Coronavirus Aid, Relief, and Economic Security Act – Key Takeaways for Commercial Real EstatePrint PDF
On March 27, 2020 Congress approved and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The general purpose of the legislation is to provide emergency assistance and health care responses for individuals, families, and businesses affected by the 2020 coronavirus pandemic. From a commercial real estate perspective, the CARES Act is most relevant to multifamily properties with federally backed loans and properties participating in federal housing programs, but the broader commercial real estate industry can benefit from the tax benefits and cash made available to operating businesses by the CARES Act.
Below is a discussion of the provisions of the CARES Act that are most relevant to commercial real estate:
1. Categories of Affected Mortgage Loans
As further outlined below, the CARES Act includes two provisions (Sections 4022 and 4023) that apply exclusively to properties encumbered by mortgages falling within the following two categories:
- Important to Residential Mortgage Lenders. “Federally backed mortgage loans” encumbering one-to-four family properties that are made, insured, guaranteed, purchased, or securitized by certain federal agencies or under certain federal programs (a few examples would be FHA loans, VA loans, and Fannie Mae and Freddie Mac loans on one-to-four family properties, including conventional, conforming residential mortgage loans sold to Fannie Mae or Freddie Mac); and
- Important to Owners of Multifamily Properties. “Federally backed multifamily mortgage loans” encumbering multifamily properties (i.e., properties for five or more families) that are (i) made, insured, guaranteed, supplemented, administered, or assisted in any way, by the federal government or (ii) purchased or insured by Fannie Mae or Freddie Mac. This includes the popular Fannie Mae and Freddie Mac multifamily mortgage-backed securities programs.
2. Federally Backed Mortgage Loans (i.e., Loans on One-to-Four Family Properties): Forbearance Requirements and Limitations on Foreclosures under Section 4022
- Available Forbearance. The CARES Act provides borrowers of federally backed mortgage loans (i.e., one-to-four family properties) with up to a 360-day forbearance period if the borrower experiences financial hardship due directly or indirectly to the COVID-19 outbreak. Section 4022 of the CARES Act indicates that this optional forbearance is available during the “covered period” (without defining what “covered period” means in this context). The 360-day forbearance is comprised of an initial 180-day period that may be extended at the request of the borrower for an additional 180 days. Servicers of federally backed mortgage loans are required to grant forbearance requests based solely on a basic attestation of financial hardship by the borrower. In addition, servicers cannot require any documentation beyond the basic attestation. Importantly, servicers cannot charge any additional fees, penalties, or interest in connection with a forbearance under the CARES Act.
- Prohibition on Foreclosure and Related Evictions. Except with respect to a vacant or abandoned property, the CARES Act bars servicers of a federally backed mortgage loan from foreclosing or executing a foreclosure-related eviction or foreclosure sale on one-to-four family properties during the 60-day period beginning on March 18, 2020.
3. Federally Backed Multifamily Mortgage Loans (i.e., Loans on Multifamily Properties of Five or More Units): Forbearance Requirements and Renter Protections under Section 4023
- Available Forbearance. The CARES Act provides borrowers of federally backed multifamily mortgage loans (i.e., properties for five or more families) with up to a 90-day forbearance period if the borrower experiences financial hardship due directly or indirectly to the COVID-19 outbreak. The optional forbearance is available until the sooner of the termination date of the coronavirus national emergency or December 31, 2020. In order to benefit from the forbearance, the borrower must have been current on its loan payments as of February 1, 2020. The 90-day forbearance period is comprised of an initial 30-day period that may be extended by the borrower for up to two additional 30-day periods. Loan servicers are required to “document the financial hardship” and grant the forbearance (and grant the extensions if the borrower requests each extension at least 15 days prior to the end of the initial forbearance period).
- Renter Protections. A borrower of a federally backed multifamily mortgage loan that receives a forbearance pursuant to the CARES Act may not evict or charge late fees or penalties to tenants during the forbearance period.
4. Limitations on Eviction and Nonpayment Charges under Section 4024
During the 120-day period beginning on the date of enactment of the CARES Act, the Act bars landlords of residential properties with any of the federally backed loans discussed above (as well as landlords with properties participating in certain federal housing, subsidy, and tax programs) from (a) initiating any eviction action based on the nonpayment of rent or (b) charging any fees, penalties, or other charges to tenants based on the nonpayment of rent.
5. Bonus Depreciation for Qualified Improvement Property under Section 2307
The CARES Act corrects an error in the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The TCJA expanded bonus depreciation rules, but the law inadvertently excluded interior improvements to nonresidential property (i.e., tenant improvements financed or built by a landlord) as amounts eligible for the enhanced bonus depreciation rules. The CARES Act includes some technical amendments to the Internal Revenue Code to allow bonus depreciation for interior improvements to nonresidential property placed in service after December 31, 2017. Among other things, this fix makes tenant improvements much cheaper on an after-tax basis. For more detail on this provision and the tax-related provisions of the CARES Act, please read our advisory Key Tax Components of the Coronavirus Aid, Relief, and Economic Security Act.
This advisory was prepared by Marianne Ajemian, Matt Gaughan, John Lerner, Mark McCarthy, Beth Mitchell, and Chris Papavasiliou in Nutter’s Real Estate Department. For more information, please contact any of the above individuals or your Nutter attorney at 617.439.2000.
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.