President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law on March 27, 2020. This $2 trillion stimulus package is designed, among other things, to provide the country with relief from the economic effects of the novel coronavirus pandemic. The CARES Act contains provisions impacting the real estate industry, including investors, landlords, tenants, contractors and creditors. This is the first of a two-part summary on the most relevant provisions of the CARES Act pertaining to commercial real estate. It is intended as an overview to assist real estate professionals in navigating the CARES Act.
CARES Act Payments to Individuals and Businesses
The CARES Act contains provisions intended to assist residential and commercial tenants with rent payments. It provides for cash payments or “recovery rebates” to qualifying, individual taxpayers. Recovery rebates are intended to be used by taxpayers for payment of basic living expenses, such as rent. For businesses, the CARES Act authorizes various assistance programs. Most significantly for commercial landlords and tenants, it authorizes forgivable loans to qualifying small businesses, known as paycheck protection loans (PPLs). Funded by the Small Business Administration (SBA), a PPL payment is calculated based on payroll expenses. PPLs must be used to pay eligible “payroll expenses,” which expressly includes rent. Under recently adopted regulations, up to 25% of the proceeds from a PPL may be used to pay rent, without jeopardizing the loan’s eligibility for loan forgiveness. See Business Loan Program Temporary Changes; Paycheck Protection Program, Section III(2)(o), Small Business Administration (Apr. 2, 2020).
Use of Individual Retirement Funds for Rent and other Expenses
Section 2202 of the CARES Act sets forth special rules for use of retirement funds. This provision waives the early withdrawal penalties for distributions up to $100,000 from qualified retirement accounts if used for “coronavirus-related purposes.” Some tenants, particularly in the senior housing context, may use this provision to withdraw much needed funds to pay rent and other occupancy expenses. A coronavirus-related distribution is one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined or other factors as determined by the Treasury Secretary. The applicability and impact of Section 2202 should be considered carefully by taxpayers and their advisors.
National Moratorium on Residential Evictions for Properties with Federal Loans
Most states have enacted moratoria on eviction actions. The CARES Act follows suit by placing a 120-day moratorium on residential evictions for tenants occupying properties financed by federally-backed multifamily loans. These loans are defined as loans made or insured, guaranteed, or assisted by the Federal Government or by a HUD program or purchased or securitized by Freddie Mac or Fannie Mae. See CARES Act, Section 4024(a)(5), 116th Cong. (2020). Furthermore during the 120-day period, landlords at these properties are barred from charging any fees, penalties, or other charges to residential tenants based on the nonpayment of rent. The CARES Act itself does not expressly restrict the use of security deposits.
Forbearances Available for Properties with Federal Loans
Under the CARES Act, certain home mortgages and multifamily loans participating in federally-backed programs are eligible for the forbearance of payments for up to 90 days. See CARES Act Section 4023. If borrowers under federal multi-family loans opt into these forbearance provisions, they will be subject to additional restrictions on tenant evictions, fees and penalties.
Expansion of Small Business Access to Bankruptcy Reorganization
Section 1113 of the CARES Act expands the Small Business Reorganization Act of 2019 (SBRA) to benefit more small businesses. The recently enacted SBRA provides small businesses with more efficient and less costly access to the benefits of reorganization via bankruptcy. With the expansion of the SBRA under the CARES Act, more tenants (as well as some smaller real estate developers and owners) should be able to pursue a successful reorganization over liquidation. Section 1113 of the CARES Act temporarily increases the eligibility threshold to file under subchapter V of Chapter 11 of the U.S. Bankruptcy Code to businesses with less than $7,500,000 of debt. After one year, the eligibility threshold returns to $2,725,625.
Section 3610 and GSA Leased Facilities
Section 3610 provides that certain federal contractors may be reimbursed for employee paid and sick leave if, as a result of the pandemic, work cannot be performed at a federally-owned or leased site. This Section is intended to pay employees working on federal sites, including federally-leased facilities, in order to keep these workers "in a ready state." The intent is to ensure that key federal contractors can begin working as soon as restrictions to work sites are lifted. Section 3610 may come into play for landlords, contractors or developers working on GSA leased facilities across the county. In other words, developers, owners and landlords may be able to use Section 3610 to obtain payments related to construction projects, maintenance work or other key services at GSA facilities. Because the authority is discretionary, satisfying the Section 3610 criteria does not guarantee that a contracting officer will authorize the reimbursement.
This is a fluid and rapidly changing situation and these resources are current only as of the date of publication. We recommend that you contact your local Quarles & Brady attorney regarding the most up-to-date information or with any other questions regarding this subject matter, or contact