Here Come the Accounting Changes

When the Senate passed its version of the financial overhaul Brendan Reilly, SVP of government relations for the Commercial Real Estate Financial Council told Globest.com he was relieved that the provisions were basically in line with what the real estate industry needed for CMBS to restart. But he couldn’t help adding that the financial legislation is only one piece to a larger recovery, with other regulatory and accounting reforms also playing a role.

Indeed, it could be said that the accounting reforms coming the industry’s way will have almost as big an impact as the financial services bill. There are several moving parts to this story – one is the push to converge global and U.S. accounting regulations, which will deliver both benefits and risks. The day of reckoning for that is a bit off – the SEC has yet to make some crucial decisions about deadlines.

More immediate though are two proposals from Federal Accounting Standards Board – one that has grabbed the attention of real estate firms and one that is just as steadily moving towards resolution but with little notice.

Yesterday FASB put forth its proposal that banks report the fair value of loans on their books and accelerate recognition of credit losses. If that rule was in force now you know what it would mean: no more pretend and extend, a lot more distress. For borrowers the former would have made a painful period a lot worse; for opportunistic funds, it would led to more buying opportunities. Indeed the Wall Street Journal reported this week that many of these funds are returning money to investors as their commitment periods end because they haven’t found anything in which to invest.

The other proposal on which FASB and International Accounting Standards Board are working has to do with lease accounting standards. Like the banking proposal, this will have a big impact on a wide range of industries – basically anyone who leases anything, from equipment to property will have new business decisions to make once this rule goes into affect. Property owners are just now beginning to realize that as tenants are becoming even less willing to sign long-term leases until the ramifications of the new standard are completely clear.

Life’s Appetite for Real Estate, CMBS Grows

Insurance companies have never been ones to spell out their allocations for commercial real estate. Usually real estate developers and investment managers are left to make their best guesses at the start of the year as to what insurance companies will be doing, both in terms of lending and in what they will be investing. By now it’s pretty clear that life insurance are not just lending defensively to real estate this year — that is, lending just to keep their existing portfolios solvent — but are actively expanding their business.

The latest proof point: Bernard Winograd, Prudential Financial’s executive vice president for U.S. businesses. According to comments he made in a conference call, the insurance company is happy to be a lender to real estate again. “We feel good about the upside opportunity for valuations relative to the downside risk.”

It’s not just Prudential. As Bloomberg reports, MetLife said last month that prices have bottomed out while valuations are starting to rise. “Smart capital is starting to queue up,” Principal Chief Executive Officer Larry Zimpleman said in an April 27 interview. “There are a lot of new funds being formed by investors who are looking to invest and buy either loan portfolios or buildings.”

Perhaps of even greater interest are the comments made by Primerica CFO Alison Rand in another interview with Bloomberg.
The insurer is planning to invest at least some of its portfolio in CMBS, she says.

Supply of new CMBS, that is, has been sparse for obvious reasons, one of which is lack of demand. Whether Rand was discussing new or existing CMBS is unclear, but either way it signals growing intereste by the buy side for these securities.

What does Freddie Mac’s Loss Mean on Capitol Hill ?

Freddie Mac has posted an eye-popping $8 billion first-quarter loss — an amount higher than the $7.8 billion that Freddie lost in Q4 2009.

The GSE will be seeking more funding from the government. In the short run it will likely get it. The Obama Administration has all but said the sky’s the limit for keeping Fannie and Freddie solvent. There is a case to be made for that – certainly multifamily companies like that position.

However the numbers also bolster a case being made by some Republicans that it is time to cut the cord for Fannie and Freddie. Unfortunately, they may be the right — the government’s support of the two GSEs in the long run is not sustainable. It is also hindering private market solutions, such as a multifamily CMBS.

Given the strong constituency that wants to keep the status quo with the GSEs – at least, again for multifamily – the situation is not likely to change any time soon. Including the GSE’s bleeding red ink.