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COVID-19 Industry Insights: Real Estate

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All businesses are feeling the effects of the COVID-19 pandemic. For the real estate industry here in the Pacific Northwest, the impact varies greatly depending on a company’s core services. For example, “real estate and mortgage lending” activities are deemed “essential” in Washington. Although essential, even these activities are only permitted following distinct restrictions and limitations. In the commercial real estate and property management sectors, the impact is deeply felt in several areas, particularly in hospitality. Additionally, with the regional suspension of the majority of construction activities, ongoing real estate development has been severely delayed; the resulting financial impacts are not yet fully understood.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (HR 748) was signed into law on March 27, 2020 to aid individuals, businesses, and the economy overall by providing emergency assistance and tax relief during the pandemic. The $2.3 trillion stimulus and relief package contains business tax provisions, loan programs, and mortgage relief to mitigate the effects of the pandemic and a potential downturn of the economy. Below are several key elements of the Act and other considerations that may provide relief to companies in the real estate industry.

Paycheck Protection Program (PPP)  loans are available to small businesses (typically companies with fewer than 500 employees). These loans are designed to provide up to 2.5 times the average monthly payroll to businesses in order to keep workers employed, rehire laid off or furloughed employees and/or pay employee benefits. The portion of the loan that is spent in the first eight weeks after funding on payroll costs, rent, and certain utilities is eligible for tax-free debt forgiveness. As of April 16, the first round of appropriated funds under the PPP program have all been distributed.  Future rounds of funding are based on congressional approval. 

The Qualified Improvement Property (QIP) technical correction decreases the recovery period for QIP from 39 years to 15 years – allowing for 100 percent bonus depreciation through 2022. This correction is retroactive and applies to any QIP with placed-in-service dates after December 31, 2017. Qualified improvement property is defined as any improvement to a nonresidential building’s interior made by the taxpayer excluding the enlargements of a building, addition of an elevator or escalator, or improvements to the internal structural framework of a building. To apply this change retroactively, a company must complete Form 3115, Application for Change in Accounting Method, or amend prior year returns. This provision of the CARES Act is a substantial opportunity for real estate businesses to recoup cash through tax refunds.

Net Operating Loss (NOL) The CARES Act allows for the 5 year carryback of NOLs generated in 2018, 2019, and 2020. The ability to carryback NOLs had previously been eliminated by the Tax Cuts and Jobs Act. Additionally, the 80% of taxable income limitation for NOL carryforwards is suspended for tax years prior to 2021. 

Business interest expense limitations have been increased from 30% to 50% of adjusted taxable income for 2019 and 2020. Partnership limitations remain at 30% in 2019. However, one-half of any excess business interest allocated to a partner and carried over from 2019 can automatically be treated as business interest paid by the partner in 2020.

Federally backed mortgages are prohibited from foreclosure for 60 days after March 18, 2020. Additionally, if a business experiences financial hardship due to COVID-19, it has the right to request a forbearance for up to 180 days with an extension of an additional 180 days.

The recently announced Main Street Lending Program can be a resource for businesses that are not eligible for PPP loans. The program provides loans ranging from $1 million to $25 million to companies with fewer than 10,000 employees and revenue of less than $2.5 billion, subject to restrictions on net income and future use of proceeds. Interest rates will be 0.01% plus 250-400 basis points with a four-year maturity. In order to qualify, companies must make reasonable efforts to maintain payroll and retain workers. It is important to note that while this lending program can be used by businesses not eligible for PPP loans, enrollment in the Paycheck Protection Program does not prohibit eligibility for the Main Street Lending Program.

The Families First Coronavirus Response Act mandates paid sick leave and expanded family and medical leave for COVID-19 related reasons and creates the refundable paid sick leave and paid child care leave credits.

Berntson Porter is here to help you navigate these unprecedented times. Visit our online Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.