How and where the impact of the bill will be felt depends on the next stage of this process, the actual writing of regulations. The bill creates a framework that will be hammered out in detail by the appropriate regulatory authorities, says Clifton E. Rodgers Jr., senior vice president at the Real Estate Roundtable, based in Washington, DC. "It is premature to speculate about the impact this bill will have on real estate credit and capital availability," he says.

Indeed, two days after the bill was passed by the Senate, the industry was still scrambling to figure out what exactly was included in it, since the language was changing and being inserted up until the last minute, says Rodgers, who is not a particular fan of the bill, the Roundtable didn't support it, neither during the legislative nor lobbying process. "A lot of critics feel it will increase the cost of borrowing because of the additional regulatory burden that it places on financial institutions," he says.

The real estate industry did get some of what it was asking for in the bill, he notes, such as the regulations around securitization and the relaxation of the derivatives legislation for end users. But then there is what the bill didn't do, he adds: it didn't establish how Freddie Mac and Fannie Mae will be regulated, or privatized. More fundamentally, it doesn't make new credit or liquidity available to real estate. For the most part, the bill is seen as something that will constrain the commercial real estate industry. Predicts Marisa Manley, president of Commercial Tenant Real Estate Representation in New York City: "There will be fewer market participants for deals because of it, and more restrictions on what those market participants can do." There will also be higher financing costs, she says, since the intent of the regulations is to tighten standards even more.

Much will be determined quietly and behind the scenes over the next 90 to 120 days as the administration and regulators get down to the task of writing these rules, says Dennis Nason, CEO of Nason & Nason, an executive search firm for banking and finance based in Coral Gables, FL, and a former investment banker with Wells Fargo and Citigroup. "It is the way those regulations will be framed, oftentimes in the last instant, that will have the greatest impact on how real estate finance will work."

About 50% of the bill is a reminder or tutorial of what the fundamentals of banking are, it is banking 101 basically, Nason says. "It directs the banks to adhere to the fundamentals in the way they make loans," he notes. "That isn't really new, but what will be new is how regulators decide to interpret and codify those instructions."

For example, consider the matter of banking reserves, the amount of capital institutions are required to hold against certain loans or activities. There are rules both formal and informal on that now, with the informal ones giving banks, especially community banks, some wiggle room.

The unwritten or informal rules might touch upon concentration of credit, such as geographic or category classification. Congress is not going to legislate that, but regulators may now determine that a bank cannot lend, say, more than 10% of its capital to multifamily developers in the south, or if they do, they must increase their reserves by a specified amount.

To a certain extent this has been happening to community banks anyway-to their chagrin. Regulators, still burned by the failures on their watch, have been clamping down on community-bank practices, disallowing certain approaches or standards that were routine before. Community banks counter that they know their customers and markets best.

However, this has been occurring on a case-by-case basis, it will be worse for the banks-and their real estate customers-once such judgments by regulators become codified in the bill. "There is a bank in Miami that has % of its loans in commercial real estate," Nason says. "That bank will not survive in its current form under the new regime."

Determining when a performing loan becomes non-performing is another area likely to become codified with new regulations, as well as accounting standards currently in draft form. Right now most banks are allowing borrowers to meet their current obligations even if the maturity date has passed and even if the underlying value has gotten out

of whack, but such permissiveness is expected to change as well.

The contours of the debate around this topic are well-known: regulators want to be completely objective, valuing the asset at its lowest, perhaps fire-sale price. Banks, for their part, are not inclined to believe the asset is worth so little, or will be worth so little in the medium term. And again, they point to their knowledge of the borrower

as an important factor that should be weighed as well.

Expect regulations in this area to become as minute as determining which firm should conduct the appraisal of the asset, Nason says, "New regulations could mandate that an appraiser is located so many hundreds of miles away," he explains, "to make sure there is no conflict of interest or bias that one might get with using a local appraiser."

The use of over-the-counter derivatives by commercial real estate firms is another example. Implementing the legislation could require some 400 regulations to be developed. The industry is hopeful that real estate endusers will not be severely impacted.

Theoretically, the end-user protections in the bill should allow non-financial entities that are hedging commercial risk to continue to use these instruments without being directly subject to margin requirements. Their swap dealer counterparts may be required to post margins on these trades, however. Also, non-systemic/ non-dealer financial entities will be required to clear derivatives that are eligible for clearing, while trades that are not subject to the clearing requirement-such as customized derivatives-may be subject to margin, according to the RER's preliminary analysis by of the bill that cleared the House-Senate committee at the end of June.

The risk-retention language, by contrast, is a little more concrete, and its inclusion was seen as a win by the commercial real estate finance industry, at least when stacked up against what might have been. Here too, though, there is enough room for regulators to visit mischief on the industry, at least from originators' perspective. The so- called skin-in-the-game provisions give regulators such choices as a percent retention, flexible underwriting guidelines and controls and stronger representations and warranties when setting guidelines.

However, not all of the bill is viewed with disdain by the industry: in some quarters, at least quietly, the new mandates for credit rating agencies were welcomed. The new law subjects them to greater liability, notes W. P. Carey School of Business Professor Emeritus Herbert Kaufman-indeed it even permits them to be sued if they "recklessly" fail to review key information. Meanwhile, the Securities and Exchange Commission has two years to address the inherent conflict of interest at rating agencies, meaning that they are paid by the companies who rate them. "On balance that is a very good thing in a law that one can say will be only moderately helpful in stopping the next crisis," Kaufman says.

If the SEC doesn't establish a procedure around this, an amendment proposed by Sen. Al Franken (D- MN) will be implemented, which would create a board to assign ratings agencies to debtissuers. For all the change and subsequent angst the bill has introduced, there are steps real estate companies can take to best position themselves, says Paul Shapses, transactional commercial real estate partner at Herrick, Feinstein in New York City. Conversely, distress investors thinking about the next wave of opportunities may start scouting along these lines as well, looking for firms that are not taking the appropriate defensive measures. Shapses advises companies to: Manage assets scrupulously, because it's the value of the asset, against the backdrop of loan-to-value underwriting standards, that will dictate whether a borrower can borrow and, if so, how much and at what cost and terms.

• Maintain as good a reputation as a sponsor as possible. Strength of sponsorship is a crucial factor in determining whether your project is more viable than others, Shapses says.
• Establish and strengthen relationships with lenders as quickly as possible. "Then, when the time is right, mine those relationships, they will be a factor in determining who borrows and who goes without," he says.
• Get in line for loans sooner rather than later. This legislation is about many things, but it is not about stimulating lending activity. "It's about managing and lessening lending risk," Shapses notes. "And at least for a while, the pendulum will keep swinging that way." Prepare and project internally to pay higher costs for borrowing and to put up more equity, in keeping with tightened underwriting and diminished tolerance for high loan-to-value ratios. "Borrowers, not the financial institutions," he says, "are likely to be the ultimate payers of taxes on financial institutions that this legislation brings. And the supply-demand equation will be unfavorable to borrowers in the wake of this legislation, because demand will be there but supply figures may shrink because of bank capital and retention requirements."
• Finally, Shapses urges, beware the competition not affected by this legislation. It will be interesting to see whether or not the international community will adopt similar rules for their financial institutions. "If not, the US may be giving a competitive advantage to foreign firms," the Herrick, Feinstein partner says. "We'll also see an expansion of the role of unregulated lenders in the market. Extend and pretend will continue to look attractive to financial institutions where equity coverage is inadequate to permit refinancing, subject to any regulations mandating revised mark-to market and capital rules."

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