Roundtable Weekly -- April 24, 2020

CORONAVIRUS – Paycheck Protection Program (PPP)

Policymakers Replenish Paycheck Protection Program, Consider Framework for Larger Economic Response Package; Treasury Questions Public Companies’ PPP Loan Eligibility

U.S. Capitol blue sky

A  supplemental coronavirus emergency aid measure enacted today replenishes the Paycheck Protection Program (PPP), which ran out of money after its launch on April 3 due to high demand.  A recent Small Business Administration (SBA) report shows real estate, rental and leasing businesses were approved for 79,784 PPP loans totaling more than $10.7 billion (figures through April 16).  [Roundtable Weekly, April 17] 

  • SBA’s PPP Loan Approvals report also indicates that, through April 16, the construction sector received the most PPP loans ($44.9 billion) with health care ($39.8 billion), hotels and restaurants ($30.5 billion), and retail ($29.4 billion) also receiving significant percentages of assistance. 

  • The Roundtable on April 8 submitted an 8-Point Plan to policymakers that seeks to clarify and improve the PPP.

  • Policymakers this week have also expressed ideas for expanding the next coronavirus response package beyond individual and business relief measures.  Additional funding programs may include hazard pay for essential workers, vote-by-mail programs and funding for the U.S. Postal Service, with a total cost that could exceed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress last month.  (Roundtable Weekly, March 27)

  • This week’s funding bill is referred to as an interim step to combat the economic impact of the pandemic as lawmakers consider a major follow-up package, generally referred to as “CARES 2.”  (The Hill, April 23)

  • Senate Democratic Leader Chuck Schumer (D-NY) said, “We will need a big, strong and active [fourth bill]. It’ll have to come very soon. The needs are large and great.”  Schumer added that funding for state and local governments is a top priority as municipalities’ tax revenues drop and city officials work to set budgets for the next fiscal year. (The Hill and Axios Cities, April 22)

  • Schumer also stated Federal Reserve Board Chairman Jerome Powell is working to open up the Main Street Lending program to nonprofits and municipal governments.  (AP, April 21)

  • Additionally, Sens. Bill Cassidy, (R-LA) and Bob Menendez, (D-N.J.) on April 19 unveiled legislation that would provide a $500 billion fund to help states and local governments respond to the public health and economic crisis, while maintaining essential services. (Sen. Cassidy news release)

  • Treasury Secretary Steven Mnuchin is reported as stating the next bill may include some infrastructure funding to boost 5G cellular and broadband access, and incentives for manufacturers to bring PPE, pharmaceutical, and other critical infrastructure production back from China.  (POLITICO Playbook, April 24) 

Senate Majority Leader Mitch McConnell (R-KY) this week hedged on any endorsement of assistance to state and local governments, instead focusing on how future coronavirus-related legislation could add to the growing national debt.  “Let's weigh this very carefully, because the future of our country in terms of the amount of debt that we're adding up is a matter of genuine concern.”  (The Hill, April 22)

Treasury Questions Large Companies’ PPP Loan Eligibility 

Treasury and SBA updated their Frequently Asked Questions guidance on the PPP yesterday, which questions whether businesses owned by large companies, with adequate sources of liquidity to support the business’s ongoing operations, qualify for a PPP loan.  (Question # 31 from FAQs

  • The answer addresses public companies seeking PPP loans, stating “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification [of economic need] in good faith.”

  • Before the PPP ran out of money, approximately 150 public companies received nearly $600 million in loans from the $350 billion program, with some of those companies announcing this week that they will return the funding obtained.  (Wall Street Journal, April 23)

  • Updates to the PPP rules and guidance are available via the Treasury Department’s website (April 23 FAQ update here) and the Small Business Administration’s Covid-19 resource webpage. 

The Real Estate Roundtable’s response and resources, including policy comment letters related to the pandemic, are listed on its website.    

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Tax Policy

Roundtable Video Alert Focuses on Tax Policy Pandemic Responses and Priorities; Industry Asks Treasury to Clarify Like-Kind Exchange Deadlines

Jeffrey DeBoer, Real Estate Roundtable President and CEO, Covid-19 and Tax Policies

The Real Estate Roundtable on Tuesday released a video alert focused on tax policy efforts aimed at mitigating the COVID-19 pandemic’s economic impact on commercial real estate.  

  • Roundtable President and CEO Jeffrey DeBoer, above, introduces the video with a report on the organization’s various policy efforts related to emergency financing, including the Payroll Protection Program (PPP) and the Federal Reserve’s credit lending facilities, such as the Term Asset-Backed Securities Loan Facility (TALF) – before delving into tax policy with Roundtable Senior Vice President and Counsel Ryan McCormick.

  • McCormick describes recent actions the Treasury Department and the Internal Revenue Service have taken to provide relief and ease cash flow challenges for taxpayers, including real estate businesses and their tenants, and shares insight on remaining COVID-19-related tax priorities.

  • The discussion highlights new Treasury guidance permitting partnerships to file amended tax returns, thus allowing partnerships to benefit from retroactive provisions in the CARES Act, including the shorter depreciation period for improvements to nonresidential property.  Other issues include new guidance allowing real estate businesses to revoke prior elections under the business interest limitation.  The Roundtable had urged both actions to ensure that the tax relief in the CARES fully extends to commercial real estate and its tenants.  (Roundtable Weekly, April 10)

  • The video alert also addresses the administrative relief related to tax deadlines for like-kind exchange transactions and opportunity zone investments – along with added flexibility for mortgage servicers’ to modify loans in mortgage-backed securities (REMICs) without triggering tax liability. 

  • Remaining tax policy priorities for The Roundtable include relief that would allow private parties to restructure existing loans through debt workouts and restructurings without generating cancellation of indebtedness (COD) income – (see Roundtable COD letter, March 20) – as well as greater flexibility under the tax law for REITs to take an economic interest in a struggling commercial tenant to help avoid business closures and layoffs."  

Like-Kind Exchange Deadline Clarification

An industry coalition, including The Real Estate Roundtable, on April 20 wrote to Treasury Secretary Steven Mnuchin seeking further clarification and relief on deadlines affecting real estate like-kind exchanges.  (LKE policy comment letter, April 20)

  • The letter requests that Treasury or the IRS clarify that recently issued IRS Notice 2020-23 did indeed initiate the 120-day extension of like-kind exchange deadlines that is part of the 2018 revenue procedure that applies to declared disasters.

  • At a minimum, Notice 2020-23 extended the 45-day deadline for identifying like-kind exchange replacement property and the 180-day deadline to close on a like-kind exchange transaction until July 15, 2020 (if the deadline otherwise would have occurred between April 1 and July 14).
  • However, relief associated with prior disasters provided 120-day deadline extensions that were retroactive to the date of the disaster declaration.  The IRS may have intended to grant the full 120-day extension, and some experts interpret the guidance as providing the longer benefit, retroactive to March 13, the date of the President’s COVID-19 disaster declaration.

  • As the letter notes, governmental restrictions and Stay at Home orders in place across the country, along with the fear of catching or spreading the life-threatening disease, threaten the ability of taxpayers to complete like-kind exchanges.

  • Identifying properties for trade purposes requires travel and a confidence in both the expected cash-flow stream and the value of potentially acquired property. Closing on an identified property requires these same conditions plus extensive due diligence by the buyer, lender and other third-party contractors, such as appraisers.  All of these necessary steps are thwarted by travel restrictions, the inability to access properties, and the closures of title/escrow companies and governmental recording offices.

  • The letter concludes, “This relief would give taxpayers who may have commenced, or who wish to commence an exchange, the necessary time to identify and / or close on a replacement property.  Taxpayers, many of whom are small to mid-sized businesses and middle class investors, should not have to be concerned about the possibility of having to pay significant capital gains taxes because like-kind exchange transactions cannot be completed due to the disruption caused by the coronavirus pandemic.”

Additional guidance from Treasury or the IRS on like-kind exchange transactions is expected in the coming days.

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Capital and Credit

The Roundtable and Nareit Request Expansion of The Fed’s “Main Street” Lending Programs to Prevent Further Disruption to CRE Markets

The Federal Reserve in Washington, DC

The scope of the Federal Reserve’s “Main Street” Lending Programs should be expanded to forestall further disruption and economic dislocations in commercial real estate, according to an April 22 letter sent to Treasury Secretary Steven Mnuchin and Fed Chairman Jay Powell from The Real Estate Roundtable and Nareit. 

  • This week’s letter requests specific changes to the Fed’s Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF), both established on April 9.

  • The April 22 letter emphasizes that real estate borrowers, owners and managers now face existential challenges.  The letter states, “At a time when Main Street needs credit, it cannot get it because the secondary markets that provide liquidity to Main Street lenders are clogged.”
     
  • The Roundtable and Nareit urge specific changes to enable CRE borrowers to access the Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF).  The joint letter addresses (1) Underwriting/ Leverage Limitations/ Loan Size, (2) Distributions/ REITs (3) Loan Terms (4) Applicable Interest Rate Index and (5) Program Timing.

  • Previous industry letters to the Fed on March 24 and April 14 addressed the need to broaden the range of a separate credit facility – the Term Asset Backed Securities Facility (TALF).  Those letters requested that TALF eligible collateral include both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations.  On April 9, the Fed confirmed that the TALF would be expanded to include triple-A rated legacy non-agency CMBS and loans.

  • Since then, as rental income has diminished, conditions in the commercial real estate sector have deteriorated further, causing real estate credit and capital markets to stall.  Therefore, it is important for the Main Street credit facilities to help bring renewed liquidity to commercial and multifamily real estate. 

  • The CARES Act permits financially stressed tenants in properties financed by federally backed loans to postpone rent payments, while several states and municipalities are currently considering additional measures to afford tenants rent forbearance. 

As the Treasury and Fed continue to take positive actions benefiting liquidity for the nation’s economy, the Main Street Lending Programs can be enhanced to support commercial real estate. 

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COVID-19 & CRE Impact

Moody’s Releases Interactive Tool Showing Covid-19 Impact on Various Commercial Real Estate Property Types

Moodys CRE Impact Tool

Moody's Analytics on April 22 unveiled a new tool to help commercial real estate market participants assess how the coronavirus crisis is affecting CRE fundamentals across US markets. The COVID-19 CRE Impact Dashboard is a publicly available resource that provides access to economic, property, and construction data, analytics and insights for CRE property types. 

  • Presented as a visual mapping tool, the dashboard brings together Moody’s Analytics CRE capabilities and supplements them with up-to-date information on COVID-19 from public sources.  The dashboard also includes forecasts for market vacancies and rents under different economic scenarios for office, retail, industrial, and multi-family properties.

  • “The coronavirus pandemic is changing the landscape of commercial real estate, as businesses of all types adapt to new economic realities,” said Cristina Pieretti, Managing Director of Moody’s Analytics REIS. “We are offering our new tool to help the CRE community make the critical business decisions necessary to navigate this unprecedented event.”

To access the dashboard, and for more information, visit reis.com or Moody’s Coronavirus blog

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