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:
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:
SBA Stimulus Programs
The Act provides for the following loan options for small businesses: