Fed Chairman Testifies Congressional Stimulus Measures Should Continue as Main Street Lending Program Launches; Regulators Support Financing to Non-Bank Lenders

Federal Reserve Chairman Jerome Powell told House and Senate policymakers this week that economic support for workers and businesses adversely affected by COVID-19 should continue, adding that until COVID-19 is fully contained, “a full recovery is unlikely.” 

  • Powell testified remotely on June 16 before the Senate Banking Committee and on June 17 before the House Financial Services Committee to deliver his Semiannual Monetary Policy Report to Congress.
  • “It would be wise to look at ways to continue to support people who are out of work and also smaller businesses that may not have vast resources for a period of time…so that we can get through this critical phase,” Powell said. “That support would be well placed at this time.” (Wall Street Journal, June 17 and 18)
  • The Fed Chairman acknowledged some economic indicators have suggested “a modest rebound.” He also cautioned, “That said, the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.”  (BGov, June 17 and Marketwatch, June 18)
  • During his two days of congressional testimony, Powell defended the Fed’s aggressive purchases of assets and corporate bonds.  “I don’t see us as wanting to run through the bond market like an elephant, doing things and snuffing out price signals,” he said. “We just want to be there if things turn bad in the economy.”  (Bloomberg, June 16)
  • Powell delivered his remarks to Congress after stating last week that the central bank will continue buying large quantities of bonds and leave interest rates near zero through at least 2022.”  (USA Today, June 10)
  • The Fed Chairman also warned that the economic downturn could widen inequalities between rich and poor.  “Low-income households have experienced, by far, the sharpest drop in employment, while job losses of African-Americans, Hispanics and women have been greater than that of other groups,” Mr. Powell said. “If not contained and reversed, the downturn could further widen gaps in economic well-being that the long expansion had made some progress in closing.”  (New York Times, June 16)

Former Federal Reserve Chairs Ben Bernanke and Janet Yellen signed a June 16 letter to congressional leaders, endorsed by more than 150 economic scholars, stating, “Congress must pass another economic recovery package before most of the support in the CARES Act expires this summer.  Congress should address this risk, and the already occurring economic damage, by passing, as soon as possible, a multifaceted relief bill of a magnitude commensurate with the challenges our economy faces.” (Washington Center for Equitable Growth, June 16 statement)

Main Street Lending Program Launches

The Real Estate Roundtable and Nareit on April 22 wrote to Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell urging that additional measures be adopted to expand the scope of the Main Street Lending Programs (MSLP) to forestall further disruption and economic dislocations in the commercial real estate sector during the pandemic.  (MSLP letter, April 22)

  • On June 8, The Federal Reserve Board expanded its MSLP to allow more small and medium-sized businesses to be able to receive support. (Roundtable Weekly, June 12)
  • This week, the Federal Reserve’s MSLP opened for lender registration.  The Federal Reserve Bank of Boston announced on June 15 that lenders can find the necessary registration documents and are encouraged to begin making Main Street program loans immediately.  (News Release)
  • The program offers five-year loans with floating rates, with principal payments deferred for two years and interest payments deferred for one year. The loans range in size from $250,000 to $300 million to support a broad set of businesses.

The MSLP intends to purchase 95% of each eligible loan that is submitted to the program after meeting all requirements. The Program will also accept loans that were originated under the previously announced terms, if funded before June 10, 2020. 

Regulators Support Financing to Non-Bank Lenders

Federal banking regulators responded favorably this month to a request from a business coalition, including The Real Estate Roundtable, that requested clarifications about financial institutions working with borrowers impacted by COVID-19. (Regulators April 7 guidanceInteragency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.)

  • The coalition on May 15 wrote to the regulators requesting clarification that – in addition to traditional loan products – lending and financing arrangements, such as warehouse lines and repurchase agreements secured by multifamily and commercial real estate loans and commercial mortgage-related securities, are within the scope of the guidance.  (Coalition May 15 letter)
  • The coalition’s focus was the debt financing extended by commercial banking institutions to non-bank lenders (NBLs) who, in turn, provide mortgage loan funding to commercial and multifamily property owners of all types.  The coalition received two affirmative replies, from Acting Comptroller of the Currency (OCC) Brian P. Brooks on June 4 – and on June 18 from Federal Deposit Insurance Corporation (FDIC) Chairman Jelena McWilliams.

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) continues to work to address the current crisis, pursuing measures that will enhance liquidity and capital formation, and to help develop an effective insurance program that provides the economy with the coverage it needs to address future pandemics. 

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Paycheck Protection Program Changes Signed Into Law; Next COVID-19 Stimulus Legislation Expected by July

Architect of the Capitol

Legislative changes to the Paycheck Protection Program (PPP) signed into law today will ease restrictions on forgivable loans to small businesses seeking to retain and pay workers affected by COVID-19.  (BGov, June 4)

  • H.R. 7010 passed the House (417-1) on May 28, cleared the Senate by unanimous consent on June 3 and was signed into law by President Trump today.  (Roundtable Weekly, May 22 and AP, June 5)

The bill also:   

  • Replaces the “75-25 Rule” on the use of PPP loan proceeds for loan forgiveness purposes with requirements to spend at least 60% for payroll costs and up to 40% for covered mortgage interest, rent, and utility payments;

  • Extends the PPP re-payment period to five years for small businesses that do not receive loan forgiveness;
  • Allows PPP loan recipients to take full advantage of deferral of employment taxes through the end of 2020; and
  • Provides borrowers a “safe harbor” from the loan forgiveness rehiring requirement if the borrower is unable to rehire an individual who was an employee of the recipient on or before February 15, 2020, or if the borrower can demonstrate an inability to hire similarly qualified employees on or before December 31, 2020;  (Congressional Research Service summary, May 28)

Senate Majority Leader Mitch McConnell (R-KY) said additional  technical fixes to the PPP will follow at the requests of Sen. Ron Johnson (R-WI), Senate Small Business and Entrepreneurship Chairman Marco Rubio (R-FL) and Sen. Susan Collins (R-ME) (RollCall, June 3)

Next COVID-19 Stimulus; Fed Expands Muni Loan Program

The Trump Administration is considering policy options for the next legislative response to the coronavirus pandemic.  The Wall Street Journal reports a senior administration official stated this week, “We’ve been through the rescue phase and we’re now in the transitional reopening phase and I think generally speaking we’d like to move into a growth-incentive phase for the future economy.”  (WSJ, June 2)

  • White House aides, according the Journal, stated the nation’s mass unrest over police brutality and racial inequality, along with the progress of business reopening efforts, will influence the pace of discussions – but they do not expect the completion of a package until July.
  • House Ways and Means Committee Chair Richard E. Neal (D-MA) on Wednesday said he is continuing negotiations with Treasury Secretary Steven Mnuchin on another round of coronavirus relief legislation that could include major infrastructure spending and tax credit proposals.  (Law360, June 4)
  • Neal said on June 3 that in addition to infrastructure investment, he intends to propose an expansion of new markets tax credits for private investment in low-income communities, low-income housing tax credits to build affordable housing, and historic rehabilitation tax credits for preservation purposes. (TNT, June 4)
  • This week also saw the Federal Reserve expand the scope of its $500 billion a lending program for state and local governments to include smaller borrowers.   (Fed news release, June 3)
  • The Fed’s expansion of its Municipal Liquidity Facility (MLF) will now enable all U.S. states “… to have at least two cities or counties eligible to directly issue notes to the MLF regardless of population.”  Governors from each state will also be able to select two bond issuers “…whose revenues are generally derived from operating government activities (such as public transit, airports, toll facilities, and utilities) to be eligible to directly use the facility.’  (MLF term sheet, June 3)
  • The MLF expansion may now allow sparsely populates states to designate two areas hard hit by the economic repercussions of the pandemic, or bond issuers like New York’s subway system, to sell debt to the Fed as a way to maintain critical services.  (New York Times, June 3)

The various policy response to economic impacts of COVID-19 will be a focus next week during The Roundtable’s Virtual Annual Meeting, which will include a discussion with Treasury Secretary Steven Mnuchin.

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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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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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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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