and Credit

Federal Reserve Launches $2.3 Trillion in New Credit Facilities, Expands TALF to Existing AAA CMBS and Commercial Mortgage Loans

Federal Reserve Building DC

The Federal Reserve yesterday announced the establishment of $2.3 trillion in new credit lending facilities in an effort to restore liquidity and steady economic shocks from the Covid-19 pandemic. These actions include the expansion of its Term Asset Lending Facility (TALF) to include AAA-rated commercial mortgage-backed securities (CMBS) and commercial mortgages as eligible collateral.  (Fed news release and TALF term sheet, April 9)

  • The Fed’s Term Asset Lending Facility – previously used during the 2008 financial crisis and relaunched on March 23 – will now accommodate non-agency CMBS issued before March 23, 2020; any issuance after that date is ineligible.  All collateral must also be AAA-rated and located in the U.S or its territories. The TALF will support up to $100 billion in credit, which is backed by $10 billion in credit protection from the Treasury Department. (TALF term sheet)

  • Under the TALF, static collateralized loan obligations (CLOs) are also eligible collateral, yet CMBS securities related to single-asset single-borrower (SASB) and commercial real estate collateralized loan obligations (CRE CLOs) are not eligible at this time.

  • The terms and conditions for commercial mortgages to be included as eligible collateral in the TALF have yet to be announced. (TALF term sheet, April 9)

  • While the Fed’s recent actions are welcome, an industry coalition, including The Roundtable, continues to advocate for the inclusion of CRE collateralized loan obligations (CLOs) and Single Asset, Single Borrower (SASB) CMBS in the TALF. (Joint Industry letter, March 24)

  • The Federal Reserve also announced $600 billion for purchasing loans in two new “Main Street” facilities. The Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF), which will purchase 95% participations in new 4-year loans to businesses that have up to 10,000 employees or up $2.5 billion in 2019 annual revenue. Borrowers with more than 10,000 employees but less than $2.5 billion in 2019 revenue may potentially qualify.

  • The Fed’s new credit facilities also include $500 billion for short-term municipal bonds and additional funding for the central bank’s purchases of larger investment grade businesses and capital markets securities.

  • Fed Chair Jay Powell commented on yesterday’s actions during a webinar.  “Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers that are available only in very unusual circumstances—such as those we find ourselves in today—and only with the consent of the Secretary of the Treasury.”  He added, “I would stress that these are lending powers, not spending powers.  We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.”

  • During Q&A after his remarks, Chairman Powell acknowledged severe liquidity concerns faced by mortgage servicers as the pandemic has resulted in widespread forbearance on mortgage payments.  Powell referred to the mortgage market as "at the very center of our economy" and stated, "We're watching carefully the situation with the mortgage servicers and I will just tell you that we certainly have our eyes on that as a key market."  (S&P Global, April 9)

  • On April 4, a broad coalition financial industry and affordable housing advocates, including The Roundtable, urged government regulators to provide a source of liquidity to mortgage servicers in need of additional capacity to support homeowners and renters impacted by COVID-19. (Coalition mortgage servicers letter)

  • While this week’s actions could provide up to $2.3 trillion in loans to support the economy, the Treasury and the Fed have not yet committed the full $454 billion allocated for credit support to lending facilities under the recently-enacted Coronavirus Aid, Relief, and Economic Security Act (CARES).  Therefore, more loan programs or an expansion of these now existing loan programs could be forthcoming. (Roundtable Weekly, March 27).

  • This week’s massive Fed intervention also includes the creation a Paycheck Protection Program Lending Facility (PPPLF) to support the Small Business Administration's Paycheck Protection Program (PPP) – established under the CARES Act.  This facility will extend credit to eligible financial institutions that originate PPP loans to small businesses, taking the loans as collateral at face value.  (See story below on The Roundtable’s 8-point reform plan for the PPP).

  • Yesterday’s actions by the Fed recognize that businesses vary widely in their financing needs – and input from lenders, borrowers, and other stakeholders until April 16 is welcome through a Federal Reserve feedback form.

The Fed’s response to the pandemic is the focus of an April 8 Chicago Economic Club discussion moderated by Roundtable Chair Debra Cafaro (Chairman and Chief Executive Officer, Ventas, Inc.) with Charles Evans, President and CEO of the Federal Reserve Bank of Chicago. (Watch interview on Youtube)

As part of the rapidly evolving developments related to the COVID-19 pandemic, The Real Estate Roundtable continues to be proactive on all policy fronts in Washington to provide insight and recommendations to lawmakers and regulators.  The Roundtable depends on the input and expertise of its dedicated members, including those serving – now remotely – on the organization’s Real Estate Capital Policy Advisory Committee (RECPAC).

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CORONAVIRUS – Paycheck Protection Program (PPP)

Roundtable Unveils 8-Point Plan to Improve the PPP; Roundtable Member Discusses Successful PPP Funding

8 Point Plan to Reform the Payroll Protection Program -- The Real Estate Roundtable

The Real Estate Roundtable on April 8 submitted an 8-Point Plan to clarify and improve the Payroll Protection Program (PPP) to congressional leadership, Treasury Secretary Steven Mnuchin and Small Business Administrator (SBA) Jovita Carranza.  (Roundtable Letter and 8-Point Plan)

  • The Roundtable supports the intent of the PPP in the CARES Act, and the efforts to get SBA loans to struggling individuals, families and businesses as soon as possible.

  • The CARES Act passed by Congress and signed by President Trump on March 27 established the PPP to provide financial assistance to “any” business concern that has 500 employees or less, or meets small business size standards used by SBA for its existing loan program.  Larger companies sized-out of the PPP might obtain credit support through the Federal Reserve’s new Main Street Lending Program, and its expanded Term Asset-Backed Loan Facility (TALF). (See story above for more details)

  • The Roundtable’s recommendations detailed in the “8-Point Plan to Reform the PPP” would significantly help avoid potential calamitous economic consequences for small businesses.

  • The letters to Congress, Treasury, and SBA transmitting the 8-Point Plan warn of foreclosures by lenders upon building owners who go into mortgage default because rents are not being paid to cover debt service.  The Roundtable’s plan thus supports use of PPP loans to help businesses pay rents and other operating expenses.

  • The Roundtable letter urges Congress and the Administration’s agencies to enact 8 improvements as swiftly as possible to clarify, streamline and improve the process.

  • Additionally, a coalition including The Roundtable today wrote to Fed Chair Jay Powell, Treasury Secretary Mnuchin and SBA Administrator Carranza to request additional guidance on current business affiliation rules as part of the PPP.  (Coalition affiliation rules letter, April 10)

  • Among its requests, the coalition urges the policymakers to allow small businesses supported by venture capital, angel capital and private equity firm investors to access critical funding that would help retain workers and jobs during the economic fallout of this health crisis.

Since the SBA launched the program last Friday by making borrower  applications available on-line, demand for PPP loans has been intense. Challenges have included a massive influx of traffic that has brought website application sites down, confusion over specific application packages, and the technology used to process loans and approve lenders. (The Hill, April 9 and Wall Street Journal, April 10)

Roundtable Member’s Successful PPP Experience

A successful example this week of PPP funding is profiled in an interview recorded today by Roundtable President and CEO Jeffrey DeBoer with Roundtable member Albert Dwoskin, President and CEO of A.J. Dwoskin & Associates, Inc.   (Watch the interview here)

  • Mr. Dwoskin’s company, facing a sudden halt in rental payments due to the pandemic, immediately sought PPP funding to stabilize its capital needs and retain more than 100 employees.  “The application went in on Tuesday and was funded on Friday. We didn’t expect that,” Dwoskin says in the interview.

  • Dwoskin’s Vice President of Accounting & Finance Natalia Ostroveanu, also details the PPP loan process. “J.P. Morgan had a question as part of their review … because the number of employees on the application was different than what the report from ADP showed.  And once I explained to them the reason for that number, they were okay with it and that was yesterday morning.  Today, this morning, we already received the funds,” Ostroveanu states.

Since the SBA launched the program last Friday by making borrower  applications available on-line, demand for PPP loans has been intense. Challenges have included a massive influx of traffic that has brought website application sites down, confusion over specific application packages, and the technology used to process loans and approve lenders. (The Hill, April 9 and Wall Street Journal, April 10) 

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COVID-19 Congressional Response

House Democrats Propose Pandemic Risk Insurance Program Modeled on TRIA; Senate Attempts to Break Stalemate on “Phase 4” Coronavirus Relief Package

Capitol_Dusk_rooftop_475w

House Financial Services Committee Democrats this week proposed a federal reinsurance program for pandemic risks as part of the next round of congressional coronavirus relief.   (HFS Committee memo)

  • An April 6 memo from the committee’s majority Democratic staff states the recently enacted CARES Act was only a down payment on the relief needed to fully address the historic negative health and economic effects of COVID-19.  For the next congressional package, the memo recommends policy proscriptions focused on both the crisis and the recovery that includes “Pandemic Risk Insurance.”

  • The draft package's reinsurance program proposal would be “similar to the Terrorism Risk Insurance Program for pandemic risks in order to promote the availability and affordability of insurance coverage that includes pandemic risks.”

  • Whether existing business interruption insurance policies have virus and bacteria-related exclusions is a growing issue between closed businesses and their insurers.  (BGov and Insurance Insider, April 9)

  • Rep. Carolyn Maloney, (D-NY), chairwoman of the House Oversight and Reform Committee and a senior member of Financial Services Committee, circulated a letter this week informing colleagues in the House that she is “… developing the Pandemic Risk Insurance Act of 2020, to create the Pandemic Risk Reinsurance Program, a system of shared public and private compensation for business interruption losses resulting from future pandemics or public health emergencies.”

  • Rep. Maloney's note explains, “An ounce of prevention is worth a pound of cure. The Pandemic Risk Insurance Act (PRIA) would be an important step in our prevention efforts against future pandemics by both requiring insurance companies to offer business interruption insurance policies that cover pandemics, and creating a Pandemic Risk Reinsurance Program to ensure that there is sufficient capacity to cover these losses and protect our economy in the event of a future pandemic. Like the Terrorism Risk Insurance Act (TRIA), the federal government would serve as a backstop to maintain marketplace stability and to share the burden alongside private industry”

  • Rep. Maloney's pandemic program would be prospective – not retrospective.

  • The current TRIA program would be triggered if losses from certified acts of terrorism attack exceed $200 million across all affected insurers.  The establishment of the federal terrorism backstop – and its multiple reauthorizations over the years – has been a top policy priority for The Real Estate Roundtable since the 9/11 attacks. (Roundtable TRIA webpage

  • John Doyle, president and CEO of the insurance unit of Marsh & McLennan Companies Inc., offered in a March 30 letter to Congress and the White House to help create a federal pandemic backstop.  Doyle wrote, “The basic framework of a pandemic risk insurance program would be to structure a risk sharing model between policyholders, insurers and the federal government.” 

The Roundtable is working with policymakers and stakeholders to help develop an effective pandemic risk insurance program that addresses the current crisis and provides the economy with the coverage it needs to address future pandemic risks.  

Senate Attempts to Develop a Phase 4 Coronavirus Relief Package

Senate Republicans and Democrats this week failed to reach agreement on “Phase 4” coronavirus legislation that would quickly follow and expand the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed on March 27.  Republicans sought more funding for the Paycheck Protection Program (PPP) for small businesses impacted by COVID-19, while Democrats emphasized any follow up measure to the “Phase 3” CARES Act should include increased funding for hospitals and local governments.  (Akin Gump, April 9 and Deloitte, April 10)

  • Negotiations between congressional leaders and the White House over a Phase 4 package are ongoing.  With the Senate in pro forma session on Monday, there is a chance for a deal to be reached over the weekend.

  • The Senate and House are currently scheduled to return for regular business the week of April 20.  Health concerns for Members of Congress and their staff cast doubt on when they can return to Washington to consider legislation. The only way for Congress to currently vote on and send legislation to President Trump is by using the unanimous consent process, which can be blocked by any single member.

  • Rep. Thomas Massie (R-KY) last month forced hundreds of his colleagues to return to the Capitol to pass the CARES Act.  He warned on April 8 that he may again block unanimous consent for a Phase 4 coronavirus bill if it is not held with a roll call vote. (The Hill, April 8)

President Trump wrote on Twitter March 31 that a larger infrastructure should be included in the next coronavirus relief bill.  “With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill,” President Trump wrote. “It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4.”

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Tax Policy

IRS Guidance Ensures Real Estate Businesses Benefit from Phase Three Tax Relief

IRS Building

This week, the IRS issued two revenue procedures that will help real estate businesses maximize the amount of tax relief they receive under the “Phase 3” CARES Act. The IRS actions are consistent with recent Real Estate Roundtable recommendations.

Partnership Amended Returns

  • The CARES Act included several provisions designed to generate deductions in prior years that can be “monetized” today, through the filing of amended tax returns, to help businesses stay afloat during the current economic turmoil.  As the Senate Finance Committee summary noted, “[t]hese changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.”  

  • In the understandable rush to enact the CARES Act, Congress did not have an opportunity to consider fully how provisions in the legislation would interact with various aspects of existing tax law and regulations.  In particular, under the partnership audit regime enacted in 2015, partnerships are no longer permitted to file amended tax returns.

  • In a letter on April 4, Roundtable President and CEO Jeffrey DeBoer urged the Treasury Department and IRS to use its regulatory authority to allow partnership to file superseding tax returns that could replace returns filed in 2018 and 2019. 

  • IRS Rev. Proc. 2020-23, released on Wednesday, allows partnerships to file amended returns for those years, effectively providing the relief The Roundtable requested.  

Business Interest Limitation

  • The Tax Cuts and Jobs Act created a new limitation on the deductibility of business interest, but allows real estate businesses to elect out, which most did in 2018.  The election is irrevocable, and the price of the election is longer cost recovery periods for real property and improvements.  The CARES Act liberalized the limitation on the deductibility of business interest for tax years 2019 and 2020.  However, the law did not allow real estate businesses to go back and change their election out of the regime.

  • In its April 4 letter, The Roundtable asked the IRS to allow real estate businesses to revoke elections made in 2018 and 2019.  This afternoon, the IRS issued the requested relief in Rev. Proc. 2020-22.

Like-Kind Exchanges

  • In addition to the actions related to the CARES Act, the IRS has provided relief to taxpayers having difficulty completing like-kind exchanges due to the COVID-19 pandemic.  In late March,  The Roundtable and 21 other national real estate organizations requested relief from the strict statutory deadlines that apply for identifying replacement property and closing on like-kind exchange transactions.  Under IRS Notice 2020-23, like-kind exchange deadlines that would otherwise fall between April 1 and July 14 are extended to July 15.

Opportunity Zones

  • Relief from the various deadlines and compliance testing dates for Opportunity Zones during the pandemic is a Roundtable priority.  IRS Notice 2020-23 provides that if a taxpayer’s 180-day period to invest gain in an opportunity fund would have expired between April 1 and July 14, 2020, the taxpayer now has until July 15, 2020 to make the investment.   

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