Congress and the Federal Reserve took unprecedented action to shore up businesses, including commercial real estate.
As the COVID-19 pandemic began to shut down the economy, lawmakers in Washington responded, reaching agreements on several bills intended to help the country survive the economic chaos caused by the pandemic. Congress passed three relief bills in March, and the House passed a fourth bill in May that was headed for further negotiations with the Senate.
“Phase I” was H.R. 6074, the Coronavirus Preparedness and Response Supplemental Appropriations Act, signed March 6. It provided approximately $8 billion in additional funding to federal health agencies and eased regulations to allow for over-the-phone consultations between Medicare recipients and their health providers. The bill also empowered the Small Business Administration (SBA) to issue an Economic Injury Disaster Loan declaration, which makes loans of up to $2 million available to small businesses.
The second phase of COVID-19 relief legislation was H.R. 6201, the Families First Coronavirus Response Act. The bill provided $192 billion in additional spending geared to supporting small businesses (those with fewer than 500 employees). Among other steps, the bill:
- Requires businesses to provide 12 weeks of protected leave to employees unable to work or telework because their child’s school or care provider has closed due to the public health emergency.
- Deems all employees eligible for paid sick leave if unable to work due to one of several conditions related to COVID-19, including quarantine/isolation orders, or a need to care for an affected individual.
- Establishes tax credits for businesses with affected employees, in the amount of up to $200 per day for each individual, and $10,000 total per quarter.
- Creates a “Paycheck Protection Program” (PPP) providing $350 billion in federally guaranteed loans through the SBA, and modifying the existing SBA loan program by allowing all or part of the loan to be forgiven if the business maintains its payroll.
- Excludes from income the cancellation of emergency small business loan debt, which would otherwise be taxable.
- Increases the cap on the deductibility of interest expense, from 30% of EBITDA for taxable years beginning in 2019 and 2020 to 50%.
- Allows employers to defer their share of payroll taxes through the end of the 2020 calendar year, with 50% of the deferred amount due in 2021 and the remainder in 2022.
- Provides an employee retention credit (applied against the employer’s 6.2% share of payroll taxes) for businesses ordered by a governmental authority to partially or fully close. The credit covers wages up to $10,000 per employee, per quarter. However, employers who receive a small-business-interruption loan are not eligible for the credit.
This “Phase II” went into effect on March 18. Before the provisions of Phase II were fully in effect, however, the scope of the economic problems made it clear that a more substantial “Phase III” relief would be needed. By mid-March, millions of businesses across the country had closed down or were closed down due to state government orders. Landlords and tenants alike began to worry about their ability to pay mortgages and rent.
Phase III of Washington’s legislative response was the Coronavirus Aid, Relief, and Economic Security Act, better known as the CARES Act, a $2.2 trillion economic relief package. NAIOP worked closely with its allies in the real estate field as well as representatives on Capitol Hill to contribute to the bill. In the end, this measure did much to boost commercial real estate, as well as shore up tenants’ declining cash flows. The legislation:
- Makes a technical correction to the Qualified Improvement Property (QIP) depreciation drafting error from the 2017 Tax Cuts and Jobs Act (TCJA). The error resulted in a 39-year depreciation period for QIP, rather than the 15-year period — eligible for immediate expensing — that was intended. For real estate firms that elect out of business interest deduction limitations, the error results in a 40-year depreciation period for QIP, rather than the intended 20-year period.
- Temporarily suspends the TCJA’s loss limitation rules and allows net operating losses (NOLs) from 2018, 2019 and 2020 to be carried back five years for a non-REIT business.
- Fixes another TCJA drafting error related to NOLs and ensures that businesses with non-calendar fiscal years are not adversely affected by carryforward limitations imposed by the tax bill.
The rapid rollout of the PPP and confusion as to eligibility of certain businesses that applied for loans were problematic at the outset. NAIOP and its real estate allies have been active in efforts to encourage the Trump administration and Congress to address the program’s deficiencies in Phase IV legislation.
While lawmakers were passing legislation, the Federal Reserve was also taking steps to protect the economy. On March 3, it cut the target rate for federal funds by 0.5 percentage points, to a target range of 1% to 1.25%. It cut rates again on March 15, lowering the target rate for federal funds by 1.0 percentage point, to a target range of 0% to 0.25%. At the same time, the Fed announced it would buy at least $500 billion of Treasury securities and at least $200 billion of agency mortgage-backed securities.
On March 22, the Fed announced unlimited expansion of bond purchasing programs, created two new lending facilities to support credit to large employers and a third to enable the issuance of asset-backed securities (e.g. student, auto, and credit card loans, and loans guaranteed by the Small Business Administration). On April 9, the central bank announced the formation of a Main Street Business Lending Program to support lending to eligible small- and medium-sized businesses, complementing efforts by the SBA, and expanded the eligibility of assets that can be purchased by its asset-backed purchasing facility to commercial mortgage-backed securities.
The actions taken by Congress and the Federal Reserve thus far are the first steps in what is likely to be a continuing federal response to the COVID-19 pandemic and the resulting economic devastation. NAIOP will be working with policymakers in the coming months and over the longer term to ensure policies address the challenges faced by the commercial real estate industry as a result of this crisis.