Roundtable Weekly -- April 17, 2020
High Demand Depletes Small Business Loan Program as Congress Negotiates More Funding; President Trump Announces “Guidelines to Open Up America Again”
The Small Business Administration (SBA) yesterday announced that the Covid-19 Paycheck Protection Program (PPP) hit its $349 billion limit after successfully processing more than 1.6 million loans since the program launch on April 3. The PPP – funded by the Coronavirus Aid, Relief, and Economic Security (CARES) Act for small businesses struggling with the economic shocks of the pandemic – was quickly depleted as Congress continued negotiations over how to replenish funding. (Wall Street Journal, April 16)
- “The SBA has processed more than 14 years’ worth of loans in less than 14 days. By law, the SBA will not be able to issue new loan approvals once the programs experience a lapse in appropriations,” according to a joint statement by the Treasury and SBA.”
- The urgent need for Congress to move quickly to authorize additional funding for the PPP is detailed in an April 15 letter to policymakers from more than 250 industry and business groups, including The Real Estate Roundtable.
- The SBA this week also released its first report on loan approval details since launching the program. Through April 13, the SBA report shows 49,000 real estate businesses and 115,000 construction businesses were approved for PPP loans. (SBA PPP Report) See The Wall Street Journal, April 15, “Where the Stimulus Loans for Small Businesses Are Going”)
- The Roundtable on April 8 also submitted an 8-Point Plan to clarify and improve the Payroll Protection Program (PPP) to policymakers. A coalition letter from national real estate organizations also seeks clarifications and confirmation on real estate businesses’ eligibility for the PPP. See April 16 letter to the Treasury and SBA.
- Updates to the PPP rules and guidance are available via the Treasury Department’s website (April 15 FAQ update here) and the Small Business Administration’s Covid-19 resource webpage.
- Congressional Republicans this week have emphasized that additional PPP funding should be limited to $250 billion solely for small businesses – while Democrats want to add an additional $100 billion for hospitals, $150 billion for state and local governments and more food assistance funds. (The Hill, April 16)
- Due to coronavirus health concerns the House and Senate are currently scheduled to return to Washington on May 4. Until then, both chambers need unanimous support to pass an additional funding package.
Re-Opening the U.S. Economy
- President Trump yesterday announced “Guidelines to Open Up America Again” that delegates final decisions for states to lift stay at home orders or business restrictions to governors once certain criteria are met. States would first need to demonstrate their COVID-19 cases are on downward trajectory over a 14-day period, while also establishing a system for testing health care workers before they can proceed to a phased opening. (Guidelines document and Wall Street Journal, April 16)
President Trump on April 14 also announced the formation of various “Great American Economic Revival Groups” to gain insight on combating the economic impact of the coronavirus from leading business executives representing various economic sectors. Among the 200 leaders from industry sector groups are 10 members of The Real Estate Roundtable. (Full list, White House news release and Bisnow, April 15)
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Industry Requests TALF Expansion to Include a Broader Range of Commercial Real Estate Assets, CMBS; Congressional Efforts Seek to Address Pandemic Business Interruption Insurance Policies
Six real estate industry organizations, including The Real Estate Roundtable, wrote to federal regulators on April 14 to communicate the urgent and growing need to include a wider range of investment grade commercial real estate debt instruments in the Fed’s Term Asset-Backed Securities Loan Facility (TALF) credit facility. Currently, TALF eligible collateral is limited to triple-A rated tranches of outstanding (legacy) commercial mortgage backed securities (CMBS), commercial mortgage loans and newly issued collateralized loan obligations. (TALF letter, April 14)
- The TALF, previously used during the 2008 financial crisis, was relaunched on March 23 in response to the Covid-19 crisis to “enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.” (Fed news release, March 23)
- Immediately after the TALF was relaunched, an industry coalition on March 24 urged the Federal Reserve, Treasury, and Federal Housing Finance Agency to expand the TALF to include non-agency CMBS – including legacy private-label conduit and single-asset single borrower (SASB) assets. The coalition, which includes The Roundtable, stated the inclusion of private-label assets would stabilize asset prices and shore up the balance sheets of market participants. (Joint Industry letter, March 24)
- On April 9, the Federal Reserve announced that it would broaden the range of TALF eligible collateral to include triple-A rated tranches of both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations. However, the updated term sheet excludes single-asset single borrower (SASB) CMBS and commercial real estate collateralized loan obligations (CRE CLOs).
- According to the April 14 letter, “Commercial and multifamily real estate assets that were perfectly healthy just weeks ago now face massive stress and a wave of payment and covenant defaults. As the economy shuts down and American workers face massive layoffs, it is now clear that many tenants will not be able to meet their debt obligations. This will soon cascade through the over $4 trillion commercial real estate debt market and exponentially increase the pressure on the financial system.”
To bolster the health of the CMBS market, the industry coalition recommends the following investment grade instruments be added as eligible TALF assets:
- Legacy and new issuance, investment grade, non-agency CMBS;
- Investment grade Agency Credit Risk Transfer (CRT) securities;
- Legacy and new issuance Single-Asset, Single-Borrower (SASB) CMBS;
- Commercial real estate (CRE) collateralized loan obligations (CLOs); and
- U.S. commercial real estate (CRE) first mortgage loans (which have capital charges equivalent to investment grade/NAIC CM 1 and 2 and loans in good standing, or can obtain a rating agency letter confirming that the pledged loan is rated at least single-A).
The coalition letter explains that a broader, deeper, and more effective TALF would complement and minimize the direct lending that will be required of the Federal Reserve’s other credit facilities, which are supported by the $454 billion provided under the CARES Act.
The coalition also notes that expansion of the TALF’s scope and the Fed’s further support of the highly illiquid non-bank financial sector would forestall further disruption and economic dislocations in the commercial real estate sector.
Pandemic Risk Insurance Coverage
Two preliminary legislative proposals in Congress seek to address increasing requests for the property and casualty industry to extend business interruption (BI) insurance policies to cover pandemic risk related claims – and the general lack of pandemic risk commercial insurance availability.
- A recent effort in the House led by Rep. Carolyn Maloney (D-NY) seeks to develop the Pandemic Risk Insurance Act of 2020 (PRIA), which would create the Pandemic Risk Reinsurance Program. PRIA would seek to create “a system of shared public and private compensation for business interruption losses resulting from future pandemics or public health emergencies.” (Rep. Maloney Dear Colleague letter, April 10 Roundtable Weekly)
- Rep. Maloney's pandemic program would be prospective – not retrospective. “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,” according to Maloney.
- In the Senate, Sen. Steve Daines (R-MT) is working on a broader concept that is both retrospective and prospective. Known as the Workplace Recovery Act, the measure would provide direct retrospective reimbursement through a Federal Automated Security Trust program to every business for operating losses, limited to 90% of past revenues.
- The Senate proposal would also establish a new government-funded business interruption insurance add-on for every privately administered commercial insurance plan to protect against future national pandemics.
- The National Association of Insurance Commissioners issued a statement recently warning that such efforts “would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.” (NAIC statement, March 25)
As with terrorism risk insurance, The Roundtable is working with policymakers and stakeholders to help develop an effective risk insurance program that addresses the economic impact of the current pandemic crisis and provides the economy with the coverage it needs to deal with future pandemic risks.
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IRS Grants Safe Harbors for Loan Modifications by Servicers of Mortgage-Backed Securities
The IRS on April 13 issued rules that will help facilitate mortgage modifications and debt work-outs between borrowers and lenders when a loan is held in a mortgage-backed security. The IRS guidance is consistent with the Roundtable’s request on March 20 that Treasury and the IRS take steps to protect private parties from the tax consequences of restructuring debt during the extraordinary and unanticipated COVID-19 pandemic.
- The new safe harbors extend to real estate mortgage investment conduits (REMICs) and investment trusts affected by loan forbearances and workouts due to the Covid-19 pandemic. (IRS Rev Proc 2020-26)
- REMICs are widely used vehicles for pooling mortgage loans and issuing residential and commercial mortgage-backed securities. A REMIC is generally required to hold a substantially fixed pool of real estate mortgages and related assets and must not have the power to vary the composition of its mortgage assets.
- Even if an entity initially qualifies as a REMIC, one or more significant modifications of mortgages held by the entity may terminate its REMIC status. Certain loan modifications are permitted if the change is “occasioned by default or a reasonably foreseeable default.” A prohibited transaction by a REMIC, however, can result in a tax equal to 100 percent of the income from the transaction.
- The new IRS rules provide that REMICs and investment trusts can grant forbearance relief to COVID-19-affected borrowers – and REMICs can acquire mortgage loans for which such forbearance is already in place – without adverse tax consequences or threatening their tax status. (Sidley Austin, April 15)
- These safe harbors apply to mortgage loan forbearance that is provided voluntarily by the mortgage holder or servicer, forbearance that is State-mandated, and forbearance that is mandated in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
- The CARES Act generally provides temporary forbearance relief for borrowers with certain federally backed mortgage loans who are experiencing a financial hardship due directly or indirectly to the COVID-19 emergency. (JD Supra, April 16)
The rules extend to both residential and commercial mortgage loans, including federally backed mortgage, multifamily and any “non-federally backed mortgage loans,” with no explicit limits on the type of property financed. The specific safe harbors are profiled in Alston & Bird’s April 15 Advisory.# # #
Real Estate Roundtable Members Stanley Chera and Mayer Greenberg Pass
- Stanley Chera founded Crown Acquisitions with Isaac Chera Sr. and built it over a span of three generations to include ownership interest in dozens of retail and office properties throughout North America, including trophy buildings in Manhattan. He was a member of The Roundtable since 2015.
- President Trump called out Mr. Chera at a 2019 rally in Grand Rapids, Michigan, as “one of the biggest builders and real estate people in the world.”
- Mayer Greenberg, a real estate tax attorney with Kramer Levin was also a member of The Roundtable and an active member of its Tax Policy Advisory Committee (TPAC). He advised domestic and foreign investors on the tax implications of complex commercial transactions, including joint ventures, mergers, acquisitions and other business restructurings.
- Before joining Kramer Levin Naftalis & Frankel LLP in 2019, Mr. Greenberg was a partner with Stroock & Stroock & Lavan LLP.
Roundtable President and CEO Jeffrey DeBoer said, “We are saddened by the loss of two well-established professionals in commercial real estate who participated in The Real Estate Roundtable for several years. Both Stanley Chera and Mayer Greenberg were generous with their time and expertise in helping their colleagues, the industry and our organization grow and adapt to rapid changes in the policy and business landscape. We will miss them and we extend our sincere condolences to their families.”
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