The commercial real estate industry is hoping that decision 2012 will help to loosen the logjam of legislative issues piling up in Washington.

There are numerous proposals on the table that will directly influence lending and availability of capital, regulatory control, economic stimulus and, of course, taxes. Although these issues present great fodder for political debate, many industry observers don’t anticipate significant resolution until after the 2012 election.

“We don’t expect to see any sort of broad change of key issues until the election is over a year from now, which just means more uncertainty during the entire election cycle and less confidence,” says Ed Padilla, CEO of Northmarq Capital in Minneapolis.

The industry is following discussions related to economic stimulus, jobs bills and efforts to gain control of federal spending and the deficit with keen interest. Political posturing also is producing a lot of uncertainty on tax code and property owners are concerned about how state and local budget shortfalls will impact property taxes.

“For us, it is less about the detail issues, such as whether you believe in the flat tax and how carried interest will be impacted—that list of issues goes on and on,” says Padilla. The broader issue is the political deadlock that is a hindrance to economic progress. “The hope is to at least get from absolute dysfunction to something better, and maybe we can at least start moving forward on some of these issues after the election,” he adds.

“There isn’t any time deadline or time certainty when the policymaking situation will clarify itself,” says Jeffrey DeBoer, president of the Real Estate Roundtable. “By itself, that wouldn’t be a key factor in business operations or expansions. But when it’s put on top of other macroeconomic concerns, it is a big negative.”

Legislative solutions?

Although there is no silver bullet to fix the current economic climate, industry groups are advocating for a number of initiatives aimed at launching a more robust recovery.

The National Association of Realtors (NAR) is one group that is focusing on three key problems—improving bank liquidity, helping distressed borrowers that are “underwater” with loans, and shoring up small business loans.

“We have to find ways to return liquidity to the whole market—both residential and commercial,” says Bill Armstrong, treasurer of the National Association of Realtors and vice president of sales and marketing at Mackintosh Realtors in Frederick, Md.

For example, NAR is endorsing legislation aimed at encouraging equity investment in distressed commercial properties by granting investors a one-time 50 percent bonus depreciation. Investors who commit at least 80 percent of an equity investment to reduce the outstanding balance of debt, with the remaining funds going towards capital improvements, would be eligible for the one-time bonus. The proposal is included in H.R. 1147, the Community Recovery and Enhancement Act of 2011.

NAR also supports a simple term extension in lieu of a refinance for commercial borrowers that are making their monthly payments, which is included as part of H.R. 1723, the Common Sense Economic Recovery Act of 2011. Lenders are currently not offering these extensions due to pressure from bank regulators.

Although both of these legislative proposals are actively being discussed, the sentiment coming out of Washington is that nothing will be accomplished until after the election, which is still nearly an entire year away. “It is so disturbing to hear that, because we have really big issues on our plate,” says Armstrong. “People have lost focus as to why they were elected and why they are in Washington on our behalf.”

The Real Estate Roundtable, meanwhile, is continuing to send the message to representatives in Washington of the importance of a healthy real estate marketplace. “Sometimes in Washington it seems to be forgotten,” DeBoer says. “There are economic benefits from commercial real estate in terms of jobs, tax revenues and returns for 401ks and other pension investment vehicles. It’s very important, even during a slow or down time of policymaking, that the industry continue to interact with policymakers and interact in a positive way about the value of growing and healthy real estate market.”

More reform ahead

The business community continues to raise concerns about the negative impacts of over regulation, and the commercial industry continues to wait for clarity on key reforms to the CMBS market and lease accounting standards.

New requirements are sending tremors through the CMBS market. As part of the Dodd-Frank Act, entities that securitize mortgage loans are now required to retain 5 percent of the mortgage risk.

Yet it is still unclear how regulators will further define that risk retention rule. Will the 5 percent stake be a horizontal or vertical tranche, and who will be required to hold that 5 percent? If the originating bank has to retain that risk on its balance sheet it could “destroy” that industry, says Brian Stoffers, president of CBRE Capital Markets in New York.

The uncertainty related to what the regulations will be in the future makes it difficult to commit to the CMBS market, adds Padilla. Credit Suisse is one major lender that has decided to exit the CMBS market for now. The regulatory issue was certainly a factor in that decision, and the concern is that other firms may follow suit. “We will see some companies that will hang in there, but everyone is convinced that the market would be more robust if there was confidence and certainty in the political process,” says Padilla.

According to Mike Konczal, a fellow with the Washington, D.C.-based Roosevelt Institute think tank, key parts of the Dodd-Frank bill that will strengthen the financial sector include the Volcker Rule, increased consumer protection, increased disclosures and risk retention. “Securitization was a Wild West between 1989 and now, but it became the primary mechanism through which we distributed mortgages,” Konczal said during a panel discussion at the ULI Fall Meeting in Los Angeles in October. “One way to look at it is that we want to take the ways we set up regulations in the commercial banking sector and bring them to the securitization world.”

But part of the problem, according to Mark Wilsmann, managing director and head of real estate portfolio management with Met Life Inc., is that the details surrounding the treatment of CMBS are being hashed out too slowly, which is hurting the recovery of the market.

“Regulators would like to fundamentally change what has been a originate-to-distribute model … to instead a model that you originate, retain first loss risk and use securitization market to finance your business going forward,” Wilsmann said during the ULI panel. “A lot of shops are not prepared to do that.”

The proposed rules also include the concept of a premium capture reserve account, which means that sponsors would have to put aside cash to cover potential losses not be able to record profits from their businesses until the end of a 10-year loan.

“Any profit would have to go into risk retention as a first loss provision,” Wilsmann said. “The whole industry has said this is not going to work. … Essentially as proposed, there would be no CMBS going forward.”

Lease accounting

The Financial Accounting Standards Board and the International Accounting Standards Board have yet to release a final version of their new lease accounting standards, including the date that the new standards will go into effect. Although the aim is to create more transparency, the concern in the industry is that it would create an added administrative burden for companies who do lease a large amount of real estate, and it could prompt tenants to shorten lease terms.

Other important items on the watch list for the coming months will be indications on how the government plans to restructure Freddie Mac and Fannie Mae. The two agencies were bailed out by U.S. taxpayers during the credit crisis. According to the Federal Housing Finance Agency, the government has provided $154 billion in capital to the two agencies. However, that volume is expected to drop to $124 billion by 2014 as Fannie and Freddie starts to repay some of that debt.

Both Fannie and Freddie are vital financing sources to both the single family and multifamily housing markets. Fannie Mae expects its multifamily mortgage backed securities issuance to top $20 billion in 2011, while Freddie Mac has provided $259 billion in liquidity to the single and multifamily industry during the first three quarters of 2011. “Housing is so important to the American economy, and they provide so much of the financing behind that, that it is hard to imagine that Congress will take too traumatic a step too rapidly, less they undermine what fragile recovery might be taking place in housing,” says Stoffers.

Once the election is no longer a stumbling block, the question remains as to whether the path will be clear to move forward with legislation that is important to the business community and the commercial real estate industry, or will partisan politics continue to be an impediment. “I would really like to believe that after the election, people can start to work for a common solution,” says Armstrong.