In an attempt to loosen credit in the commercial real estate industry, the Federal Reserve announced that commercial mortgage-backed securities can be used to collateralize loans through a Fed program beginning in June.
The Fed’s Term Asset-Backed Securities Loan Facility is one of two major financial bailout programs created by the George W. Bush administration. It originally was meant to unfreeze the credit market for credit cards, student loans and car loans. Now, it has been expanded to include CMBS.
According to a statement released May 1 by the Federal Reserve, “The inclusion of CMBS as eligible collateral for TALF loans will prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans, and facilitate the sale of distressed properties.”
Nearly 70 percent of the commercial real estate loans issued in 2007 originated through CMBS facilities, but a question weighing on local real estate and finance specialists is whether the extension of TALF loans will jump-start projects in the Valley.
While many are hoping for the best, others believe the majority of distressed commercial real estate properties are overleveraged at prices that now far exceed current values. In that case, they will not qualify as “economically viable commercial properties.”
Another major concern is whether this first expansion of TALF could be extended to older loans.
Here’s a look at the divergence of opinions as to the impact of this change on the local commercial real estate community:
“The fact that there is any potential debt being made available at all is a good thing, because the credit markets are not very cooperative. I had heard that TALF may only apply to very recent-vintage CMBS, which is not the bulk of the originations.”
Chris Toci
Executive director Cushman & Wakefield of Arizona Inc.
“There were 250 multifamily sales (properties with 100-plus units) in 2006, compared with 150 in 2007 and 17 in 2008. TALF can only be good for the real estate industry. We are rooting for everybody to transact. Credit availability has to be increased for all of us to succeed in the near future.”
Bobby Bull
Managing director of investment sales
“For the refinancing of commercial construction loans that have nowhere to go, TALF could now help loosen up some badly needed capital. … It will be a number of weeks before we really can assess the specific impact to commercial real estate in the Valley, but we should have some real examples by then. Fingers are crossed that this will help in a meaningful way.”
Tim Lawless
President,
“More details from the Fed are needed before anyone gets too excited, but this hopefully signals the reawakening of the CMBS market, albeit with different terms than before.”
Craig Henig
Senior managing director
“None whatsoever. It’s only applicable to new CMBS five-year deals.”
Ed Zito
Executive vice president
“We are following the information, but there is very little out about the rules for TALF, how the funds will be distributed and who will qualify. I’m hopeful it will have a positive impact, but many of the properties in trouble are overleveraged. TALF might open up funding for investors with cash, allowing them to leverage their funds.”
Terry Martin-Denning
Vice president and chief operating officer