A coalition of nine real estate industry groups, including The Real Estate Roundtable, on July 21 submitted a set of recommendations to the Senate Banking Committee aimed at improving the Fed’s Main Street Lending Program (MSLP) for commercial real estate owners and tenants. The committee is currently reviewing the effectiveness of the MSLP and other Fed credit lending facilities launched to counter the economic repercussions of the COVID-19 crisis. (Real estate coalition letter, July 21)
- The coalition letter states, “The impact of COVID-19 has been especially devastating to commercial real estate tenants, borrowers and lenders. As our members attempt to navigate the fall-out from this crisis, there is a deficiency of reasonably priced capital sources to address temporary liquidity deficits. Should impacted assets go into foreclosure, a downward spiral follows, affecting jobs, property values, investors at all levels (including pension funds), and state and local tax revenues. The repercussions on communities will be profound and take years from which to recover.”
- The coalition letter makes a number of recommendations for adapting the MSLP to support real estate.
AHLA Comment Letter Requests Additional Liquidity Assistance
The American Hotel & Lodging Association (AHLA) sent a letter to the congressional leadership this week requesting additional relief as the leisure and hospitality sector faces the loss of 4.8 million jobs since February. AHLA is urging Congress to:
- Provide additional liquidity for severely impacted businesses through a targeted extension of the Paycheck Protection Program (PPP).
- Establish a Commercial Mortgage Backed Securities (CMBS) market relief fund, with a specific focus on the hotel industry, as part of the Federal Reserve’s lending options.
- Make structural changes to the Main Street Lending Facility (MSLP) established under the CARES Act to ensure hotel companies can access the program.
- Include limited liability language to provide a limited safe harbor from exposure liability for hotels that reopen and follow proper public health guidance.
- Include targeted tax provisions that will benefit severely injured businesses and their employees, including tax credits for capital expenditures or expenses to meet the industry’s Safe Stay initiative.
Moody’s Report Raises Concerns About CMBS Delinquencies for Hotel and Retail
Moody’s reported yesterday that special servicing and late payment volumes have both continued to spike as ongoing COVID-19-related cash flow disruptions severely hinder retail and hotel properties backing commercial mortgage-backed securities (CMBS) loans.
- The report shows that significant drops in revenue per available room (RevPAR) and low rent collections among nonessential business have resulted in hotel and retail loans making up more than 91% of special servicing transfers since 1 March. The remaining 9% was primarily office and mixed-use. Mixed-use property types typically included a retail or hotel component. (Moody’s report, July 23)
Federal Reserve officials are scheduled to meet on July 28 and 29 to discuss how and whether to provide more economic stimulus. They are expected to address interest rates and the status of several credit lending programs, but will likely not release any proposal until the fall. (Wall Street Journal, July 22)
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Commercial mortgage-backed security borrowers could face a historic wave of foreclosures starting this fall, impacting local communities and jobs across the country, without a long-term federal relief plan to combat liquidity deficiencies facing commercial real estate borrowers caused by the COVID-19 pandemic. That is the bipartisan message sent on June 22 to the Federal Reserve and Trump Administration by more than 100 members of Congress, who are seeking support for real estate borrowers unable to keep up with payments on debt tied to CMBS. (Wall Street Journal, June 23)
- The bipartisan letter acknowledges the existence of the Fed’s lending facilities, yet warns about “the looming crisis in commercial real estate adversely impacted by the COVID-19 pandemic, including the $540 billion Commercial Mortgage-Backed Security (CMBS) market that, if left unchecked, may lead to a wave of foreclosures, exacerbating the current downturn in the U.S. economy and ultimately result in permanent job loss in multiple industries and communities across the country.” (Congressional letter, June 22)
- The congressional letter also requests the Fed to “devise a relief plan for these borrowers, who through no fault of their own, have experienced a significant drop in revenue on account of the COVID-19 pandemic and related governmental orders.”
- Rep. Van Taylor (R-TX) is leading the effort to show policymakers the troubles faced by many hotels, shopping malls and office buildings that borrow money in the CMBS market – with some owners expressing concerns their properties could go to foreclosure. (Wall Street Journal, June 4)
- A June 26 letter from four national hotel trade associations to Treasury and the Fed emphasizes the unique pressures they face when pursuing loans using the Fed’s Main Street Lending Program (MSLP), which utilizes strict criteria based on Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
- The hoteliers detail multiple unnecessary obstacles in accessing desperately needed liquidity and how the industry’s asset-heavy business model shut them out from utilizing the MSLP because of the rigid EBITDA leverage test. “Most hotels are financed via mortgage debt, which means that their total outstanding debt is generally already above the maximum six-times EBITDA threshold established in the Main Street Lending Facility,” the letter notes.
- The hotel coalition letter also details specific “actions that would allow this critical industry access to liquidity to keep workers employed and help survive the crisis.”
- 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 MSLP to forestall further disruption and economic dislocations in the commercial real estate sector during the pandemic. (MSLP comment letter, April 22)
- Previous industry letters to the Fed on March 24 and April 14 addressed the need to broaden the range of a separate credit facility – the Term Asset Backed Securities Facility (TALF). Those letters requested that TALF eligible collateral include both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations. On April 9, the Fed confirmed that the TALF would be expanded to include triple-A rated legacy non-agency CMBS and loans.
- The Federal Reserve Bank of New York reported this week that the TALF had done $145,213,948 of “commercial mortgage” collateralized financing – legacy CMBS – out of a total of $252,155,890 of total volume, or 57.59%.
- Overall, the CMBS market over the next two years could see 13,000 loans totaling $148 billion go into default, according to a recent analysis by CoStar Risk Analytics. (CoStar News, April 30)
- Additionally Fitch reports that $21 billion of CMBS loans are now in Special Servicing due to the coronavirus pandemic’s impact on tenants and borrowers. This total is more than double the amount of CMBS loans that went into special servicing all of last year. (GlobeSt, June 23 and The Real Deal, June 22 and Fitch, June 17)
- Real Capital Analytics reports that the volume of deals for U.S. commercial properties including, offices and hotels, plummeted 79% in May compared with a year earlier. Deals to purchase hotels plunged 95% in May, the largest drop of any property type. Retail property transactions were down 83%. (BGov, June 25)
The June 22 congressional letter led by Rep.Taylor requests that Treasury and the Fed urgently consider targeted economic support to bridge the temporary liquidity deficiencies facing all commercial real estate borrowers. The letter concludes, “We believe an opportunity exists for responsible federal government investment in the commercial real estate market to provide a pathway to stabilize affected properties, the local jobs and businesses they enable, and the neighborhoods they serve.”
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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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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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