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A Proposal to Incentivize New Equity Investment in Real Estate

John Hart

Hart Realty Advisers

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Current Situation

• Commercial real estate values are down 30% to 40% and thousands of properties across the county are carrying debt that exceeds the property value.

• Approximately, $1.4 trillion of commercial real estate debt will come due in the next three years, half of that held by commercial banks.

• The greatest exposure, in relation to capital, lies with regional and community banks, which are also the primary sources of credit to small business.

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Impact on Real Estate

• In addition to the drop in values, lenders have adopted more restrictive lending standards with lower debt ratios.

• Therefore, the commercial real estate industry needs to find vast new sources of equity capital to keep existing loans compliant or meet new lending standards.

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The Proposal

• Attract new equity capital to CRE, with the requirement that the majority of the new funds be used to reduce the current debt ratios.

• Incentivize equity investment in commercial real estate through enhanced depreciation benefits.

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Proposal Details

• Investors would be allocated a 15 year straight line depreciation of their shares.

• Investments must be made before 2013, and the entire invested capital must be used as follows: – a) not less than 80% to reduce the principal

obligation on commercial bank debt, and – b) the remainder to invest in new tenant or

energy efficient capital improvements.

• Investors may be able to utilize any losses associated with the qualifying investment without regard to the passive loss limitations.

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Benefits of the Proposal• Allows owners to retain a controlling interest

in their properties.  • Helps bring new equity to CRE.• Enables banks to re-underwrite / convert

troubled loans into performing loans. • Reduces the risk of bank failures at a

savings to the FDIC deposit insurance fund.• Puts banks in a better position to extend new

credit. Downside: Short-term cost to the government.

– Short-term costs will be eventually reclaimed as future depreciation benefits are reduced.