The CARES Act: Key Provisions Affecting Commercial Real Estate Companies

Below is an overview of the many provisions of the CARES Act that are relevant to the commercial real estate industry, including Small Business Administration (SBA) loans to cover payroll and other costs, the Main Street Business Lending Program, and newly available tax deductions.

SBA Loans

SBA Section 7(a) Paycheck Protection Loans

Less than a week after the SBA announced it ran out of the $349 billion originally allocated to its Section 7(a) Paycheck Protection Program (PPP) under the CARES Act, Congress passed and President Trump signed the Paycheck Protection Program and Health Care Enhancement Act to provide an additional $310 billion to boost the program. The additional funding gives a lifeline to businesses with outstanding applications for PPP loans and others which have not applied due to questions such as whether they qualify.

Under the PPP, the SBA provides loans which are forgivable up to the full principal amount to existing small businesses to help cover payroll and other expenses. The CARES Act defines “small businesses” as companies of up to 500 employees (including their “affiliates”—i.e., firms under common ownership or control) unless an applicable size standard for an industry (i.e., NAICS code) allows for a greater number of employees.

The CARES Act waives affiliation rules for businesses within industry “Sector 72,” which applies to Accommodation and Food Services (which includes some hotel and restaurant chains), such that they qualify for new loans as long as they do not have more than 500 employees at any given location. The SBA’s affiliation rules also are waived for franchises that are approved on the SBA’s Franchise Directory and small businesses that receive financing through the Small Business Investment Company program. The SBA’s affiliation rules are complex and require expert guidance—further information on affiliation rules and whether a company is a “small business” can be found here. More information on the PPP and the restaurant industry can be found here.

The proceeds from a PPP loan may be used for payroll support, specifically including employee salaries (up to $100,000 per employee, as prorated during the covered period), paid sick or medical leave, insurance premiums, and mortgage, rent and utility payments (collectively, “Qualifying Expenses”). Importantly, Section 1106 of the CARES Act, titled “Loan Forgiveness,” provides that the Government will forgive the amount of a qualifying loan that a recipient can document was used to Qualifying Expenses during the eight weeks following issuance of the loan (the “Qualifying Period”). Note that 75 percent of loan proceeds must be spent on payroll costs regardless of whether the borrower is pursuing forgiveness. Additionally, no more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs such as mortgage and rent.

This loan forgiveness can be reduced in situations where the company lays off employees or reduces salaries by more than 25 percent during the Qualifying Period. However, for businesses that reduced the number of employees and/or wage levels between February 16, 2020 and April 26, 2020 (effectively because of the coronavirus shutdown), loan forgiveness is still possible as long as wage and/or employee levels return to pre-crisis level by June 30, 2020.

The federally backed PPP loans do not require collateral or personal guarantees and are available to eligible businesses in amounts up to 250 percent of their average monthly payroll costs, with a maximum loan size of $10 million and interest rates of not more than 4 percent per annum. The CARES Act also waives the requirement that applicants demonstrate an inability to obtain credit from other sources. Further information can be found in Pillsbury’s client alerts discussing SBA loan opportunities (here and here), and in our client alert discussing the SBA’s interim regulations and guidance on the PPP. Eligible companies can apply using this application form.

SBA Section 7(b) Economic Injury Disaster Loans

In addition to the PPP, the CARES Act also contains provisions related to SBA’s Section 7(b) Economic Injury Disaster Loan (EIDL) program. Funding for the EIDL program also saw a boost with Paycheck Protection Program and Health Care Enhancement Act, increasing the total amount available by $60 billion, which includes an additional $10 billion for the $10,000 emergency grants that can be awarded as an advance to loan recipients.

The EIDL program provides low-interest (3.75 percent for small businesses and 2.75 percent for non-profits), long-term loans to small businesses located in areas that SBA has declared to be geographic disaster zones, which are identified on the SBA website. Small businesses and private nonprofit organizations (other than certain religious or political organizations) can apply for up to $2 million in Disaster Loans if they are located within one of these geographic disaster zones identified on the SBA website. Key changes to the EIDL program based on the CARES Act include:

• SBA Disaster Loans will be available until December 31, 2020.
• The definition of “small business,” for the purposes of a Disaster Loan, now includes companies with no more than 500 employees (but does not waive the affiliation rules for but does not waive the affiliation rules for Sector 72 – Accommodation and Food Services).
• No personal guaranty requirement and no requirement for applicants to demonstrate that they are unable to obtain credit from other sources.
• A $10,000 emergency advance (within three days of submitting an application) while an applicant’s loan application is pending, which SBA will not require to be repaid.

Disaster Loans may be used to pay fixed debts, payroll, accounts payable and other costs, but are not intended to replace lost sales or profits and cannot be used for certain purposes, including to refinance debt, make payments on loans owed by another federal agency, pay tax penalty obligations, repair physical damages or pay dividends to stockholders.

To be eligible, the applicant must have an acceptable credit history, have the ability to repay the loan, be physically located in a declared disaster area and have suffered working capital losses due to the declared disaster, not due to a downturn in the economy or other reasons. Organizations may apply using this SBA application.

Should you decide to pursue an SBA loan under the CARES Act, Pillsbury can provide the following services, among others:

• Carry out an assessment of the affiliation rules and other requirements to confirm your business qualifies for a loan under the program.
• Provide strategic guidance on how best to utilize PPP loans and 7(b) Disaster Loans together.
• Assist with applications to apply for assistance under these programs.
• Provide guidance regarding establishment of appropriate protocols/documenting compliance with associated conditions applicable to the assistance (e.g., loan conditions).
• Assist with appeals/denials of applications.
• Provide on-going support (e.g., evidencing compliance, oversight challenges).

In addition, most companies seeking SBA loans will have existing loans, that may prohibit taking on additional debt. Pillsbury will review existing loan documents and assist in negotiating waivers or other actions, so that SBA loans can be accessed without violating other financing agreement.

The Main Street Lending Program

Companies that do not qualify or are otherwise unable to receive SBA loans may still qualify for the Main Street Business Lending Program (MSLP), created by the Treasury Department and Federal Reserve as part of the CARES Act. The MSLP is designed to enhance financial support for eligible mid-sized businesses employing up to 10,000 workers or with revenues of less than $2.5 billion—with no minimum size requirement yet established. Unlike the SBA’s PPP Loans, MSLP loans will not be eligible for forgiveness.

The MSLP creates a special purpose vehicle (SPV) in which the Treasury and Federal Reserve will provide debt and equity investments of up to $600 billion in order to enable the SPV to purchase 95% participations in eligible term loans extended by eligible lenders (U.S.-insured depository institutions, bank holding companies, and savings and loan institutions).

Two new loan facilities will be established under the MSLP: (1) the Main Street New Loan Facility, and (2) the Main Street Expanded Loan Facility. For the Main Street New Loan Facility, eligible loans must be originated on or after April 8, 2020. For the Main Street Expanded Loan Facility, an eligible loan is one that originated before April 8, 2020, and has been subsequently upsized.

For Main Street New Loan Facility loans, the maximum loan size that is the lesser of (i) $25 million, or (ii) an amount that, when added to the borrower’s existing outstanding and committed by undrawn debt, does not exceed four times the borrower’s 2019 earnings (before interest, taxes, depreciation, and amortization).

For Main Street Expanded Loan Facility loans, the maximum loan size that is the lesser of (i) $150 million, (ii) 30 percent of the borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the borrower’s existing debt, does not exceed six times the borrower’s 2019 earnings (before interest, taxes, depreciation and amortization).

All eligible loans must have:

• 4-year maturity.

• Interest rates on direct loans will need to reflect risk and market conditions but should not be higher than 2 percent per annum. Duration of the loan has not been established.

• Amortization of principal and interest deferred for one year.
• Adjustable Secured Overnight Financing Rate of +250–400 basis points.
• Prepayment permitted without penalty.
• Minimum loan size of $1 million.

To be eligible for MSLP loans, a business must have incurred or will incur “covered losses” as a result of COVID-19, cannot be a debtor in a bankruptcy proceeding, and must be created or organized in the United States or under the laws of the United States with significant operations in and a majority of employees based in the country.

The Treasury and Federal Reserve have not yet announced when MSLP funds will be available. This information is subject to change as Treasury and the Federal Reserve develop and release additional guidance. For an in-depth review of what businesses are eligible borrowers, and what loans are eligible for purchase, please see our alert titled Treasury and Fed Launch $600 Billion Main Street Lending Program.

Various Tax Deductions

The CARES Act includes numerous tax benefits, mainly in the form of credits or deferred payments. Many of these provisions provide taxpayers with liquidity benefits, by pushing back payment deadlines, providing deductions that will reduce current year tax liabilities (which can be important for estimated tax purposes), providing access to deductions that will retroactively reduce 2019 (and possibly earlier year) tax liabilities and providing for refundable tax credits. In many cases, however, the provisions will require taxpayers to file amended returns and claims for refunds. In those cases, the liquidity benefits will not be immediate and will depend on the taxpayers’ ability to file amended returns quickly and for the IRS to process those returns. The IRS is encouraging taxpayers entitled to refunds to file returns as soon as possible, to file electronically and to provide direct deposit information.

The key tax benefits are:

• Payroll Tax Relief
  • A new refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. This credit cannot be used if you take an SBA loan.
  • Deferral of payment of the employer portion of the payroll tax. Also, tax credits can also now be refunded in advance. (For more information, see our client alert discussing COVID-19 related employer tax credits).
• Removal of NOL Restrictions
  • New provisions allow for Net Operating Losses (NOLs) incurred in 2020 and going back to 2018 to be carried forward to offset future taxable earnings made by the company.
• Tax Credit Advances for Paid Leave
  • The CARES Act creates a streamlined process under which employers can request an advance of anticipated dollar-for-dollar tax-credits and refunds for paid sick and FMLA leave. The intent of the new process is to ease employers’ cash flow concerns related to providing leave. (See also our client alert discussing the Families First Coronavirus Response Act (FFCRA), which requires employers with fewer than 500 employees to provide partial paid leave to employees unable to work).
• Accelerated Depreciation for Qualified Improvement Property
  • An expansion of bonus depreciation rules for “qualified improvement property” from the Tax Cuts and Jobs Act of 2017 to include amounts expended for interior improvements to non-residential property (effectively giving an immediate tax refund). (For more information, see our client alert titled New Coronavirus Legislation Fixes Real Estate Glitch from 2017 Tax Act).

Many of these benefits can be obtained through regular tax filings prepared by your accounting firms. However, Pillsbury can assist clients in maximizing the strategic use of these credits.

As financial regulators globally address the COVID-19 crisis, rules and guidance for financial institutions are changing rapidly. It is important to stay current on developments, most of which are effective without significant implementation time. Generally, the regulatory direction is for financial institutions to take all reasonable measures to meet financial needs of and ameliorate the challenges being faced by customers affected by the novel coronavirus. Pillsbury can help navigate these challenges.

Pillsbury’s experienced, multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.