While stay-at-home orders to combat COVID-19 are decimating the economy as a whole, small businesses are taking the brunt of the impact. Nearly a quarter of the estimated 30 million small businesses are at risk of closing permanently, and some 35.7 million small business employees could find themselves out of work.1 Given that further declines in rent payments are expected, small apartment landlords and property managers are in danger of becoming a part of those disturbing statistics.
To address the growing calamity, Congress provided relief for small businesses within the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act in late March. It followed up with a $484 billion funding bill on April 23 that largely targeted small businesses. Along with mortgage forbearance, favorable tax provisions and other measures tailored to give relief to a broad number of companies and industries, the bills earmarked a total of $670 billion in forgivable loans for companies with less than 500 workers as part of the Small Business Administration’s (SBA) Paycheck Protection Program (PPP).
PPP: Which Real Estate Businesses Are Eligible?
PPP began accepting applications on April 3 and ran through the initial $350 billion of funding allotted under the CARES Act about two weeks later. The follow-up bill supplemented PPP with an additional $320 billion.
PPP rules have largely shut out passive real estate businesses, such as real estate investment companies, as well as small landlords of apartments and other properties.2 Real estate property management firms, however, can apply for funds. Nearly 80,000 such “real estate, rental and leasing” firms were approved for some $10.7 billion in loans in the first iteration of PPP for an average funding of $134,000, according to the SBA.3
Property management firms may be eligible whether they are independent or affiliated with a property owner, so long as the loans go toward payroll and other expenses related to the manager and not toward mortgages or other obligations of the owner.4 In some circumstances, the management agreement may need to be amended to eliminate a property owner’s obligation to reimburse the manager for payroll costs.5
Here are some important PPP program highlights to keep in mind:6
- PPP provides loans of up to 2.5 times a company’s monthly payroll capped at $10 million. Businesses must use the proceeds to meet payroll, mortgage interest, rent and utilities for eight weeks after the loan is made.
- Loans are forgivable if businesses use the proceeds to cover approved costs, but it is anticipated that not more than 25 percent of the proceeds will be forgiven for non-payroll costs. Borrowers must maintain the same number of workers that were employed on Feb. 15, 2020 and maintain compensation levels for employees making $100,000 or less. To the extent a borrower fails to meet any of these requirements, a pro rata portion of the loan will not be forgiven.
- Loans or parts of loans not forgiven will have a two-year term, a 1 percent interest rate and a payment deferral of six months.
- No collateral or guaranty is required.
Other Relief Sources
While not eligible for PPP funds, some property owners can seek mortgage relief in accordance with the CARES Act. Specifically, multifamily sponsors that have experienced hardship and that have a U.S. Housing and Urban Development, Fannie Mae, Freddie Mac or other federally backed mortgage can request a 180-day forbearance from their loan servicers.7 Multifamily owners that receive forbearance may not evict tenants solely based on non-payment of rent, nor may they charge tenants late fees or other penalties.
Additionally, multifamily property owners and managers alike may apply for an SBA Economic Injury Disaster Loan (EIDL). EIDL predates the coronavirus pandemic, and proceeds can pay fixed debt, payroll, accounts payable and other expenses that could have been paid but for the disaster. The program provides loans of up to $2 million, but the CARES Act appropriated $10 billion to the program to deliver immediate grants of $10,000 to eligible applicants even if they ultimately do not receive a larger EIDL loan.8 The advances do not have to be repaid. Like PPP, EIDL ran out of money, and the latest bill included $60 billion in additional program funding.
Beyond the $10,000 grants, standard EIDL loans feature up to 30-year terms and interest rates of 2.75 percent or 3.75 percent for non-profit and for-profit companies, respectively. Loans of more than $25,000 require collateral, while loans of more than $200,000 require a guaranty.
Lawmakers and other government officials promising help for small businesses are hoping that the next iteration of PPP funding goes much further than the first, which some claim have not gone to the businesses that are most in need of assistance.
To address some of these concerns, lawmakers earmarked $60 billion of the $320 billion in PPP funding in the latest bill for small banks and other community lenders that frequently work with small businesses. The SBA also issued new guidance aimed at curbing potential abuse by requiring borrowers to certify that the loans are necessary and that they cannot tap other funding sources.9 It remains to be seen what concerns lawmakers or regulators will address, and whether opening PPP to property owners is possible.
While not perfect, the federal government’s quick actions to extend relief to small businesses, will help ensure the viability of many companies and industries, and hopefully restore some certainty to the real estate industry and economy at large.
1 Main Street America, The Impact of COVID-19 on Small Businesses, April 9, 2020.
2 Anchin Accountants and Advisors, Are Real Estate Businesses Eligible to Participate in the Paycheck Protection Program? April 16, 2020.
3 Small Business Administration, PPP Report, April 16, 2020.
4 Frost Brown Todd, Considerations for Approvals of PPP and EIDL SBA Loans by Existing Commercial Real Estate Lenders, April 9, 2020.
5 Frost Brown Todd.
6 Treasury.gov, PPP Information Sheet: Borrowers, April 2, 2020.
7 Morrison Foerster, Cares Act for Real Estate Businesses, April 3, 2020.
8 National Conference of State Legislatures, Small Business Loan Summaries, April 3, 2020.
9 CNBC, US issues new guidance for small business loans, pressures public companies to return funds, April 23, 2020.