The $2.2 trillion Coronavirus Aid, Relief and Economic Security Act, the largest stimulus package in US history, along with additional efforts from the US Federal Reserve, have helped stabilize the commercial real estate market amid the ongoing covid-19 shutdown.
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“This could have been an uncontrolled downward spiral in real estate tenant demand and investor demand,” Lee Menifee, head of Americas research at New Jersey-based manager PGIM Real Estate, told PERE. “[The CARES Act] definitely puts a floor under it that is much higher than it would have been otherwise. It is not a stimulus bill, it is really a bill to keep businesses and people afloat for at least a couple months.”
It is really knowing your own situation and what benefits you qualify for. Going through the CARES Act, there a bunch of provisions that certainly help the real estate industry.
The CARES Act, which was signed into law by President Donald Trump in late March, has provided mechanisms for small businesses and unemployed workers to continue making rent payments, in addition to giving direct stimulus to owners of hotels and senior living facilities. Beyond providing cashflow assistance, the act also includes several tax policy adjustments to ease the financial burden faced by commercial property owners, including allowing for deductions in net operating losses, business losses and qualified improvement property depreciation.
CARES Act SBA loans
Program size: $349 billion
Eligible borrowers: Businesses with up to 500 employees that have been impacted by the coronavirus outbreak
Loan sizes: 2.5 times applicants’ monthly payroll, capped at $10 million
Terms: Two-year maturity, 1 percent interest rate
Forgiveness: Yes, for borrowers that use loans to pay payroll costs, mortgage interest, rent or utilities in the eight-week period after receiving the loan
Key provisions: For full forgiveness borrowers cannot reduce their staffs by more than 25 percent. No more than 25 percent of the loans can go to non-payroll expenses, e.g. rent and mortgage interest
“It is really knowing your own situation and what benefits you qualify for,” Lisa Knee, co-chair of real estate services at the New York-based accounting firm EisnerAmper, told PERE. “Going through the CARES Act, there a bunch of provisions that certainly help the real estate industry.”
The CARES Act’s key outreach to the business community is the Payroll Protection Program, which includes a $349 billion fund created for Small Business Administration, a US government agency, to issue loans to businesses with up to 500 employees. If businesses use this funding to pay employees and cover other operating costs, the loans will be fully forgiven. Eligible borrowers can take out loans for two-and-a-half times their monthly payroll up to $10 million, potentially providing a two-month lifeline to their landlords. However, no more than 25 percent of these loans can be used for non-payroll expenses, such as rent, mortgage interest or debt services.
Benefits to real estate owners: Indirect. Most real estate owners and operators cannot take out loans. Key exceptions include hotels, restaurants and residential properties that provide health care and/or medical service
Most property companies are barred from directly receiving loans through the program because they are deemed passive businesses. There are some exceptions, however, such as senior living facilities. But even with senior living, those facilities owned by private equity or private equity real estate funds are excluded because institutional investors are considered affiliated companies and therefore count toward a business’s employee total.
“The rules make most of the institutional owners in the funds and the property owners below them ineligible,” Mark Lochiatto, a Boston-based partner for the law firm Goodwin Procter, told PERE.
Fed Main Street Lending Program
Program size: $600 billion between two credit facilities
Eligible borrowers: Businesses with up to 10,000 employees or annual $2.5 billion of revenue in 2019 that have been impacted by the coronavirus outbreak
Loan sizes: $1 million-$25 million, no more than four times borrower’s 2019 EBIDTA
Terms: Four-year maturity, adjustable rate of secured overnight financing rate plus 250-400 basis points
Key provisions: Loans cannot be used to pay down other loan balances. Borrowers must make “reasonable efforts” to keep employees and maintain payrolls
Benefits to real estate owners: Direct. Real estate companies are not excluded from receiving loans through the program
Hotels are one noteworthy exception to the CARES Act’s SBA affiliation rules, Lochiatto said, seen as an effort by Congress to prop up the hospitality industry, which is being battered by the covid-19 crisis. Only employees that work at a given property are counted. However, hotel owners still need to make challenging calculations to meet eligibility criteria. The PPP’s cap on non-payroll expenses, for example, means they would have to rehire large amounts of unneeded staff to be able to cover their other expenses. “Two months from now, I don’t think anyone knows where things will be,” Lochiatto said. “Some hotel owners are pausing to think what makes the most sense for them.”
The CARES Act has also authorized one-time cash payments of up to $1,200 for eligible Americans as well as an additional $600 per week for the unemployed, which in theory could provide rent relief for some tenants.
Dodge Carter, managing director of Dallas-based manager Crow Holdings Capital, said it unclear so far if these measures have improved tenants’ abilities to pay rents. “It is too early to have any clarity on the CARES Act and its impact on the multifamily business here in the US,” he said.
While fund managers and the companies they own cannot access SBA loans, Nishant Bakaya, chief investment officer of Chicago-based manager CA Ventures, told PERE the loans from the program would have anyway been too small to help firms such as his, which manages $8.7 billion of assets. “Other programs, particularly the Main Street Lending Program targeting larger size businesses, are expected to more beneficial,” he said.
The Main Street Lending Program is a $2.3 trillion plan from the Fed that picks up where the CARES Act leaves off. It will back larger loans for bigger companies – those with up to 10,000 employees – with fewer strings attached, but also no option for forgiveness. Instead of imposing strict payroll requirements, the Fed’s program simply states a borrower should make “reasonable efforts to maintain its payroll and retain its employees.” The central bank has created two credit facilities totaling $600 billion to back loans of up to $25 million. Critically, it has also pledged to buy more asset-backed securities, including commercial mortgage-backed securities, to maintain market liquidity.
This could have been an uncontrolled downward spiral in real estate tenant demand and investor demand.
The CARES Act and the Main Street Lending Program have given hope to businesses across the country as well as their landlords. As robust as the stimulus packages are, however, both have their limitations and will run out of funds sooner than later. Depending on the duration of the crisis, they could be a bridge back to solvency or a stopgap before inevitable, widespread defaults.