OpenLobby.EU
Explore

Commercial Real Estate Finance Council Europe

CREFC Europe

CREFC Europe is a not-for-profit membership association for those directly or indirectly interested in commercial real estate (CRE) finance, across lender types, in Europe or any part of Europe.

Lobbying Activity

Response to Debt equity bias reduction allowance (DEBRA)

26 Jul 2022

We support initiatives to encourage productive and sustainable investment in the European economy, but we do not think the debt-equity bias is as real or pervasive as the Commission appears to believe, and while we express no opinion about the proposed allowance on new equity, we have serious concerns about the proposed limitation to interest deductions. In brief: (1) A loan and an equity investment are very different things in commercial terms: a lender provides a (financial) service for a capped return (a finance charge), whereas an equity investor is an owner of the investee business (with rights to profit distributions). A great deal of productive and sustainable long-term funding for business takes the form of (low risk, low return) debt. This is certainly the case in the capital intensive context of the built environment and real estate. Where debt is genuine, commercially priced, third party debt, it is both reasonable and usual for tax relief to be available for that business cost. Distributions of profit on the other hand are just that - they are not a cost of the business. (2) For many businesses (including SMEs), debt may be a more attractive source of additional capital than equity not because of its tax characteristics, but because it comes at a fixed cost. Borrowing allows equity capital to be leveraged to drive growth without loss of control, diluting ownership or giving up super-profits. Debt also offers attractive risk/returns to institutional (and other) investors, and real estate debt has the additional characteristic of an illiquidity premium that suits life companies, for example. There are likely to be unintended consequences from a heavy-handed legislative intervention designed to distort the market away from debt towards equity. (3) For most non-financial businesses, "exceeding borrowing costs" will mean "borrowing costs", as they are unlikely to have material amounts of interest receipts. In effect, therefore, the directive proposes an arbitrary restriction on tax relief for financing costs, making debt (the cheapest form of capital because it is low risk/return compared to equity) more expensive. That will be a problem for businesses with existing and/or involuntarily high leverage. (4) Real estate is a long-term, capital intensive industry, in which both income (rent under a lease) and outgoings (including financing costs on debt) are typically fixed for many years in advance and therefore predictable. That characteristic makes real estate attractive for institutional capital. Yet many existing arrangements, which may have been structured on the assumption of tax relief under existing rules, may come under pressure if interest relief is suddenly and arbitrarily to be denied for part of the debt from 1 January 2024 (which is less than 18 months away). Some form of grandfathering for existing arrangements should be considered, or commencement of the interest restriction significantly delayed. (5) The proposed exclusion of "financial undertakings" gives rise to a familiar problem for the real estate industry, insofar as both (a) entities classified as "financial undertakings (e.g. AIFs) and (b) entities not so classified (e.g. listed or private companies and other vehicles) are routinely used to develop, own and manage real estate assets. Are the competition, market distortion and arbitrage risks for the real estate sector that result from this approach to scope understood, considered and justified? We are not implacably opposed to the proposed measure. However, great caution is needed before introducing it at a time of involuntarily (GFC or pandemic-induced) high leverage, and its impact on existing arrangements could be damaging and counterproductive. If it is to be taken forward, a slower, more gradual implementation would be advisable. The document uploaded with this response sets out our views more comprehensively and in a little more detail.
Read full response

Response to Debt equity bias reduction allowance (DEBRA)

12 Jul 2021

There is a fundamental difference between equity and debt investments which justifies the different tax treatment of payments made to equity investors and to lenders. An equity investor is an owner of the undertaking who hopes to profit from that ownership. A lender provides a service for a price, namely the loan of capital in return for a financing charge. Accordingly, returns paid to equity investors essentially amount to the distribution of the net profits of an undertaking to its owners – they are not “costs related to equity financing”. Interest payments to lenders are a contractual obligation of the undertaking, payable in consideration of the provision of a loan to the business. It would be strange if the tax system did not treat interest payments as a deductible cost of the business, in line with rent, staff and other costs of the business; it is similarly natural that the tax system does not provide tax deductions for the extraction of profits by the owners of an undertaking. It is not correct to regard the different treatment of dividends and interest as creating a 'bias' or 'incentive' towards leverage, because there are compelling reasons for that different treatment. It is fundamentally justified by the essential difference between the position and function of an equity investor in an undertaking (seeking a profit through ownership), and the position of a lender to that undertaking (seeking a fixed return for the temporary loan of capital, regardless of the undertaking's profitability). Interest payments are a cost of the business and reduce the profits that can be extracted by equity investors. The economic logic of borrowing and incurring interest costs is that the management of the undertaking considers that doing so will be accretive to the profits of the business available to its equity investors, because the net profits that can be generated by deploying the loan capital will be greater than the (interest) cost of financing that capital. It is not the pursuit of tax deductions. There may be a case for introducing some form of allowance for equity investment, particularly for SMEs, although we have not seen evidence or analysis of the consequences (intended or unintended) of such a measure. Presumably, there would be a potentially material cost associated with such a measure in terms of tax revenue for member states. On the other hand, we consider that an intervention to restrict the tax deductibility of interest payments to address a perceived “tax induced debt-equity bias” would increase the cost of capital, reduce investment and inflict lasting damage on the European economy, especially in the post-pandemic context (the “negative effects on growth and employment due to depressed investment” are indeed noted in Section C of the Roadmap). We are disappointed that both the Roadmap and the “full” consultation seem to us to demonstrate a lack of commercial understanding and intellectual rigour, and a superficial consideration of the evidence for and implications of the potentially very far-reaching measures proposed. In summary: • we consider that restricting the tax deductibility of interest paid to an unrelated third party lender for credit provided on commercial terms would be very damaging for European businesses, markets and the economy; • there are already extensive rules at national, EU and international level to combat excessive and tax-driven use of debt, and no evidence has been provided to suggest that these are inadequate; and • we have no opinion on the possible introduction of an allowance for equity investment, although (in the absence of empirical evidence or rigorous theoretical analysis) we doubt whether the cost of such a measure can be justified by its likely economic benefits.
Read full response

Response to Action Plan on the Capital Markets Union

30 Jul 2020

The Commercial Real Estate Finance Council Europe is the representative body for European commercial real estate (CRE) finance markets. We strongly support the CMU and agree with the statements in the Action Plan as to why it is important and what it should achieve. We would like to emphasise the role that CRE can play in: (a) providing investment options (especially to those willing to sacrifice some liquidity for a higher yield in a persistently low interest rate environment), both for equity investors and for non-bank lenders and debt investors; (b) providing essential capital for SMEs (in the sense that, if they can rent fit-for-purpose commercial premises, they can deploy scarce capital elsewhere rather than needing to buy or build their premises); and (c) supporting the green transition (given the significant contribution made by CRE to carbon emissions and consequently the impact that green retrofit can have). We would also like to emphasise that the shape and structure of CRE credit markets is important economically, in terms of financial stability, and for investment (in recovery and for the green transition). • CRE faces multiple challenges that necessitate substantial investment over the coming years: structural changes (e.g. e-commerce) are compounded by Covid-19 and the need for green transition. Equity capital is expensive, and can go much further if it is paired with debt. • It has been very disappointing to see European policymakers block the recovery of CRE debt securitisation (through the commercial mortgage-backed securities, or CMBS, market) – by excluding it from the STS framework and imposing penal capital charges under Solvency II. CMBS could offer insurers and other institutional investors a more transparent, comparable and liquid form of exposure to CRE debt than is otherwise available – but unreasonable policy decisions prevent its recovery to the sort of proportion of the CRE debt market that it might otherwise usefully occupy. This situation cannot be justified in policy terms and urgently requires review. • More generally (and as mentioned above in relation to CRE), CRE debt can offer good risk-adjusted returns to investors. Investor protection should not prevent economic investment (by institutions or by retail investors). It should instead ensure that investors understand the characteristics of the CRE debt (including its relative illiquidity) and that there is both transparency and suitable alignment of interests between lenders / asset managers and investors. The position of a secured CRE debt investor is inherently less risky than that of the owner of the real estate, and the illiquidity premium available can make CRE debt an attractive investment. • Restrictions at the national level on CRE lending continue to impede CMU, imposing regulatory and structuring costs on sources of credit that could diversify activity and risk away from Europe’s banks. • Banks can act as a catalyst for green retrofit of commercial buildings, aggregating information and spreading expertise, as well as finance, across a very fragmented industry in terms of ownership. We have made numerous submissions to the Commission and the ESAs over the last few years elaborating on most of the above points, to very little effect. We will not reattach any of them here, but we are very happy to engage with officials on any of our representations. We would be delighted to help officials ensure that the CRE and CRE lending industries make the best possible contribution to CMU and to Europe’s economic recovery and future.
Read full response

Response to Development of secondary markets for non-performing loans

8 Jun 2018

The submissions of the Commercial Real Estate Finance Council (CREFC) Europe are set out in the attached document. This document also includes as an appendix our response to the European Commission's 2017 consultation on improving secondary markets and the rights of secured creditors, as many of the points we made in that response remain relevant.
Read full response