PRINT THIS STORY:

CHANGE TEXT SIZE:

PROPERTY OWNERS CALL FOR REMIC REFORM

Federal Realty Investment Trust simply wanted to spend $10 million fixing up a vacant big box at one of its Virginia properties. But the Rockville, Md.-based REIT stumbled into a nine-month imbroglio during which it had to get a lot of appraisals and legal advice.

It turned out that the property was encumbered with a conduit loan — a kind of commercial mortgage that gets securitized and is governed by a set of rigid rules that make it hard to alter the property.

“A lot of us [developers] aggressively manage our properties to maximize development and tenanting opportunities,” said Dawn Becker, Federal Realty’s senior vice president and general counsel. “With conduit financing, the restrictions make it difficult to do that.”

Now two bills that could loosen conduit loan rules are up for consideration in Congress. The legislation involves real estate mortgage investment conduits, or REMICs, which are used to package and sell commercial-mortgage-backed securities and ensure timely payments to investors. These conduits sell CMBS backed by diverse pools of small loans of moderate credit quality. Lenders take care to preserve the underlying collateral and prevent premature repayment.

Specifically, the REMIC bills propose to give landlords freedom to improve properties under conduit loans and even to change a CMBS loan’s interest rate, so long as they don’t extend the term or alter the principal.

At present, getting approval for such maneuvers involves huge amounts of huddle time with tax lawyers. Property owners often resort to refinancing the mortgage instead, substituting a loan from a balance-sheet lender, which typically holds the loan on its own books until it is paid off.

Federal Realty wound up spending between $30,000 and $40,000 on appraisals and legal consultation, among other services, before it could redevelop the big-box site, Becker recalls. By comparison, persuading the lender to approve changes at a similar project that wasn’t encumbered by a conduit loan took about a week, she says.

REMIC modernization legislation would reduce hassles and allow developers flexibility to manage their properties as they see fit, proponents say. It could also boost demand for CMBS financing among retail real estate developers, says Kenneth T. Tyra, a partner at Dorsey & Whitney, a Minneapolis-based law firm. As things stand now, developers intending to make substantial structural changes to a property generally steer clear of CMBS financing, he says.

“We’re looking to do secured financing on properties we’ve acquired of a joint venture,” said Becker, referring to Federal Realty’s partnership with ING Clarion to buy grocery-anchored centers in the Northeast. Some of those will have to be mortgaged through balance-sheet lenders to minimize potential administrative pitfalls, the firm says.

The REMIC bills benefit a relatively small niche of the financial market, observers say. So small, in fact, that the legislation will have to be attached to, say, a tax bill to gain passage, says Tom Heinemann, regulatory and industry relations policy representative for the National Association of Realtors.