The Coronavirus Aid, Relief, and Economic Security Act (commonly referred to as the “CARES Act”) was enacted on March 27, 2020. The CARES Act is a nearly $2 trillion stimulus package aimed at combating the economic impact of the COVID-19 pandemic on businesses, individuals and families. The CARES Act contains certain key provisions that will afford relief to the real estate industry from the wide-ranging effects of the pandemic. The CARES Act establishes two loan programs intended to provide liquidity to businesses in the United States that certain eligible real estate businesses can benefit from: (1) the Coronavirus Economic Stabilization Act of 2020 (CESA), which creates loan programs to be directed by the United States Department of the Treasury and (2) the Keeping American Workers Paid and Employed Act, which creates the Paycheck Protection Program, designed to help small businesses retain employees, fund payroll and pay for other operating expenses. The CARES Act also provides mortgage relief for single family and multi-family property owners with federally backed mortgages who agree to not evict tenants from their property for non-payment of rent. The CARES Act also contains certain tax relief provisions that could potentially benefit property owners and real estate businesses. The key provisions of the CARES Act that benefit real estate businesses and consumers are discussed below.
1. CESA authorizes up to $500 billion in loans and loan guarantees to air carriers and certain qualifying U.S. businesses of which (a) $46 billion is earmarked for air carriers and businesses critical to maintaining national security (the “Specified Treasury Loan Program”) and (b) $454 billion, plus unused amounts from the Specified Treasury Loan Program, is available for loans to other eligible businesses (the “Joint Treasury/Federal Reserve Loan Program”). These loans must be direct loans to businesses and not structured as: (i) a syndicated loan, (ii) a loan originated by a financial institution in the ordinary course of business, or (iii) a securities or capital markets transaction.
2. Loan terms are subject to broad discretion given to the Treasury Department, but the duration of the loans or loan guarantees can be no longer than five years.
3. Businesses receiving assistance are subject to certain restrictions, such as limiting stock buybacks, dividends, and executive compensation. In addition, the Specified Treasury Loan Program requires minimum employment levels.
4. Application procedures are not currently available.
1. The $349 billion package expands the Small Business Administration’s (SBA) existing loan program to provide loans and loan guarantees known as the Paycheck Protection Program (PPP) for qualifying businesses, along with loan forgiveness for loan proceeds used for certain payroll and fixed costs.
2. General Loan Terms:
3. Limitations on the size of businesses that can receive loans and, in some circumstances, affiliation rules can apply and can disqualify portfolio companies of private equity and/or venture capital investors. During the period from February 15, 2020 to June 30, 2020 (the “Covered Period”), businesses and non-profits with no more than 500 employees are eligible to apply for loans from the SBA that are intended to fund certain business operating expenses. Any business that employs no more than 500 employees per physical location of any business assigned an NAICS Code beginning with 72 (restaurant and hospitality industry) is included. Sole proprietorships, individuals acting as independent contractors and certain eligible self-employed individuals are also eligible. The Act waives the SBA’s affiliation rules with respect to eligibility during the Covered Period for accommodation and food service enterprises, any business concern operating under an SBA franchisor identifier code and any business concern that receives financial assistance from a small business investment company licensed by the SBA under the Small Business Investment Act of 1958, as amended.
4. Loan proceeds may be used for payroll, group health care, mortgage interest payments, rent, utilities and certain interest payments on non-mortgage debt.
5. Borrowers may receive forgiveness of the principal of the PPP loans in an amount equaling the costs incurred or paid in the eight weeks following origination of such loan that relate to payroll costs, mortgage interest, rent or utilities owed.
6. The amount of loan forgiveness may be reduced if the borrower fails to comply with minimum employment and salary requirements.
7. Loan forgiveness will not be deemed to be cancellation of debt for federal tax purposes.
8. On April 1, 2020, the Treasury Department released its guidance concerning the PPP. Small businesses and sole proprietorships can submit applications beginning on April 3, 2020. The Treasury recommends that applications be filed as soon as possible since the amount of money authorized for the loans (nearly $350 billion) is fixed. Independent contractors and self-employed individuals must wait until April 10 to file their applications. No date is given for when non-profit entities should file, although in the absence of instruction, it is recommended that non-profits use the earlier filing date. Borrowers do not need to try to obtain loans elsewhere first as is the case with a typical SBA loan program (known as the “Credit Elsewhere” requirement). To obtain a PPP loan, however, borrowers must certify in good faith that the “current economic uncertainty makes the loan necessary to support . . . ongoing operations.” This amorphous standard is not further described in the guidance. The full amount of the loan may be forgiven, as long as at least 75 percent of the loan amount is used for payroll costs (salaries, vacation or sick leave, qualified health plan contributions and other benefits, etc.). In other words, not more than 25 percent of the forgiven amount may be for non‑payroll costs (rent, utilities, mortgage interest). This concept was not explicitly described in the CARES Act, but has been included in the Treasury guidance “due to likely high subscription” rates for the loans. Further, borrowers must either maintain their current staffing or rehire employees prior to June 30, 2020, in order to be eligible for loan forgiveness. Various formulas will be applied to reduce forgiven amounts if the borrower decreases employee headcount, salaries or wages. There are inconsistencies between the borrower guidance and the application form concerning how the eligible loan amount will be calculated. The application form requests information about the borrower’s average monthly payroll amount for 2019, which the CARES Act itself says will be multiplied by 2.5 to determine the amount of the loan. If this amount is higher than $10 million, the loan will be capped at $10 million. However, in the borrower guidance, the Treasury states that “the lender will calculate the eligible loan amount using the tax documents [the borrower] submitted.” It is not clear how tax information could be used to calculate 2019 payroll costs, particularly if the business has not yet filed its 2019 tax returns. Although the CARES Act allows up to 4 percent interest, the rate of interest for PPP loans will be 0.5 percent per the guidance (but could be subject to change). Repayment is deferred for six months, although interest will accrue during this period. Borrowers will have up to two years to repay any non-forgiven amount, with no penalty for pre-payment.
For more information on the loan programs established by the CARES Act, , please refer to Morrison & Foerster client alert, “Brief Overview of CARES Act Loan Programs,” and blog post, “Treasury Department Issues Guidance (and Application) for Paycheck Protection Program Loans.”
There is a 60-day moratorium, beginning March 18, 2020, on servicer foreclosure actions, including evictions and sales of federally backed mortgage loans. In addition, borrowers may submit requests to their mortgage loan servicers for up to 180 days of forbearance (plus one 180-day renewal) on federally backed mortgage loans (including HUD, Fannie Mae, Freddie Mac, the rural housing voucher program or Violence Against Women Act of 1994) if they experience financial hardship because of the COVID-19 emergency. The forbearance must be requested 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. During the forbearance period, no interest, fees or penalties will accrue other than amounts that would apply if borrowers made regularly scheduled payments. Servicers will be required to grant forbearance even if the borrower is delinquent, and no borrower documentation will be required beyond an attestation of financial hardship. Any landlord who has received such forbearance on a federally backed mortgage may not evict any tenants from their property based solely on non-payment of rent, or charge any tenants any late fees or other penalties due to non-payment of rent.
The CARES Act contains certain tax relief provisions aimed at business taxpayers that are intended to provide prompt relief to various businesses. Certain of the key tax relief provisions are briefly highlighted below. For a more detailed analysis of the tax relief provisions in the CARES Act, please refer to the Morrison & Foerster client alert, “Coronavirus (COVID-19) ‘CARES Act’ Provides Targeted Tax Relief for Businesses.”
1.Removal of Certain NOL Restrictions
The Tax Cuts and Jobs Act that was signed into law at the end of 2017 (TCJA) substantially limited the ability of corporate taxpayers to use net operating losses (NOLs) arising after December 31, 2017 to offset taxable income. Under the TCJA, corporate taxpayers could use NOLs arising in 2018 or subsequent tax years to offset no more than 80 percent of their taxable income and could not carryback NOLs to prior years. The CARES Act removes the 80 percent limitation for taxable years beginning before January 1, 2021, and allows taxpayers to carryback NOLs arising in tax years beginning after December 31, 2017 and before January 1, 2021 over a five-year period. The CARES Act contains certain exceptions and special rules. For example, consistent with prior law, REITs cannot carryback NOLs to non-REIT years.
2.Increased Allowance for Business Interest Expense Deductions
Under Section 163(j), enacted by the TCJA, taxpayers may deduct business interest expense only up to 30 percent of their “adjusted taxable income” (a concept similar to EBITDA). The CARES Act increases the limitation to 50 percent for taxable years beginning in 2019 and 2020, and allows taxpayers to elect to use their 2019 adjusted taxable income to calculate their Section 163(j) limitation for their 2020 taxable year.
For partnerships, the Section 163(j) limitation applies at the partnership level. The 30 percent limitation will continue to apply to partnership interest expense in 2019; however, 50 percent of any excess business interest allocated to a partner and carried over from 2019 will be treated as business interest paid by the partner in 2020, and will not be limited to the partner’s business interest income for 2020. The remaining 50 percent will continue to be subject to such limitations.
3. Acceleration of AMT Credits
Prior to the enactment of the TCJA, corporations were subject to alternative minimum tax (AMT) at a rate of 20 percent. AMT taxes were treated as a tax credit that could be carried forward to offset non-AMT taxes in subsequent years. The TCJA eliminated the corporate AMT, and provided that only 50 percent of the AMT credits carried forward by a corporation could be refundable in tax years beginning after December 31, 2017 and before January 1, 2021. After December 31, 2020, 100 percent of any excess AMT credits could be refunded. The CARES Act permits corporations to claim a refund for 2018 equal to the full amount of their excess AMT tax credit carryforwards. For corporations that do not elect this refund, the CARES Act eliminates the 50 percent limit on AMT tax credits for taxable years beginning in 2019. This provision will benefit corporations with excess AMT tax credits by permitting refunds of 2018 taxes.
4. Payroll Tax Relief
The CARES Act puts in place a temporary moratorium on the payment of an employer’s share of Social Security taxes for the tax periods ending before January 1, 2021. The deferred tax payments must be paid over the following two years: 50 percent by December 31, 2021 and the remaining 50 percent by December 31, 2022.
In addition, for businesses with operations that were all or partially suspended due to orders from a governmental authority as a result of COVID-19, or who experienced a significant decline in gross receipts as determined under a qualitative test set forth in the bill, they are entitled to a refundable payroll credit for 50 percent of the wages paid or incurred from March 13, 2020 through the end of the year. This provision will ease the strain on employers’ cash flow and may encourage employers to retain current employees. In particular, to the extent affected businesses expect business disruption to be temporary, the refundable payroll credit for wages paid during COVID-19 may help companies retain and pay employees during this time.
5. Removal of Loss Limitations for Non-Corporate Taxpayers
Present law disallows a deduction for “excess business losses.” with any disallowed deduction being permitted to be carried forward as a NOL. The CARES Act suspends this limitation for tax years beginning before 2021. As with the changes to NOLs for corporate taxpayers, the suspension of the limitation on excess business losses provides a similar benefit to non-corporate taxpayers, some of whom may be able to claim a refund for their 2018 taxable year.
6.Accelerated Depreciation for Qualified Improvement Property
Under current law, a taxpayer can deduct the full cost of certain depreciable property placed in service or acquired by the taxpayer in a taxable year before January 1, 2027 (“bonus depreciation”). Improvements to building interiors made by a taxpayer (“qualified improvement property”) were not included in the list of property eligible for bonus depreciation. The CARES Act includes a technical correction which identifies qualified improvement property as “15-year property” eligible for bonus depreciation (instead of having to depreciate over the 39 year life of the building as set forth in the TCJA). This provision may allow taxpayers to file amended returns and claim refunds for the 2018 and 2019 tax years if they placed qualified improvement property into service during those years, and may also encourage taxpayers to make needed improvements in the coming years as the economy recovers from the COVID-19 pandemic.
For those interested in the financial services provisions of the CARES Act applicable to lenders, including real estate lenders, please refer to the Morrison & Foerster client alert, “CARES Act Enacted: Financial Services Provisions.”
Additional details and questions related to these programs under the CARES Act are covered in Morrison & Foerster’s CARES Act Resource Center.