Stabilization Plus Recovery and Reinvestment – Does It Add Up To Available and Affordable Refinancing For Commercial Real Estate?

The Emergency Economic Stabilization Act of 2008 (the “Stabilization Act”) was signed into law on October 3, 2008 to provide, in part, a rescue plan (or as some have called it, a “bailout”) for the U.S. financial markets. The Stabilization Act created a Troubled Asset Relief Program (“TARP”), under which the Secretary of the Treasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages issued prior to March 14, 2008.

On February 17, 2009, President Barack Obama signed into law The American Recovery and Reinvestment Act of 2009 (the “Recovery and Reinvestment Act”), a $787 billion spending and tax relief program, which by any measure is the largest appropriations bill in U.S. history. The Recovery and Reinvestment Act is an emergent attempt to restore confidence in the faltering U.S. economy by, among other measures, preventing further systemic problems in the economy resulting from residential foreclosures and unemployment and creating job growth through public works projects, tax incentives and tax cuts for small businesses and individuals, and aid to states.

It has been estimated that approximately $400 billion of commercial mortgages will mature in 2009, and another $800 billion will mature in 2010 and 2011 combined. The shutdown of the commercial mortgaged-backed securities (“CMBS”) market together with decreasing market values and the historic tightening of credit standards by banks provide an enormous obstacle to refinancing these commercial mortgages. Despite capital infusion from the U.S. Treasury by programs promulgated under the Stabilization Act, banks have increased reserves and are skeptical about making loans secured by commercial real estate.

One possible solution to jump start the CMBS market is the expansion of the Term Asset-Backed Securities Loan Facility (“TALF”) to newly originated secured loans on commercial real estate properties. TALF is a Federal Reserve credit facility which was established by the U.S. Treasury under the Federal Reserve Act and is part of TARP. The Federal Reserve created TALF to address certain credit needs of individuals and small businesses by supporting the issuance of asset-backed securities (“ABS”) collateralized by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and the recent addition of securities backed by commercial mortgage loans.Pursuant to the Financial Stability Plan which was unveiled by the U.S. Treasury on February 10, 2009, the Federal Reserve plans to expand TALF to $1 trillion from the $200 billion which was originally committed. If approved, the $1 trillion credit facility would be available to eligible owners of certain AAA-rated ABS collateralized by the aforementioned asset classes, including new commercial mortgage loans.

TALF loans are non-recourse secured by eligible ABS collateral and will have three (3) year terms. TALF loans will either be at a fixed or floating interest rate as elected by the borrower, and may be prepaid in whole or in part during the loan term without penalty. Substitution of collateral during the loan term generally will not be allowed. Borrowers are required to pay the Federal Reserve an administrative fee equal to 5 basis points of the loan amount upon closing of the loan. Unless extended by the Federal Reserve Board, TALF will cease making new loans on December 31, 2009.

An important aspect of TALF for its borrowers is the loans are not subject to mark-to-market or re-margining requirements. These two risk factors have caused turmoil in the CMBS market as investors worried about volatility in CMBS and a return to wider spreads face increased prospects of a loss on their investments.

TALF will commence operations on March 17, 2009, the initial subscription date, and the loans will be funded March 25, 2009. TALF loans will be funded monthly through December 2009, or longer if the Federal Reserve extends the facility. The subscription dates will be the first Tuesday of every month.

TALF loan will not be available for CMBS in the March funding. However, The U.S. Treasury and the Federal Reserve anticipate that TALF will accept ABS collateralized by new commercial mortgage loans for the April funding. In addition, specifics regarding eligibility criteria for CMBS collateral, including the type and investment-grade rating category are not yet available. Once the specifics regarding TALF lending initiative for CMBS is available, we will provide an update.