The CARES Act Impact on Real Estate Ownership
April 23, 2020
On Friday March 27, 2020, Congress passed and the President signed the Coronavirus Aid, Relief and Economic Security Act (CARES ACT). The $2 trillion relief package contains direct payments to individuals and small businesses (defined as companies with fewer than 500 employees) as well as many tax-saving provisions that impact both individuals and businesses. It constitutes the largest spending bill in U.S. history dwarfing the $800 billion TARP legislation adopted to stem the 2008 recession. The CARES ACT expands the Small Business Act to create a small business interruption loan program to make loans to a broad array of businesses as well as nonprofits. Loan amounts are based on four months of payroll, mortgage, rent and debt payments, not to exceed $10,000,000 per applicant. Taxpayers that receive loans before the end of June would be eligible to have the loan forgiven in an amount equal to the cost of maintaining payroll during the period from March through June 2020.
The CARES Act thus provides an incentive to maintain employment but apparently doesn’t provide a similar incentive to pay rent or other bills. As a result, Landlords have found themselves in a difficult position, since much of the funding from the CARES Act won't go directly to them, and they'll need the cooperation of tenants to maintain rent revenue. Anecdotal evidence so far is many commercial tenants are holding off as long as possible to pay rent because many states and municipalities have adopted eviction moratoriums. And in other situations, the courts are closed or only partially functioning.
The challenge for landlords, is that they aren't getting forbearance on their loan payments, tax payments or other bills but are losing rental income from tenants.
In some situations, landlords and tenants have negotiated rent deferrals on the condition that tenants apply for funding through the CARES Act and then pay rent when funding is received. That is the ideal situation for landlords in this environment. Longer term, there is an additional problem for landlords. Many businesses have learned they can successfully leverage technology to utilize tele-commuting. If this trend continues, the demand for commercial space could be permanently impaired.
Can Hotels Get Payroll Assistance?
Hotels, which have been particularly hard-hit by the pandemic because of the plunge in travel, are trying to understand whether they can benefit from the CARES Act since the payroll aspect of the relief is meant to be used to reimburse employee expenses, yet many hotels don't directly hire employees. Hotel owners, instead, enter into management agreements with hotel chains and pay management fees which are used by the hotel chains to cover payroll. The hope is that the Treasury Department will recognize the unique structure of the hotel industry and adopt regulations allowing hotel owners to apply for relief under the CARES Act, but the government will have to deal with avoiding double counting by hotel owners and hotel chains.
Restaurants and hotels face a difficult timing issue when contemplating applying for CARES Act funding, since many of them sent their employees home before the law was passed, It is unclear if it's a good idea to bring workers back to qualify for government aid, given that consumer demand may remain low for longer given the uncertain timing of the pandemic.
Are Condos and Co-ops Eligible for Relief?
Cooperative housing corporations and condominium associations are also trying to understand if they can get payroll relief from the CARES Act. To date SBA guidance still does not make it clear whether co-ops and condos can get relief. Interim rules would seem to allow CARES Act applications, but further guidance is needed.
In New York, the Governor issued an Executive Order to require insurers to provide the following relief to consumers and small businesses (defined as any New York based business that is independently owned and operated, and employs 100 or fewer individuals”) who can demonstrate financial hardship due to COVID-19:
Life Insurance and Annuity Contracts
Extend the premium grace period (usually 30 days) to 90 days to ensure that the policyholder’s life insurance policy does not lapse for nonpayment.
Waive late payment fees otherwise due, and not report late payments to credit rating agencies, during the 90-day period.
Allow premiums due but not paid during the 90-day period to be paid over the course of the following year in 12 equal monthly installments.
Extend the period to exercise policyholder rights and benefits under life insurance and annuity contracts to 90 days.
Property & Casualty
Provide a 60-day grace period for the cancellation, conditional renewal or non-renewal of an insurance policy held by a policyholder facing financial hardship due to COVID-19.
Allow premiums due but not paid during the 60-day period to be paid over the course of the following year in 12 equal monthly installments.
Waive any late payment fees, and not report late payments to credit rating agencies, during the 60-day period.
Insurers are required to accept a written attestation from a policyholder as proof of financial hardship as a result of the COVID-19 pandemic.
THE ABOVE INFORMATION IS NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE OR RECOMMENDATIONS. To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.