MBA, Affiliate Groups Submit Main Street Lending Program Recommendations

The Mortgage Bankers Association and affiliated groups shared recommendations with the Senate Banking Committee to improve the Main Street Lending Program’s effectiveness for commercial real estate owners and tenants.

The Federal Reserve established the Main Street Lending Program in April to support lending to businesses harmed by the COVID-19 pandemic. It allows the Fed to purchase loans given to small and medium-sized firms.

The letter to Senate Banking Committee Chairman Mike Crapo, R-Idaho, and Ranking Member Sherrod Brown, D-Ohio, said pandemic-related safety measures and mandated closures have “devastated” many businesses across the country and much of the commercial real estate industry is under severe financial distress.

“Commercial properties across asset classes–hotels, shopping centers, apartments and office buildings–are a major part of the economy, directly and indirectly comprising 18 percent of U.S. GDP,” the letter said, noting these properties are financed by $11.4 trillion in equity and $4.6 trillion in debt, mostly provided by commercial banks, life companies, the government-sponsored enterprises and commercial mortgage-backed securities. Overall loan delinquencies have increased 500 percent year-to-date due to the pandemic and hotel and retail delinquencies have reached record highs. “These rates already exceed those experienced during the height of the Great Financial Crisis a dozen years ago,” the letter said.

Before COVID-19, many real estate assets were performing well and even thriving. “[But] today a number of these income- and job-producing properties are shut down or operating at very limited capacities, impacting their ability to meet contractual debt obligations,” the letter said. “The economic crisis created by the pandemic has created temporary market distortion for CRE that should be minimized in order to preserve some of the value of the underlying assets to investors and the communities we serve. A mechanism offering liquidity could be the bridge they need to help restore the jobs and tax revenue they support until they can prosper again.”

The letter said the MSLP could provide much-needed relief for commercial properties. “Unfortunately, current eligibility rules of the Paycheck Protection Program, MSLP and the Primary Market and Secondary Market Corporate Credit Facilities have effectively excluded owners of property from applying for these loans even if they suffered economic hardship from the pandemic, their tenants have not met rent obligations and they are unable to meet their ordinary business expenses,” it said. “Congress provided the Federal Reserve and the Treasury Department with minimal MSLP guidance in the CARES Act. For MSLP to be utilized by our members we believe it is necessary for Congress to now provide direction.”

Accordingly, the groups proposed that Congress take action to provide relief for CRE by making several changes to the MSLP:

Expand Eligibility
Congress should make clear that all businesses of a certain size can qualify for MSLP. Currently, MSLP uses the Small Business Administration’s (SBA) 7(a) loan eligibility standards, even though this is not an SBA program. The SBA eligibility standards are problematic as they exclude business entities holding passive real estate.

Extend the MSLP
Given the mid-June start of the program, the letter recommends extending the MSLP application period until at least December 31, 2020 from the current September 30 deadline.

Modify Asset-Backed Underwriting Methodology
Lenders need flexibility to adjust the underwriting methodology based on the types of assets involved. Currently, MSLP limits a borrower’s maximum loan size to a multiple of its earnings before interest, taxes, depreciation and amortization. As the Federal Reserve has acknowledged, EBITDA is not a standard underwriting metric for real estate or other asset-based businesses.

Additional Debt
Many CRE loans prohibit borrowers from taking additional debt, which increases risk for the borrower, property and lender. Additional debt reduces a commercial property’s cash flow and has a negative impact on the credit underwriting profile of the property. A better alternative to loan facilities for commercial property is preferred equity, which does not add to a property’s debt burden and keeps cash available to operate.

The letter said Congress should allocate unused Title IV CARES Act funds and direct the Federal Reserve and Treasury to create a preferred equity program for CRE borrowers, as part of MSLP or as a separate facility. The purpose of the new facility or program would be to purchase such positions and to provide full or partial guarantees to insured financial institutions to make such purchases, providing a temporary liquidity bridge to combat the temporary market distortion in certain commercial real estate sectors.

Statutory Distributions
The Internal Revenue Code requires Real Estate Investment Trusts to pay dividends to their investors. MSLP guidance should not conflict with existing Internal Revenue Code requirements for these distributions. Currently the MSLP program permits other similar kinds of tax distribution.

“The impact of COVID-19 has been especially devastating to commercial real estate tenants, borrowers and lenders,” the letter said. “As our members attempt to navigate the fallout from this crisis, there is a deficiency of reasonably priced capital sources to address temporary liquidity deficits. Again, unfortunately, federal assistance has been out of reach. Should impacted assets go into foreclosure, a downward spiral follows, affecting jobs, property values, investors at all levels (including pension funds), and state and local tax revenues. The repercussions on communities will be profound and take years from which to recover. We appreciate the chance to share our views and look forward to working with you to craft relief that will enable our members to weather the current predicament and position the economy for a recovery when the pandemic subsides.”