The effects of the coronavirus can already be felt in nearly every sector of the real estate industry. The financial and economic fallout ranges from tenants forced to close under government mandate, deals paused or canceled entirely, and a decrease in demand for certain properties like co-working spaces or brick-and-mortar retail. Hotel, retail, and hospitality tenants are likely to request rent deferments or temporary mortgage forbearance or renegotiate contracts if they haven’t already done so. Changes in how people work may likely alter the commercial office sector, too.
It’s not all bad news, though. Consumer demand for online shopping could drive up the need for industrial real estate, and low-interest rates are an ideal opportunity to refinance at historically low rates. The CARES Act is also good news for real estate and the overall economy, as it contains provisions designed to ease the financial and tax burdens of coronavirus closures and business interruptions.
When the President signed the CARES Act into law on March 27, 2020, the intent was to offer financial and tax relief provisions to stem the tide of losses. The CARES Act is a $2.2 trillion piece of legislation that contains numerous provisions to provide emergency relief to businesses and individuals.
Tax Relief Measures
The CARES Act modified or corrected several pieces of tax law that are applicable to real estate companies. These changes mean that most real estate companies should examine their tax returns from 2018 and 2019 and consider amending them or reviewing 2019 returns if not yet filed.
Qualified Improvement Property Correction
Going back to the Tax Cuts and Jobs Act (“TCJA”), the real estate industry should have benefited from 100 percent bonus depreciation; however, a drafting error disallowed bonus depreciation for qualified improvement property (“QIP”), including qualified leasehold improvements and restaurant improvements. That technical error prevented businesses from claiming bonus depreciation on QIP. The CARES Act corrected that error, retroactive to 2018. QIP is now recognized as 15-year property, instead of a 39-year property as written in the TCJA, making QIP eligible for 100% bonus depreciation.
It’s worth reviewing QIP projects placed in service in the past two years to see if a return can be amended for tax refunds. Look for interior improvements to the non-residential property; internal structural framework improvements are excluded from 100 percent bonus depreciation. Given that the current tax filing deadline has been extended to July 15, real estate contractors and businesses that haven’t yet filed can use this opportunity to reclaim depreciation and increase the cash on hand from any refunds.
Another element of the TCJA that was amended within the CARES Act legislation is the removal of excess business loss limitation for taxable years 2018 through 2020. Under TCJA, real estate and other non-corporate businesses had a cap for tax deductions from flow-through business losses. Real estate companies may want to review 2018 and 2019 tax returns to see if it makes sense to amend them for unlimited tax deductions on losses.
Net Operating Losses Carryback
Also amended by the CARES Act is the ability to carry back Net Operating Losses (NOLs) incurred in 2018, 2019, or 2020, to the five year period preceding the NOL. NOLs can also offset up to 100 percent of business income incurred in 2020.
Previously, NOL tax deductions could not be carried back to prior years and were limited to offsetting only 80 percent of a business’s income in any given year.
There are two important limitations:
- REITs are prohibited from NOL carrybacks.
- The 80 percent limit will be reinstated in 2021 and beyond.
There are also modifications to pass-through losses, expanded access to AMT credits, and several other business provisions that real estate companies should know about. Read more in our previous post on the CARES Act.
Financial Relief Measures
Under the CARES Act, billions of dollars have been set aside to help businesses affected by closures or partial shutdowns due to coronavirus. Most apply to businesses with fewer than 500 employees but there is still a significant amount of relief money available to large businesses, too.
Payroll Protection and Loan Forgiveness
Real estate companies with less than 500 employees can apply for a Paycheck Protection Program loan. Loans are meant to cover payroll costs and other expenses. The maximum loan amount is limited to the lesser of average total monthly payroll costs, multiplied by 2.5, or $10 million total. Paycheck Protection loans can be used to cover payroll, payments for mortgage interest, rent, utilities, interest on any other debt incurred before February 15, 2020.
The repayment period is limited to two years, and interest rates will not be more than 1%. No payments of principal or interest will be due for the first six months. Once real estate companies have received their loan, to the extent they pay payrolls or the other approved items noted above in the 8 week period following, they may apply for tax-free loan forgiveness. Since this loan is primarily designed to assist with payroll, a maximum of 25% of loan forgiveness can be for mortgage interest, rent, and/or utilities; 75% must be for payroll. Loan forgiveness is diminished if the company reduces its workforce or lowers salaries or wages by 25 percent or more for employees who earned at least $100,000. There are exemptions for re-hires who have already been laid-off.
Economic Injury Disaster Loans are available to real estate companies and other businesses with fewer than 500 employees and need funds to pay working capital such as fixed debts, payroll, accounts payable, and other bills. EIDL loans, which are administered through the SBA, can be taken out for up to $2 million with a 3.75 percent interest rate. Loans below $200,000 do not require personal guarantees. These loans are not forgivable.
Immediate funds might be available under EIDL grants. EIDL grants max out at $10,000, do not have to be repaid, and are available immediately, before the rest of the loan is disbursed. Note that the amount of the grant reduces the amount of eligible loan forgiveness of a PPP loan.
Payroll Tax Relief
Real estate businesses who do not take a PPP loan are eligible to defer the payment of the employers’ portion of Social Security taxes for 2020. Section 2302 of the CARES Act allows for the business’s share of social security taxes to be split over two years. Half must be paid by December 31, 2021, and the remaining 50 percent by December 31, 2022.
Employee Retention Credit
Finally, the Employee Retention Credit fully refunds the business portion of employment taxes for half the wages paid during the coronavirus crisis. Businesses are eligible if they must suspend operations due to government orders or regulations OR the business experienced at least a 50 percent reduction of gross receipts in a quarter, compared to the same quarter in the previous year.
The credit is limited to the first $10,000 of compensation per eligible employee, including health benefits, and the applicable timeframe is after March 12, 2020, and before January 1, 2021, calculated by quarter.
Qualified wages depend on the number of full-time or full-time equivalent (FTE) employees.
Employers with ≥ 100 employees: eligible wages are those paid when an employee is not working due to business shutdown
Employers with ≤ 100 employees: eligible wages are those paid during any period described above, even if the business is operational
Real Estate Companies Should Also Be Aware Of…
Other than relief measures designed to help the real estate company itself, also remember that the CARES Act put a temporary moratorium on property foreclosures and evictions. Federally backed mortgage borrowers are permitted to request a temporary forbearance, as long as their payments were current as of February 1, 2020. Even non-federally backed mortgage forbearance may be available, as banks seem to be somewhat amenable in the current conditions.
Additionally, the FDIC has a greater lending authority, which should help ease real estate and other loan availability. That will be beneficial in the future too, as it should make room for the expansion of real estate projects once things return to normal.
A phase IV coronavirus relief package is likely, but not until Congress is back in session at the end of April. For now, real estate businesses can explore how the above relief measures can bridge the gap and keep critical projects, and employees, going. PBMares is here to help answer your questions about how the CARES Act will impact your real estate business and holdings.