WASHINGTON — It’s the equivalent of a Hail Mary pass.
A dozen commercial real estate trade groups, including the International Council of Shopping Centers, have asked Treasury Secretary Henry Paulson Jr. for help, seeking to tap into a $200 billion federal loan program created by the federal government because of the credit squeeze.
Michael Kercheval, president and chief executive officer of ICSC, said in interview that shopping center owners and developers are trying to prevent a crisis.
“You have assets in shopping centers that are not troubled….Retailers are paying the rent, sales are high, there is plenty of cash flow,” he said. “But most of these loans are balloon or bullet mortgages that you pay off all or most of the principle at maturity. The problem is there is nobody out there to refinance that principle balance” when the loan matures.
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It’s too early to determine if the government, which has already committed to bailing out banks, credit-card issuers and auto makers, would assist the developers.
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“I would be surprised if the federal government helps the developers,” said Gus Faucher, director of macroeconomics for Moody’s Economy.com. “You can make the argument that you need the financial system to work in order to get credit flowing and the economy expanding, but it is unclear to me how developers in and of themselves would help those credit flows.”
The move by the real estate groups is a signal of “deteriorating expectations [and one of] opportunity,” said Victor Calanog, director of research at real estate analysis firm Reis Inc. “If Washington seems open to helping other industries, we better get in line. The worst they could do is say no, and then you’d be in the same spot.”
The real estate groups have raised the possibility of foreclosures, bankruptcies and defaults on a huge scale in 2009 because of the shutdown in the credit markets as hundreds of billions of dollars in debt are set to mature.
“We’re looking at an $800 billion [credit] market that’s been shut down,” said Louis Taylor, real estate analyst at Deutsche Bank. “Commercial real estate is just anther type of loan that people are having difficulty getting. It might not affect as many people as credit cards, but it still affects a lot of people.”
Rich Moore, analyst with RBC Capital Markets, said, “It’s very, very hard for anyone in commercial real estate to find debt today. The issue is not the quality of the retail properties themselves, but ‘Where do I find debt?’ Very high quality regional malls that could always get debt now can’t.”
In a letter to Paulson, commercial property developers estimated that more than $400 billion of commercial real estate mortgages will come due through the end of 2009. They said government’s failure to act could potentially negatively impact $6 trillion of commercial real estate, which is financed partly through over $3 trillion in debt.
The federal loan program, created by the Treasury Department and Federal Reserve in November, was originally intended to alleviate the pressure on car loans, credit-card debt and student loans. The money would help investors buy certain triple-A rated securities backed by the assets.
The industry groups argue that if commercial real estate is included in the federal loan program, banks might have an incentive to make more loans to developers, as they would have a greater ability to sell them to investors with assurances of government backing.
“If we didn’t have this complete shutdown of the credit markets, these are properties that would be in high demand,” said James Feldman, REIT research analyst at UBS. “When you talk about REITs, you’re talking about assets that are the top 10 percent to 20 percent of commercial real estate properties….There’s enough disruption in the economy right now [that] if the government can prevent the landlords who own the places where we live, work and shop from having to give back the properties, then the action may be worthwhile.”
Commercial mortgages are typically underwritten for five or 10 years, with the payment on principle due at the end. Most businesses refinance the loans at maturity.
“This letter is suggesting to Secretary Paulson that the federal government is already purchasing or refinancing other types of debt, so let’s allow them to purchase or refinance the highest quality pieces of the highest quality assets in the commercial market,” the ICSC’s Kercheval said. “It is not a request to buy troubled assets or toxic loans.”
The coalition of real estate groups has held discussions with Treasury and Federal Reserve officials as well as congressional leaders on Capitol Hill and members of President-elect Barack Obama’s transition team.
Jeffrey DeBoer, president and ceo of the Real Estate Roundtable, which is leading the lobbying initiative in Washington, told reporters Friday there are only two sources of financing for maturing debt — banks and the commercial-backed securities market.
“The commercial-backed securities market is basically dead in the water,” DeBoer said. He noted that usually about $200 billion a year is issued to support the commercial real estate sector, and this year only $10 billion to $12 billion of debt was issued.
“We are talking about facilities to help finance the safest, most credit-worthy securities that are backed by commercial mortgages in America,” DeBoer said.