Federal policies addressing the economic consequences of the COVID-19 pandemic continue to evolve rapidly. The Real Estate Roundtable (RER) prepared and distributed an insightful memorandum to its Tax Policy Committee with a COVID-19 update and roundtable initiatives. The following are some of the highlights:
Small Business Loans
Phase 3½. The Treasury and SBA’s $350 billion small business loan and loan forgiveness initiative (the Paycheck Protection Program, or PPP) remains a centerpiece of the government’s economic response. Reporting today that $100 billion of the funds have been committed and processed (though not disbursed), Senate Republican Leader McConnell asked for unanimous consent to increase the PPP authorization by $250 billion. In response, Senate Democrats questioned the urgency, emphasized the backlog in other SBA emergency grant programs, and offered an alternative plan. At an impasse with no real negotiations ongoing, the Senate adjourned until Monday.
Roundtable 8-Point Plan. The PPP platform needs to be clarified and in some aspects improved to provide the much-needed protections for U.S. workers and the businesses that employ them. The RER’s plan includes proposals to: (a) clarify that real estate leasing and development businesses qualify for PPP loans; (b) waive the SBA affiliation rules for all industries; (c) calculate PPP loan amounts based on operating expenses, as opposed to just payroll expenses; (d) repeal the regulatory policy limiting PPP loan forgiveness to no more than 25% of non-payroll expenses, such as rent, mortgage interest, and utilities; (e) provide flexibility to measure employment at the level of the management company or the property owner; (f) allow employers to exclude part-time workers for purposes of determining whether they have fewer than 500 employees; and (g) extend eligibility broadly to multifamily housing owners to help ensure they can meet mortgage obligations while tenants are protected under the CARES Act from the consequences of nonpayment.
Outlook. Congressional leaders for both parties continue to express strong support for PPP, and amendments to the program are likely in a COVID-19 Phase Four bill. Phase Four bill negotiations could pick up the week of April 20, when the full Senate is scheduled to return. In the meantime, the RER are pursuing administrative relief on several of the priorities described above.
Partnership tax relief. Yesterday, the IRS issued administrative relief that will permit partnerships to receive retroactive tax relief under the CARES Act, such as the immediate expensing or accelerated depreciation of qualified improvement property. This issue was the focus of an RER letter sent to Treasury and the IRS on Saturday. Partnerships subject to the BBA partnership audit rules generally cannot filed amended returns. Rev. Proc. 2020-23 allows partnerships subject to the BBA centralized partnership audit regime to file an amended return (Form 1065) and issue amended Schedules K for tax years beginning in 2018 and 2019. Under the Rev. Proc., BBA partnerships may file amended returns for 2018 or 2019 before September 30, 2020. The amended returns may take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law.
Extension of tax deadlines. On April 9, 2020, the IRS expanded on the relief available under its broad disaster tax relief authority in sec. 7508A triggered by the President’s COVID-19 emergency declaration. In the case of most income tax payment and filing obligations falling between April 1, 2020 and July 15, 2020, IRS Notice 2020-23 automatically postpones the deadline to July 15, 2020 and suspends the calculation of related interest and penalties during the 106-day period.
Like-kind exchanges. The RER’s initial read of the IRS Notice is that it extends the 45-day period to identify replacement property for a 1031 exchange and the 180-day period to close on replacement property by 120 days if the period began between the date of the President’s disaster declaration (March 13) and July 15. The RER also believes the relief applies to both forward and reverse exchanges (exchanges in which the replacement property is purchased before the replacement property is sold). This is in line with the request made by national real estate organizations, including RER, earlier this month.
Opportunity Zones. Relief from the various deadlines and compliance testing dates for Opportunity Zones is an RER priority. The RER read the IRS Notice as providing that if a taxpayer’s 180-day period to invest gain in an opportunity fund would have expired between April 1 and July 14, 2020, the taxpayer now has until July 15, 2020 to make the investment.
Debt restructurings and work-outs. RER has already weighed in with both Treasury and Congress on the issue of cancellation of indebtedness (COD) income. See our March 20 letter. The RER continues to hear from real estate businesses that anticipate the need for significant debt restructurings as a result of the COVID-19 pandemic. The potential that restructurings will trigger COD income could become a major impediment to the private sector’s necessary realignment of financial obligations. Going forward, we are adding the related issue of debt modifications by the servicers of securitized real estate loans to this effort. Debt workouts by real estate mortgage investment conduits (REMICs) can threaten their tax-exempt status. During the financial crisis, the IRS issued several revenue procedures (Rev. Proc. 2007-72; Rev. Proc. 2008-28; Rev. Proc. 2008-47) to provide protections and safe harbors so that REMICs could engage in loan restructurings. The RER is working to achieve similar relief today so that the tax code does not have a chilling effect on the private sector’s ability to work through its own challenges.
Business interest limitation. Another issue addressed in the RER tax comment letter was relief for taxpayers seeking to modify a real property trade or business election under section 163(j). Four changes in the CARES Act potentially affect how a taxpayer would analyze the RPTOB election decision: (a) the immediate expensing of QIP; (b) the increase in the Section 163(j) interest limit; (c) the ability to use 2019 adjusted taxable income for purposes of calculating their 2020 interest limit, and (d) the liberalization of the use of losses. All of these retroactive changes in the law could influence the tax consequences of the RPTOB election. In short, for many taxpayers, if they had known in 2018 what they know now, they may not have made the RPTOB election. The irrevocability of the RPTOB election is compromising taxpayers’ ability to fully benefit from the relief Congress intended in the CARES Act.
Main Street Lending Program –dividend and executive compensation restrictions. The Fed’s new $600 billion Main Street Lending Program is going to reach into a much broader population of American businesses — not just publicly traded corporations. How will the executive compensation and dividend restrictions of the CARES Act apply to small, medium-sized, and closely held businesses? These rules were written with large corporations in mind. How will these rules apply to real estate partnerships and pass-throughs? Unlike a corporation, the net income of a partnership always flows out to the partners. Is it possible that as the compensation and distribution rules are interpreted, partnerships could face unique challenges?
Capital and Credit
On April 9, 2020, the Federal Reserve announced new lending facilities and expanded existing lending facilities for mid-sized “Main Street” businesses, larger investment grade businesses, capital markets and municipal securities. While these actions could provide up to $2.3 trillion in loans to support the economy, the Treasury and the Federal Reserve have not yet committed the full $454 billion of CARES Act money allocated for credit support to lending facilities. More loan programs, or expansion of these now existing loan programs, could be forthcoming.
The terms of each of the facilities announced today are subject to change and must be operationalized. So, it could take several weeks before lending actually begins. Two of the most important announcements related to TALF and the Main Street Loan Facilities.
Term Asset-Backed Loan Facility (TALF). The Federal Reserve has broadened the range of eligible collateral for TALF loans to include outstanding non-agency triple-A rated tranches of legacy CMBS issued before March 23, 2020. CMBS issued after that date is not eligible. Single-asset single-borrower CMBS and CRE CLO are not eligible. While the TALF was broadened to include new AAA-rated collateral, RER reports “there was no deepening of the TALF down the credit ladder, which is important to restore liquidity to CRE credit markets.” Treasury has capitalized TALF with $10 billion in equity (unchanged) with up to $100 billion of loans available. The Single-Asset Single Borrower (SASB) and CRE CLO markets have grown in importance in recent years and therefore including these types of securitizations is an RER priority.
Main Street Loan Facilities (MSLF). Capitalized with $75 billion in equity from the Treasury, the Federal Reserve is committing to lend up to $600 billion to small and mid-sized businesses. The Main Street New Loan Facility (MSNLF) will purchase from qualified lenders a 95% interest in new, unsecured term loans made by commercial banks to businesses that have up to 10,000 employees or up $2.5 billion in revenue (banks retain 5% of the risk). The RER reports that Treasury and the Fed are discussing additional options for companies with more than 10,000 employees and $2.5 billion in annual revenue that do not fit within these lending facilities. Loans eligible for purchase must have the following characteristics: (a) 4-year maturity; (b) amortization of P&I deferred for one year; (c) adjustable rate of SOFR + 250-400 bps; and (d) prepayment with no penalty. In addition, the maximum loan size is $25 million (or potentially less for highly leveraged borrowers). Borrowers must also make certain attestations, including that it requires financing due to the COVID-19 pandemic, it will make reasonable efforts to maintain its payroll and retain its employees, the proceeds will not be used to pay dividends or buy back stocks, and it will comply with certain executive compensation requirements. The lender must agree that the funds will not be used repay or refinance existing loans and lines of credit with the borrower. The borrower must commit to refrain from using the proceeds to repay other loan balances with the exception of mandatory principal payments.
The second “Main Street” facility is the Main Street Expanded Loan Facility (MSELF), which will purchase the upsized tranche of eligible loans. The requirements are similar except that the maximum loan size is the lesser of: (a) $150 million; (b) 30% of the borrower’s maximum (including undrawn) bank debt; and (c) an amount that does not result in the borrower’s pro forma leverage to exceed six times 2019 EBITDA.
Last Friday, RER Chair Debra Cafaro, RER President & CEO Jeffrey DeBoer, and RER senior staff sent out a Roundtable Covid-19 Video Alert, detailing how the industry has switched into high gear, focused on legislative and regulatory policies aimed at repairing frozen liquidity conditions that threaten the entire American economic system. You can watch it on the Roundtable’s YouTube channel.
SOURCE: Real Estate Roundtable Tax Policy Advisory Committee Memorandum – Thursday, April 9, 2020