Real Estate Industry Alerts Tracker - June 5, 2020 Issue

Congress Passes Bill to Provide Greater Flexibility in Spending PPP Funds

Last week, the U.S. House of Representatives passed Bill H.R. 7010. The Bill provides businesses with greater flexibility in spending loan proceeds from Paycheck Protection Program (PPP) loans while still allowing those expenses to qualify for loan forgiveness. On June 3, 2020, the Senate passed the Bill by voice vote. Under the Bill, the PPP has been amended to:
  • Revise the eligibility requirements for loan forgiveness by reducing the portion of the loan proceeds that must be spent on payroll from 75% to 60%. As a result, up to 40% of loan proceeds can be spent on certain qualified non-payroll items such as rent, mortgage interest, and utilities.
  • Revise the eligibility requirements for loan forgiveness by extending the time period for businesses to spend the loan proceeds from 8 weeks to 24 weeks.
  • Increase the minimum loan term from 2 years to 5 years.
  • Permit businesses seeking loan forgiveness to defer payroll taxes without penalty.
  • Give businesses an additional 6 months to rehire employees or restore payroll levels without incurring any reduction in the forgiveness amount, by extending the rehiring safe harbor from June 30, 2020 to December 31, 2020.
  • Provide exemptions in eligibility for loan forgiveness when an employer is unable to rehire an employee or hire a replacement and for the inability to return to the same level of business due to compliance with certain COVID-19-related orders or other circumstances.

A copy of House Bill H.R. 7010 may be found here.

Additional information may be found here.

In response to a reader’s request for clarification: The Paycheck Protection Program Flexibility Act of 2020 (the Flexibility Act”), which was signed into law by President Trump on June 5, 2020, only increases the minimum loan term from 2 years to 5 years and for a maximum of 10 years for new PPP loans. For loans that closed prior to the effective date of the Flexibility Act, PPP lenders and borrowers are not obligated to renegotiate the term of existing PPP loans to conform the term to the minimum 5-year and maximum 10-year term provided for new PPP loans under the Flexibility Act. However, they are not prohibited from doing so. As noted in the firm’s June 4, 2020 COVID-19 Washington Update, further program modifications are possible.

New Jersey Governor Murphy Vetoes Coronavirus Small-Business Rent Suspension Bill

Last week, New Jersey Governor Phil Murphy vetoed a bill that would have suspended rents for distressed small businesses and barred their eviction during the pandemic. The bill would have authorized a distressed small-business tenant” that leases its property for non-residential purposes to stop paying rent following the governor issuing a rent-suspension executive order” as long as: (a) the tenant had 50 or fewer employees on February 10, 2020; and (b) its monthly revenue doesn’t exceed 80% of the tenant’s reasonable expectations” as a result of the COVID-19 pandemic. Under the bill, the executive order would specify the duration of the suspension, which could not exceed 3 months, and would set a repayment schedule of between 6 to 9 months, beginning on the first day of the second month after the COVID-19 state of emergency is lifted. Governor Murphy noted that, while he shared the concerns plaguing small businesses as a result of the pandemic, he felt that the bill failed to fully consider the financial impact that an emergency-rent suspension would have on non-residential property owners who are, in many cases, small businesses. He also noted that the bill would have allowed any business meeting the definition of a distressed small-business tenant” to assert a right to an emergency rent suspension, regardless of whether the business was capable of making its rent payments, thereby shifting the entirety of the financial burden onto the landlords who still needed to make their mortgage payments and pay property taxes.

Additional information may be found here.

New York State Creates Loan Fund For Certain Small Businesses, Non-Profits and Landlords

New York State has created a new economic recovery loan program to provide working capital loans to certain small businesses, non-profits, and landlords who did not receive a Paycheck Protection Program loan or an Economic Injury Disaster Loan from the Small Business Administration. The loans are available under the New York Forward Loan Fund (NYFLF). The maximum available to borrowers is $100,000 to be repaid within 5 years, at a rate of 3% for small businesses and landlords, and 2% for nonprofits. The loans are not forgivable in whole or in part.

The following is a summary the NYFLF eligibility requirements (the complete list may be found here):

  • Small businesses must have 20 or fewer full-time equivalent employees and less than $3 million in annual gross revenue.
  • Non-profits must provide direct services and have an annual operating budget of less than $3 million per year.
  • Landlords:

    • Cannot have more than 200 units under ownership, and no single property greater than 50 units;
    • Properties must either be located in a low or moderate income census tract or meet a rent test where property rents are affordable to tenants of low and moderate income;
    • Properties must have a positive cash flow for a 12-month period prior to the loan request;
    • Properties must have an active forbearance agreement for their mortgage, or proof that they have not missed a monthly debt service payment in the last 12 months, or no active mortgage;
    • Property taxes must be paid through March, 2020;
    • Property owners must attest that they will not evict non-paying tenants impacted by COVID-19; and
    • Properties must be in good repair, with no major life and safety violations.

New York State will give priority to industries and regions that have been reopened. The geographic proportionality goals for the NYFLF for small businesses can be found here.

New York City Passes Rent Relief for Limited Number of Struggling Tenants

New York lawmakers approved a rent relief bill last week to aid residential tenants impacted by the pandemic. The bill, which relies on $100 million in federal stimulus funds, is to be used for rental vouchers and only applies to applicants (i) paying more than 30% of their income in rent, (ii) who have lost income between April 1 and July 31 of this year, and (iii) who make less than 80% of an area’s median income. Tenant advocates, who were seeking a full rent freeze during the pandemic, are ere critical of the legislation arguing that it funnels the stimulus funds to landlords, ignores millions of tenants, and locks tenants into unaffordable rents.

Additional information may be found here.

New York City Expands Law Barring Harassment of Commercial Tenants to Included Commercial Tenants Impacted By COVID-19

On May 13, 2020, the New York City Council enacted bill number Int. 1914-2020, which was signed into law by Mayor de Blasio last week. The New York City Administrative Code prevents landlords from harassing a commercial tenant in an effort to have such tenant vacate the premises or waive any rights under the lease.

Harassment is defined as any act or omission that is intended to cause a commercial tenant to vacate covered property, or to surrender or waive any rights under a lease, when coupled with an improper threat. The new law modifies the term harassment” to include threatening a commercial tenant based upon its status as a person or business impacted by COVID-19 or [its] receipt of a rent concession or forbearance for any rent owed during the COVID-19 period.” It defines businesses impacted by COVID-19” to include businesses that are subject to seating, occupancy or on-premises services limitations” pursuant to COVID-19-related governmental orders, as well as businesses whose revenue has declined by more than 50% during the COVID-19 period” as a proximate result of the pandemic. The new law defines the COVID-19 period,” as the period from March 7, 2020, through the later to occur of: (a) the end of the first month that commences after the expiration of New York’s moratorium on enforcement of evictions” under the New York governor’s executive orders; (b) the end of first month that commences after the expiration of certain residential evictions” under the federal CARES Act; or (c) September 30, 2020.

Heard Around the Industry

CMBS Delinquency Rates Increase in May: A foreseen ripple effect of stay-at-home orders is the impact it would have on loan payments.  With job losses, store closures, and travel restrictions, rent payments have decreased dramatically, resulting in the inability of property owners to make debt service payments. According to a CMBS delinquency report provided by an industry analyst, the default rate for CMBS loans shot up from 2.29% in April to 7.15% in May. The report notes that the May delinquency could have been closer to 10% due to the sheer number of CMBS borrowers that missed their May loan payments. However, many of those loans were categorized as being in a grace” or beyond grace” period, while others reverted to current” rather than moving into the delinquent” category of loans that are at least 30 days past due. The delinquency rate was highest in the hotel and retail industries. The delinquency rate in the hotel industry shot up from 2.71% in April to over 19% in May, while the retail delinquencies for the same period increased from 3.67% to over 10%. Industrial, multifamily, and office delinquencies were much smaller, with industrial delinquencies increasing from 1.36% to 1.82%, multifamily delinquencies increasing from 1.92% to 3.25%, and office delinquencies increasing from 1.92% to 2.4%. One industry analyst projected the delinquency rate to peak in the neighborhood of 8.25% to 8.75% by the end of the third quarter. The impact on hotel and retail properties is projected to be the most severe, with  delinquency rates for hotel properties increasing to about 30% and the rate for retail properties increasing to 20%.

The Impact of COVID-19 on Commercial Real Estate Considerations Going Forward: Business consultants are trying to assess the markets going forward as more states begin to open up their economies. According to one consulting firm, here are some market observations:

  • CMBS/Debt Financing: Lenders are likely to moderate their risk by offering fewer interest only loans until the bond markets recover. Spreads are likely to be higher, but interest rates will still be attractive to borrowers. However, with tougher underwriting assumptions and rising debt yields expected, borrowers should expect reduced loan proceeds as compared to the pre-pandemic market.
  • Hotel & Lodging: As a result of the pandemic, hotel closings have been widespread and four million hotel-supported jobs have been lost and about 70% of hotel workers furloughed or laid off. Key hotel operating metrics have been severely impacted and steep declines are expected to continue through the end of 2020.
  • Office: Declining demand will likely push down occupancy and effective rents. Companies have successfully navigated office closures with work-at-home policies during the pandemic.  As such, there is a concern that some companies will continue using work-at-home policies and reduce their office spaces going forwards.  On the other hand, companies that retain their offices may need additional space to redesign and reconfigure their spaces to allow for social distancing.

    Additional information may be found here.
  • Impact on Sale Transactions: According to CoStar, a provider of commercial real estate data, approximately 17% of deals scheduled for an April closing were cancelled, a record high as compared to 5.6% cancellations in the first quarter of 2008 during the global financial crisis. Nearly 33% of hotel deals, 19% of multi-family deals, 14% of office deals, 12.6% of retail deals, and 8% of industrial deals were canceled.

    Additional information may be found here.