Significant benefits may be afforded to the multifamily real estate industry through the CARES Act (the "Act") signed into law by the President on March 27th. The Act includes provisions for: (i) a $349 billion governmental loan guarantee to cover companies' payroll and other expenses; (ii) forbearance, foreclosure and eviction limitations for properties encumbered with government backed loans, and (iii) a $454 billion relief provision for especially hard hit businesses and municipalities.
The Paycheck Protection Program.
A most compelling feature of the Act is the Paycheck Protection Program (the "PPP") as this provision can put significant funds into the pockets of companies that own or lease real estate and may be suffering from a drastic reduction in cash flow due to the pandemic. The PPP offers low interest rate loans (greater than 4% per annum) to small businesses based on an amount equal to the borrower's average monthly payroll for all employees multiplied by a factor of 2.5 up to a maximum loan of $10 million, which may be used for a variety of purposes including rent, utilities, salary, payroll taxes, pension and health care benefits, mortgage interest payments or interest on other indebtedness. The covered loan period for PPP beings on February 15, 2020 and ends on June 30, 2020.
Perhaps the most compelling feature of the Act is forgiveness of the loan where certain conditions are met to the extent that the borrower utilized the funds for payroll, interest payments on mortgage obligations existing before February 15, 2020, rent payments under a rental agreement in effect prior to February 15, 2020, and utilities and transportation services in effect prior to February 15, 2020. The Act also waives certain fees and removes personal guarantee requirements and canceled indebtedness will not be included in the borrower's taxable income. Please see our alert regarding PPP for greater detail: https://www.sgrlaw.com/client-alerts/forgivable-coronavirus-payroll-loans-for-employers-with-fewer-than-500-employees.
Forbearance of Certain Mortgage Debt Affecting Multifamily Real Estate.
The Act also provides relief to the residential and multifamily sectors of real estate. Section 4022 of the Act provides protection on all federally backed mortgage loans for borrowers, such as those purchased by Fannie Mae and Freddie Mac, insured by the U.S. Department of Housing and Urban Development ("HUD"), Department of Veterans Affairs ("VA"), or United States Department of Agriculture ("USDA"), or directly made by USDA. Applicable mortgages for multifamily borrowers include loans affecting real property designed for 5 or more families that are purchased, insured, or assisted by Fannie Mae, Freddie Mac, or HUD.
Covered Period for Loan Forbearance. A multifamily borrower with a federally backed mortgage loan may request forbearance provided that such borrower was current on its loan as of February 1, 2020 and is experiencing financial hardship on account of COVID-19 during a "covered period". The covered period begins on the date of enactment of the Act and ends upon the earlier of the end of the national emergency determined by the federal authorities or December 31, 2020.
Mortgage Loan Forbearance. The Act prohibits foreclosures on all federally-backed mortgage loans for a period of 60 days beginning on March 18, 2020. Borrowers may also request forbearance for a period of 180 days, with the ability to request an extension for an additional 180 day period. Similarly, Section 4023 of the Act, allows multifamily borrowers with a federally backed multifamily mortgage loan who were current on their mortgage payments as of February 1, 2020, and who have experienced and shown financial hardship, may request an initial period of 30 days forbearance, with two additional 30 day periods available thereafter.
Temporary Moratorium on Evictions and Eviction Restrictions Where Benefits are Enjoyed. Under Section 4024 of the Act, for a period of 120 days beginning on March 27, 2020 landlords are prohibited from initiating legal action to recover possession of a rental unit or to charge fees, penalties, or other charges to tenants related to such nonpayment of rent where the landlord's mortgage on that property is insured, guaranteed, supplemented, protected, or assisted in any way by HUD, Fannie Mae, Freddie Mac, the rural housing voucher program, or the Violence Against Women Act of 1994. Multifamily borrowers receiving forbearance may not evict tenants or charge late fees to tenants for the duration of the forbearance period.
1-4 Family Properties. Local and State laws should be reviewed with respect to restrictions upon evictions and foreclosures of 1-4 family properties as the provisions above apply to properties containing 5 or more residential units. Various states and cities have instituted their own restrictions as part of the emergency and those restrictions and requirements should be separately considered.
Tax Benefits. The Act also includes material tax benefits which are not the subject of this bulletin but may have significant financial impact and should be considered.
Regulations. The Act requires the Secretary of the Treasury to publish rules and regulations governing the implementation of the provision of the Act within 15 days of enactment of the Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
