ICSC Is Supporting H.R. 5943…Are You ?

The International Council of Shopping Centers (ICSC) is leading a charge to get Congress to enact legislation that would encourage more rapid workouts of distressed loans. In late July, Congresswoman Shelley Berkeley (D-Nev.) introduced H.R. 5943, the “Community Recovery and Enhancement Act of 2010”.

The bill has been referred to the House Ways and Means Committee. It has drawn two co-sponsors—Devin Nunes (R-Calif.) and Joseph Crowley (D-N.Y.). A companion bill has not yet been introduced to the Senate.

The bill is designed to encourage third parties to inject equity into situations where a borrower is under water on the mortgage. If passed, the bill would provide a tax benefit in the form of 50% bonus depreciation on the amount invested into a distressed debt situation. The new investor would obtain a minority stake in the center and a preferred cashflow position on future income.

In turn, the lender would have to take a slight haircut and restructure the mortgage while getting a chunk of the mortgage repaid immediately. And the distressed borrower would use the investment to pay down debt, give up an interest in the center and use 20% of the new equity on capital improvements.

How does it work?

ICSC outlined a hypothetical scenario to show how the bill would work. Say a buyer acquired a $30 million shopping center in 2007 and took out a $24 million mortgage loan for three years at a 5.5 percent interest rate. Today that same property may be worth just $22.5 million if it’s lost 25 percent of its value, meaning the loan to value that was originally at 80 percent is now 107 percent.

Under terms of the bill, a new investor could pay $7 million for a 30 percent stake in the property and get a 4.5 percent annual preference on cash flow and a 30 percent share of residual cashflow. The new investor would also receive rights to a 30 percent share of the net sales proceeds if the property were sold (after the lender is paid and the original $7 million is recovered).

In addition, the bill would enable the new investor to receive an immediate bonus depreciation of 50 percent, meaning the investor would only have to pay taxes on $3.5 million of the investment that would be depreciated over the remaining useful life the property.

The lender, meanwhile, would take a $1.5 million write-down, which together with the $7 million of new equity, would enable the loan balance to be reduced to $15.5 million and extended under new terms.

Lastly, the delinquent borrower would be brought current with a reduced principal. The borrower would take a hit on future returns, but retain control of the property. Moreover, the bill stipulates that 80 percent of the new equity would go toward paying down debt, with the remaining 20 percent going to capital or tenant improvements on the property.

Why now?

The motivation behind the bill is that too few distressed situations are currently being resolved. Banks—especially regional and community banks—are loathe to take write-downs on existing commercial real estate loan portfolios. That’s true even in situations where borrowers are underwater on their mortgages (the amount owed on the mortgage is greater than the value of the property).

Instead, banks often grant extensions of existing terms, even if borrowers are having trouble meeting payments. The bill is also designed to encourage cash that has been sitting on the sideline to enter the market through the tax break.

“The intent is to create a targeted, short-term solution,” says Betsy Laird, ICSC’s senior vice president of global public policy. “This would not help everyone. But it would help a large number of properties by rewarding equity that up until now has been sitting in a ‘wait-and-see’ mode.”

Laird thinks the legislation would most likely benefit small and medium-sized owners of commercial property that have less pull with lenders. Large institutional players, including real estate investment trusts, have been able to refinance debt loads.

ICSC originally began outlining the bill internally last fall. After refining the proposal, the association pushed for the bill to be introduced earlier this year during its annual strategic leadership summit in mid-March. During that period, ICSC members from across the country traveled to Washington, D.C. to visit with senators and representatives and lobby for legislation. This year more than 150 ICSC members took part in the summit.

Congresswoman Berkeley, whose purview includes Las Vegas, took an interest in the bill because of the high number of distressed properties in her district, according to Jenifer Platt, ICSC’s director of federal government relations. “Over the last few months, we worked with her office to get [the bill] into legislative language that they were comfortable with,” Platt says.

The bill’s future, however, is cloudy. Congress is in recess until Sept. 13 and there remains little time left for the 111th Congress to address the issue. Laird and Platt said they don’t have a sense for when the legislation might be considered. It may, in fact, need to be reintroduced next year when the new Congress takes over. The fact that it has bipartisan support, however, may help matters. ( credit d. bodhamer)

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2 Comments

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2 responses to “ICSC Is Supporting H.R. 5943…Are You ?

  1. Steve Dietrich

    I am at a loss to see how this is a good deal for the investor or for the country. Would Sam Zell do this deal? “expletivite delected” NO.

    Should the taxpayers do the deal NO, the taxpayers are becomming very anti-bailout sensitive.

    Part of the problem behind the reluctance to realistically restructure projects and loans is the belief that if the lender and owner wait long enough there will be a better deal offered by the government.

    At the end of the outlined transaction the lender is still holding an 84% LTV loan in a market which thinks something in the low 60% range is more reasonable.

  2. HR 5943 is a red herring and a waste of ISCS resources. It is quite obvious that this bill attempts to shift the cost of malinvestment to an unsophisticated investor (I say unsophisticated because those in the business would laugh you into the street, delete your name from Outlook and instruct their assistants to never let you waste their time again).

    ICSC has published a paper on why H.R. 5943 is a good idea. I am working on a paper with an indepth critique but let me give a few highlights.

    Firstly (this is the big one): investors would be able to avoid the forclosure process. The bank is responsible for the foreclosure not the investor (unless the investor purchases the note which would be at a very large discount). Consquently, the investor is avoiding nothing and is actually in a better position post-foreclosure; the bank must now dispose of an asset that has inherent liablities (eg: taxes, insurance, management). The foreclosure process is a necessary part of our system that clears out malinvestment and allows investors to acquire property at or below market rates; if there is no market rate, then the process has spoken volumes as to current value.

    Second: the investor has the ability to invest in undervalued commercial assets. Huh? One of the foundation points of H.R. 5943 is an attempt to address the fact that nearly half of commercial loans are underwater. Try getting a recent appraisal from a bank on a commercial property that is distressed. This is the “don’t ask don’t tell policy V.2”.

    Thirdly, the ecconomics just don’t make sense. The example (and I understand its just an example) has unrealistic CAP rates and no dollars built into project improvement, build-out, tenant incentives. My point is that the devil is in the details and the eccomic details are far too simplistic to match a real world evaluation.

    Finally, taking passive losses. Investors with hard cash are not thinking of offsetting losses (assuming they meet the criteria for passive losses). Profits are hard to come by and to suggest we need to be thinking of offsetting profits just seems misplaced. Those with cash understand their trump position and will endeavor to exploit that position; taking passive losses is furthest from the mindset.

    I hope my comments are taken in the spirit of finding realistic solutions to the CRE problem.

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