2013: Commercial Real Estate Finance's "Regulatory Cliff"

CRE Finance World, Autumn 2012

2013: Commercial Real Estate Finance’s “Regulatory Cliff” Michael Flood Vice President, Legislative & Regulatory Policy CRE Finance Council T legislative and regulatory “cliffs” in the form of new 2. Can a long-term solution on the U.S. debt be reached? Moody’shas already announced that a lack of a long-term solution willlead to a downgrade. Will Fitch follow Moody’s lead shouldCongress and the White House not find common ground?he decisions made in Washington, D.C. next year are goingto be crucial to the commercial real estate finance industry.Why? Because 2013 brings our industry its own fiscal, regulations and laws that are in limbo until after this year’s elections. 3. What will final Dodd-Frank regulations look like? For both CMBS In short, the actions taken by Congress and the regulators in 2013 and portfolio lending, we will finally have clear guidance on the will determine the final commercial real estate finance playing field. ground rules for CRE finance. While only 30% of all Dodd-Frank rules have been finalized as of this writing, the rules most important CRE finance is a complex industry, which sometimes makes it to our industry will be decided in 2013. difficult for lawmakers to grasp, given the hundreds of other issues they are asked to digest. That is why the CRE Finance Council Regulators, just like everyone else in this country, are awaiting the Government Relations team spent a majority of 2012 “introducing” results of the November elections prior to finalizing most major our industry to Congress, the Administration and regulators. We rules, such as risk retention. A change in the Administration would have been able to meet with 100% of the members on both the certainly affect the outcome of any final rules. That said, regardless House Financial Services and Senate Banking Committees and of the Presidential election results, the industry should expect to every regulator who will affect the future of our business model, see the following rules finalized: explaining who we are, what our industry does, and why we are important to them. 1. Proprietary Trading: Regulators have stated that they expect to finalize the Volcker Rule by the end of this year. While a Further, with the help of Trepp, LLC, we have been able to typical CMBS transaction should not be affected, it is possible show the CRE financing activity for each Congressional district that any transaction short of “plain vanilla” will have enhanced and demonstrate how our industry affects every congressman compliance burdens. and senator. 2. Risk Retention: Regulators will likely offer either a re-proposal or As a result, not only has the knowledge of our industry become final rule in the first quarter of 2013. The status of the “big three” broader on Capitol Hill, but it is deeper as well. CMBS provisions most important to our Members is as follows: CREFC is, as our tag line states, the voice of commercial real a. PCCRA: Regulators have received a bi-partisan letter from estate finance in Washington, D.C. 12 Senators asking for the PCCRA to be eliminated from final rules. Additionally, Democrat Senators Mark Warner (VA) and Despite our successes to this point, much work remains. Our work Chris Coons (DE) have sent a second letter expressing their and the engagement of you, our Members, are both critical as we concern that implementing the PCCRA “significantly changes face finality on crucial policy issues. the securitization model.” We believe that at the very least, the PCCRA will be modified, and at best removed from the final rules. What’s on the horizon? The decisions made in Washington, D.C. next year on three main b. Operating Advisor: It is highly likely that final rules will contain issues will affect our long-term future: an operating advisor, which CREFC endorsed in a modified version. The outstanding and still undecided question is how 1. Will there be a quick resolution to the “fiscal cliff”? We all remember much power the OA will have. last year when House Republicans, Senate Democrats and the White House engaged in a stare-down until raising the debt c. B-Piece Transferability: If the B-piece investor decides to take ceiling at the 11th hour. It was the timing of the solution that hurt on the 5% risk retention provision, will they have to hold it for us, not the actual solution itself. The outcome of the elections the life of the transaction? There will likely be a minimum hold will determine whether history repeats itself. period, but it will be hard for regulators to justify a life-of-the-hold standard for such an investment (let alone any investment). CRE Finance World Autumn 2012 6


CRE Finance World, Autumn 2012
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