Key Regulators View Banks’ Office Loan Concentrations as Manageable Risk
Fed Chair Jerome Powell and Treasury Secretary Janet Yellen this week said that federal regulators are closely monitoring bank loan concentrations in office properties for heightened economic risk but view the CRE sector’s financial challenges as manageable. (60 Minutes’ Powell transcript, Feb. 3 and Bloombergvideo of Yellen testimony, Feb. 6)
Regulators Focus on CRE
Chair Powell told CBS’ 60 Minutes, “We looked at the larger banks' balance sheets, and it appears to be a manageable problem. It's a secular change in the use of downtown real estate. And the result will be losses for the owners and for the lenders, but it should be manageable.”
Secretary Yellen also said economic pressures on office properties are “manageable” before the House Financial Services Committee on Feb. 6 and the Senate Banking, Housing and Urban Affairs Committee on Feb. 8. Her testimony included a summary of findings from the Financial Stability Oversight Council’s annual report, which noted, “Elevated interest rates, high costs, and potential structural changes in demand for CRE have heightened concerns about CRE.”
CNBC’s Squawkbox interviewed Minneapolis Fed Pres. Neel Kashkari on Feb. 7 about the regulators’ CRE concerns. “It really is focused on the office sector. Many other segments within commercial real estate seem to be doing very well, so I think that delineation is important. And we think it’s going to be on a bank-by-bank basis where we see pressures flare up. Our bank supervisors are in very close contact with others around the country,” Kashkari said.
Roundtable Board Member Scott Rechler (Chairman and Chief Executive Officer, RXR) told CNBC’s Squawkbox on Feb. 6 that commercial real estate markets in 2023 were "a little bit paralyzed" but 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)
A recent CRED iQ report found that more borrowers are modifying CRE loans. The report covers 441 loans with a total value of $13.6 billion (GlobeSt. Jan. 25)
CNBC’s Last Call interviewed House Financial Services Committee Member French Hill (R-AR) about capital and credit pressures on CRE on Feb. 1. Rep. Hill addressed the negative impacts of interest rates, fiscal policy, and inflation on the economy and the office sector—and the problems posed by the regulatory agencies’ Basel III “Endgame” proposal.
Separately, The Federal Reserve Board recently announced that its Bank Term Funding Program will cease making new loans on March 11. The program remains available as an additional source of liquidity for eligible institutions until that date. (Fed news release, Jan. 24)
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Foreign Investment & CRE
U.S. Appeals Court Blocks Law Restricting Foreign Investment in Florida Real Estate
A federal appeals court recently blocked enforcement of a Florida law that could have negative consequences for foreign investment in U.S. property and agriculture land. The Real Estate Roundtable has urged Florida officials for months to consider changes to the interpretation of the law’s broad language. As currently written, the measure could prevent U.S.-managed funds from pursuing investment opportunities in the state if there is any level of investor participation in the fund from “countries of concern.” (Roundtable Weekly, Feb. 2 and Dec. 15 | Reuters and WFTV, Feb. 2)
Foreign Investment in U.S. Property
The outcome of the case (Shen v Simpson) involving the Florida law (SB 264) could have national ramifications. At least 15 other states enacted similar legislation restricting foreign investment in U.S. real estate during the first six months of 2023. An additional 20 states are considering the issue. (Congressional Research Service, July 2023 and Gibson Dunn, Sept. 2023)
On Feb. 5, BisNow quoted a Sept. letter from Real Estate Roundtable President and CEO Jeffrey DeBoer to the Florida Real Estate Commission. The letter emphasized that non-U.S. investors may include small investors from China, who routinely subscribe to funds controlled or advised by regulated U.S. asset managers. Third-party, passive investors ordinarily invest as limited partners in the partnership, and do not have the right to participate in the partnership's management, or exercise control over its underlying investments.
“Our concern with the new law is that these U.S.-managed investment funds, which are controlled and managed by U.S. nationals, may now be precluded from pursuing investment opportunities in Florida if there is any level of investor participation in the fund from countries of concern like China,” DeBoer wrote. (Roundtable letter, Sept. 5, 2023)
The Roundtable also submitted a comment letter on Jan. 30 to the Florida Department of Agriculture and Consumer Services, which is considering implementing SB 264measures addressing foreign investment in Florida’s agricultural land. The Roundtable’s letter raised concerns about the unintended and negative consequences for investment in Florida and future economic growth. (Roundtable letter and Roundtable Weekly, Feb. 2)
SB 264 & FIRRMA
The 11th U.S. Circuit Court of Appeals, above, considered a ban authorized by SB 264 restricting certain Chinese citizens from owning homes or land in the state. The U.S. Department of Justice filed a “statement of interest” in the case, noting that SB 264 violates federal law and the U.S. Constitution. (Politico and NBC News, Feb. 2)
The appeals court's Feb. 1 order stated the Florida law is “preempted” by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which is implemented by the U.S. Committee on Foreign Investment in the United States (CFIUS). (Appeals Court order)
CFIUS is an interagency federal committee authorized to review certain transactions involving foreign investment in the United States and certain real estate transactions by foreign persons.
Roundtable Chairman John Fish (Chairman & CEO, Suffolk) was quoted in Bloomberg about Florida’s SB 264, stating, “The law is far-reaching, very, very confusing, and the unintended consequences would be very, very detrimental.” (Bloomberg, Dec. 11 | Bisnow and Inman, Dec. 12)
Treasury Regulators Propose Beneficial Ownership Rule for All-Cash Residential Transactions
This week, the Treasury Department’s Financial Crimes Enforcement Network (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. (Reuters and AP, Feb. 7)
The proposed rule would require reporting on various types of residential real property transfers. Exceptions would apply for highly regulated types of entities and trusts that are less likely to be used by illicit actors to launder money through residential real property. (FinCEN Fact Sheet on NPRM, Feb. 6)
FinCEN expects that the obligation to file Real Estate Reports would generally apply to settlement agents, title insurance agents, escrow agents, and attorneys.
Comments about the Notice of Proposed Rulemaking will be accepted for 60 days following publication in the Federal Register.
Small Business Registry
Treasury has also pursued the development of a new small business ownership database called the beneficial ownership registry, which is expected to include personal information on the owners of at least 32 million U.S. businesses. (AP, Feb. 7 | FinCEN’s background information and FAQs on reporting)
The registry requires millions of companies to report information about persons who own at least 25% of a company or exert significant authority over it to the Financial Crimes Enforcement Network (FinCEN).These beneficial ownership regulations took effect on Jan. 1, 2024 under the Corporate Transparency Act (CTA). (Final Rule | Fact Sheet | Wall Street Journal and Bloomberg Law, Sept. 29)
On Jan. 8, Treasury Secretary Janet Yellen announced that 100,000 businesses have registered for the new database. (AP, Jan. 8)
Ten national real estate industry organizations and The Roundtable submitted detailed comments to FinCEN on Feb. 21, 2022 about the proposed anti-money laundering regulations affecting real estate transactions. (Roundtable Weekly, Feb. 25, 2022)
On Oct. 13, 2023, The Roundtable and a coalition of eight national real estate groups urged Treasury Secretary Yellen to delay the implementation of these burdensome reporting requirements. (Coalition letter | Roundtable Weekly, Oct. 20 and Sept. 30)