- March 26, 2020
The Senate passed a $2 trillion stimulus package on March 25 in response to the damage to the U.S. economy caused by the COVID-19 pandemic: the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The bill will now go to the House for a vote on March 27 and the President for signature. We expect the bill to pass and become law in the next day or two.
Parts of CARES are aimed at providing relief in the form of loans to real estate sectors particularly hard hit by the emergency, especially hotels and restaurants, and the law will also allow many multifamily mortgage borrowers to receive temporary forbearance of loan payments. It also would direct payments to individuals, expand small-business loans and provide a wide expansion of unemployment insurance benefits.
Until June 30, under a provision in the bill called the Paycheck Protection Program https://www.sbc.senate.gov/public/index.cfm/2020/3/cardin-bipartisan-senate-task-force-secure-377-billion-for-small-businesses, the SBA will be authorized to guarantee loans to a much broader array of entities than usual, including standard businesses, but also sole proprietors, independent contractors and the self-employed.
Importantly for the hotel and restaurant industry, the law specifically states that "any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a North American Industry Classification System (AICS) code beginning with 72 ... shall be eligible to receive a covered loan." AICS Code 72 refers to hotels, casinos, bars, restaurants (full-service and limited service) and other related businesses, such as food service contractors and caterers.
Borrowers can receive a loan totaling the lesser of two-and-a-half times their average monthly payroll over the last year or $10 Million.
The loans, according to CARES, may be used for payroll or continued healthcare coverage for workers, but also for rent or the payment of interest on any mortgage obligation — but not payment of any principal. Under the terms of the bill, borrowers will also be able to ask for forgiveness of a loan, to the extent that it was used to retain employees or pay rent or mortgage interest. Loan forgiveness will be reduced if the borrower reduces employees and/or wages.
Another section of CARES allows a borrower with a federally backed multifamily mortgage who is experiencing financial hardship due to the pandemic to request a forbearance — a temporary reprieve on payments for 30 days. Borrowers can also request two 30-day extensions. During the forbearance period, however, a borrower may not evict any tenant for nonpayment of rent or charge late fees or other penalties for late payment of rents. The bill as written is in line with guidance from the Federal Housing Finance Authority which oversees FNMA and FHMC https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Moves-to-Provide-Eviction-Suspension-Relief-for-Renters-in-Multifamily-Properties.aspx.
CARES temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
CARES also provides a needed technical correction related to depreciation. As part of the 2017 Tax Cuts and Jobs Act, Congress intended to accelerate the depreciation on qualified improvement property (QIP); which is defined as any improvement made to the interior of a nonresidential building any time after the building was placed in service. The 2017 legislation was supposed to reduce the depreciable life of QIP from 39 to 15 years, and with 100% bonus depreciation being available for all assets with a life of 20 years or less. However, when the legislation was drafted, QIP was never assigned a 15-year life. As a result, it retained its prior 39-year designation. CARES corrects the QIP problem by giving it its intended 15 year life, while making the change retroactive to January 1, 2018. As such, taxpayers will be entitled to file amended returns to reap the benefits of accelerated depreciation in 2018 and 2019