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COVID-19: Commercial Real Estate Implications of the CARES Act
Practical Law Legal Update w-024-9811 (Approx. 6 pages)
COVID-19: Commercial Real Estate Implications of the CARES Act
by Practical Law Real Estate
| Published on 14 Apr 2020 • USA (National/Federal) |
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (PL 116-136) opens the door for some assistance for commercial real estate borrowers, landlords, and tenants whose businesses have been disrupted because of the 2019 novel coronavirus (COVID-19). The CARES Act offers loans to small businesses, including restaurants and hotels, to help sustain employee costs and rent and certain mortgage obligations, some of which loans can be completely forgiven. It also creates a program of loans, loan guarantees, and other investments to provide funding for businesses throughout the US economy.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (PL 116-136) includes several provisions to help commercial businesses during the on-going financial crises caused by the pandemic. These programs include:
- The Paycheck Protection Program (PPP). The PPP makes up to $377 billion available to support small businesses (businesses with under 500 employees). The PPP is characterized as a loan program, but is subject to full forgiveness of debt, without any negative tax ramifications. For a fulsome discussion of the CARES Act and its key provisions on the Paycheck Protection Program, see CARES Act: Stimulus for Small Businesses Under the SBA Checklist.
- Economic Injury Disaster Loans (EIDL). EIDL loans make $10 billion in emergency loans available to small businesses by expanding recipients of Economic Injury Disaster Loans. For a complete description of the expansion of EIDLs, see CARES Act: Stimulus for Small Businesses Under the SBA Checklist.
- The Coronavirus Economic Stabilization Act of 2020 (CESA). CESA includes a $500 billion program of loans, loan guarantees, and other investments to provide funding across many sectors of the US economy. For a complete discussion of CESA, see Legal Update, CARES Act: $500 Billion Loan Program for US Businesses.
The CARES Act also directly impacts federally backed residential (one-to-four dwelling units) and multifamily (five or more dwelling units) borrowers by requiring loan servicers to offer payment forbearance and prohibits certain foreclosure and eviction actions. For information on those aspects of the CARES Act, see Legal Update, COVID-19: Federal CARES Act Stimulus Provides Relief for Federally Backed Residential and Multifamily Mortgage Loans.
The PPP, EIDL, and CESA all include benefits related to commercial real estate issues.
Paycheck Protection Program
The PPP offers a loan, a major portion of which must be used to provide relief to companies for their employee-related costs, but a portion of the loan proceeds can be applied to all or some of a company’s real estate rent or its interest on any mortgage. Businesses with 500 or fewer employees (including sole proprietors and self-employed individuals) should look into availing themselves of the fully forgivable loans available through the SBA. Loan amounts can be up to the greater of $10 million or 2.5 times the amount of the borrower's average monthly payroll obligations. Allowable uses for the loans include:
- Payroll costs.
- Costs for continuing health care benefits.
- Employee salaries and commissions.
- Interest on any mortgage (but not principal).
- Rent.
- Utilities.
- Interest on other debt incurred before February 14, 2020.
For the loan to be forgiven:
- 75% of the loan proceeds must be spent on payroll and employee costs.
- The proceeds must be spent within the first eight weeks of receipt.
A borrower may use up to 25% of the loan proceeds for rent and interest on mortgage obligations and have the loan be forgiven.
PPP loans are only available to eligible businesses. Certain real estate businesses are specifically ineligible. These include:
- Passive businesses owned by developers and landlords that do not actively use or occupy the assets on which the loan proceeds are used.
- Businesses that subdivide real property into lots and develop it for resale.
- Businesses that own or purchase real estate and lease it for any purpose.
- Businesses that lease land so there can be installed:
- cell towers;
- solar panels;
- billboards; or
- wind turbines.
- Businesses that enter into management agreements with third parties giving the management company sole control over business operations, including:
- employees;
- finances; and
- bank accounts.
- Apartment buildings.
- Mobile home parks.
- Residential facilities not providing healthcare or medical services.
Economic Injury Disaster Loans
EIDL loans have similar purposes as PPP loans and are not mutually exclusive. However, a borrower may not use the proceeds for both programs for the same purpose. So realistically, when deciding how to cover real estate related costs, whether such costs are related to payments of real estate rent or mortgages, businesses should carefully assess which program makes the most sense for them before proceeding. Notably, EIDLs have no limits on what amounts can be applied to rent and mortgage payments, including principal.
EIDLs are emergency loans to small businesses to allow them to meet financial obligations and operating expenses, including:
- Meeting payroll and sick leave payments.
- Making rent or mortgage payments, including principal.
EIDLs:
- Are not forgivable.
- Have a fixed interest rate of 3.75 percent and up to a 30-year amortization.
- Can be used to pay rent and mortgage indebtedness.
- Are not tied to payroll and employee expenses when either:
- using the loan proceeds; or
- determining loan amounts.
Coronavirus Economic Stabilization Act of 2020
Of the $500 billion earmarked to be spent under the CESA, $454 billion is for loans, loan guarantees, and other investments in support of Federal Reserve programs or facilities that provide liquidity to the financial system. The liquidity provided under this program supports lending to businesses, states, and municipalities by purchasing their obligations or other interests either directly or in the secondary markets, or by making loans directly, including loans secured by real estate collateral.
Under the CESA, banks and lenders may, among other things, make direct loans mid-sized businesses with between 500 and 10,000 employees. These loans:
- Must be repaid.
- Have an interest rate of not higher than 2%.
- Have no payments due for 6 months.
It is less certain based on the CESA what these loans will look like but for companies with more than 500 employees, this may provide a significant opportunity to bring liquidity and enable payment of rent, mortgage obligations, and other real estate related expenses.
Practical Implications
Certain commercial real estate companies can benefit from the CARES Act, smaller companies under the PPP or with EIDLs, larger companies through CESA. Because all of these programs provide liquidity, they can help parties timely pay their rent and mortgage obligations during this uncertain time.
Landlords should encourage their smaller tenants to seek out PPP loans or EIDLs. These loans might allow tenants to make rent payments. Landlords should also explore whether and to what extent they could avail themselves of EIDLs. EIDL funds can be used for mortgage payments.
Lenders should also encourage their borrowers to consider all opportunities available to them under the CARES Act, to put borrowers in a better position to make mortgage payments.