Authors: William A. Organek
A centerpiece of the CARES Act is the Paycheck Protection Program (the PPP), a $350 billion tranche meant to assist small businesses that retain their workforce by providing forgivable loans if certain conditions are met. However, the PPP was not expressly designed for landlords with sizable real estate holdings whose businesses often have small numbers of direct employees. This Alert focuses on:
- CARES Act provisions that can assist landlords;
- Parts of the PPP that might benefit landlords; and
- Certain actions taken outside of the CARES Act (either by state governments or by agencies of the federal government) that may bring financial relief to landlords concerned about their mortgages.
Loans under the Paycheck Protection Program
While much of the media attention surrounding the CARES Act focuses on the PPP, many landlords may be unlikely to qualify for the PPP or may only find limited direct relief through the PPP. Loans made under the PPP are to be made on favorable terms, include a forgivable component, and can be used for payment of items such as interest on debt and rent. However, the metric used to determine the size of a PPP loan can be a limiting factor for landlords. Section 1102 of the CARES Act provides that the maximum amount available under the PPP is equal to the lesser of $10 million or 2.5 times the “average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made . . .”.1 Such loans were designed to encourage companies with larger numbers of direct employees to retain their staff in order to mitigate a nationwide unemployment crisis. To further this policy objective, an interim final rule proposed by the Small Business Administration (the SBA) on April 2 clarified that independent contractors do not count as employees for purposes of calculating the size of a PPP loan. Consequently, PPP loans may be more useful for a hotel owner-operator with multiple hotels and scores of direct employees,2 but may not provide much benefit for a real estate company that has a $250 million portfolio managed by a total staff of 10 direct employees.
Landlords should also consider that even if a landlord does not directly qualify for aid under the PPP, its tenants may be able to avail themselves of the program. Some landlords have established arrangements with third-party professional service firms to assist their tenants in applying for PPP aid. As PPP funds can be applied by tenants to rent payments, landlords stand to benefit indirectly from increased use of the PPP by tenants.
Loans under the Economic Injury Disaster Loan Program
Landlords are not limited to the PPP in seeking aid under the provisions of the CARES Act. Section 1110 of the CARES Act greatly expands the SBA’s Economic Injury Disaster Loan (EIDL) program, which permits the SBA to provide loans of up to $2 million at a statutorily-capped interest rate of 3.75 percent and a term of up to 30 years.3 Any business with not more than 500 employees can apply for an EIDL, and the CARES Act provides for $10 billion in additional funds to be used for this program.
The CARES Act supercharges the existing EIDL program by:
- Permitting applicants to self-certify their compliance with certain aspects of the program;
- Removing the requirement that a tax return be provided and examined along with an application;
- Removing any requirement that personal guarantees be provided on loans of $200,000 or less; and
- Eliminating the requirement that a business demonstrate that it would be unable to obtain credit elsewhere before turning to the EIDL program.4
Additionally, section 1110 of the CARES Act provides that an applicant can request an advance on an EIDL of up to $10,000, to be disbursed by the SBA within three days after receipt of such a request. Moreover, an applicant “shall not be required to repay any amounts of an advance . . . even if subsequently denied a loan . . .”.5 The CARES Act expressly provides that an EIDL disbursed by the SBA can be used for rent payments, mortgage payments, and payments of other debts. Thus, a hypothetical landlord with few employees but substantial real property holdings can benefit significantly from an EIDL and receive a forgivable cash infusion to stave off an immediate shortfall, regardless of the size of its direct payroll.
The PPP and EIDL programs represent the two largest efforts undertaken by Congress to date that can directly impact landlords. However, they are not the only options available. Federal agencies, states, and localities have taken additional legislative, executive, and regulatory actions which can benefit landlords. While this regulatory landscape remains fluid and is subject to further change, several notable regulatory actions taken by the government housing financing agencies and the New York Department of Financial Services merit attention, as they are likely to have a broad impact on landlords nationwide.
Federal and State Regulatory Actions
Fannie Mae and Freddie Mac (the Enterprises) have released directives permitting landlords of multifamily properties to delay making monthly mortgage payments for a temporary period, without incurring late fees, having delinquencies reported to credit agencies, or being at risk of foreclosure or other legal proceedings due to such delays.6 In return for this protection, the Enterprises will require owners of multifamily properties to suspend all evictions for tenants unable to pay rent due to the impact of COVID-19 for the entire period during which any forbearance is in place. Any Enterprise-backed mortgage should qualify for such forbearance, and the Enterprises continue to release guidance for both borrowers and lenders on how such forbearance programs will be implemented. Fannie Mae has indicated that any forbearance agreement must provide that a borrower will bring a loan current by the earlier of (i) 12 months after the end of the forbearance period, or (ii) the borrower’s receipt of business income insurance proceeds or other applicable relief program proceeds.7 Any forbearance agreement must also require that a tenant can repay any missed rent payments over a period of 12 monthly installments without late charges.8 These acts by the Enterprises should provide a clear path forward for borrowers and lenders that are party to Enterprise-backed loans.
For loans that are not backed by the Enterprises, actions taken by the New York Department of Financial Services (DFS) in recent days may impact landlords by altering both their rights and the rights of tenants at their properties. Executive Order 202.9, signed by Governor Cuomo on March 21, 2020, provides that:
“it shall be deemed an unsafe and unsound business practice if, in response to the COVID-19 pandemic, any bank which is subject to the jurisdiction of the [DFS] shall not grant a forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days.”9
As many national banks and mortgage servicers undertake activities in New York and therefore may be regulated by the DFS, borrowers should confirm whether or not their lenders or servicers are subject to the requirement to offer a 90-day forbearance.
Executive Order No. 202.13, signed by Governor Cuomo on March 29, 2020, provides relief for small businesses (i.e., businesses resident in the State of New York, independently owned and operated, and employing 100 or fewer individuals) that hold property and casualty insurance policies with insurers regulated by the DFS.10 This executive order requires that property and casualty insurers shall extend to 60 days the grace period for the payment of premiums and fees under property and casualty insurance policies. These insurers are also prohibited from cancelling, non-renewing, or conditionally renewing any policy issued to an individual or a small business, or any group policy of which an individual or a small business is a policyholder. Insurers regulated by the DFS must also permit premiums not paid over this 60 day period to be paid over the following year in monthly installments, waive late fees associated with such delayed payment, and not report any such late payment to credit agencies. This executive order can protect qualifying policyholders from defaults that might otherwise be triggered in their loan documents, leases, or other relevant agreements for failure to promptly pay insurance policies.
Although landlords with few direct employees may at first seem to be overlooked by the CARES Act, they can benefit directly and indirectly from many provisions of the law. Although landlords cannot include payments to certain third parties as ‘payroll costs’ for purposes of applying for a PPP, they can reap indirect benefits through PPP loans received by their tenants and can also qualify for EIDL loans. Furthermore, regulatory action taken on a federal and state level offer landlords protection from the economic slowdown caused by the pandemic.
- CARES Act, section 1102. The law also provides for limited exceptions to this sizing in the event a business has a large number of seasonal employees.
- Note that section 1102 waives affiliation requirements for businesses in the “Accommodation and Food Services” sector (NAICS Code 72), thus allowing each business concern in this category with not more than 500 employees, or each business concern operating as a franchise in this category, to be treated as its own business for purposes of qualifying for its own PPP loan. Hotel operators with operations in multiple locations could benefit from these relaxed affiliation rules and thus qualify for a PPP loan for each hotel. Although the employees at many hotels are often, as a legal matter, employees of hotel management companies rather than property owners, hotel management companies should be able to qualify for PPP loans as their businesses fall within NAICS Code 72.
- See 15 U.S.C. Sec. 636(b).
- CARES Act, section 1110.
- “Mortgage Help For Homeowners Impacted By The Coronavirus,” Federal Housing Finance Agency, accessible at www.fhfa.gov (accessed March 31, 2020).
- “Supplement 20-04R: Revised – COVID-19 Forbearance Delegation and Asset Management Property Inspection Guidance,” Fannie Mae – DUS Navigate, effective March 24, 2020, accessible at mfguide.fanniemae.com (accessed March 31, 2020).
- Executive Order No. 202.9, “Continuing Temporary Suspension and Modification of Laws Relating to the Disaster Emergency,” March 21, 2020, accessible at: www.governor.ny.gov (accessed March 31, 2020).
- Executive Order No. 202.13, “Continuing Temporary Suspension and Modification of Laws Relating to the Disaster Emergency,” March 29, 2020, accessible at: www.governor.ny.gov (accessed March 31, 2020).
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Client Alert 2020-204