A real estate financier turned U.S. representative is leading the charge to give the commercial real estate industry a lifeline — albeit a risky one for the government.
Texas Republican Rep. Nicholas Van Taylor plans to introduce a bill that would authorize the Treasury Department to provide real estate investors hit by the pandemic with low-cost financing to support their properties, according to real estate attorneys briefed on the proposal.
“The idea is that the real estate industry is experiencing real pain. This would help get through this rough patch,” Bruce Stachenfeld, chairman of the New York real estate law firm Duval & Stachenfeld, told The Real Deal.
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The Helping Open Properties Endeavor (HOPE) Act of 2020 aims to help avoid a wave of foreclosures, according to Stachenfeld, whose firm was briefed on the proposal by Van Taylor’s staff.
The program would be open to investors in good standing before the pandemic hit, with no loan defaults before March 1. It would provide real estate owners with something similar to a very low-cost loan: Borrowers could take on as much as 10 percent of their existing debt at a rate as low as 2.5 percent.
That could be a boon for struggling real estate investments, particularly when traditional rescue capital charges around 10 percent, industry experts said.
“That’s an extremely attractive injection of capital. It’s money that can be used to pay expenses or service the existing debt if the property is having cash flow problems,” said Woody Heller, co-head of the capital markets group at Savills.
“It effectively creates a standardized form of workout which will expedite the process of getting money into borrowers’ hands and thereby save more properties from going into foreclosure,” he added.
It’s unclear how much capital the HOPE Act would allocate, but the potential distress in the commercial real estate market is vast. The coronavirus has sent some $20 billion worth of securitized commercial mortgages into special servicing, which is a step on the way toward foreclosure, data from Fitch Ratings show.
But Van Taylor’s proposal is a particularly risky way for the government to get involved in distressed properties. Preferred equity is similar to a loan in that the investor receives a set return as opposed to a share of the profits (or losses). But unlike with a loan, preferred equity investors don’t have a secured claim giving them recourse if the investment goes belly-up.
“It’s an extraordinarily high-risk position in the capital stack for governmental money to sit in,” said Aaron Appel, senior managing director at Walker & Dunlop. “It would be wildly helpful to property owners; I just don’t view it as something that would actually happen.”
A spokesperson for Van Taylor acknowledged the proposal but declined to comment before the Plano politician firms up an introduction date.
“There is no final bill text or provisions,” the spokesperson wrote via email.
Van Taylor spent 16 years at real estate finance firm Churchill Capital Company before winning election to Congress in 2018. He sits on the House of Representatives’ influential Financial Services Committee and has advocated for helping real estate.
He led a group of 105 members of Congress in June who signed a letter calling on the Treasury and Federal Reserve to back up real estate, particularly the $540 billion CMBS market.
“Millions of jobs depend on keeping these properties open,” he said, citing 8.3 million in the hotel industry alone. “These industries don’t need a bailout, but they do need flexibility and support to keep their doors open, provide millions of jobs in communities across the country, and drive their local economies.”
A good chunk of Van Taylor’s campaign contributions since last year have come from real estate. The industry gave just over $151,000 of the $1.38 million he raised, according to OpenSecrets.org.
The federal government has already spent trillions to prop up the economy in the wake of the coronavirus pandemic. The Federal Reserve has bought about $500 billion worth of mortgage-backed securities since March in an effort to keep mortgage financing markets operating.
Some critics question how much government bailout spending is too much.
Earlier this week, the White House said it wants to cap the next stimulus package at $1 trillion, and on Thursday House Speaker Nancy Pelosi said she was aiming for another round at double that figure.
Thomas Schatz, president of the watchdog group Citizens Against Government Waste, said he thinks Van Taylor’s proposal is an example of sensible spending because of its limited scope.
“It’s not a complete bailout of an industry. It does seem to be targeted at businesses that are much more likely to be able to repay the loan, as opposed to just anybody who owns a building,” he said.
But he did warn that the tab for all this government spending will come due, and should be counterbalanced with savings where possible.
“We’re concerned with what’s going to happen going forward,” he said. “This is unprecedented, obviously. But our preference would be to offset as much of this money as possible.”
Contact Rich Bockmann at rb@therealdeal.com or 908-415-5229