The New Pandemic Playbook for California Real Estate

A Guide to COVID-19 resources for retail, industrial and multifamily investors

From airlines to cruise lines, retail to restaurants, the coronavirus has crippled a number of industries, and the California real estate industry is no exception. Although the impact of the pandemic is harsh, it remains a developing scenario and the jury is still out regarding the long-term impact. However, the general consensus among industry insiders is that there is no real cause for sustained panic. Many see the market as being “on hold” and predict that, as successful phased reopening occurs and uncertainty eases, the California real estate market will resume the relatively brisk pace it set at the beginning of the year, motivated by a persistent housing shortage and historically low interest rates.

California announces expansion of phase two

On May 18, Governor Gavin Newsom, under increased pressure from local governments, expanded phase two of his four-pronged reopening plan, allowing some counties that want to reopen more quickly than the state overall to begin to do so, but with a laundry list of restrictions. For example, by around the first of June, sporting events can be held. However, no fans will be cheering in the stands. And by the middle of June, stores can start doing business beyond curbside pickup and hair salons and barber shops might possibly be able to open.

Although California’s latest “green light” is a positive signal for the economy, the real estate industry finds itself wringing its hands, with many landlords complaining that they have to act like banks, while tenants (both residential and commercial) are allowed to delay paying rent and cannot be evicted for reasons of delinquent payment during the pandemic period. For commercial property owners and landlords, this makes navigating the choppy waters of the pandemic especially treacherous. However, although commercial real estate has had a painful wait for its turn at economic reprieve, there is now viable government support at both the federal and state levels—with more on the way.

Federal relief aid now available

Congress and the Federal Reserve have teamed up to inject the biggest stimulus in history into the economy, totaling roughly $6 trillion to date. The $2.3 trillion authorized by Congress includes $454 billion to backstop Federal Reserve lending programs, allowing the central bank to pump as much as $4 trillion into the economy—more than what was spent on its bond-buying program in the six years following the financial crisis.

More relief aid on drawing board

Going a step beyond, the House of Representatives is proposing another $3 trillion relief package which includes $175 billion to states to help renters and property owners alike pay mortgages, rents and other housing costs and avoid default.

In addition, a sweeping new proposal in the California State Senate includes an aid package to help both tenants and landlords. The $25 billion economic recovery fund would allow landlords to receive tax credits for rent payments missed in exchange for promising to halt evictions. The plan would spread tax credits and rent repayments over a 10-year period, from 2024 to 2033. Landlords would be able to sell their state credits for immediate income to meet mortgage payments and other expenses. Says Senator Steve Bradford, D-Gardena, “We will keep tenants housed, and we will keep landlords out of foreclosure.”

Here’s what you need to know now

With new economic relief packages evolving almost daily, it is critical to be proactive and diligent in both understanding and pursuing opportunities to compensate for potentially reduced income streams. To help you keep pace and stay informed, following is a guide to the various funding resources designed to provide financial relief through the current rough patch. With this groundwork, you can be better prepared to consult with your tax professional and other real estate advisors to leverage the right financial resources for your particular situation at the right time.

CARES ACT

The $2 trillion+ Coronavirus Aid, Relief, and Economic Security Act (CARES Act), passed by Congress in March of 2020, stretches its tentacles into the workings of America pretty broadly—including businesses of every size and shape. Below are specific resources beneficial to the commercial real estate market. You can also view a comprehensive list of all the provisions in the bill here.

RESOURCES FOR THE RETAIL/INDUSTRIAL MARKET

Small Business Administration (SBA): The CARES Act grants funding through SBA loan programs to impacted industries and businesses, including commercial brokerages and property management firms. Many commercial brokerages will qualify for the following programs and can then pass on some degree of relief to tenants and clients. Applications for these programs are available online at SBA.gov.

• SBA Economic Injury Disaster Loans: Extends low-interest loans of up to $2 million to small businesses and nonprofits severely impacted by the pandemic. Applicants are immediately eligible for advance funds up to $10,000 to cover payroll, rent, utilities and similar payments.
• SBA Paycheck Protection Program (PPP): Provides loans to small businesses (fewer than 500 employees) up to 250 percent of the previous year’s average monthly payroll expenses (with a ceiling of $10 million). Funding is designed to cover payroll, mortgage interest, rent, and utilities for impacted businesses. There is no requirement for collateral or personal guarantees, and the maximum interest rate is 4 percent annually.  Employers who maintain at least 75 percent of their average monthly payroll costs during the covered period (February 15 to June 20) will be able to have 100 percent of those loans forgiven; as employers lower their payroll levels below 75 percent, the forgivable portion phases out.

• The CARES Act also allows cash conservation for employers by allowing the deferral of payment of the employee share (60 percent) of social security tax ordinarily payable in 2020. Fifty percent of the deferred payment is due by December 31, 2020 and the remaining 50 percent is due by December 31, 2022.  In addition, the CARES Act provides eligible employers whose operations have been suspended due to the pandemic with a refundable credit on payroll tax equal to 50 percent of the first $10,000 in wages paid per employee.

Federal Reserve Main Street Lending Program: The Main Street Lending Program is designed to support lending to small and mid-sized businesses that were in sound financial condition before the onset of the pandemic. The program will operate through three facilities: the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Main Street Expanded Loan Facility.

To implement the program, the Federal Reserve will set up a special purpose vehicle to purchase participations in loans originated by eligible lenders, and lenders will retain a percentage of the loans. To be eligible for these loans, businesses must meet either of the following conditions: (1) the business has 15,000 employees or fewer; or (2) the business had 2019 revenues of $5 billion or less. Loans issued under the program would have a four-year maturity and principal and interest would be deferred for one year.

RESOURCES FOR THE MULTIFAMILY MARKET

Fannie Mae and Freddie Mac (the Enterprises): Offers multifamily property owners mortgage forbearance under the condition that all evictions are suspended for renters unable to pay rent due to the impact of the coronavirus.

CARES Act: Allows multifamily owners who were current on their mortgage payments as of February 1, and have federally insured, assisted, or supplemented loans (Fannie Mae, Freddie Mac, Federal Housing Agency (FHA) or any loans backed or assisted by any branch of the federal government, including Low-Income Housing Tax Credit), to request forbearance for 30 days due to financial hardship with extensions up to a total of 90 days. Borrowers receiving forbearance cannot evict or charge late fees to tenants for the duration of the forbearance period.

Department of Housing and Urban Development (HUD)/Federal Housing Finance Agency moratorium on evictions and foreclosures: This only affects borrowers with mortgages backed by Fannie Mae, Freddie Mac, FHA, Veterans Administration and Rural Housing Services, and only applies to FHA single-family mortgage borrowers and Home Equity Conversion Mortgage borrowers. The moratorium for Enterprise and HUD loans is set for 60 days (through May 16).

Tenants are not relieved of the obligation to pay rent or other amounts owing, such as late fees and interest, during the deferral period. Landlords should execute a re-payment plan to go into effect once the deferral period lapses and get agreement from their tenants.

IRS UPDATES

Extended tax deadlines. The IRS grants deadline relief for 1031 like-kind exchanges and opportunity-zone investments. Both programs are designed to promote economic growth in communities:

• 1031 like-kind exchanges: If an investor has taken the first step of a like-kind exchange by selling the old property, and either the 45-day or the 180-day deadline falls between April 1 and July 15, the deadline can be extended to July 15.
• Opportunity zones: If an investor sold a capital asset, planning to roll over the gain into an Opportunity Fund, and the 180-day deadline falls between April 1 and July 15, the investment can be delayed up to July 15.

Sole proprietors. Sole proprietors who pay quarterly estimated taxes now have until July 15 to file their second quarter payment. As a result of an earlier IRS notice, first quarter estimated tax payments have already been extended to July 15. There is no penalty if you choose to delay until then.

TAX PROVISIONS

Qualified improvement property technical fix: Businesses can immediately write off costs associated with internal improvements to certain real estate (including restaurants and retail stores), instead of having to depreciate them over the 39-year life of the building. Since companies are being told to file for refunds with an amended tax return for 2018, you will want to consult your tax advisor and/or accountant to move forward with this.

Business tax offsets: Businesses can now carry back net operating losses from 2018, 2019 or 2020 against profitable years, up to five, and get immediate refunds. The current taxable income limitation is also temporarily removed to allow a net operating loss to fully offset income.

We're here to help

The Private Bank at Union Bank has specialists with extensive experience managing retail, multi-family, commercial, and industrial properties, as well as vacant land and trustor-occupied and rental homes. Whether the properties are local or global, our team will work closely with you and your advisers to coordinate the management of your real estate and specialty assets with your traditional investments to help meet your overall financial objectives.