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Commercial real estate got some indirect bad news.

The Securities and Exchange Commission sent letter exchanges to several community or regional banks about potential exposure to CRE loans, as the Wall Street Journal reported.

The agency contacted Alerus Financial and the holding companies behind Mid Penn Bank, Ohio Valley Bank and MainStreet Bank. The letters were “to request more clarity in their disclosures around the potential consequences from the failures of First Republic Bank, Silicon Valley Bank and Signature Bank.”

The three banks were closed and put into receivership by the Federal Deposit Insurance Corporation. Certain long-term bond assets that the banks held lost a lot of value as the Federal Reserve drove interest up in an attempt to curb inflation. When interest rates rise, bond values at previous lower interest rates lose value. These bonds were classified by the banks as held-to-maturity, meaning they could be treated as keeping their face value. But concerned depositors pulled large amounts of money out of the banks. That forced the institutions to sell bonds, which then were marked to market, losing liquidity and pushing the banks toward insolvency.

CRE loans aren’t the same as bonds, but there are two ways they could lose value. One is that increased interest rates could put borrowers with loans coming to maturity into a position where they can’t get refinancing. The lending bank would at least have to modify the loan, which could affect depositor trust and willingness to leave their deposits in place. Or the borrower could outright default.

The other way they could suddenly lose value is if the valuation of the property dropped — something happening broadly across all asset types, as has reported. That could leave the loan underwater, increasing risk and leaving depositors concerned and, again, possibly pulling out money and threatening the bank’s liquidity and potentially solvency.

Small, mid-size, and regional banks were the originators of many of the existing CRE loans. Unlike consumer mortgages, the banks don’t sell off the loans, leaving them holding all the risk.

“The SEC is worried that some of the banks may not be disclosing as much of their risk or exposure as they should to their investors,” Kenneth Chin, a partner at law firm Kramer Levin Naftalis & Frankel, told the Journal.

The SEC asked the banks to provide a more specific breakdown of CRE loan portfolios by property type, geography, and other factors.

Although the SEC has only made direct requests of these banks, the thousands of other institutions could see this as a pressure they too could face. Banks might further restrict their lending activity in 2024, increasing scrutiny and tightening underwriting standards, like loan-to-value ratios, even more than has previously happened.


Source:  GlobeSt.

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After years of discussions and hints, the Securities and Exchange Commission finally released its proposed environmental disclosure rule for public company reporting. They include greenhouse gas emissions; how the company governs and manages climate-related risks; actual or likely material impacts on business, strategy, and outlook; financial statement metrics; and information about climate-related goals and any transition plans.

Getting the information and making the determinations will be a challenge for any sized company that comes under the SEC’s purview. But there are significant questions about who is responsible for gathering and reporting information from commercial real estate facilities.

“This is a prime example of market participants like ESG investors and large companies (appropriately) acting like the adults in the room,” Blaine Townsend, executive vice president as well as director of sustainable, responsible, and impact investing at wealth and investment management firm Bailard, said in a statement to


“My initial reaction is that the SEC essentially gave ESG investors everything they requested on enhanced climate-change disclosures,” Michael Biles, a partner in King & Spalding’s securities enforcement and regulation practice, tells

He adds that companies will have to disclose “detailed information about how their business impacts climate-change” in their annual 10-Ks or registration statements.

“The proposed rules will be eye-opening for most registrants, particularly those that do not operate in energy or heavy industrial space and thus probably did not think that they needed to monitor or report their GHG emissions,” Biles adds.

Verdantix, an ESG research and advisory firm, estimated that the changes will run $6.7 billion on consulting over the next three years and “pose an additional challenge” for companies that don’t have the “internal and external experts to implement a robust management system for SEC climate rule disclosures.”

“[T]he real question is how far will the requirements go?” Thomas Gorman, a partner in the law firm Dorsey & Whitney, said in a statement sent by the firm to “The answer is in probability not as far as some foreign regulators such as the Hong Kong securities commission and the Monetary Authority of Singapore who are leaders in this area have gone. There will surely be a beginning, however, which in probability will be followed by lawsuits.”

What gets sticky is who will have to report what in CRE. Companies under SEC regulations will need data and analysis to even make the determination of whether there are material impacts on business, strategies, and outlooks, let report specifics.

“Under the proposed rules, all registrants must disclose their Scope 1 emissions—i.e., ‘direct GHG emissions from operations that are owned or controlled by a registrant’—and Scope 2 emissions—i.e., ‘emissions as indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant,’” Biles says. 

But lines get blurred.

“For example, if a software company that rents office space owned by an insurance company, who discloses the emissions caused by the electricity used in the office building, the software company or the insurance company?” says Biles. “I don’t know the answer to that question.”

What if commercial tenants want environmental information to do their reporting and that becomes a requirement for a landlord that, even if used to office or industrial leasing, doesn’t have the necessary data? Or what if landlords will feel increasing pressure to provide bundled services? What are the landlord’s obligations then?

This could get complicated and sticky quickly.


Source:  GlobeSt.