The real estate industry stands to be significantly affected by the economic impact of the COVID-19 pandemic. To help guide property developers, owners and managers, Friedman has compiled information on relief programs you may be able to take advantage of, CARES Act tax provisions that can be leveraged to maximize cash flow and resources to respond to a rapidly changing industry landscape.
Qualified Improvement Property (“QIP”) Glitch Corrected, Creating Bonus Depreciation Opportunity
The CARES Act, signed on March 27, introduced a technical correction affecting QIP:
- The act corrects the error in the 2017 tax reform with respect to QIP, which is any improvement to an interior portion of nonresidential real property, if such improvement:
• is placed in service after the date the building was first placed in service, and;
• isn’t an enlargement of the building, an elevator or escalator or work on the internal structural framework of the building.
- The depreciable life is changed from 39 years to 15 years retroactive to the beginning of 2018.
- Taxpayers will now also be able to take 100% bonus depreciation on QIP.
- The IRS just released guidance allowing affected taxpayers the opportunity for a limited time to amend or adjust returns or file for a change in accounting method – whichever is most beneficial – to take advantage of this change.
Cost Segregation Studies
Before the CARES Act but after the 2017 tax reform, identifying QIP in a cost segregation study had a limited benefit. Owners should consider updating previous cost segregation studies or getting new ones to maximize the benefit.
Limits on Excess Business Losses Removed
The excess business loss limitation for pass-through businesses and sole proprietors is suspended through 2020.
- Under the Tax Cuts and Jobs Act, section 461(I) of the code was added. This section limited a taxpayer’s business losses to $500,000 for a married couple ($250,000 for a single taxpayer). Prior to enactment such losses were unlimited subject to basis and participation rules.
- The CARES Act retroactively allows these additional losses for the 2018, 2019 and 2020 tax years. This is a significant planning opportunity.
The CARES Act introduced the Paycheck Protection Program (“PPP”) to aid small businesses. For more from Friedman on the Paycheck Protection Program’s measures to provide relief to small businesses, click here.
While the original program quickly ran out of funds, Congress is set to act to provide more loan money. The loans are based on payroll which can include a limited amount of the income allocated to partners. It doesn’t include payments to independent contractors. Loans are also available to self-employed individuals and independent contractors.
There are special affiliation rules to determine eligibility for businesses providing customers with lodging and/or preparing meals, snacks and beverages for immediate consumption as well as franchises and businesses in other specified industries.
The loans will be eligible for forgiveness if applied to payroll costs and other business expenses (like rent, utilities and mortgage interest) in the 8 weeks following the loan’s origination and if employee and compensation levels are maintained or reductions in force or compensation are cured by June 30, 2020.
How to Leverage the Main Street Lending Programs for Relief
All businesses with up to 10,000 employees may participate in the Main Street Lending Programs which provide $600 billion in loans for mid-sized businesses – even those that received PPP loans. While $46 billion is allocated to commercial airlines and air freighters, $454 billion in Economic Stabilization Funds (“ESF”) will be available through Federal Reserve lending. Terms for these loans have been released but details haven’t been provided concerning how to apply for them. Borrowers must be based in the U.S., with primarily U.S.-based employees, cannot be receiving another form of relief under the Act, and must not have other sources of credit “reasonably available.”
Participants in the Main Street Lending Programs are subject to restrictions – they may not reduce employment levels, increase compensation on some highly-paid employees or purchase stock buybacks. Additionally, they will have to adhere to new reporting obligations.
For more on the Main Street Lending Programs, click here.
Use-Specific Relief Opportunities
Owners of property used for healthcare purposes can encourage their tenants to apply for relief under Title III, which extends financial assistance, waivers and other benefits to hospitals and health care institutions. Also, there may be additional benefits for, and loans to, healthcare providers in further stimulus packages.
Owners of industrial property or vacant space may explore repurposing their space for use by the government in responding to the outbreak. The Act allocates $1 billion for purchases under the Defense Production Act, including for businesses supplying products or services supporting the national defense.
Forbearance on Federally Backed Mortgage Loans
Under the CARES Act, owners of a “federally backed multifamily mortgage loan” current on its payments as of February 1, 2020, can request forbearance of the borrower’s service, if they submit documented evidence of financial hardship relating to the COVID-19 outbreak. Forbearance can be granted for up to 30 days and may extend for up to 90 days total, if requests for extended forbearance are made while covered and 15 days before the end of the initial 30 day period.
For these purposes, a “multi-family borrower” is defined as a borrower of a mortgage loan secured by a lien against a property with 5 or more residential units. A “federally backed mortgage loan” is any loan that is not a temporary financing arrangement secured by a lien on multi-family property, and which is arranged through an officer or agent of the federal government, and purchased or securitized by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.
Eviction Restrictions on Borrowers of Federally Backed Mortgage Loans
For the duration of the forbearance, the lessors of a covered dwelling may not initiate legal action for nonpayment, charge fees or penalties for late payment or issue a notice to vacate, among other restricted actions.
While the Act does not restrict lender-led foreclosures on multi-family or commercial borrowers, some states have introduced statutes to that effect.
States Announce Moratoriums on Foreclosures and Evictions
Several states have announced measures to protect homeowners unable to pay their mortgages – often suspending foreclosures and evictions. Click here to access an article detailing the actions taken state-by-state.
Resources for New York’s Real Estate Industry
The Real Estate Board of New York (“REBNY”) maintains information concerning the stimulus programs, business best practices, health and safety information and philanthropic opportunities that real estate enterprises may find useful. Click here to access REBNY’s resource page.
If you have any questions about how your real estate business can respond to the COVID-19 outbreak, contact a Friedman professional today.