April 6, 2020

COVID-19 Relief for Commercial Real Estate Businesses

By James Philbin, Partner, Tax & Business Services

office building Tax & Business

The COVID-19 crisis has created unique challenges for the commercial real estate industry. The pandemic’s impact on business operations is producing great uncertainty under commercial leases regarding the obligations of all parties to the lease. This article will attempt to provide some mitigating actions to consider for both landlords and tenants.

Industry-wide, landlords are being contacted by tenants requesting rent abatements, concessions, or free rent. This has been necessitated by the emergency stay-at-home orders imposed by local or state ordinance resulting in many tenants closing their businesses or operating on an abbreviated basis. In these cases, some concessions may be justified. There may be a provision in the lease contract to provide relief. As the tenants are lacking the cash flow to pay operating expenses, with rent being a significant item for most small businesses, this is not an unexpected development in this deepening crisis.

Both landlords and tenants can consider funds available through recent federal government relief bills. The U.S. Small Business Administration (SBA) is offering Economic Injury Disaster Loans (EIDL) to all states and territories. These low-interest federal disaster loans provide working capital to small businesses suffering substantial economic injury as a result of COVID-19. These loans are administered directly by the SBA .Tenants are eligible if they are a small business or private, non-profit organization (as defined by SBA size standards) that is directly affected by the disaster, offer services directly related to the declaration, or are indirectly related to an industry that is likely to be harmed by losses. Eligible entities must have a credit history acceptable to SBA, a demonstrable ability to repay the loan,be physically located in the United States, and have suffered working capital losses due to the disaster. Eligible entities may qualify for loans up to $2 million based on the reduction in revenues realized during the affected period. Interest rates for for-profit entities are 3.75% and 2.75% for non-profit organizations, with terms up to 30 years based on the borrower’s ability to pay, with four months of payments deferred upon request. The funds can be used to pay fixed debts, payroll, accounts payable, and other operating bills that could have been paid had the disaster not occurred. It is important to note that the funds are not intended for existing debt reduction or to replace lost sales or expansion.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act has allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program, the initiative provides 100% federally guaranteed loans to small businesses who maintain their payroll during this emergency. Loans can be up to 2.5 times the borrower’s average monthly payroll costs, not to exceed $10 million. The interest rate is 0.5%, and the term of the loan is 2 years. These loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward. These loans will be administered through approved lenders. Businesses are eligible if they are either a small business with fewer than 500 employees, a small business that otherwise meets the SBA’s size standard, an IRS Section 501(c)(3) organization with fewer than 500 employees, or an individual who operates as a sole proprietor or independent contractor. To qualify, the business must have been in operation before February 15, 2020, and must have paid salaries and payroll taxes or paid independent contractors. A good faith certification that the uncertainty of current economic conditions makes the loan request necessary to support ongoing operations is required, as well as a guaranty that the borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments. The borrower must also certify that it does not have an application pending for a loan duplicative of the purpose and amounts applied for here. (Note: There is an opportunity to fold emergency loans made between January 31, 2020 and the date this loan program becomes available into a new loan). This program has a loan forgiveness provision that also factors in rent paid in the two months after the loan is made.

There is also an Employee Retention Credit for Employer Subject to Closure due to COVID-19 in which an eligible employer is allowed a credit against employment taxes for each calendar quarter equal to 50% of “qualified wages” for each employee taken into account for such calendar quarter. Credits are available for qualifying wages paid after March 12, 2020, and before January 1, 2021. To take advantage of this credit, employers may not have taken an SBA 7(a) Paycheck Protection Program loan.

In addition to the options provided through the federal government’s relief bills, landlords and tenants can consider lease modifications that could be a “win-win” for both parties. For example, the landlord could offer some period of free rent for 2020 as a trade-off for accelerating a renewal option. This could be a creative way to provide security for the landlord and rent relief for the tenant.

Note: This article will appear in the May 2020 issue of The Mann Report.

If you have any questions, contact James Philbin, Partner, Tax & Business Services, at 617.807.5190 or email James.

Coronavirus Resource Center

Have more questions about the impact of the coronavirus on your business? Visit Marcum’s Coronavirus Resource Center for up-to-date information.