Negotiations this week between congressional lawmakers and the White House on a fourth comprehensive coronavirus relief package continued through this afternoon, as significant policy and funding differences remain between Democrats and Republicans. (POLITICO Playbook PM, August 7)  

• The GOP’s $1 trillion package released July 27 contrasts with the $3.4 trillion proposal House Democrats passed in May. (Brownstein Hyatt Farber Schreck, July 31 – “HEALS Act Comparison to HEROES Act and Current Law,” and CNet, August 5 – “HEALS vs. CARES vs. Heroes stimulus packages: Key differences between Democratic and Republican proposals”)
• President Donald Trump tweeted yesterday that if a deal cannot be made soon, he would sign executive orders extending the CARES Act’s residential tenant eviction moratorium and some enhanced unemployment benefits, while also establishing a payroll tax cut. Unilateral executive action on these matters, however, would likely result in legal challenges. (Bloomberg, August 6)
• Senate Minority Leader Chuck Schumer (D-NY) commented on the negotiations with Treasury Secretary Steven Mnuchin, White House Chief of Staff Mark Meadows and House Speaker Nancy Pelosi (D-CA). “We’re still slogging through step by step by step. They made some concessions, which we appreciated. We made some concessions, which they appreciated. We’re still far away on a lot of the important issues, but we’re continuing to go at it,” Schumer said. (Wall Street Journal, August 4)  
• The House of Representatives is out of session next week but members have been notified they will be called back if a deal is reached. In the Senate, Majority Leader Mitch McConnell (R-KY) announced yesterday that he will allow senators to leave Washington until an agreement is reached. (The Hill, August 6)
• “Exactly when that deal comes together I couldn’t tell you, but I think it will at some point in the near future,” McConnell said yesterday on “Squawk on the Street,” which also featured an interview with Pelosi. (CNBC interviews, August 6)

Paycheck Protection Program (PPP) Loans

The PPP is set to expire on August 9. It has provided over five million loans and more than $521 billion since April to help small businesses meet expenses for payroll, benefits, rent, and other obligations. (Small Business Administration statistics through July 31).

• Senate Small Business Chair Marco Rubio (R-FL) has unveiled two amendments for the next coronavirus relief package to extend the PPP. (Politico Pro, August 5)
• Sens. Rubio and Susan Collins (R-ME) on July 27 introduced the “Continuing Small Business Recovery and Paycheck Protection Program (CSBRPPP) Act” that would fund PPP “second draw” loans, establish a new loan program for “Recovery Sector Businesses,” and make other PPP reforms.  (Section-by-section summary and one-pager.)
• Businesses with 300 or fewer workers, that can also show a 50 percent quarterly revenue loss compared to last year, could qualify for a second round of PPP loans under the Rubio-Collins proposal.
• The Real Estate Roundtable joined 120 business groups (including the International Franchise Association (IFA), U.S. Chamber of Commerce, and U.S. Travel Association) in an August 5 letter urging Congress to expand “second draw” PPP loan eligibility beyond the scope of the Rubio-Collins bill. (IFA press release, Aug. 5)
• The coalition’s August 5 letter stresses that “the 50 percent decline as proposed in the CSBRPPP Act is simply too high.” A revenue decline of 20 percent or greater for small businesses could mean the difference between staying open or closing, according to the letter.
• Meanwhile, CEOs of major retail, hospitality, and technology companies separately urged Congress in an August 3 letter to enable more businesses to qualify for government-backed loans beyond the current PPP. (Politico, August 3) 
• The CEOs expressed support for the “Reviving the Economy Sustainably Towards a Recovery in Twenty-twenty (RESTART) Act” (S. 3814), introduced by Senators Michael Bennet (D-CO) and Todd Young (R-IN).  The measure currently has 52 bipartisan Senate cosponsors. It would allow businesses with up to 5,000 employees to qualify for federally-backed, forgivable loans if they sustained a 25 percent revenue loss in 2020 (with reference to a comparable 2019 quarter). (Press release, May 21).   
• The Roundtable supports S. 3814 to help small and mid-sized businesses meet up to six months of payroll, rent, and other obligations during the pandemic. RESTART loans would be repaid up to seven years, with loan forgiveness amounts calculated based on the business’s employee size and extent of revenue loss. (RESTART Act summary)  
• Sen. Bennet commented on Sen. Rubio’s PPP proposal, “We’ve got to expand the ambition of the program. $100 billion of loans is a great start, but it’s not going to meet the large portion of the need. The amount is substantially greater than that.” (Politico, August 3)

The ongoing efforts of policymakers to provide COVID-19 economic relief was a focus of a discussion last week featuring Real Estate Roundtable President and CEO Jeffrey DeBoer and other real estate industry trade group leaders in a Walker & Dunlop webinar “All Eyes On Washington: What will the next stimulus bill do for CRE?”— moderated by Roundtable member and W&D Chairman and Chief Executive Officer Willy Walker.  (Roundtable Weekly, July 31)

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Senate Banking Committee Chairman Mike Crapo (R-ID) on July 31 submitted a letter to Treasury Secretary Mnuchin and Fed Chair Jay Powell encouraging the expansion of the Main Street Lending Program (MSLP) by setting up an asset-based lending program and commercial real estate program.  (Sen. Crapo’s letter, July 31)

• Specifically, the letter encourages the Treasury and Fed to:
  • Establish a facility to accommodate asset-based lending could open access to critical resources for several industries that could not otherwise access the MSLP based on earnings or cash flow metrics. Such asset-based lending would be predicated on pledged collateral.
  • Address the unique circumstances faced by commercial real estate, including securitized commercial mortgages, whether through access in the MSLP or a separate facility. Several options have been circulated and should be carefully considered in crafting the appropriate terms.
• The letter also directs the Treasury and Fed to sidestep the need for an additional Congressional appropriation of funds by utilizing the remaining funds available under section 4003(b)(4) of the CARES Act intended for Federal Reserve 13(3) facilities.
• A coalition of nine real estate industry groups, including The Real Estate Roundtable, on July 21 submitted a set of recommendations to the Senate Banking Committee aimed at improving the Fed’s MSLP for commercial real estate owners and tenants.  The committee is currently reviewing the effectiveness of the MSLP and other Fed credit lending facilities launched to counter the economic repercussions of the COVID-19 crisis. (Real estate coalition letter, July 21 and Roundtable Weekly, July 24)
• The MSLP became fully operational about a month ago with $600 billion in lending capacity.  Banks who participate in the program must make loans for at least $250,000, with strict requirements, and loans cannot be approved for highly-indebted companies.
• The program to date has attracted only eight borrowers as of July 27 – according to a report released yesterday by the central bank – and been used to support only about $100 million in loans, with more in process.  (BGov, Aug 7)
• Separately, four U.S. Senators wrote to Treasury Secretary Mnuchin and Federal Reserve Chairman Jay Powell this week with recommendations on reforming the Fed’s MSLP credit facilities.  (Senators’ letter, Aug. 4)
• Sens. Mike Braun (R-IN), John Cornyn (R-TX), Kelly Loeffler (R-GA) and Thom Tillis (R-NC) offer specific ways the MSLP program could be amended to better serve borrowers across the nation to save millions of American jobs, including:
  • Increase the maximum debt-to-EBITDA leverage ratio that qualifies borrowers for loans.
  • Eliminate the 200% collateralization requirement in the MSPLF and increase the maximum loan amount.
  • Permit borrowers of MSLP loans to refinance debt within at least 12 months of the maturity period, revising the present prohibition on refinancing debt until it comes within 90 days of the maturity date.

The Congressional Oversight Commission held a hearing today on the MSLP.  The bipartisan commission is a five-person panel established by the CARES Act to monitor use of coronavirus aid funds. Witnesses at today’s hearing included Federal Reserve Bank of Boston President and CEO Eric Rosengren.  The Commission has released three reports, all of which are available for review at the Congressional Oversight Commission's website.

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Commercial real estate executives recognize the various challenges in the current market as a result of the COVID-19 pandemic, while remaining optimistic about future market conditions, according to The Real Estate Roundtable’s Q3 2020 Economic Sentiment Index released today.  The report emphasizes the importance for developing, testing, and distributing a vaccine in the coming months in order for market conditions to show further improvements.

• “As our Q3 index shows, commercial real estate markets continue to suffer from the effects that the COVID-19 pandemic has had on businesses and residential tenants” said Real Estate Roundtable President and CEO Jeffrey DeBoer. “Hospitality, senior housing, and retail commercial real estate tenants in particular are struggling currently, as are CMBS loan pools consisting of these asset types. Other commercial real estate sectors, notably office and multifamily, also are facing challenges related to the overall economic hit from the health care crisis and are very cautious in their activities. However, generally balanced CRE market conditions and responsible leverage prior to the crisis positions the industry to stabilize and move forward positively once a vaccine is available,” DeBoer added.
• The Roundtable’s Q3 2020 Sentiment Index registered at 42 – a four point increase from the previous quarter.  [The Overall Index is scored on a scale of 1 to 100 by averaging Current and Future Indices; any score over 50 is viewed as positive.]. This quarter’s Current Conditions Index of 21 increased eight points from the previous quarter, while this quarter’s Future Conditions Index of 63, is an increase of one point compared to last quarter, and a 13-point increase compared to Q1 2020. 

• The report’s Topline Findings include:
  • Many respondents expressed optimism about future market conditions as they feel current market conditions are the result of the COVID-19 pandemic, as opposed to poor underlying market fundamentals.  However, until a vaccine or treatment is released and the general populace regains its confidence, responders felt the market would stay in its current challenged state.  
  • Survey responders expect a challenging market for at least the next six to nine months while a vaccine is created, tested, and distributed. Assuming a vaccine is released, most responders assume the market will be in recovery by this time next year.
  • Transaction volume has been down since the beginning of the COVID-19 pandemic in most markets.  Anticipated asset price discounts for most property types have yet to materialize as property owners are not willing to capitulate to market pressures if they can keep hold of their assets until a post-vaccine market. 
  • Many responders described the capital markets as open, but challenging to access.  Construction and permanent financing options have increased since the beginning of the pandemic, but are still selective, relative to the projects they will finance.  Institutional equity has continued to enter the market where it has an existing relationship with a manager; otherwise, investors are reluctant to enter the market at this time.    
• DeBoer noted, “While a vaccine continues to be explored, it is imperative that Congress and the Administration soon come to an agreement on the next round of COVID-19 relief. Extending added unemployment benefits, additional funding for the Paycheck Protection Program (PPP), and a rental assistance program to help impacted people as well as struggling small businesses is needed. Moreover, property owners, hospitals, schools and others need liability protection against frivolous lawsuits and businesses need assistance as they seek to cover new and unusual expenses related to safety and cleaning protocols.” 

Data for the Q3 survey was gathered by Chicago-based FPL Associates on The Roundtable’s behalf. The Roundtable table’s Q4 Sentiment Index will be released in November.

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Final Treasury regulations released on July 28 create a detailed legal framework to implement the new limitation on the deductibility of business interest enacted in the Tax Cuts and Jobs Act of 2017.  The underlying provision—section 163(j) —caps the deduction for business interest expense at no more than 30 percent of modified gross income but allows real estate businesses to elect out of the regime altogether. 

• The deductibility of business interest expense was front and center in the 2017 tax reform debate.  Elimination of the deduction was viewed by some as a necessary “pay-for” to help offset the cost of immediately expensing capital investment and reducing the corporate rate from 35 to 21 percent.  The Roundtable worked to preserve the full deduction, noting that it was necessary to accurately measure income and critical to the normal financing of real estate investment and activities.  (Roundtable President & CEO Jeffrey DeBoer Statement for the Record before Senate Finance Committee, video clips and full hearing on September 19, 2017)
• During the rulemaking process, The Roundtable focused on ensuring that the regulations would not restrict unnecessarily the ability of a real property trade or business (RPTOB) to elect out of the provisions of the new limit (section 163(j)).  Previously proposed regulations clarified, as requested, that interest on debt incurred by a partner to fund an investment in a partnership engaged in a real estate business would be allocable to that business and therefore qualify for the RPTOB election.  The proposed regulations also clarified that an RPTOB election by a partnership did not bind a partner with respect to any activity conducted by the partner outside the partnership.
• The 575 pages of final rules unveiled last week favorably address and resolve several outstanding issues raised in Roundtable comment letters submitted at various times during the two and a half year regulatory process.  (The Roundtable’s Interest Deductibility webpage)
• For example, the regulations clarify that a business entity can be in a real property trade or business even if it is not in a trade or business under the general tax rules of section 162 (the provision that authorizes taxpayers to deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business).  Unlike the proposed rules, the final regulations provide that a small business that is exempt from the business interest limit can still make a RPTOB election.
• This clarification is important because individual partners in a small business may not qualify for the exemption once their interests in multiple properties are aggregated.  The final regulations favorably revise troubling language in the proposed rules that suggested the RPTOB exception was only available for trades or businesses involved in rental real estate activities.
• Consistent with Roundtable recommendations, the Treasury guidance also includes a notice (IRS Notice 2020-59) with a proposed revenue procedure that creates a safe harbor for assisted living facilities so they can qualify for the RPTOB exception – notwithstanding their provision of other services, such as nursing and routine medical services.  Other elements of the Treasury guidance include new proposed regulations on specific issues, such as application of the rules to foreign taxpayers.

Collectively, the final regulations should provide greater certainty to real estate owners and investors that debt used to acquire, improve, and operate commercial real estate remains fully deductible for federal income tax purposes, provided the taxpayer complies with specific tax and filing requirements. 

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Proposed carried interest regulations released by the Treasury Department on July 31 would implement the three-year holding period requirement enacted in the Tax Cuts and Jobs Act (TCJA) of 2017.  TCJA restricted eligibility for the reduced long-term capital gains rate in the case of certain capital gain allocated to a profits interest in a partnership if the investment is held for less than three years. 

• The proposed rules under section 1061 represent the first formal Treasury regulations on the issue of carried interest since it emerged as a controversial political issue in 2007.
• The 3-year holding period requirement reflects a compromise approach developed by key tax-writers during the 2017 tax reform debate.
• Members of The Roundtable’s Tax Policy Advisory Committee (TPAC) reviewed and discussed the proposed carried interest regulations on August 3. Critically, the 3-year holding period would not apply to property used in a trade or business (section 1231 gain).  In addition, the rules would permit REITs to report capital gains dividends in a manner that facilitates look-through treatment.  Thus, REIT shareholders could take into account whether the underlying REIT gain relates to property that meets the 3-year requirement or relates to property excluded from the rule because it gives rise to section 1231 gain.
• Certain other aspects of the proposed rules appear less favorable.  For example, the regulations take an expansive view of what constitutes an “applicable partnership interest” subject to the regime.  The exemption for capital gain that relates to a partner’s capital interest involves complex rules and restrictions that may complicate its use.  The regulations appear to import a rule from pending legislation that would prevent partners from crediting partnership capital contributions that are attributable to a loan from other partners or the partnership.
• Other important aspects of the new regime including detailed rules for: determining the “recharacterization amount” and the applicable holding period, anti-abuse measures, and reporting requirements. 

A TPAC working group will be convening in the days ahead to develop comments and recommendations for Treasury and IRS officials related to the proposed regulations. 

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