The $2 trillion stimulus package, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), H.R. 748 which will deliver emergency aid across the U.S., including $1,200 checks to many Americans, was enacted on Friday, March 27th. The relief package includes a vast pool of grants and loans for small businesses, a large expansion of unemployment insurance, new resources to help strained state, local, and tribal governments as they combat this pandemic, funding for affordable housing and homelessness assistance programs, and access to Federal Reserve facilities and programs expected to be leveraged up to $4 trillion for loans, loan guarantees, and purchases of other interests of businesses and others experiencing economic distress during the crisis. Clarifying details on the statute are expected to be ironed out by required guidance from the relevant executive branch agencies in the days and weeks to come.
The CARES Act provides a $1,200 refundable tax credit for individuals ($2,400 for joint taxpayers), plus $500 for each child. These amounts begin phasing out for individuals with $75,000 or more in adjusted gross income, $112,500 for head of household, $150,000 or more for joint filers, and are completely phased out for adjusted gross income above $99,000 for individual filers; $146,500 for head of household filers, and $198,000 or more for joint filers. The bill instructs the IRS to issue these payments “as rapidly as possible.”
The small business paycheck protection program (PPP loan) provides loans to small employers equal to two-and-a-half months of the average total payroll costs of employees earning up to $100,000, with a maximum loan of $10 million. This relief is provided to certain business concerns with not more than the greater of 500 employees or, if applicable, the size standard for the number of employees established by the Small Business Administration (SBA) for the industry in which the business concern operates. Certain hotel and restaurant businesses (under NAICS code 72) with no more than 500 employees at a physical location are eligible for the loans.
Under the CARES Act, the types of uses to which a PPP loan may be put to use include payroll costs, costs related to group health benefits, salaries, commissions, or other compensation, interest payments on mortgage obligations, rent, utilities, and interest on previously-incurred debt obligations for payments between Feb. 15, 2020 and June 30, 2020.
Generally, the PPP loan principal is forgivable (converted to a grant) if actually spent on payroll, mortgage interest, rent, and utilities within eight weeks of the date of the PPP loan. The amount eligible to be forgiven is reduced in a proportion based on the number of, and wages paid to, employees retained or rehired by the business.
The PPP loans are not available to businesses that receive the refundable employee retention tax credits described below in the Business Tax Provisions section. Further, eligibility for the loan program remains murky for certain business concerns. The SBA is required to issue guidance and regulations implementing the program within 30 days after enactment of the CARES Act.
The CARES Act codifies the earlier announcements from the Department of Housing and Urban Development and the Federal Housing Finance Agency with respect to forbearance, foreclosure relief, and applicable eviction restrictions for owners of single-family and multi-family assets secured by federally insured mortgages.
Single family residential borrowers have the right to request up to 360 days of forbearance (180 days, plus one 180-day renewal) on federally backed mortgage loans, if they experience financial hardship directly or indirectly related to the COVID-19 emergency. During the forbearance period, no interest, fees, or penalties will accrue.
Multifamily borrowers have a similar right of forbearance with regard to federally insured multifamily mortgages for up to 90 days, including an initial 30-day period, plus two 30-day renewals. As a condition to receipt of forbearance, multifamily borrowers may not evict renters or charge late fees, penalties, or other charges related to late or nonpayment of rent.
A temporary moratorium on certain residential eviction filings is imposed for a 120-day period beginning on March 27, 2020, regardless of whether the landlord is the subject of any forbearance granted under the CARES Act where the landlord’s mortgage on the property is insured, guaranteed, supplemented, protected, or assisted by HUD, Fannie Mae, Freddie Mac, the rural housing voucher program, or the Violence Against Women Act of 1994.
The CARES Act provides $500 billion to the Treasury Department to make loans, loan guarantees, and other investments in eligible businesses, states, and municipalities related to losses incurred as a result of coronavirus. The $500 billion is separated into two primary parts: $46 billion for passenger and cargo air carriers and for businesses critical to maintain national security; and $454 billion to be made available for facilities established by the Federal Reserve.
The amounts provided to the Federal Reserve programs or facilities are intended to provide liquidity to the financial system that supports lending by purchasing obligations directly from issuers or in secondary markets or otherwise and making direct loans and providing loan guarantees to eligible businesses, states, and municipalities. An eligible business is a U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees under the CARES Act.
With respect to direct loans, eligible businesses will be required to agree to several restrictions for the period that the direct loan is outstanding plus 12 months including limits on stock buybacks, certain dividends, and executive compensation. The stock buyback restriction precludes the eligible business from repurchasing equity securities listed on a national securities exchange of the eligible business or parent company. The dividend restriction prohibits an eligible business from paying dividends or making other capital distributions with respect to the common stock of the eligible business. Nareit believes the dividend limitation was a technical oversight with respect to REITs which are required by law to pay dividends to maintain status as a REIT, and we are optimistic that it will be addressed in the future. Executive compensation will essentially be limited to 2019 compensation levels for employees and officers who earned more than $425,000 in 2019 (but not more than $3 million) and to two-times the total 2019 compensation level for any severance package. For those employees and officers earning more than $3 million in 2019, compensation for any 12-month period will be limited to $3 million plus 50% of 2019 compensation in excess of $3 million. Compensation includes salary, bonuses, awards of stock, and other financial benefits.
The Treasury Secretary is also directed to “endeavor to seek the implementation of a program of facility” for mid-sized businesses that would provide financing to banks and other lenders that make direct loans to eligible businesses with between 500 and 10,000 employee with a maximum 2 percent annual interest rate.
Under the program for mid-sized businesses, if implemented, eligible businesses would be required to make a good-faith certification of the following: 1) uncertain economic conditions necessitate the loan to support ongoing operations, 2) the funds will be utilized to retain at least 90 percent of the workforces at full compensation and benefits through September 30, 2020, 3) the business intends to restore at least 90 percent of the workforce that existed on Feb. 1, 2020 at full compensation and benefits within 4 months of the termination of the public health emergency, 4) the entity is a U.S. business domiciled in the U.S. with significant operations and employees in the U.S., 5) the business is not in bankruptcy proceedings, 6) the business is created and organized in the U.S. and has significant operations in and the majority of the employees based in the U.S., 7) the business will not pay dividends with respect to the common stock of the business or repurchase an equity security that is listed on a national securities exchange of the business or parent of the business while the direct loan is outstanding (with an exception for certain pre-existing contractual obligations), 8) the business will not outsource or offshore jobs for the period of the loan plus two years after repaying the loan, 9) the business will not abrogate existing collective bargaining agreements for the term of the loan plus two years after repaying the loan, and 10) the business will remain neutral in any union organizing effort for the term of the loan.
The CARES Act also includes several business-related tax provisions, including some of particular interest to tenants and REITs.
The legislation increases the limitation on deductible business interest under section 163(j) from 30% to 50% of EBITDA for 2019 and 2020 and allows businesses to elect to use their earnings from 2019 for purposes of calculating the 2020 limitation.
The bill allows for net operating losses (NOLs) arising in 2018, 2019, or 2020 to be carried back for five years and temporarily removes the limit that allows NOLs only to offset 80% of taxable income, thereby providing businesses greater liquidity at a reduced cost of capital. The NOL carryback does not apply directly to REITs because REITs have already distributed income from prior years to shareholders, however, taxable REIT subsidiaries are eligible to carry back NOLs.
The technical “glitch” relating to deduction for qualified improvement (QIP) expenses (generally, improvements to the interior of existing nonresidential buildings), enacted as part of the Tax Cuts and Jobs Act in 2017 (TCJA), Pub. L. 115-97, is remedied under the CARES Act. Effective as though enacted as part of TCJA, this provision restores both the 15-year recovery period for taxable income purposes, makes QIP eligible for bonus depreciation, and provides a 20-year recovery period for alternative depreciation system (ADS) purposes that is used in calculating dividends.
Refundable payroll tax credits of up to $5,000 (50% of “qualified wages” of up to $10,000) per employee will be available against an employer’s portion of employment taxes for employers who retain employees during the COVID-19 crisis. Employers are eligible if their operations are fully or partially suspended due to a governmental shut-down order or if they experience a 50% reduction in quarterly receipts due to the crisis. The determination of “qualified wages” is based on the employer’s size. For businesses of up to 100 employees in 2019, qualified wages are the wages paid by the employer. For employers with more than 100 employees, wages only include those paid to employees who are not providing services due to the COVID-19 crisis. The employee retention credit is not available to businesses that receive the PPP loans described above .
Finally, the CARES Act allows for deferral of the employer’s share of social security payroll taxes (6.2%) from date of enactment until Jan. 1, 2021. Half of the deferred amount must be repaid in 2021 and half in 2022.
Nareit Gathering Input for Future COVID Related Legislative Relief
Nareit has been gathering input from members on potential items for a future relief package that would help REITs assist tenants and that would provide capital preservation and liquidity opportunities to REITs. Nareit welcomes member input on ways to assist REITs, their tenants, and the communities in which they operate in connection with this current crisis. Currently identified priorities include:
- Increasing the “related party rent” threshold from 10% to 50%, which would allow REITs to advance equity to their tenants;
- Allowing REITs an election for a one year extension of certain distribution requirements;
- Permitting REITs to extend additional credit to tenants and eligible independent contractors;
- Permitting REITs to provide additional services, such as increased cleaning or new accommodations for meal delivery at senior care facilities, by increasing the current de minimis rule;
- Increasing the current ownership limit for health care REITs in their eligible independent contractors from 35% to 50%; and
- Allowing REITs to defer cancellation of debt income.