House Passes LIBOR Legislation

Legislation that impacts commercial real estate is moving through the United States Congress. The U.S. House of Representatives passed the ‘‘Adjustable Interest Rate (LIBOR) Act of 2021,” H.R. 4616 by 415 to 9 margin, on Wednesday December 8, 2021.

The legislation was received in the Senate and read twice before being referred to the Committee on Banking, Housing, and Urban Affairs. Should the Senate pass the bill, it would then go to the President for approval before becoming law. California Representative Brad Sherman is the lead sponsor of the bipartisan bill. Senators Jon Tester (D-MT) and Thom Tillis (R-NC) are now seeking to pass the legislation before year end. 

Passing a bipartisan bill is important for the commercial real estate industry because it will set up a framework to replace the benchmark U.S. Dollar London Interbank Offered Rate (LIBOR) interest rate that is used in many financial contracts but is scheduled to begin a sunset period at the end of this year. The Alternative Reference Rates Committee (ARRC) selected the Secured Overnight Financing Rate (SOFR) to succeed the LIBOR benchmark interest rate in 2017. That led to a need to find a different benchmark than U.S. Dollar LIBOR, which has previously been a key standard for interest rates in financial contracts, including mortgages.

What this bill means is that financial contracts that do not currently have USD LIBOR replacement language can transition smoothly to a new benchmark rate, avoiding interruptions and minimal risks stemming from the cessation of LIBOR. There are roughly $200 trillion of dollars’ worth of existing contracts, commonly referred to as “tough legacy contracts,” still tied to USD LIBOR that do not currently have alternative terms in place to establish a substitute rate for the expiring LIBOR benchmark rate.

The new legislation has the support of CRE Finance Council (CREFC) and other National Real Estate Organizations (NREOs), mainly because it establishes a clear and uniform process to replace LIBOR in existing contracts. The legislation does not affect the ability of parties to use any appropriate benchmark rate in new contracts.

Lisa Pendergast, CREFC’s Executive Director, said in a statement, “CREFC applauds the House’s action and thanks Rep. Sherman for leading the bipartisan effort to solve this important piece of the LIBOR transition. Federal legislation gives more certainty for everyone in the market, and we urge the Senate to act swiftly to send the legislation to the President’s desk. 

Ahead of the House vote, CREFC and 21 other trade organizations sent a letter of support to Speaker Nancy Pelosi and Republican Leader Kevin McCarthy highlighting why it was necessary to take federal action for tough legacy contracts. They believe without federal legislation to address these contracts, investors, consumers, and issuers of securities may face years of uncertainty, litigation, and a change in value. This would thereby create ambiguity that would lead to a reduction in liquidity and an increase in volatility. None of those are favorable outcomes for those in the commercial real estate industry.

Here is a link to check out the latest text of the bill.