Federal Reserve Supervisors Focused on Banks’ CRE Lending Risk
Roundtable and Housing Affordability Coalition Urge Senate to Pass Tax Package
Federal Initiatives on Buildings, Climate Gaining Momentum Ahead of 2024 Elections
Treasury Testifies on New Rules for Investment Advisors to Combat Illicit Finance
Roundtable Weekly
February 16, 2024
Federal Reserve Supervisors Focused on Banks’ CRE Lending Risk
Michael Barr

Federal banking regulators are closely monitoring risk factors in commercial real estate bank lending throughout the United States, according to comments today from Federal Reserve Board Vice Chair for Supervision Michael Barr. This week, the Fed also released scenarios for its annual stress test for large banks that includes a 40 percent decline in commercial real estate prices—one of several hypothetical risks designed to assess the resilience of the banking system in the event of a severe recession. (Barr speech, Feb. 16 and Fed stress test, Feb. 15)

Managing CRE Risks

  • Barr stated today, “Let me turn to supervision of a specific risk: commercial real estate. The reduced demand for office space and higher interest rates have put pressure on some CRE valuations, particularly in the office sector.”
  • Barr noted that Fed supervisors are “closely focused on banks’ CRE lending in several ways.” He explained that regulators analyze how banks measure and report their risk, what steps they have taken to mitigate the risk of losses on CRE loans, and whether they have sufficient capital to buffer against potential CRE loan losses. (Barr speech, Feb. 16)
  • He also stated that today’s heightened financial risk environment has led the Fed to downgrade firms' supervisory ratings at a higher rate in the past year and increase its issuance of enforcement actions. Barr said, “We continue to evaluate whether we should temporarily require additional capital or liquidity beyond regulatory requirements where the firm has trouble in managing its risks.” (PoliticoPro, Feb. 16)
  • Bloomberg reported that regulators determined that 22 regional banks late last year had CRE loan portfolios that merit greater scrutiny. (Connect CRE, Feb. 15)

Wave of CRE Refinance Meets Price Discovery

Roundtable Board Member Scott Rechler (Chair and CEO, RXR)
  • Bloomberg also reported this week that commercial property deals in the U.S. are starting to pick up at deep discounts, forcing lenders to brace for increased pressure on maturing loans. (Bloomberg, Feb. 14)
  • Roundtable Board Member Scott Rechler (Chairman and Chief Executive Officer, RXR) told Bloomberg that as more transactions add price discovery to the market, investors will have to recapitalize loans to reflect lower values.
  • Rechler said, “In 2024, we’re at that fifth stage of grief. People are now in acceptance.” He also commented on falling property values: “You can’t ignore that anymore. Depending on the severity of it, we’ll see who has actually marked appropriately and who hasn’t.”
  • RXR’s CEO told CNBC last week that “if you're a borrower who's willing to invest money, banks are willing to reduce their loan balances to reflect the current environment.” (CNBC, Feb. 6 and Roundtable Weekly, Feb. 9)
  • The Wall Street Journal reported this week that investors are starting to show interest in properties where building owners are unable to extend their loans. The article cites Trepp data that shows more than $2.2 trillion in commercial mortgages are scheduled to mature between now and the end of 2027. (WSJ, Feb. 12)

The Mortgage Bankers Association (MBA) reported this week that 20 percent ($929 billion) of the $4.7 trillion of outstanding commercial mortgages held by lenders and investors will mature in 2024. That represents a 28 percent increase from the $729 billion that matured in 2023, according to MBA’s Commercial Real Estate Survey of Loan Maturity Volumes.

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Roundtable and Housing Affordability Coalition Urge Senate to Pass Tax Package
Housing Affordability Coalition logos

This week, The Real Estate Roundtable and 21 other industry organizations urged the Senate to pass a tax package that was approved by the House in an overwhelming bipartisan vote (357-70) on Jan. 31. (Coalition letter, Feb. 15)

Tax Provisions in the Senate

  • The Housing Affordability Coalition’s letter to all Senators emphasized the importance of advancing provisions in The Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) that strengthen the low-income housing tax credit (LIHTC)—along with various real estate investment measures that would benefit families, workers, and the national economy.
  • The coalition noted how the bill would increase the supply of housing as a positive response to the nation’s housing affordability crisis. It would also suspend certain tax increases on business investment that took effect in 2022 and 2023. 
  • The Feb. 15 letter focused on details of the bill’s provisions that positively impact the LIHTC, deductibility of business interest, bonus depreciation, and small business expensing.
  • The Roundtable also joined the National Multifamily Housing Council (NMHC) and a large coalition of housing and other real estate groups in a Jan. 26 letter to Congress in support of the tax package. That letter also focused on the bill’s important improvements to the LIHTC, which will significantly increase the construction and rehabilitation of affordable housing over the next three years.

Congressional Timing

U.S. Capitol building
  • Senate Republicans considering the House tax package have called for an amendment process that would be time consuming. (The Hill, Feb. 2)
  • With Congress in recess until the last week of February, there will be limited legislative vehicles available the bill could ride on, just days before a set of government funding deadlines hit on March 1 and 8. The best chances the package could have for inclusion in other legislation include a potential funding bill to prevent an early March government shutdown or a bill to reauthorize the Federal Aviation Administration on March 8.
  • If the tax package is pushed beyond March, it may not be considered until a lame duck session after what is expected to be a contentious election season.

SALT Reform Pinched

  • On Feb. 14, a procedural rule to advance the SALT Marriage Penalty Elimination Act (H.R. 7160) to a floor vote in the House fell short of a majority vote needed to pass.
  • The effort by House lawmakers to double the $10,000 cap on state-and-local tax deductions (SALT) for married couples earning up to $500,000 failed by a vote of 195-225. (RollCall and CQ, Feb. 14)

The tax package (H.R. 7024) passed by the House last month did not address the SALT cap, which led to this week’s consideration of a separate reform measure. The current SALT cap is scheduled to expire at the end of 2025, along with many other measures passed as part of the Tax Cuts and Jobs Act (TCJA) of 2017.

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Federal Initiatives on Buildings, Climate Gaining Momentum Ahead of 2024 Elections
The White House

The Biden-Harris administration is accelerating actions at the intersection of climate and real estate policy in the lead-up to November’s elections to implement its signature clean energy legislation passed during its first years in office. RER’s Sustainability Policy Advisory Committee (SPAC) remains engaged with policymakers on a variety of initiatives coalescing in 2024 that include the following:

Climate-Related Financial Risk

  • The U.S. Securities and Exchange Commission (SEC) is expected to issue a final rule this spring for registered companies to disclose financial risks from climate change.(RER fact sheet and Roundtable Weekly, March 10, 2023).
  • Scope 3 “indirect” emissions from sources in a company’s supply chain are controversial elements of the anticipated SEC rule. RER’s 2022 comments urged the Commission to drop its “back door mandate” for Scope 3 disclosures. (Roundtable Weekly, June 10, 2022)
  • Litigation against the SEC’s imminent rule is widely expected. A recent lawsuit filed by industry groups against a California disclosure package passed last summer (modeled after the SEC’s proposal) signals similar claims that the federal government might face in court. (Wall Street Journal, Jan. 30 and RER fact sheet)

Voluntary Frameworks

EPA's NextGen Building Label
  • NextGen certification may serve as an “intermediate step” for buildings that strive for a voluntary Zero Emissions Building (“ZEB”) definition coming from the U.S. Energy Department. Recent comments from RER and Nareit maintain that the federal ZEB definition can lend consistency to the confusing state-local regulatory patchwork of building performance standards. (Roundtable Weekly, Feb 2.)
  • EPA is acting on requests to update Portfolio Manager, CRE’s standard tool to measure metrics for building efficiency and emissions. Portfolio Manager upgrades announced at last month’s SPAC meeting will help real estate companies strive for NextGen or ZEB status. (Coalition letter, Sept. 14, 2023)
  • This spring, the influential GHG Protocol—an international framework heavily relied upon by the SEC, EPA, DOE, and institutional investors—will undertake its first revisions since 2015 to its guidance for companies to account for emissions from electricity use. RER will participate in the upcoming Scope 2 guidance public comment process.

Tax Incentives

Ben Myers, left, and Tony Malkin, right -- SPAC leadership
Roundtable Sustainability Policy Advisory Committee Chair Tony Malkin, right, and
Vice Chair Ben Myers
  • The Internal Revenue Service (IRS) has issued dozens of proposed rules and notices to implement clean energy tax incentives available to real estate and other sectors since Congress passed the Inflation Reduction Act (IRA) in 2022. (RER fact sheet)
  • The IRS is expected to release final rules before November on topics such as the ability of REITs to transfer certain tax credits, proposed rules on non-urban census tracts eligible for EV charging station credits, and the 179D deduction for building retrofits.
  • RER has submitted comments on these and other topics in response to initial IRS notices and will continue to provide feedback as opportunities arise. (RER letters Oct. 30 and July 28, 2023;  Nov. 4 and Dec. 2, 2022)

The Roundtable’s SPAC—led by Chair Tony Malkin (Chairman, President, and CEO, Empire State Realty Trust) and Vice Chair Ben Myers (Senior Vice President of Sustainability, BXP)—will press forward with RER’s climate and energy priorities for the remainder of the current administration and into the next.

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Treasury Testifies on New Rules for Investment Advisors to Combat Illicit Finance
Treasury Department's FinCEN logo

The director of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) appeared before the House Financial Services Committee this week to address recent regulatory proposals for investment advisors to combat illicit finance activity and money laundering in U.S. residential real estate. Director Andrea Gacki testified, “We are also considering next steps with regard to addressing the illicit finance risks associated with the U.S. commercial real estate sector.” (Committee hearing and Gacki’s statement, Feb. 14)

FinCEN’s Business Regulatory Proposals

  • The hearing on Wednesday followed a new FinCEN proposal that would require investment advisors to report suspected money laundering to the U.S. government. (Wall Street Journal, Feb. 13)
  • A fact sheet on the proposal explains that although FinCEN is not proposing an obligation for investment advisers to collect beneficial ownership information at this time, it anticipates it will do so in the future. (FinCEN Proposal and Fact Sheet, Feb. 13 | Treasury’s 2024 Investment Adviser Risk Assessment)
  • Last week, FinCEN proposed a rule that would require certain real estate professionals involved in the closing or settlement of residential transfers to report information to FinCEN about the beneficial owners of legal entities and trusts involving all-cash transactions. The rule would not require the reporting of sales to individuals.  (Roundtable Weekly, Feb. 9 | Reuters and AP, Feb. 7)
  • Another set of regulations that took effect on Jan. 1, 2024 is expected to collect personal information from owners of at least 32 million U.S. businesses into a beneficial ownership registry managed by the government.  A beneficial owner is described as individual who owns at least 25 percent of a company or enough to exert significant control over it. (Final Rule | Fact Sheet | RER background on beneficial ownership)
  • FinCEN Director Gacki told the House Committee that more than 430,000 businesses have submitted reports to the registry so far. (PoliticoPro, Feb. 14)

Concerns About Beneficial Ownership Registry

  • In his opening statement, Committee Chairman Patrick McHenry (R-NC), above, was critical of Treasury’s ongoing proposals and its beneficial ownership regulations affecting small businesses. McHenry added, “Until FinCEN can show Congress it can do its current job and appropriately use its existing authorities, I’m skeptical of providing greater authorities and resources.” (FinCEN’s background information and FAQs on beneficial ownership reporting)
  • McHenry added, “The administration has transformed what was a simple and direct program into Frankenstein’s monster of complexity. We now have a new, overly complex and less secure access regime."

On Oct. 13, 2023, The Roundtable and a coalition of eight national real estate groups urged Treasury Secretary Yellen to delay the implementation of the burdensome reporting requirements. (Coalition letter | Roundtable WeeklyOct. 20 and Sept. 30)

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