The Coronavirus Aid, Relief and Economic Security (CARES) Act enacted last week does not treat all commercial real estate equally. Owners of multifamily properties may face new restrictions on their collection and eviction remedies. Others will see both direct and indirect financial support from the CARES Act.
As we move forward, lenders, investors/owners and tenants must work together to maximize the benefits from the federal government’s emergency cash infusion. Loans, leases and other contracts will often require restructuring to capture stimulus dollars.
As we collaborate through these uncertain times, all market players in the real estate pyramid must be mindful of the regulatory burdens that will come with federal support and attempt to weigh the known benefits against the unintended consequences that can accompany government intervention.
Here are some ways the CARES Act will influence our commercial real estate industry.
Residential Landlords (Multifamily and others)
- Residential landlords may not evict or charge late fees or penalties resulting from the nonpayment of rent for 120 days from March 27, 2020, if they have a mortgage that is insured, guaranteed or assisted in any other way by HUD, Fannie Mae, Freddie Mac, or other governmental programs (120-day Moratorium). Notices to vacate are only allowed after the 120-day Moratorium and must provide 30 days to vacate. We strongly encourage residential landlords to review their mortgages with their lender and attorney to determine how their operations may have to adjust under the CARES Act.
- Borrowers of federally-backed multifamily mortgage loans may seek up to 90 days of forbearance so long as they were current on their loans as of February 1, 2020. Federally-backed multifamily borrowers have to be careful about the strings attached to this assistance. The same remedy and notice restrictions from the 120-day Moratorium will continue if the forbearance period extends beyond the 120-day Moratorium. Many federally-backed multifamily borrowers will be under the 120-day moratorium so pursuing the forbearance may be a consideration.
Direct Benefits for CRE
- Qualified Improvement Property is now eligible for the 100% bonus depreciation on a retroactive basis to 2018. The CARES Act fixes an unintended error in the 2017 tax cut legislation For more information on this tax benefit, see our alert here. Taxpayers need to consult their tax lawyer and accountant to determine whether they are eligible.
- Real estate businesses may be eligible for one or more loans, grants or loan forgiveness programs under the CARES Act. These programs are not limited to the hard-hit restaurant, hospitality and travel industries. Real estate businesses and their tenants may be able to qualify for financial support to cover payroll, rent, interest payments and other operational expenses. For more information on these programs, see our alert here.
- The CARES Act imposed a moratorium on foreclosures of federally-backed mortgage loans through May 17, 2020. This applies to both commercial and residential loans. It does not apply to vacant or abandoned property. Hopefully, this moratorium will allow collaboration on modifications. Many economic commentators are of the opinion that the CARES ACT will not be the last federal relief measure in response to the coronavirus, so this moratorium period could be extended by future legislation.
- Residential borrowers of federally-backed mortgage loans may seek up to 360 days of forbearance.
Restructuring Leases and Loans
All restructuring conversations will need to consider the benefits and requirements under the various CARES Act programs. Landlords and lenders will need to assess whether a tenant or borrower qualifies for federal assistance and the timing and requirements for that assistance. Even if a tenant or borrower does not qualify, landlord and lenders should consider whether their tenant or borrower will derive indirect benefits from CARES Act programs (i.e. improved cash flow into the tenant or borrower from other sources). Modification terms will need to give tenants and borrowers time to realize financial support from the direct and indirect benefits under the CARES Act. At the same time, landlords and lenders need to be assured that their tenants and borrowers are diligently pursuing these benefits. Modifications should give time for the parties to achieve greater certainty from which successful restructuring can be obtained.
A Word to the Wise
- The CARES Act is a massive program. Regulatory agencies will need to produce implementing regulations and the procedures to administer and deliver the promised financial support. Lenders, landlords and tenants will all need to keep a close watch on their implementation procedures and timing.
- Will the CARES Act create an unintended reduction in mortgage market liquidity? If evictions, mortgage payments or foreclosures are deferred, how will servicers of securitized mortgages have the cash flow to meet their monetary obligations to mortgage-backed securities investors? The federal government and the Federal Reserve will need to monitor the mortgage market closely to ensure we do not add a housing finance crunch to these turbulent times.
- The CRE industry needs to spend this time evaluating how our regional economy, businesses operations and real estate needs will be modified when the COVID impact becomes a part of our new normal.
Luis F. Ruiz