On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law by President Trump. The CARES Act is the largest economic relief law passed in U.S. history and approves approximately $2.2 trillion to mitigate the effects of the COVID-19 pandemic on individuals and businesses. The CARES Act contains many items that commercial real estate businesses may want to take advantage of, including new loan programs, mortgage forbearance provisions, and tax changes. This Client Alert identifies and briefly explains some of the CARES Act provisions likely to be attractive to the commercial real estate industry.
The CARES Act establishes two loan programs designed to provide liquidity to U.S. businesses: (1) the Coronavirus Economic Stabilization Act of 2020 (CESA), which creates loan programs directed by the Treasury Department; and (2) the Keeping American Workers Paid and Employed Act, which creates the Paycheck Protection Program (PPP).
CESA authorizes up to $500 billion in loans and loan guarantees of which (a) $46 billion is set aside for air carriers and businesses critical to maintaining national security (the “Airlines and National Security Loan Program”) and (b) $454 billion, plus unused amounts from the Airlines and National Security Loan Program, is available for loans to other eligible businesses (the “Federal Reserve Loan Program”). These loans (the “Federal Reserve Loans”) must be direct loans to businesses and cannot be part of a syndicated loan, a loan originated by a financial institution in the ordinary course of business, or a securities or capital markets transaction.
The duration of the Federal Reserve Loans must be 5 years or less, but the Treasury Secretary has significant discretion over the other loans terms. There are several conditions on businesses seeking Federal Reserve Loans, including restrictions on stock repurchases and issuance of dividends, significant limitations on employee compensation, and requirements to maintain certain employment levels.
The PPP provides for the expansion of the Small Business Act (SBA) in order to create up $349 billion in a new line of federally-guaranteed, forgivable, small business loans ("SBA Loans") available during the period of February 15, 2020 through June 30, 2020. These SBA Loans are available to small businesses with fewer than 500 employees and permit such qualified small businesses to borrow up to 2.5 times the average total monthly payroll costs incurred in the 1-year period before the SBA Loan is made with a cap of $10 million.
Throughout April, the Small Business Administration and the Treasury Department have issued evolving guidance on numerous issues related to the SBA Loans. This guidance is changing rapidly and there remains significant ambiguity on how to apply, qualify, and best position businesses for success in procuring the SBA Loans, as well as how to, once secured, comply with the loan terms and eventually secure loan forgiveness. Given all of this uncertainty, Brown Rudnick attorneys are closely monitoring the situation and strongly advise that businesses considering applying for SBA Loans consult experienced counsel to maximize the likelihood they obtain these critical resources and manage them properly.
For previous thoughts from Brown Rudnick on PPP and the SBA Loan program, please see the Client Alert issued by Brown Rudnick on March 30, 2020, Small Business Loans Under the CARES Act: What You Need to Know. Please check back soon for an update to this Client Alert that takes into account the new guidance.
Mortgage Forbearance Provisions
Sections 4022 and 4023 of the CARES ACT provide borrowers of certain federally-backed mortgage loans (e.g., HUD, Fannie Mae, and Freddie Mac-backed loans) with payment forbearance rights, and also impose certain tenant protections.
Section 4022 provides borrowers of federally-backed mortgage loans on 1-4 family properties (i.e., non-multifamily properties) with up to a 360-day forbearance period if the borrower experiences financial hardship due directly or indirectly to the pandemic (made up of a 180-day initial period which can be extended upon borrower request for an additional 180 days). Servicers of the mortgage loans are required to grant forbearance requests without any documentation other than a basic statement of financial hardship. Servicers cannot charge any additional fees, penalties, or interest in connection with the forbearance. The forbearance must be requested by the borrower prior to the termination of the National Emergency declared on March 13, 2020 as a result of the coronavirus pandemic, but no later than December 31, 2020. Section 4022 also places a moratorium on foreclosures, evictions, or foreclosures sales by loan servicers during the 60-day period from March 18, 2020 through May 18, 2020.
Section 4023 provides borrowers of federally-backed mortgage loans on multifamily properties (i.e., properties with 5 or more units) with up to a 90-day forbearance period if the borrower experiences financial hardship due directly or indirectly to the pandemic (comprised of a 30-day initial period that may be extended by the borrower for up to 2 additional 30-day periods). In order to take advantage of the forbearance rights granted by Section 4023, the borrower must have been current on its loan payments as of February 1, 2020. As is the case for Section 4022 loans, servicers of the mortgage loans are required to grant forbearance requests without any documentation other than a basic statement of financial hardship, and the forbearance must be requested by the borrower prior to the termination of the National Emergency declared on March 13, 2020 but no later than December 31, 2020. A borrower who receives forbearance under Section 4023 may not evict or charge late fees or penalties to tenants during the forbearance period.
Section 4024 of the CARES Act bars, through July 25, 2020, landlords of residential properties that secure federally-backed loans (or landlords participating in certain federal subsidy programs) from (i) evicting any tenant for the nonpayment of rent or (ii) charging any fees, penalties, or other charges to any tenant due to the nonpayment of rent.
The CARES Act contains certain tax provisions intended to provide relief to various businesses. Particularly relevant to real estate businesses are the following changes:
Accelerated Depreciation for Qualified Improvement Property
The 2017 Tax Cuts and Jobs Act (TCJA) expanded bonus depreciation rules to allow a 100% deduction for certain property acquired after Sept. 27, 2017 and placed in service before Jan. 1, 2023. However, Congress neglected to include certain improvements, including leasehold improvements, to nonresidential building interiors in the list of property eligible for bonus depreciation. The CARES Act includes a technical correction which fixes this mistake and subjects these interior improvements to the TCJA’s bonus depreciation rules. This provision may allow taxpayers to amend prior tax returns to claim refunds and may reduce the after-tax cost of future interior improvements.
Removal of Net Operating Loss Deduction Restrictions
The TCJA limited the ability of certain corporate taxpayers to offset taxable income using net operating losses (NOLs). NOLs from 2018 or subsequent tax years could offset no more than 80% of taxable income and could not be carried back to prior years. Subject to certain exceptions, the CARES Act removes the 80% limitation for tax years through 2020. The CARES Act also permits taxpayers to carry back NOLs arising in the 2018 through 2020 tax years over a 5-year period, which may generate significant cash refunds.
Business Interest Deductions
The TCJA limited the ability of certain corporate taxpayers to deduct business interest expenses. The limitation was generally equal to the sum of the taxpayer’s business interest income plus 30% of “adjusted taxable income.” Such disallowed interest expenses were available to carry over to future tax years. The CARES Act increased the 30% limitation to 50% for tax years 2019 and 2020. The CARES Act also allows taxpayers to use 2019 income to determine the limitation for 2020. The increased interest expense deduction may result in larger NOLs.
Loss Limitations Removed for Non-Corporate Taxpayers
The TCJA limited the amount of “excess business losses” that could be used to offset the non-business income of individuals, including individuals generating such losses through pass-through entities, to $250,000 ($500,000 for joint filers). The CARES Act lifts this limitation for tax years 2018 through 2020, which may result in additional tax benefits to taxpayers holding real estate businesses through pass-through entities.
Given the complexity of the CARES Act, and the daily changes in the guidance being issued by the government on the same, it is crucial that businesses considering applying for relief under the CARES Act seek the advice of experienced counsel. Brown Rudnick attorneys are ready and willing to help you and your business navigate and manage these opportunities.
The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.