The Senate is now discussing the bailout. They’ve added something like 300 pages of tax breaks and credits.

There may be, however, a bunch of provisions in this version that the commercial real estate industry will like, including sections on how to treat losses and damages resulting from natural disasters and credits for adopting green building standards.

I’m not sure what that has to do with the bailout and getting credit flowing again, but it should make some people happy anyway.

I just received this in my inbox. ICSC is supporting the bailout package.

I’m continually befuddled by the support for this bailout. There’s no question that some action is necessary to help restore the credit markets. But there’s been a ton written at this point at why the bill, as structured, may be insufficient to do that at economics blogs like Mish’s Global Economic Trend Analysis, Calculated Risk and Clusterstock. How about what Nouriel Roubini has proposed?

It will push a lot of money to the banks while exposing taxpayers to a lot of risk. It doesn’t address the issue of recapitalizing the banks. It doesn’t explain how these assets the government is buying will be valued. It doesn’t do anything to help homeowners stay in their homes.

Anyway, here’s ICSC’s take:

Dear ICSC Member:

Our industry has been held hostage to a lack of liquidity in the commercial real estate markets for several months, but recently the ability to obtain loans, capital guarantees and access to financial markets has become untenable. Furthermore, consumers have lost faith in the basic financial institutions that our customers rely on everyday.

Clearly, our elected officials are being asked to make a difficult decision, allocating billions of taxpayers dollars to clean up a problem that never should have been allowed to happen. However, we must restore the global faith and credit in our capital markets. If this legislation is not passed, there could be damaging long-term effects to our nation’s economy and certainly to our industry.

Please click here to send an email to your US Senator to express your support of the economic recovery package. The Senate needs to know that there are Americans who understand the long-term economic ramifications of inaction.

Thank you for your support of the retail real estate industry.

Betsy Laird
ICSC Senior Vice President of Global Public Policy

Here’s a good and brief rundown of the bailout.

Of course, now that it’s gotten voted down, it could change again.

By all indications, there is massive popular opposition to the bailout. Congressional fax lines and phones have been ringing off the hook with voters opposing the measure by huge margins–like 99 to 1. Opposition has come from the left–who don’t want to see what they perceive as a handout to Wall Street–and the right–who see the bailout as a major blow against the free market and who remain convinced that there is a market solution to the credit crunch.

Personally, I do think that is is necessary for the government to step in and help open the credit markets. But plenty of economists and other financial leaders–Nouriel Roubini, Paul Volcker and Joseph Stiglitz come to mind–who have talked about alternative solutions to the Pauslon plan. Up to now, all Congress has done is to take the Paulson plan and try and tweak it to make it more palatable to both sides. Perhaps it’s time to chuck it.

(Hat tip Deal Junkie for pointing this out.)

This perplexes me. Real Estate Roundtable CEO Jeffrey D. DeBoer wrote an op-ed in the Wall Street Journal in favor of the bailout. In the article, the numbers that continue to indicate microscopic defaults in commercial mortgage-backed securities (CMBS) pools are invoked, yet the article still pleads that without the bailout, commercial real estate will suffer. (Incidentally, it appears CMBS will be eligible assets for the government to purchase if you read the text of the act.)

Today, debt on office buildings, shopping malls, hotels and apartment complexes continue to perform well. The default rate for commercial mortgage-backed securities (CMBS) loans stands at just 0.47%, while commercial mortgages in life insurance company portfolios have a default rate of just .03%.

Nevertheless, the $200 billion annual CMBS market is now dead in the water. Credit to the sector from other sources has almost completely stalled.

In short, the life line of the real estate industry, and indeed, job-creating businesses across America, has been cut. For construction workers, this means delayed projects and layoffs. For property owners, and for Main Street, this means property values are at risk of a free fall. For state and local governments, it means less revenue from commercial property taxes and an even tighter budget crunch. What happened to values in the residential market could very well happen on the commercial side — something which we can take steps to prevent.

If CMBS are, at their core, good assets and commercial real estate is an “island of stability” as DeBoer argues, why does commercial real estate need the bailout? If CMBS are strong, when the market calms, investors will once again invest in the bonds, right? Is CMBS “dead in the water”, as DeBoer writes? Why does commercial real estate need a bailout of CMBS pools are not experiencing huge defaults?

For the past 12 months, the majority of people within the commercial real estate industry have told us at Retail Traffic over and over that commercial real estate is not the same as residential real estate and that CMBS are stronger than RMBS. In RMBS not every mortgage is examined. That’s one reason so many toxic loans made it into highly-rated pools. In CMBS the rating agencies do look at every loan. People have been willing to admit that the industry got too frothy and there is concern about some of the loans done in 2006 and 2007. Yet overall we hear over and over and commercial real estate is fundamentally strong.

When we’ve raised questions or concerns, we’ve been told that we’re being too negative and that we’re spreading panic by even questioning the solidity of the industry. We’ve been told that commercial real estate is a casualty in the widespread fear about real estate. And we’ve been told that in the end the strong fundamentals will mean that commercial real estate bounces back in three months or six months. I can see the argument that everything will be at risk if the financial system is not stabilized. Obviously the banking system needs to be dealt with. But that doesn’t mean the bailout in its current form is the right package. Over 190 economists are circulating a letter opposing the bailout and arguing that the way it is structured will not be effective.

So if all that’s true, why does the commercial real estate industry support the bailout as its currently structured? The idea of the bailout is to remove toxic assets from bank balance sheets. If CMBS aren’t toxic, why should the government buy them?

So which is it? Is commercial real estate healthy or does it need the bailout?

I found this commentary very compelling. Does this bailout just help Wall Street? If the Treasury buys bonds–including CMBS bonds–will that do anything to help the end borrower at all? Who is actually getting bailed out here? I’ve heard a lot of support for the bailout from various forces in commercial real estate. Is the industry really fully behind this? It seems that in most other circles–including many, many economists–there’s a lot of opposition.

• But most of what will be bought will not be mortgages but parts of various tranches of mortgage backed–securities (MBSs), commercial mortgage backed–securities (CMBSs), collateralized debt obligations (CDOs) made up of MBSs and CMBSs, and structured investment vehicles (SIVs) made up of all the above.

No one knows what is in most of these pools, and heaven knows where the documents are. In time, with enough effort, most of the documents will be found, but not for some time and not all of them—witness the cases where special servicers have been trying to foreclose on a mortgage without original documents, usually unsuccessfully.

• There will be little opportunity to work out the mortgages that make up the pools on which the securities are based, or even to modify the mortgages to help the homeowners, as many people are understandably recommending. Without owning the vast majority of all the tranches of a particular mortgage pool, the Treasury (or its agents) won’t be able to modify the contract with the special servicer in charge of the assets (the mortgages) in the pool.

The servicers will still have to follow their contracts and foreclose on defaulted loans instead of modifying them. Well, sure, the Treasury could buy up all the securities based on the pool—if it can find who owns all of them, and if it can find a price that all the holders want to sell.

But unless it owns enough securities, it won’t control what happens to the mortgages. It could try to override the pool documents and take over control, and perhaps this is one of the reasons the Administration proposed that nothing they do could be reviewed by a court or administrative agency. However, this is highly problematic.

Link.

“This entire crisis could be placed on the accounting system,” Zell told an audience of more than 1,000 assembled on Tuesday at the Four Seasons Hotel. He revealed that he called Treasury Secretary Henry Paulson early this year to ask him to suspend rules forcing banks and other institutions to write down the value of their real-estate mortgage assets — both residential and commercial — to reflect the latest valuations.

So-called mark-to-market accounting, required as part of the post-Enron reforms enacted by Congress, led “to a whirlpool of lower and lower marks,” Zell said. “Without mark-to-market fair value accounting, this crisis would never have reached this level. You took a big problem and made it into a gargantuan problem.”

Zell predicts that the U.S. will sink further into recession by early next year, but he suggests it will be a shallow downturn. “It’s not likely to be as catastrophic as people think,” he said. He expects residential construction to pick up again as the apartment sector is strained by demand. Equity Residential, the Chicago-based apartment REIT he controls, is experiencing 95% occupancy rates currently. “We could probably run at 97%,” he said. “But there are 1 million new households being created each year in this country. I don’t know where these people will live.”

Link.

Banking mergers and bankruptcies could be bad news for commercial real estate. Bill Rudin, CEO of Rudin Management, shares his insight at CNBC.

Here’s a very brief statement from the Real Estate Roundtable Real Estate President and CEO Jeffrey D. DeBoer on the bailout of AIG, the latest major move to stabilize the financial system.

Our nation’s financial marketplace continues to face unprecedented challenges and we are fully supportive of last night’s action by the federal government to provide assistance to help stabilize AIG. Rebuilding confidence in our financial institutions must continue to be a national priority.

I’m still trying to get my head around the implications that Lehman’s collapse has for the commercial real estate sector. As I see it, there are a handful of ways this is negative or potentially negative for the sector. If you’ve got any feedback or disagreements, let me know in the comments section.

I. Values: Lehman’s sitting on $32.6 billion in commercial real estate investments in the form of loans and equities. It was a big investor in commercial mortgage-backed securities. What’s it going to do with that? Will it still roll those holdings into the bank it talked about last week? Or will it try to sell this stuff on the market. Right now, investors are so skittish about any kind of securitized debt, Lehman may have to sell at deep losses. That, in turn, will force other holders of CMBS bonds to “mark to market” based on Lehman’s precedent. So we’re looking at a real potential drop in perceived values of CMBS bonds. That could also have effects on determining the value of actual real estate. If the CMBS valuations are to be believed, it would imply deep discounts on actual property values. The industry had been hoping that the correction would be 10 to 15 percent. Now it’s looking like it may be a steeper drop than that.

A perceived drop in values of real estate is also going to hurt retail REITs. The correction in REIT stock prices had settled in at a 10 percent to 20 percent drop from 52-week highs. Now it’s looking like REITs are going head lower again.

II. Lending: In turn, the more

Yesterday hurt. And I’m not talking about the Dow. Retail REITs were not immune from the broad sell-off. Every company we cover fell between 3 percent and 15 percent during the rout. The companies that got hurt the worst stand out. The two largest mall REITs–General Growth Properties and Simon Property Group–each fell by huge amounts. Simon’s shares dropped from $98.05 to $83.01, a 15.3 percent drop. It now stands 23.8 percent off its 52-week high. General Growth fell from $27.55 to $23.75, a 13.8 percent drop. It is 58.9 percent off its 52-week high.

General Growth has gotten beaten up for months. There’s been a lot written about its debt load. Its debt to market capitalization ratio just took another big hit after yesterday.

I’m a bit more surprised about Simon’s fall. The company doesn’t have the same kind of debt issues and its portfolio metrics remain strong. In fact, yesterday may have been an overreaction. Pre-market trading indicates Simon’s stock will open up $5.00 per share. So what was behind the big sell-off yesterday for Simon?

Update 10:54 AM: It seems there might be some glitch with Simon’s stock price. Some places had Simon’s closing price at $83.01. However, elsewhere it was reported as $93.01. So maybe Simon’s stock didn’t plummet as much as it seemed yesterday. In any event, it’s currently trading at about $93.00. So either it’s recovered much of its losses from yesterday or else it never had them.