While the federal government’s recently-enacted $2 trillion-dollar stimulus package under the CARES Act provides direct relief to individuals, multi-family borrowers with federally-backed mortgages, and various hard-hit sectors of the economy, the benefits to commercial real estate owners are limited to indirect benefits from shoring up the finances of commercial tenants and changes to the tax law benefiting larger real estate investors.
For some residential landlords, news of direct payments of up to $1,200 to most individuals (and up to $3,400 for a family of four) might mean that their renters will be able to make at least some form of rent payment next month. On the other hand, for landlords in most of Southern California, these checks (albeit a great help for some) are unlikely to go very far. The following are key provisions related to residential property owners and landlords:
- Forbearance. Multifamily borrowers (five or more units) with federally-backed multifamily mortgage loans (such as Fannie Mae or Freddie Mac) that were current on their mortgage payments as of February 1, 2020, may request a forbearance for up to 30 days from their Servicer, with the right to request up to two 30-day extension periods. For individual homeowners and multifamily landlords (four or less units) with federally-backed mortgages, you may be able to suspend payments for up to 12 months.
- Foreclosure Protection. For a residential homeowner or multifamily owner (four or less units, excluding vacant or abandoned property), a Servicer of a federally-backed mortgage loan may not initiate the foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for at least 60 days beginning from March 18, 2020.
- Eviction Moratorium. If a landlord is the owner of “covered property” (i.e., property is insured, guaranteed, supplemented, protected, or assisted in any way by the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, Freddie Mac, the rural housing voucher program, or the Violence Against Women Act of 1994), such landlord is prohibited from evicting a tenant for 120 days from the date that the CARES Act was enacted.
With $350 billion in loans and guarantees being offered to small and medium-sized businesses via the Small Business Administration (“SBA”) and $500 billion in corporate aid for key industrial sectors, such as air carriers and companies deemed critical to national security (i.e., Boeing and General Electric), Southern California commercial tenants (many of which work as subcontractors crafting components for these industrial giants) may be in a position to make some rental payments as well.
Unfortunately, as drafted, the CARES Act does little in the way of providing direct relief for multi-family landlords and commercial property owners whose mortgages are held by non-federally backed or non-traditional lenders generally. Instead, the stimulus package allocates billions of dollars for companies and individuals. Landlords can only hope to see an indirect benefit from their tenants’ businesses and employers getting financial assistance by way of SBA-backed borrower-friendly loans, direct payments, and other stimuli, in addition to some tax benefits that might alleviate cash flow concerns.
Nonetheless, there are various provisions worth consideration that are applicable to the commercial real estate industry as it, much like the rest of the economy, attempts to combat the economic effects of COVID-19. Landlords and property owners should consider the following:
Maintaining Liquidity in the Lending Markets
With respect to real estate finance, the industry stands to benefit from the federal government’s decision to allocate $454 billion in loans, loan guarantees, and investments to be deployed by the Federal Reserve’s credit facilities to support lending to eligible businesses, states, and municipalities—an effort that would bolster the Federal Reserve’s prior commitment to “support the flow of credit to households and businesses by addressing strains in the markets for Treasury securities and agency mortgage-backed securities.” The $454 billion will be used for: (1) purchasing loans or other interests from issuers; (2) purchasing obligations or other interests from secondary markets; or (3) making loans, whether in the form of loans or collateral-secured advances. The Federal Reserve programs include the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, and the Term Asset-Backed Securities Loan Facility.
Foreclosure Protection for Federally-Backed Borrowers
Applying retroactively as of March 18, 2020, except for vacant or abandoned property, federally-backed mortgages will not face the threat of foreclosure—CARES prohibits a servicer from initiating the foreclosure process, moving for a foreclosure judgment or order of sale, or executing a foreclosure-related eviction or foreclosure sale for at least 60 days (Section 4022).
Loan Modifications & GAAP
The CARES Act allows financial institutions to suspend the requirements under Generally Accepted Accounting Principles (“GAAP”) for COVID-19-related loan modifications, permitting lenders to make such loan modifications without categorizing such as a troubled debt restructuring. Qualifying loan modifications may be made from March 1, 2020, through the earlier of (i) 60 days after the expiration of the national emergency declaration or (ii) December 31, 2020.
Various tax benefits are also being made available to property owners, including:
- Allowing non-REIT businesses a five-year carryback of net operating losses (“NOLs”) for 2018, 2019, and 2020. The CARES Act modifies the rules relating to NOLs for taxable years beginning in 2018, 2019, and 2020. The new rules (i) allow NOLs incurred in 2018, 2019, and 2020 to be carried back up to five years preceding the year of the tax loss and carried forward for an indefinite period, (ii) repeal the 80% Limitation for taxable years beginning before January 1, 2021, and (iii) provide that NOL carryforwards arising from taxable years beginning before 2018 are not subject to the 80% Limitation when carried forward to tax years beginning in 2021 and beyond.
- Increasing the limit on deductible business interest from 30% to 50% of adjusted taxable income (calculated similarly to EBITDA) for 2019 and 2020. Different rules apply in the case of partnerships.
- Qualified Investment Property (“QIP”) is now available for immediate expensing, rather than subject to the 39-year depreciation period—an estimated $170B windfall for real estate investors. The new provision in the CARES Act is an attempt to fix a drafting error in the 2017 Tax Cuts and Jobs Act (“TCJA”). Now, improvements to the interior of a non-residential building (so-called QIP) are eligible for immediate expensing, instead of being subject to the 39-year depreciation period of a building. With this change, the federal government is hoping to incentivize investment in capital improvements and ultimately bolster economic activity in the real estate and construction industries.
- For taxable years starting after December 31, 2017, the TCJA prevented non-corporate taxpayers from deducting more than $250,000 ($500,000 for joint filers) of net business losses against other sources of income (the “Business Loss Limitation Rule”). The CARES Act retroactively repeals the Business Loss Limitation Rule for the 2018, 2019, and 2020 taxable years.
- Excluding the cancellation of debt related to new, emergency small business loans from incom
SBA Stimulus Programs
The Act provides for the following loan options for small businesses:
- Paycheck Protection Program: The Paycheck Protection Program is an expansion of the currently existing loan program under Section 7(a) of the Small Business Administration designed to make potentially forgivable loans to businesses.
- Who Qualifies: The program generally applies to businesses with less than 500 employees, certain food-service and lodging companies, and also includes eligibility for 501(c)3 nonprofits as well as sole proprietors, independent contractors, and self-employed individuals.
- Amount of Loans: Businesses can borrow up to 2.5 times their monthly average payroll, up to a total of ten million dollars.
- Interest Rate: The terms of each loan will vary, but the maximum interest rate on the loans is four percent.
- Specific Terms: Loans will have no origination fees and will not require any collateral, and at least through the end of 2020, no personal guarantee.
- Limitation on Use of Funds: Subject to certain terms and conditions, loan proceeds may be used for mortgage interest, rent payments, leases, utility services, and payroll. Amounts used for these covered purposes are eligible for forgiveness. Payroll costs can include employee salaries (up to an annual rate of pay of $100,000), hourly wages and cash tips, paid sick and medical leave, and group health insurance premiums. Loan proceeds can also be used on other business-related expenses like inventory, but those will not be forgiven.
- Amount Forgiven: Subject to certain limitations, all loan proceeds spent on covered expenses during the eight-week period after loan origination can be forgiven, provided that if the borrower reduces full-time employees or an employee’s salary by more than 25%, then the amount of the loan forgiven will be reduced by a corresponding amount.
- SBA Economic Injury Disaster Loans: In response to the Coronavirus (COVID-19) pandemic, small business owners (e.g., landlords) are eligible to apply for an Economic Injury Disaster Loan (“EIDL”), which includes an immediate advance of up to $10,000, payable within three days of application. The loan advance need not be repaid, even if the loan application is ultimately denied. The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million that can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing. An EIDL could be a loan option for a real estate owner with little or no employment expenses. However, this loan may not be permitted by the Borrower’s other financing. Please review existing financing to determine what restrictions your lender has on additional financing.
- Who is Eligible?
- In general, all of the following entities that have suffered substantial economic injury caused by a disaster, provided they were in existence on January 31, 2020:
- Businesses with fewer than 500 employees
- Cooperatives, ESOPs, and tribal small businesses with fewer than 500 employees
- Sole proprietors
- Independent contractors
- Most private nonprofits
- What Are The Loan Parameters?
- The maximum EIDL is a $2 million working capital loan at a rate of 3.75% for businesses and 2.75% for non-profits with up to a 30-year term.
- Payments on Coronavirus EIDL loans are deferred for one year.
- Up to $200,000 can be approved without a personal guarantee.
- Approval can be based on a credit score and no first-year tax returns are required.
- Borrowers do not have to prove they could not get credit elsewhere.
- No collateral is required for loans of $25,000 or less. For loans of more than $25,000, general security interest in business assets will be used for collateral instead of real estate.
- The borrowers must allow the SBA to review its tax records.
- How can I access an Emergency $10,000 Grant?
- Eligible applicants for an EIDL can receive a $10,000 emergency grant within three days of application (through Dec. 31, 2020).
- There is no obligation to repay the grant. To receive the $10,000 emergency grant, it is not necessary to have an approved EIDL loan. However, if you are able to secure a PPP loan, the $10,000 grant will be subtracted from the forgiveness amount.