Author: Trey Jackson

Roundtable Interview Addresses Healthy Building Operations as Governments Develop Economic Re-Opening Plans

Posted on by Trey Jackson

 

Book Covers - Healthy Buildings

With states and cities beginning to re-open economic sectors, what should building owners and managers consider to safely manage the reentry of tenants, workers and visitors?  This was the topic of an interview conducted this week by Real Estate Roundtable President and CEO, Jeffrey DeBoer, with Dr. Joseph Allen, Assistant Professor at Harvard’s T.H. Chan School of Public Health and Director of its Healthy Buildings Program. (Video, May 6)

  • He was inspired at a Roundtable Sustainability Policy Advisory Committee (SPAC) meeting to assemble a report that eventually became “The 9 Foundations of a Healthy Building.”  The publication “takes 40 years of scientific evidence, distills it down to those key factors or features that we know relate to better employee health, improved productivity and help reduce infectious disease transmission.”    
  • Building stakeholders could implement a health safety plan using “a five-step hierarchy of controls” detailed in his April 29 Harvard Business Review article, “What Makes an Office Building ‘Healthy’”
  • Healthy building metrics can contribute to building valuation.  “Start measuring … health performance indicators. Capture all those gains.” He gives a specific marketplace example featured in an April 28 Harvard Business Review podcast case study, “A Tower for the People: 425 Park Avenue.”   
  • There is increased market interest in healthy buildings, especially in light of the fallout from the global pandemic. “This healthy building movement, just like working from home and teleworking, have been slowly rising – and with COVID, it has forced a massive quickening of these movements.”  (Watch interview, May 6)
  • Resources:

The Roundtable’s Building Re-Entry Working Group continues to meet weekly to address issues associated with the restarting of the economy.

Operations and performance standards for healthy buildings will be a topic discussed during The Roundtable’s virtual Annual Meeting on June 11-12, which will include remote events for both business and policy advisory committee meetings.

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Policymakers Float Measures for Next COVID-19 Relief Package; Senators Propose Changes to Paycheck Protection Program’s “75/25 Rule”; Democrats Introduce $100 Billion Emergency Rental Assistance Bill

Posted on by Trey Jackson

U.S. Capitol Dome

House Democrats are developing another massive coronavirus aid package as they consider when to return to Washington for a vote – while Republicans have signaled they prefer to pause any negotiations on future pandemic aid until the effectiveness of current programs can be evaluated.  (Wall Street Journal, May 7) 

  • House Speaker Nancy Pelosi (D-CA) has stated her goals for the next round of pandemic relief, which include $800 billion in funding for state and local governments, in addition to unemployment support, direct payouts, Covid-19 testing and more.  (Bloomberg, April 30 – AP, May 5 – Bloomberg TV,  May 7)
  • Senate Minority Leader Charles Schumer (D-N.Y.) told MSNBC yesterday, “We need Franklin Rooseveltian-type action and we hope to take that in the House and Senate in a very big and bold way.”
  • White House National Economic Council Director Larry Kudlow today said, “We’ve kind of paused as far as formal negotiations go. Let’s have a look at what the latest round produces. You need a month or so to evaluate that.”  (Roll Call, May 8)
  • Kudlow’s remarks follow Senate Majority Leader Mitch McConnell’s (R-KY) statement earlier this week that Congress should “take a pause” before passing more pandemic relief legislation.  (The Hill, May 5)
  • Kudlow added, “The president, as you know, has put out a number of his own policy ideas, payroll tax cuts being one of them, and … COVID-19 liability restrictions for businesses.”  Kudlow also highlighted proposals to promote restaurant and travel spending, as well as allowing businesses to quickly write off their expenses as they reopen.  (CQ, May 8) 

Roundtable Pandemic Policy Communications Outreach 

  • Jeffrey DeBoer, President and CEO of The Real Estate Roundtable, on May 6 participated in the Urban Lab Podcast to discuss the pandemic’s ongoing impact on CRE, The Roundtable’s recommendations for reforming the PPP, the merits of a Pandemic Risk Insurance Act similar to TRIA, the “rent obligation chain,” and the organization’s broader engagement with policymakers.  Dr. Sam Chandan, Silverstein Chair of the NYU SPS Schack Institute and Fellow at the NYU Urban Lab, hosted the podcast. (Interview with DeBoer, May 6)
  • DeBoer also participated in a Bisnow webinar last week to discuss the government’s legislative and regulatory responses to the economic impact of the coronavirus pandemic.  (Bisnow recap, May 4 and Roundtable Weekly, May 1)
  • The Roundtable’s Senior Vice Presidents on May 5 participated in “The Policy Response to COVID-19: Implications for Real Estate” – hosted by the Pension Real Estate Association (PREA).  The supporting slides for the PREA webinar offer extensive details to various issues related to the PPP, tax changes and actions by the Federal Reserve. (Download slides) 

Small Business Aid and Rent Assistance 

  • Loan demand for the Paycheck Protection Program (PPP) was expected to quickly diminish the program’s supplemental funding that became available April 27.  Yet, more than 40 percent of the aid remains unused according to data released by the Small Business Administration yesterday. (Wall Street Journal, Demand for Small-Business Loans Cools, May 8) 
  • Lenders and participants say that reasons for the slowdown in demand include the reluctance of small businesses to sign up for a program whose loan forgiveness terms remain unclear.  To obtain forgiveness of a loan, agency rules implementing the PPP require small businesses to spend 75% of funds on payroll (and no more than 25% of PPP proceeds or forgiveness can be devoted to rent, mortgage interest, utility bills, and other debt obligations).
  • The Roundtable’s 8-Point Plan to Reform the PPP recommends that SBA and Treasury should not apply the 75/25 rule as a categorical “one size fits all” standard that limits PPP assistance, in all cases, to no more than 25% for business rent and other ordinary expenses.
  • This week, a broad bipartisan group of Senators led by John Cornyn (R-TX) proposed changing the 75-25 rule to a 50-50 rule – where up to 50% of PPP loan proceeds can be used by qualifying small businesses to pay rent, mortgage and utilities.  (Cornyn letter, May 5)
  • Sen. Cornyn and 20 other Senators urged Secretary of the Treasury Steven Mnuchin and Small Business Administration Administrator Jovita Carranza to “exercise the power of your respective offices to ensure all business sectors are able to spend at least 50 percent of the loan proceeds on the statutorily allowed non-payroll expenses.”
  • Senate Finance Committee member Cornyn on May 5 also introduced The Small Business Expense Protection Act of 2020, which would modify the CARES Act to allow business owners to claim tax deductions for ordinary business expenses, regardless of whether they were paid with a forgiven PPP loan.
  • Additionally, legislation introduced today would create a $100 billion emergency residential rental assistance fund. The Emergency Rental Assistance and Rental Market Stabilization Act of 2020 was introduced by Congresswoman Maxine Waters (D-CA), Chairwoman of the House Committee on Financial Services, and Senator Sherrod Brown (D-OH), Ranking Member of the Senate Committee on Banking, Housing and Urban Affairs. (House Financial Services Committee news release and bill summary.)
  • Earlier this week, The Roundtable’s Jeffrey DeBoer was quoted in GlobeSt.com about the need for a program to help both residential and business tenants with temporary, emergency rental assistance. DeBoer said, “While the focus on employment has been necessary and effective, there is presently no COVID-19 response program with the primary goal of assisting American families and businesses in meeting their obligations to pay rent, mortgages, and other ordinary debts and expenses.” (GlobeSt, May 5)
  • DeBoer added, “No landlord wants to evict a tenant, and most are working proactively with their tenants to make payment plans and reduce tensions. Without rental income, such actions disproportionately impact smaller landlords and pummel a city’s property tax collections by sending buildings into foreclosure. Ultimately, it would affect municipal workers who will lose their jobs—including teachers, police and firefighters.”
  • The “rent obligation chain” and its crucial role to support the economy and the CRE sector was also illustrated in a March 24 Wall Street Journal article, “Businesses Can’t Pay Rent. That’s a Threat to the $3 Trillion Commercial Mortgage Market.” 

The pandemic’s ongoing impact on CRE and Washington’s policy responses will be a major focus of The Roundtable’s first virtual Annual Meeting, which will be held remotely on June 11-12. 

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The Fed Expands Main Street Loan Program to Reach More Businesses; Fed Chair Powell Urges Lawmakers to Take Further Fiscal Measures

Posted on by Trey Jackson

Fed Chair Jay Powell

The Federal Reserve yesterday announced an expansion of its $600 billion Main Street Lending Program (MSLP) to help credit flow to small and medium-sized businesses that were in sound financial condition before the pandemic.  (Fed news release and Wall Street Journal, April 30)

  • As part of its broad effort to support the economy, the Fed’s action will assist businesses that were either unable to access the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) or that require additional financial support after receiving a PPP loan. It is important to note that MSLP loans (as opposed to PPP loans) are not forgivable.
  • Three separate facilities make up the MSLP: (1) the Main Street New Loan Facility (MSNLF); (2) the Main Street Priority Loan Facility (MSPLF); and (3) the Main Street Expanded Loan Facility (MSELF). (Steptoe, comparison chart, May 1)

The changes include:

• Creating a third loan option, with increased risk sharing by lenders for borrowers with greater leverage;

• Lowering the minimum loan size for certain loans to $500,000 from $1 million; and

• Expanding the pool of businesses eligible to borrow for businesses that may already have significant debt. 

  • Businesses with up to 15,000 employees or up to $5 billion in annual revenue are now eligible, compared to the initial terms, which were for companies with up to 10,000 employees and $2.5 billion in revenue.
  • According to Steptoe, each MSLP facility uses the same borrower eligibility criteria and have similar commercial components – including the same term (four years), interest rate (LIBOR plus 3%), deferral of principal and interest for one year, and permit prepayment without penalty.  For lenders, the risk retention requirement varies: 5% for the MSNLF and MSELF, and 15% for the MSPLF.
  • The Roundtable and Nariet on April 22 wrote to Treasury Secretary Steven Mnuchin and Fed Chairman Jay Powell to request specific changes that would enable CRE borrowers to more efficiently access the Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF).  (Joint letter, April 22)
  • The joint industry letter addresses (1) Underwriting/ Leverage Limitations/ Loan Size, (2) Distributions/ REITs (3) Loan Terms (4) Applicable Interest Rate Index and (5) Program Timing.

The Fed states that a start date will be announced soon for the MSLP. (Main Street Lending Program FAQs, April 30)

Fed Chairman Powell Recommends More Fiscal Response

Federal Reserve Chair Jay Powell on Wednesday said concerns about the rising national debt should not limit the federal government’s efforts to counter the coronavirus pandemic’s economic impact.

  • After announcing the Fed would leave interest rates near zero, Powell included a rare commentary on fiscal policy, urging lawmakers to pursue do more to support the economy. (Bloomberg, April 29)
  • “This is the time to use the great fiscal power of the United States to do what we can to support the economy,” Powell said.  “The time will come again and reasonably soon I think where we can think about a long-term way to get the fiscal house in order, and we absolutely need to do that … But in my personal view, this is not the time to let that concern … get in the way of us winning this battle,” he stated.  (Video and statements of The Fed’s news conference)
  • Powell added, “I would say that it may well be the case that the economy will need more support from all of us if the recovery is to be a robust one.”  He also noted that “our credit facilities are wide open. We can do more on that front.” (MarketWatch, April 29)
  • The Fed Chairman issued a somber warning of the long-term consequences of the coronavirus economic crisis.  “These thousands of great medium- and small-size businesses are worth so much more to the economy than the sum of their net assets,” Powell said.  (Wall Street Journal, April 29)
  • He added, “It is heartbreaking, frankly, to see that all threatened now.  Everyone is suffering here, but those who are least able to bear it are the ones who are losing their jobs and losing their incomes and have little cushion to protect them.”

Powell added, that the Fed will use its powers “forcefully, proactively, and aggressively until we’re confident that we’re solidly on the road to recovery.”  (Video and statements of The Fed’s news conference)

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Congressional Republicans and Democrats Clash on Including Covid-19 Business Liability Protections in Future Pandemic Relief Legislation

Posted on by Trey Jackson

U.S. Capitol

Liability concerns in a post-coronavirus world are influencing congressional negotiations about the next pandemic relief package as states move forward on easing business restrictions and employers across the country consider plans to reopen.  (AP, April 28 and The Hill, May 1)

  • With the Senate scheduled to return to Washington on May 4, policymakers are staking their priorities about stimulus and other measures that may be included in the next round of Covid-19 related legislation.  The House announced this week they will delay their return until May 11 due to concerns about coronavirus in Washington, DC.
  • Senate Majority Leader Mitch McConnell (R-KY) and House Minority Leader Kevin McCarthy (R-CA.) said in a joint statement today that any future stimulus bill must include liability protections for employers.  “Senate and House Republicans agree these protections will be absolutely essential to future discussions surrounding recovery legislation,” according to the statement.
  • McConnell on Tuesday referred to the protections as his “red line” during an interview with Fox News.  “Let me make it perfectly clear, the Senate is not interested in passing a bill that does not have liability protection. … What I’m saying is we have a red line on liability. It won’t pass the Senate without it,” he added. (Fox interview, April 24)
  • House Speaker Nancy Pelosi (D-CA) on Wednesday said employees returning to work should have increased safety protections. “Especially now, we have every reason to protect our workers and our patients in all of this. So we would not be inclined to be supporting any immunity from liability,” Pelosi stated during a press briefing.  (National Review, April 29)
  • Senate Minority Leader Chuck Schumer (D-NY) on Tuesday said employers pushing workers to return to unsafe conditions during the pandemic should not receive protections.  He stated, “If an employer makes an employee do something that is untenable, shouldn’t an employee have some rights here?” (Bloomberg, April 28).

Negotiations on the next pandemic bill in Congress will intensify this month, as Democrats are expected to push for massive assistance to help state and local governments meet tax revenue shortfalls that pay for essential services.

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Real Estate Roundtable’s DeBoer Discusses Coronavirus Policy Responses and Need for Future Actions

Posted on by Trey Jackson

Jeffrey DeBoer, Bisnow video interview

Roundtable President and CEO Jeffrey DeBoer, above, discussed the government’s legislative and regulatory responses to the economic impact of the coronavirus pandemic – and what those policies mean for commercial real estate – in a BisNow webinar yesterday and Real Estate Executive Council Town Hall today.  (Watch April 30 Bisnow interview)

  • The discussions addressed the Paycheck Protection Program (PPP), new Federal Reserve credit lending facilities and the need for a national renter assistance program.
  • DeBoer noted that the federal response to the pandemic’s economic shockwave have provided bridge relief, and that the Small Business Administration’s (SBA) PPP and the Fed’s TALF credit facility could be improved to increase their effectiveness. 
  • The Roundtable’s Covid-19 Resource Center includes an “8-Point Plan” to improve the PPP. Additionally, the SBA on April 29 released an updated PPP FAQs document.

Restoring The Rent Obligation Chain & Future Issues

DeBoer emphasized in his discussions that there is a vital need to “restore the rent obligation chain” to benefit business and residential tenants, owners, lenders, local budgets and retirement investments. (Bisnow video)

  • Before the pandemic crisis, there was clarity on the likely income real estate assets could generate by rental obligations and contracts.  However, now those income streams are impaired. The future of certain businesses are unknown; tenants in shared buildings may default; and how employers can retain or regenerate jobs is uncertain. DeBoer noted that these challenges can be addressed by fixing the rental obligation chain.
  • DeBoer also said future issues that should be addressed include business liability, as building owners anticipate the return of occupants, workers and visitors – along with government support for a Pandemic Risk Insurance Program, which could be modeled on the highly successful Terrorism Risk Insurance Program established in the wake of 9/11. 
  • The Real Estate Roundtable recently established a Building Re-Entry Working Group to address issues associated with building re-entry, as state and local authorities seek to re-start economic sectors and allow people to return to work.
  • DeBoer also discussed what future legislative packages may include to jumpstart the economy, including infrastructure investment.

Other Roundtable videos address how the crisis has affected real estate tax issues, along with other topics, on its Youtube channel.

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Moody’s Releases Interactive Tool Showing Covid-19 Impact on Various Commercial Real Estate Property Types

Posted on by Trey Jackson

Moody’s Analytics on April 22 unveiled a new tool to help commercial real estate market participants assess how the coronavirus crisis is affecting CRE fundamentals across US markets. The COVID-19 CRE Impact Dashboard is a publicly available resource that provides access to economic, property, and construction data, analytics and insights for CRE property types. 

  • Presented as a visual mapping tool, the dashboard brings together Moody’s Analytics CRE capabilities and supplements them with up-to-date information on COVID-19 from public sources.  The dashboard also includes forecasts for market vacancies and rents under different economic scenarios for office, retail, industrial, and multi-family properties.
  • “The coronavirus pandemic is changing the landscape of commercial real estate, as businesses of all types adapt to new economic realities,” said Cristina Pieretti, Managing Director of Moody’s Analytics REIS. “We are offering our new tool to help the CRE community make the critical business decisions necessary to navigate this unprecedented event.”

To access the dashboard, and for more information, visit reis.com or Moody’s Coronavirus blog. 

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The Roundtable and Nareit Request Expansion of The Fed’s “Main Street” Lending Programs to Prevent Further Disruption to CRE Markets

Posted on by Trey Jackson
Facade on the Federal Reserve Building in Washington DC

The scope of the Federal Reserve’s “Main Street” Lending Programs should be expanded to forestall further disruption and economic dislocations in commercial real estate, according to an April 22 letter sent to Treasury Secretary Steven Mnuchin and Fed Chairman Jay Powell from The Real Estate Roundtable and Nareit. 

  • This week’s letter requests specific changes to the Fed’s Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF), both established on April 9.
  • The April 22 letter emphasizes that real estate borrowers, owners and managers now face existential challenges.  The letter states, “At a time when Main Street needs credit, it cannot get it because the secondary markets that provide liquidity to Main Street lenders are clogged.”
     
  • The Roundtable and Nareit urge specific changes to enable CRE borrowers to access the Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF).  The joint letter addresses (1) Underwriting/ Leverage Limitations/ Loan Size, (2) Distributions/ REITs (3) Loan Terms (4) Applicable Interest Rate Index and (5) Program Timing.
  • Previous industry letters to the Fed on March 24 and April 14 addressed the need to broaden the range of a separate credit facility – the Term Asset Backed Securities Facility (TALF).  Those letters requested that TALF eligible collateral include both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations.  On April 9, the Fed confirmed that the TALF would be expanded to include triple-A rated legacy non-agency CMBS and loans.
  • Since then, as rental income has diminished, conditions in the commercial real estate sector have deteriorated further, causing real estate credit and capital markets to stall.  Therefore, it is important for the Main Street credit facilities to help bring renewed liquidity to commercial and multifamily real estate. 
  • The CARES Act permits financially stressed tenants in properties financed by federally backed loans to postpone rent payments, while several states and municipalities are currently considering additional measures to afford tenants rent forbearance. 

As the Treasury and Fed continue to take positive actions benefiting liquidity for the nation’s economy, the Main Street Lending Programs can be enhanced to support commercial real estate. 

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Roundtable Video Alert Focuses on Tax Policy Pandemic Responses and Priorities; Industry Asks Treasury to Clarify Like-Kind Exchange Deadlines

Posted on by Trey Jackson

The Real Estate Roundtable on Tuesday released a video alert focused on tax policy efforts aimed at mitigating the COVID-19 pandemic’s economic impact on commercial real estate.  

  • Roundtable President and CEO Jeffrey DeBoer, above, introduces the video with a report on the organization’s various policy efforts related to emergency financing, including the Payroll Protection Program (PPP) and the Federal Reserve’s credit lending facilities, such as the Term Asset-Backed Securities Loan Facility (TALF) – before delving into tax policy with Roundtable Senior Vice President and Counsel Ryan McCormick.
  • McCormick describes recent actions the Treasury Department and the Internal Revenue Service have taken to provide relief and ease cash flow challenges for taxpayers, including real estate businesses and their tenants, and shares insight on remaining COVID-19-related tax priorities.
  • The discussion highlights new Treasury guidance permitting partnerships to file amended tax returns, thus allowing partnerships to benefit from retroactive provisions in the CARES Act, including the shorter depreciation period for improvements to nonresidential property.  Other issues include new guidance allowing real estate businesses to revoke prior elections under the business interest limitation.  The Roundtable had urged both actions to ensure that the tax relief in the CARES fully extends to commercial real estate and its tenants.  (Roundtable Weekly, April 10)
  • The video alert also addresses the administrative relief related to tax deadlines for like-kind exchange transactions and opportunity zone investments – along with added flexibility for mortgage servicers’ to modify loans in mortgage-backed securities (REMICs) without triggering tax liability. 
  • Remaining tax policy priorities for The Roundtable include relief that would allow private parties to restructure existing loans through debt workouts and restructurings without generating cancellation of indebtedness (COD) income – (see Roundtable COD letter, March 20) – as well as greater flexibility under the tax law for REITs to take an economic interest in a struggling commercial tenant to help avoid business closures and layoffs.”  
  • This week’s video discussion is the third of several Roundtable video reports addressing the COVID-19 economic crisis.  Other resources, including related policy comment letters, are available on the organization’s website.  (The Roundtable’s COVID-19 Resource Center).   

Like-Kind Exchange Deadline Clarification

An industry coalition, including The Real Estate Roundtable, on April 20 wrote to Treasury Secretary Steven Mnuchin seeking further clarification and relief on deadlines affecting real estate like-kind exchanges.  (LKE policy comment letter, April 20)

  • The letter requests that Treasury or the IRS clarify that recently issued IRS Notice 2020-23 did indeed initiate the 120-day extension of like-kind exchange deadlines that is part of the 2018 revenue procedure that applies to declared disasters.
  • At a minimum, Notice 2020-23 extended the 45-day deadline for identifying like-kind exchange replacement property and the 180-day deadline to close on a like-kind exchange transaction until July 15, 2020 (if the deadline otherwise would have occurred between April 1 and July 14).
  • However, relief associated with prior disasters provided 120-day deadline extensions that were retroactive to the date of the disaster declaration.  The IRS may have intended to grant the full 120-day extension, and some experts interpret the guidance as providing the longer benefit, retroactive to March 13, the date of the President’s COVID-19 disaster declaration.
  • As the letter notes, governmental restrictions and Stay at Home orders in place across the country, along with the fear of catching or spreading the life-threatening disease, threaten the ability of taxpayers to complete like-kind exchanges.
  • Identifying properties for trade purposes requires travel and a confidence in both the expected cash-flow stream and the value of potentially acquired property. Closing on an identified property requires these same conditions plus extensive due diligence by the buyer, lender and other third-party contractors, such as appraisers.  All of these necessary steps are thwarted by travel restrictions, the inability to access properties, and the closures of title/escrow companies and governmental recording offices.
  • The letter concludes, “This relief would give taxpayers who may have commenced, or who wish to commence an exchange, the necessary time to identify and / or close on a replacement property.  Taxpayers, many of whom are small to mid-sized businesses and middle class investors, should not have to be concerned about the possibility of having to pay significant capital gains taxes because like-kind exchange transactions cannot be completed due to the disruption caused by the coronavirus pandemic.”

Additional guidance from Treasury or the IRS on like-kind exchange transactions is expected in the coming days.

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Policymakers Replenish Paycheck Protection Program, Consider Framework for Larger Economic Response Package; Treasury Questions Public Companies’ PPP Loan Eligibility

Posted on by Trey Jackson

A  supplemental coronavirus emergency aid measure enacted today replenishes the Paycheck Protection Program (PPP), which ran out of money after its launch on April 3 due to high demand.  A recent Small Business Administration (SBA) report shows real estate, rental and leasing businesses were approved for 79,784 PPP loans totaling more than $10.7 billion (figures through April 16).  [Roundtable Weekly, April 17] 

  • SBA’s PPP Loan Approvals report also indicates that, through April 16, the construction sector received the most PPP loans ($44.9 billion) with health care ($39.8 billion), hotels and restaurants ($30.5 billion), and retail ($29.4 billion) also receiving significant percentages of assistance. 
  • The Roundtable on April 8 submitted an 8-Point Plan to policymakers that seeks to clarify and improve the PPP.
  • Policymakers this week have also expressed ideas for expanding the next coronavirus response package beyond individual and business relief measures.  Additional funding programs may include hazard pay for essential workers, vote-by-mail programs and funding for the U.S. Postal Service, with a total cost that could exceed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress last month.  (Roundtable Weekly, March 27)
  • This week’s funding bill is referred to as an interim step to combat the economic impact of the pandemic as lawmakers consider a major follow-up package, generally referred to as “CARES 2.”  (The Hill, April 23)
  • Senate Democratic Leader Chuck Schumer (D-NY) said, “We will need a big, strong and active [fourth bill]. It’ll have to come very soon. The needs are large and great.”  Schumer added that funding for state and local governments is a top priority as municipalities’ tax revenues drop and city officials work to set budgets for the next fiscal year. (The Hill and Axios Cities, April 22)
  • Schumer also stated Federal Reserve Board Chairman Jerome Powell is working to open up the Main Street Lending program to nonprofits and municipal governments.  (AP, April 21)
  • Additionally, Sens. Bill Cassidy, (R-LA) and Bob Menendez, (D-N.J.) on April 19 unveiled legislation that would provide a $500 billion fund to help states and local governments respond to the public health and economic crisis, while maintaining essential services. (Sen. Cassidy news release)
  • Treasury Secretary Steven Mnuchin is reported as stating the next bill may include some infrastructure funding to boost 5G cellular and broadband access, and incentives for manufacturers to bring PPE, pharmaceutical, and other critical infrastructure production back from China.  (POLITICO Playbook, April 24) 

Senate Majority Leader Mitch McConnell (R-KY) this week hedged on any endorsement of assistance to state and local governments, instead focusing on how future coronavirus-related legislation could add to the growing national debt.  “Let’s weigh this very carefully, because the future of our country in terms of the amount of debt that we’re adding up is a matter of genuine concern.”  (The Hill, April 22)

Treasury Questions Large Companies’ PPP Loan Eligibility 

Treasury and SBA updated their Frequently Asked Questions guidance on the PPP yesterday, which questions whether businesses owned by large companies, with adequate sources of liquidity to support the business’s ongoing operations, qualify for a PPP loan.  (Question # 31 from FAQs) 

  • The answer addresses public companies seeking PPP loans, stating “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification [of economic need] in good faith.”
  • Before the PPP ran out of money, approximately 150 public companies received nearly $600 million in loans from the $350 billion program, with some of those companies announcing this week that they will return the funding obtained.  (Wall Street Journal, April 23)
  • Updates to the PPP rules and guidance are available via the Treasury Department’s website (April 23 FAQ update here) and the Small Business Administration’s Covid-19 resource webpage. 

The Real Estate Roundtable’s response and resources, including policy comment letters related to the pandemic, are listed on its website.    

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IRS Grants Safe Harbors for Loan Modifications by Servicers of Mortgage-Backed Securities

Posted on by Trey Jackson

IRS Building

The IRS on April 13 issued rules that will help facilitate mortgage modifications and debt work-outs between borrowers and lenders when a loan is held in a mortgage-backed security.  The IRS guidance is consistent with the Roundtable’s request on March 20 that Treasury and the IRS take steps to protect private parties from the tax consequences of restructuring debt during the extraordinary and unanticipated COVID-19 pandemic.  

  • The new safe harbors extend to real estate mortgage investment conduits (REMICs) and investment trusts affected by loan forbearances and workouts due to the Covid-19 pandemic.  (IRS Rev Proc 2020-26)
  • REMICs are widely used vehicles for pooling mortgage loans and issuing residential and commercial mortgage-backed securities.  A REMIC is generally required to hold a substantially fixed pool of real estate mortgages and related assets and must not have the power to vary the composition of its mortgage assets. 
  • Even if an entity initially qualifies as a REMIC, one or more significant modifications of mortgages held by the entity may terminate its REMIC status.  Certain loan modifications are permitted if the change is “occasioned by default or a reasonably foreseeable default.”  A prohibited transaction by a REMIC, however, can result in a tax equal to 100 percent of the income from the transaction. 
  • The new IRS rules provide that REMICs and investment trusts can grant forbearance relief to COVID-19-affected borrowers – and REMICs can acquire mortgage loans for which such forbearance is already in place – without adverse tax consequences or threatening their tax status.  (Sidley Austin, April 15)
  • These safe harbors apply to mortgage loan forbearance that is provided voluntarily by the mortgage holder or servicer, forbearance that is State-mandated, and forbearance that is mandated in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 
  • The CARES Act generally provides temporary forbearance relief for borrowers with certain federally backed mortgage loans who are experiencing a financial hardship due directly or indirectly to the COVID-19 emergency. (JD Supra, April 16)

The rules extend to both residential and commercial mortgage loans, including federally backed mortgage, multifamily and any “non-federally backed mortgage loans,” with no explicit limits on the type of property financed. The specific safe harbors are profiled in Alston & Bird’s April 15 Advisory.

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