Last week, the Financial Stability Oversight Council (FSOC) released its 2023 Annual Report, identifying commercial real estate among the major financial risks to the U.S. economy in 2024. (FSOC 2023 Annual Report).

Report Findings

• Developed by the FSOC, the report reviews financial market developments, describes emerging threats to U.S. financial stability, identifies vulnerabilities in the financial system, and makes recommendations to mitigate threats and vulnerabilities.

• Citing the almost $6 trillion of commercial real estate loans outstanding in the second quarter of 2023, roughly half of which are held by U.S. banks, the report raises concerns about  “a substantial volume” of these loans that are set to mature in the next few years. (Marketwatch, Dec. 14)

• The report states, “Elevated interest rates, high costs, and potential structural changes in demand for CRE have heightened concerns about CRE. Maturing loans and expiring leases amid weak demand for office space have the potential to strain office sector conditions further, which could cause stress to spread beyond this segment of the CRE market.”

• The report also cites the July 2023 policy statement by the banking agencies on Prudent Commercial Real Estate Loan Accommodations and Workouts, as requested in the Roundtable’s March comment letter, and notes that accommodations and workouts are often in the best interest of borrowers and lenders.

• The FSOC recommends that supervisors, financial institutions, and investors continue to monitor CRE exposures and concentrations closely and track market conditions. (U.S. Department of Treasury Press Release, Dec. 14)

Looking Ahead

• This week, The Roundtable’s Clifton E. Rodgers, Jr. discussed the CRE industry’s concerns about the wave of maturing commercial real estate debt, restoring liquidity, and the challenging economic environment ahead in 2024 in an op-ed for Urban Land Institute,Finding Liquidity: Regulatory Agencies Should Exercise Caution to Prevent a Perfect Storm.

• In the op-ed, Rodgers stated, “To help rebalance these maturing loans, it is important to advance measures that will encourage additional capital formation. To that end, it is essential to bring more foreign capital into U.S. real estate by lifting legal barriers to investment, as well as to repeal or reform the archaic Foreign Investment in Real Property Tax Act (FIRPTA). Importantly, policymakers must not hike the tax rate on capital gains, end carried interest, or alter the 1031 like-kind exchange provisions.” (ULI Op-ed Dec. 18)

• A recent paper published by four economists at the National Bureau of Economic Research found that 14 percent of the $2.7 trillion commercial real estate loan market and 44 percent of office loans currently carry outstanding loan balances higher than property values and are at risk of default. (Commercial Observer, Dec. 18)

• The paper also cited that around one-third of all loans, and the majority of office loans, may encounter substantial cash flow problems and refinancing challenges.

• RER board member Scott Rechler (RXR) was quoted in the Wall Street Journal this week discussing the outlook for 2024. “In 2024, it’s game time. Owners and lenders are going to have to come to terms as to where values are, where debt needs to be, and right-sizing capital structures for these buildings to be successful.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will discuss many of these issues at our State of the Industry Meeting on January 23, 2024.

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House Ways and Means Committee members sent a bipartisan letter to House Leadership last Friday urging consideration of the Affordable Housing Credit Improvement Act (H.R. 3238) in any potential tax legislation brought to the floor in 2024. (Letter, Dec. 15)

AHCIA Provisions

• Since the introduction of H.R. 3238 in May, the bill has garnered strong bipartisan support with 200 cosponsors—100 Republicans and 100 Democrats. (summary of AHCIA)

• Representatives Darin LaHood (R-IL), Suzan DelBene (D-WA) and others wrote to House leadership urging inclusion of two key changes to the low-income housing tax credit (LIHTC) in any tax legislation that emerges (Tax Notes, Dec. 15):

• Restoring the 12.5% increase in state allocation of housing credits that expired at the end of 2021, and

• Lowering the threshold of private activity bond financing (currently 50%) that a project must meet in order to qualify for the maximum amount of 4% housing credits. 

• The competitive and over-subscribed LIHTC program is a critical federal tool for addressing the widespread lack of affordable rental housing. The arbitrary 50% bond financing requirement creates a barrier to affordable housing production, especially for the growing number of states that fully utilize their private activity bond cap. (Roundtable Weekly, May 19)

Senators Push Treasury to Finalize Rules for EV Recharging Infrastructure Incentives

• Fourteen Senators wrote to Treasury Secretary Yellen on December 15 asking for final rules implementing the alternative fuel vehicle refueling property tax credit. 

• The Roundtable previously submitted detailed comments seeking guidance requesting greater clarity for real estate owners and others contemplating new investments in EV recharging stations.

• The Inflation Reduction Act generally limits the credit to facilities installed in rural or low-income census tracts. The letter encourages Treasury to adopt an inclusive definition that effectively covers any tract if 10 percent or more of the “census blocks” inside the tract are rural. 

• The Senators’ letter includes other requests that align with the Roundtable’s comments and aims to help the administration realize its goal of deploying 500,000 chargers by 2030. For example, the Senators urge that the rules treat each port at a refueling property as a “single item” that effectively qualifies for its own credit.

Joint Tax Committee Releases “Bluebook” Describing Recent Tax Laws

• On Friday, Congress’s nonpartisan Joint Committee on Taxation released its long-awaited explanation of recently enacted tax laws.

• The General Explanation of Tax Legislation Enacted in the 117th Congress covers eight tax laws and nearly 200 tax provisions enacted or modified in 2021 and 2022, including the employee retention tax credit, the corporate alternative minimum tax, and the revamped energy tax incentives. 

• The so-called “JCT Bluebook” is often relied upon by Treasury officials and federal courts when implementing and interpreting tax statutes. 

Congress reconvenes in Washington the week of January 8, where they will face a fast-approaching deadline for fiscal year 2024 spending bills and additional priorities, including a tax package.

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The Roundtable’s policy news digest will resume publication on Friday, January 5, 2024 after the holidays. Recent issues of Roundtable Weekly can be searched by keyword here.