WASHINGTON -- To real estate agents and commercial real estate lenders, the late 1980s seem like a bad dream.
The National Realty Committee (NRC), a high-powered organization of real estate lenders and developers, is trying to make sure the nightmare of the 1980s doesn't recur.
By bringing together the big players in real estate with movers and shakers in Congress, the White House and various regulatory agencies, the committee is trying to flatten the dips and peaks of an industry that has always been cyclical by nature.
"We're trying to articulate to policy makers the important role that real estate should play in national policy," said James Didion, the organization's chairman. He is chairman and chief executive of CB Commercial Real Estate Group. "The statisticians say that real estate plays a 15% to 20% role in the GNP. Real estate has to be healthy for the economy to be healthy."
The committee is now lobbying for the passage of the Commercial Mortgage Capital Availability Act. The measure would do much to move the commercial and multifamily real estate market toward one of the National Realty Committee's major goals: the removal of impediments to commercial real estate debt securitization.
Among other things, the companion bills, introduced by Rep. Barney Frank, D-Mass., in the House and Sen. Richard H. Bryan, D-Nev., in the Senate, would extend the residential mortgage securities class exemption under the Employment Retirement Income Security Act to commercial mortgages.
Currently, the act prohibits transactions between pension funds and a broadly defined group of "parties in interest," one of whom may be tucked into a mortgage portfolio. Thios makes pension fund investment in mortgage-backed securities all the more difficult, accordingto Steven Wechsler, president of the Natoinal Reality Committee.
"It's quite a barrier in the marketplace to tell pension capital that before they can buy into a pool, they have to make sure that there is not some lease in one of the pools that somehow is related to the parent of the pension," Mr. Wechsler said.
Lobbying by the organization on Capitol Hill played a major part in easing passive loss restrictions in last year's tax bill. Restoration of deductions for passive losses has been a longstanding objective of lenders and investors alike.
In the early 1980s, members of the organization opposed the adoption of 15-year accelerated depreciation prescribed by the 1981 Tax Act, because they thought it would lead to tax-shelter-motivated investment and a subsequent overbuilding of commercial properties.
History proved it to be an accurate forcast. "It created a boom that led to an inevitable bust," Mr. Wechsler said.
In 1986, when real estate tax rules were changed again, there was "demonstrable overkill" to discourage tax shelter investing, according to Mr. Wechsler.
"We wee sddled with a rule that said you could be spending 2,000 or 3,000 hours a year in a business that as a matter of law you did not materially participate in."
With the pssage of the 1993 Clinton tax bill, taxpaying real estate practitioners could deduct passive losses on rental real estate activity, reducing the amont of total income taxed.
"We thought it was very important to show that those who spend a significant amount of time participating in real estate activities are treated the same as the grocer, or the person in the shoe business, or in any business, and are taxed the same way," Mr. Wechsler said.
The National Reality Committee evolved out of the Realty Committee on Taxation, a group of New York real estate owners created to address national tax issues affecting the industry.
The organization began life in 1969 and moved its headquarters to Washington in 1977.
It is made up of three policy advisory committees that represent the major focal points of the organization - a tax advisory committee, an environmental advisory committee, and areal estate capital policy advisory committee.
Through the advisory committees, which consist of expert members and consultants, and through task forces set up as subgroups to the committees, a "point of view" is developed, as Mr. Wechsler put it.
This is then filtered through the NRC's executive committee, which consists of 40 high-ranking executives from large lenders, realty groups and insurance companies.
"We develop a consensus and try to determine which among a given range of issues are most appropriate for our involvement," Mr. Wechsler said.
The NRC then gets in touch with the policy makers.
"Basically, it's communication," Mr. Wechsler said. "We talk to members of Congress and their staffs via NRC employees and via our members, and on occasion through consultants."
Muscle in Membership
A large percentage of National Realty Committee members are on the Fortune 500 or Forbes 400 roster, so it's not much of a surprise that the committee doesn't have much trouble making its voice heard on Capitol Hill.
"Certainly the fact that our membership and leadership consists of the leading owners, advisors, lenders, managers, and investors in income-producing property throughout the United States gives us credibility," Mr. Wechsler said.
Securitization of real estate assets is a current focus of the group. It is promoting the creation of commercial real estate investment trusts, which it believes will play an important role in thawing the frozen commercial real estate market by providing liquidity and similifying asset valuation.
"In the early 1990s, we had a market with no capital transactions taking place," said Dan Lupiani, NRC executive committee member and corporate senior vice president of First Chicago Bank. "Nothing was trading, nothing was being sold, the only action you had was foreclosure, so how do you value something?"
Real estate assets were being valued by appraisers, affording investors less confidence than would valuations created by market forces.
"The phenomenon of the REIT is to take assets that have been traditionally extremely illiquid and make them quite liquid through this form of securitization," said Richard Boyle, vice chairman of Chase Manhattan Bank. "Every night, an investor in a REIT can go to sleep knowing what someone might pay for his shares tomorrow, with the price that they closed with today."
With REITs, values tend to be driven more by expected dividends and the cap rates attached to them than by a property's potential for appreciation, said Mr. Boyle, also a member of the realty group's executive committee. This encourages transactions, starting a "snowball effect in terms of attracting equity capital."
Securitization is especially important to lenders today because it could provide a channel to reduce the large amount of loans in need of refinancing. During the building boom of the last decade, many banks' real estate holdings grew as high as 22% of assets.
"Their thought was that they would finance the construction of a building, and that once it was complete and rented, it would be refinanced through institutional sources," Mr. Boyle said. "Many of those are still not rented sufficiently to justify the refinance. There's a clog effect in terms of the amount of space it's taking up on the bank balance sheet."
There are still some barriers to the formation of REITs that the National Realty Committee is working to break down. Currently, to qualify as a REIT, a mximum of 30% of a trust's income can be derived from the sale of stock or securities held for less than one year and real property held for less than four years.
This mandate stops up the market because it reduces the flexibility a trust has to sell assets in favorable market conditions. The group is also pushing to alter REIT capital retention and asset transfer restrictions.
Environmental concerns have also worked their way into the group's agenda of policy initiatives. The group is pushing to get lender liability rules clarified during the current Superfund reauthorization process.
Currently, it is unclear when lenders and real estate owners not directly connected to the management of a property are liable for hazardous waste cleanup expenses,and this is yet another barrier to a liquid marketplace, according to Mr. Lupiani.
"The lender liability issue is [one of] clarity," he said. "When have you done what you have to do? That is the essence of lender liability: define what has to be done in a definitive way, and don't have it change with the passage of time."
Even though banks are still willing to play a role in real estate financing, the 1980s have left them slightly gun shy, according to Mr. Wechsler.
"They generally do not want to be the final source of financing for a project, and securitization really helps the 'financibility' of what banks are involved in," he said. "It's an expansion of traditional long term sources.
"Over the last three or four years, during the recession and depression of the real estate community, banks, real estate owners and the American economy went through an extremely difficult period," Mr. Wechsler aid. "That period could have been ameliorated had the real estate market been more liquid on both the debt and equity side."