Lucrative Loans for Commercial Real Estate Owners

The commercial real estate sector is uniquely vulnerable to the COVID-19 pandemic. Since the crisis started, many offices have been closed, consumers have avoided malls and stores, and hotels are operating at half-capacity at best. In response, many businesses have stopped paying rent, which makes it harder for the owners of commercial properties to make payments on their commercial loans.

If businesses walk away from offices and close retail outlets, those deferred loan payments can become defaults, leading to diminished property values, a lower commercial property tax base for local governments, and potential trouble in financial markets. Many commercial real estate loans are bundled into securities, much like the securities backed by residential mortgages in 2008. There is between $500 billion and $1 trillion outstanding in commercial mortgage-backed securities, and potential losses will spread out to investors.

Complicating matters, the commercial real estate sector has been accused of engaging in a 2008-like scheme of fraudulently increasing the value of properties in order to qualify for better commercial loans.

Taylor in June authored a letter — signed by 104 other lawmakers from both parties — to Treasury and Federal Reserve officials asking them to provide “targeted economic support to bridge the temporary liquidity deficiencies facing commercial real estate borrowers.”

So far, regulators have been reluctant to create programs tailored to the commercial real estate sector. In a September 16 interview on CNBC, Federal Reserve chairman Jerome Powell said the Fed has not wanted to create programs targeted at specific industries, and noted the Fed has already given to the industry through existing programs.

A month after the letter, Taylor introduced the Helping Open Properties Endeavor (HOPE) Act. In addition to directing the Treasury to establish a new bailout facility specifically for commercial real estate, the HOPE Act would require the Treasury to fully guarantee banks’ commercial real estate loans that are at a higher risk of not being paid back.

The legislation would specifically guarantee bank loans for so-called preferred equity, which is a kind of commercial real estate loan that only gets paid back in bankruptcy court after other more senior creditors are reimbursed. If the legislation passes and the government were to guarantee those loans, banks could be incentivized to make more of them, because the risk would be eliminated. Financial institutions would know they would get paid back in full by the government even if real estate owners can’t pay.

New resources for such loans could be a windfall for the commercial real estate industry, because many existing legal covenants make preferred equity one of the only ways for the industry to obtain additional financing during the pandemic.