Benefits for Commercial Real Estate Business Owners in the CARES Act

One week ago, the Senate passed, and President Trump signed a $2 trillion stimulus package called the Coronavirus Aid, Relief, and Economic Security, or simply “The CARES Act." The primary goal of the stimulus is to give individuals and businesses a liquidity boost to sustain themselves during the current global pandemic. 

While the stimulus is packed with a lot of economic stimuli for a variety of industries, a small portion of the package is relevant to commercial real estate, which we will discuss here. 

Many real estate professionals have already heard about Section 4023 of the CARES Act, which grants a 90-day forbearance for multifamily owners with a federally backed mortgage. By taking advantage of the forbearance under Section 4023 of the CARES Act, a multifamily borrower may not evict or even initiates eviction proceedings against a tenant for nonpayment of rent. Additionally, the landlord is prohibited from charging any late fees, penalties, or other charges to such tenant for late payment of rent.

Besides the 90-day forbearance, and $350 billion in federally guaranteed loans for small businesses (that agree not to lay off their workers), the CARES Act’s primary benefit for the commercial real estate industry is basically the overall reduction in current tax liabilities. As well as providing some cash to taxpayers with net operating loss carry-backs.

Specifically, the CARES Act does the following:  

Fixes the Qualified Improvement Property Omission. QIP refers to any property where a taxpayer made interior improvements to an existing building that is nonresidential real property. Qualifying improvements include drywall installation and replacement, interior doors, fire protection, and plumbing. The tax treatment of Qualified Improvement Property (QIP) was fixed under the Cares Act. Specifically, the Tax Cut and Jobs Act of 2017 (TCJA) inadvertently classified QI as 39-year property, and the Internal Revenue Services (IRS) refused to correct it. However, now with the passing of the Cares Act, Qualified Leasehold, restaurants, and leasehold improvement property were changed to qualify as 15-year property. Explicitly, the classification as 15-year property (not a 39-year property) makes these assets subject to 100% Bonus Depreciation deductions for many taxpayers.

Modifications for Net Operating Losses. The CARES Act temporarily suspends a number of the business loss limitations established by the TCJA. Under current law, net operating losses (NOL) are subject to restrictions based on taxable income and cannot be carried back to prior tax years. The CARES Act modifies the current law and allows taxpayers to carry back net operating losses from tax years 2018, 2019, or 2020 up to five years after that. While the TCJA eliminated the carry-back period for net operating losses and limited the amount of income NOL's created in 2018 and then could offset to 80% of adjusted gross income. The Cares Act eliminated the 80% limitation for the tax year 2018, 2019, and 2020 and created a five-year carry-back for these net operating losses. Real estate investment trusts ("REITs") do not qualify for this provision and, therefore, will not be able to carry back losses.  

Hotel Industry. In an effort to help the hotel industry, small business loans will be available to companies that own multiple hotels across the county, and this is true even if the company is too large to qualify as a small business (i.e., it has over 500 employees). However, large corporations that own brands like Marriott or Hilton are not eligible. However, individual hotels or franchises under those brands may be eligible.

If you are curious to hear live feedback from neighboring private investors and business owners, feel free to give me a call and I can fill you in. You can contact me via email me at ajize@voitco.com or call me directly 858-458-3361.