8 Accounting and Tax Considerations for Real Estate Holdings Related to COVID-19

March 16, 2020

By Lisa Knee

COVID-19 has been declared a pandemic by the WHO. In light of the challenges facing business owners in this crisis, federal and state governments are developing potential aid programs for those directly affected by disruptions resulting from this virus.  Whether you qualify for assistance or not, it’s important for real estate owners and operators to evaluate upcoming financial obligations and plan for the potential impact to their operations. There are a few major areas to consider to help you prioritize actions in an evolving situation:

1. Upcoming Deadlines - Unless Treasury extends the deadlines, there are major filings due:

  • Federal, State, and City Income and Franchise Tax Returns
  • Sales and Use Tax Returns
  • Hotel Occupancy Tax Returns
  • Commercial Rent Tax Returns

Check your calendars and adjust accordingly should an extension come through.

2. Other Timed Provisions - Be aware that time periods for other provisions of the tax code may not be extended:

  • IRC Sec. 1031 exchanges: There are a number of identification and receipt rules in an IRC Sec. 1031 exchange.
    • Within 45 days of the sale of relinquished property, replacement property must be identified.
    • Within 180 days of the sale of relinquished property, replacement property must be acquired.
  • Qualified Opportunity Funds (QOFs)
    • Investors have 180 days from the sale of capital gain property from an unrelated party to make an investment in a QOF.
    • Fund managers must comply with an asset test -- 90% of the QOF’s assets must be in qualifying assets at the QOF level (there is additional testing at the qualifying opportunity zone business level). This test is performed semi-annually.

3. Loan Considerations

  • Review all loan documents to make sure that loan covenants will still be maintained if you need to reduce rents to tenants or make concessions.
  • Address vacancy rates when reviewing parameters for net operating income with respect to ratios.
  • Speak to lenders about extending deadlines for financial statement timing if there are 90- or 120-day requirements.

4. Insurance Considerations

Disruption to your business caused by the COVID-19 situation may cause tenant forfeitures; greatly increased vacancy rates; loss or defaults in rent of retail, entertainment, and restaurant tenants; and other extraordinary items. Insurance policies covering business interruption may apply to this situation and claims should be filed.

5. Cleaning Services

  • Additional cleaning services for tenant spaces may be in high demand. This may be a source of additional revenue through direct billing or expense escalations.  Leases should be reviewed to determine how to capture this revenue.
  • Specialty cleaning services for tenants of REITs- Although the priority is keeping spaces clean right now, this may be an impermissible tenant service income, which needs to be monitored if there is no exception granted by the service.

6. Cash Management and Operational Controls

Reevaluate budgets and cash flow timing to ensure proper cash management during times of economic crisis. Take into account payroll, operating expenses, and staffing fluctuations. Reduce services and HVAC where appropriate to reduce costs. Tough economic conditions may also provide an environment where internal controls are vulnerable. Employees or vendors may be tempted to take advantage of weaknesses in your system. 

7. Cybersecurity Risks to Accounting Software Packages

With many employees working remotely, it’s a good idea to see that cyber risk assessments are performed in order to protect tenant and vendor information, as well as improve outcomes.

8. Robotics Process Automation

Efficiency in the workplace is critical to keeping down costs and getting information in a timely manner, especially while working with multiple reporting systems.

The situation with COVID-19 is evolving rapidly, but there are several steps you can take to prepare and react to its impact on your operations. With some good governance and control measures in place, you will be ready for whatever comes next.

About Lisa Knee

Lisa Knee is a Tax Partner and Co-Leader of the national Real Estate practice and leader for the national Real Estate Private Equity Group with expertise in the hotel, real estate, financial services, aviation and restaurant sectors and is a member of AICPA, New York State Society of Certified Public Accountants and the New York State Bar Association.