Legislative Update
Vijay Yadlapati, National Association of Realtors®
Associate Commercial Policy Representative
New Accounting Proposal Could Have Devastating Impact on
Commercial Real Estate Liquidity
On May 25, 2010, the Financial Accounting Standards Board
(FASB), an independent body that sets US accounting standards,
proposed an accounting rule change in an effort to create greater
transparency in financial statements. Under this proposal, financial institutions would be required to book their loans at current
market value, a method known as “fair value” or “
mark-to-market” accounting. Specifically, the proposal would require banks
to report the fair value and amortized cost of a loan on their balance sheets, which would force them to take huge write downs
or losses, particularly during periods of economic distress.
In 2007, the FASB reinstated mark-to-market accounting
for complex financial instruments such as mortgage-backed
securities, which escalated the financial crisis, according to
many industry analysts. However, in April 2009, FASB passed
a proposal to relax these rules by giving companies more leeway when valuing assets, which helped calm financial markets. The changes came after Congress criticized FASB for
the damaging effects of mark-to-market accounting, where
assets valued at market prices had to be written down, even
if a company intended to hold a particular asset to maturity – causing markets to
freeze up and forcing more write-downs.
If implemented, the proposed mark-to-market rules would exacerbate poor economic conditions by forcing banks to take
unjustified losses on assets that decline in
value, reducing overall credit capacity.
Moreover, the availability of credit would
be greatly undermined by making it
more difficult for financial institutions to
make many long-term loans, the value of
which, even if performing, would likely
be reduced on the day the loan is made.
While this rule would pose a sig-
nificant challenge for large commercial
banks, smaller regional and community
banks would be hit the hardest, especially
ones with high commercial real estate
exposure. Since commercial real estate
loans are typically longer-term assets, the
proposal would mandate onerous write-
downs and potentially cause many smaller
financial institutions to fail. As a result, credit for the commer-
cial real estate industry as well as for other businesses and con-
sumers would be further constrained, hindering our nation’s
economic recovery. If approved, the rules would take effect for
the biggest banks as early as 2013. Smaller banks, with less
than $1 billion in assets would be permitted to wait until 2017.
Doherty Industrial Group
Leasing • Sales • Land • Investments
Dan Doherty, SIOR Sr. Vice President T 702.836.3707 dan.doherty@colliers.com
Patti Dillon Vice President T 702.836.3790 patti.dillon@colliers.com
Chris Lane Marketing Specialist T 702.836.3728 chris.lane@colliers.com
Marge Ruderman Executive Assistant T 702.836.3737 marge.ruderman@colliers.com
3960 Howard Hughes Parkway, Suite 150 | Las Vegas, Nevada 89169
T 702.735.5700 | F 702.731.5709 | www.colliers.com