Policy Action Needed to Support Recovery of Commercial Real Estate Market

The commercial real estate market isn't going to fix itself.

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""As DSNews.com reported Friday"":http://dsnews.comarticles/tarp-watchdog-says-small-banks-cre-losses-could-hit-300-billion-2010-02-12, the congressional panel charged with overseeing the Troubled Asset Relief Program recently released an analysis of the commercial real estate market. According to the ""Real Estate Roundtable"":,http://www.rer.org/ a Washington, D.C.-based association bringing together leaders in the real estate industry to address key national policy issues relating to real estate and the overall economy, the report underscores the need for additional federal policy action to support economic recovery and stabilize commercial real estate markets.

""This report should be a must read for any policymaker looking to understand the scope of the problem and explore potential solutions,"" said Jeffrey DeBoer, Roundtable president and CEO.

In his testimony before Congress last summer on the $1 trillion refinancing crisis in commercial real estate, DeBoer explained that the crisis is being exacerbated by falling net operating income (NOI), significant property devaluation, and a growing shortage of equity capital. So banks can begin clearing their balance sheets of toxic assets and start lending to credit-worthy borrowers large and small, the Roundtable said top priorities should be job creation, tax policies to encourage equity investment in commercial real estate, and steps to restart secondary credit markets.
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""No single factor is as important to the state of the commercial real estate markets as a steady, and indeed, swift, economic recovery,"" the Congressional Oversight Panel (COP) said in its report, Commercial Real Estate Losses and the Risk to Financial Stability. ""Without more people in stores, more people at hotels, more people able to afford new or larger apartments, and more businesses seeking new or larger office space and other commercial property, the markets cannot recover, and the credit and term risk created by commercial real estate loans cannot abate without the potential imposition of substantial costs on lenders.""

According to the COP's report, tax issues that complicate loan workouts and new investment in commercial real estate may be hindering recovery in this market. One such example is the Foreign Investment in Real Property Tax Act (FIRPTA), a 1980 law that discourages foreign equity investment in U.S. commercial property.

The report explained that although many believe billions of dollars in non-U.S. equity are waiting to be invested in U.S. commercial real estate, non-U.S. investors can be hit with double or even triple taxation on their investments in U.S. real estate. According to the Roundtable, FIRPTA reform is critical to addressing the overwhelming equity gap in commercial real estate.

While there is no single policy solution, the Roundtable is also encouraging the extension of 15-year leasehold improvement depreciation. Cash-strapped building owners are pressed to make significant lease concessions, and the Roundtable said landlords should be allowed to recover these costs over a period closely matched to the typical seven- to 10-year lease term.

All in all, DeBoer said the panel's findings are consistent with the Roundtable's message of many months--""without action, the impact of billions of dollars of maturing commercial real estate loans could undermine the economic recovery and extend an already painful recession.""