On-Demand Webinar: Real Estate Market Update--Impact of the CARES Act and other Government Stimulus Programs (Part II)

April 03, 2020

The COVID-19 pandemic has had a dramatic and devastating impact on the economy, and making sense of the shifting impacts is crucial for navigating a path forward for the real estate industry. Our speakers discussed the elements of the CARES Act, which apply to real estate companies, including employer and self-employment payroll taxes, payroll protection loan provisions, business interest expense limitations, net operating loss rules, loss limitation rules, QIP correction, and state and local tax implications. We reviewed how to apply for SBA loans and other assistance, as well as tax deadline deferrals and considerations.

Speakers:

  • Phil Campisi, Partner, Westerman Ball Ederer Miller Zucker & Sharfstein LLP
  • Robert Katz, Director, EisnerAmper LLP
  • Lisa Knee, Partner, EisnerAmper LLP
  • Michael Torhan, Partner, EisnerAmper LLP
  • Timothy Speiss, Partner, EisnerAmper LLP
  • Greg Zucker, Partner, Westerman Ball Ederer Miller Zucker & Sharfstein LLP

Transcript

Lisa Knee:Good afternoon. Thank you for joining us today. First and foremost, we hope you and your families are safe and well.

My name is Lisa Knee and I'm the co-leader of EisnerAmper real estate services group. In partnership with our friends at Westerman Ball, we are happy to welcome you to the second part of our real estate market update series covering the CARES Act with respect to the real estate industry. As the effects of this pandemic ripple through our lives and our economy, the passage of the CARES Act provides some clarity, more questions, but nonetheless a path forward for the real estate industry. Between this stimulus package, revised tax guidelines and SBA loans, real estate businesses have more resources available to help them handle the business impacts of the crisis.

Today we are taking a closer look at the details of the CARES Act and the elements that apply to the real estate businesses. We will also dive into available SBA loans, recent tax law changes and deadline deferrals that you can use to your advantage. With that, let me welcome Greg Zucker from Westerman Ball.Greg Zucker:Thank you, Lisa. Welcome to the second half of our presentation. Again, I want to thank EisnerAmper's real estate group and their marketing group. They've been absolutely terrific and I echo Lisa's sentiment, I hope everyone that's listening is safe and healthy. A few months ago, no one could have predicted that we'd be in this situation. No one could have predicted that millions of real estate businesses would be fighting for survival and possibly filing today for emergency loans.

It reminds me of the movie Cinderella Man with Russell Crowe. He plays James Braddock, a struggling boxer during the depression, Braddock has a series of setbacks and he finally gets an opportunity to fight again. He wins and he keeps winning and right before the championship fight, he's asked by a reporter, "Jimmy, what happened? You couldn't win if your life depended on it. What changed?" And Braddock responds, "Now I know what I'm fighting for. I'm fighting for milk. I'm fighting to put milk on the table." And in the blink of an eye, this country now is in the same position.

Businesses are fighting for survival. As I said before on Wednesday. There's no clear playbook here. There's no script as to exactly what you should be doing. There are several nuances and intricacies to the CARES Act and the paycheck protection program. Just last night the rules changed. The SBA issued an interim final rule seeking to clarify various aspects of this program and indicating that more guidance would be coming out soon. So for example, it is now clear that independent contractors do not count as employees for purposes of the PPP loan. So if you have various divisions and one of those divisions, for example, is a real estate brokerage arm. A lot of times those people are treated as 10-99 or independent contractors based upon the circumstances. Their commissions, if you're the quote unquote what you believe to be the employer would not count as payroll for purposes of the CARES Act.

Second, the interest rate has changed. The administrator and the secretary of the treasury have concluded that a 1% interest rate is appropriate. Third, the maturity rate is now two years. The act previously provided that the maximum term would be 10 years, but now the latest interim rule provides that a two year loan is sufficient. If you look at the interim rule, it basically provides that they thought about it and they thought that two years was enough time for businesses to get back on their feet.

The six month deferral, it's clear that you don't have to make payments for six months however, interest will accrue during that period. Next, there's a forgiveness portion of the act. We discussed it last time. We talked about items that fall into the following categories, payroll costs, mortgage interest, rent and utilities. They now want to limit the amount of forgiveness on the non-payroll portion. So specifically, the forgiveness must be 75% based upon payroll. 25% could be attributable to the other non-payroll costs.

This partially closes up a loophole. Previously companies could wait until June 30th and then strategically hire back its employees and now you need those payroll costs in order to get the benefit, the full benefit of the forgiveness, at least 75% of it. And again, we'll talk about that in greater length today. There's been a tremendous amount of confusion regarding the affiliation rules. The SBA recognizes, they indicated last night that they'll be issuing new rules and new guidance on this topic. The way it traditionally worked under the SBA affiliation rules is they were set forth in 13 CFR 121 103.

The rules were designed so that companies could not affiliate with each other and larger companies get the benefit of the SBA program. They're complicated. They basically come down to whether or not someone has the power to control, but it's a fact intensive analysis as we will explain. There's different ways in their view in which a person could control. It could be a control of 50% of the interest in the stock. It could be the right to veto or a voting block. It could be controls under the charters or bylaws or shareholders agreements, and we'll discuss those in further depth during this program.

The interim rule provides that lenders may rely upon the certification of borrowers including regarding eligibility and the use of proceeds. So although the loan is non-recourse, you have to act properly. There'll be remedies for borrowed violations and fraud that don't play games. And then just last night they changed the rules regarding eligibility in a barely innocuous section of the interim rule they write, "Businesses are not eligible for PP loans that are identified in 13 CFR 120 .110 and describe further in SBAs standard operating procedure. But what does that mean?

Well, when you go to those rules, they talk about passive businesses and they indicate that the following businesses are no longer eligible. Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improve with the loan proceeds are not eligible. Businesses privately engaged in subdividing real property into lots and developing it for resale on its own account are not eligible. Businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose are not eligible. For example, shopping centers, salon suites and similar business models that generate income by renting space to accommodate independent businesses that provide services directly to the public are not eligible and a host of others, including if you have a management agreement with a third party manager.

What does this tell us? It basically says that this act is driven towards payroll. So if you have a payroll core, whether that's in your management entity or otherwise, this act is designed to keep those people employed and to reimburse you for that, essentially by giving you this loan and then having forgiveness because of it. So without further ado, I'd like to turn the program over to Rob Katz, the managing director.

Robert Katz:Thank you. And I will add one point because what is constantly coming up is the frustration of why things are changed, why doesn't anybody have any firmness to the program now and unlike a traditional... and it's a fair question, but unlike a traditional loan program or the EIDL... And by the way, I'll talk about this while you read slide five or glance at it. You know the EIDL is a modification of an existing loan program. The SBA has hundreds of loan programs. So here it's creating an additional increment or iteration of something that exist. The PPP is brand new. It's never existed, there's no trend, there's no actual history. So the SBA is learning as everybody is and their goal number one is what was just said, is to put out money for payroll, get the money out. As was just articulated and we'll do the audit work on the backend.

But as I've said to people, if you think about trying to not be as accurate, the penalties you'll incur are going to be significantly greater than we ever saw it at the college application scandal. So it's very critical that whatever you're certifying is in fact totally supportable. So with that said, you can see in the background most of the background parameters haven't changed and again the second to last bullet where the PPP is not operational until the SBA issues its guidance and regulations, which clearly they are not quite done with, although we have been told that certain banks are moving along and accepting applications.

These are the employers and the provisions for the employee retention credit. Again, where it's designed as you can see, right to the employee, it's 50% of the first $10,000 of wages and to be considered in the second bullet, again, you must have carried on the business during the... and I'll summarize it during the crisis period, it's not for starting a business afterwards. One of the things is very, very consistent from day one of the PPP and that is the proceeds of this loan cannot be used for business expansion. It can't be used for growth, it can't be used just to finance higher rate debt. And again it talks about some of the employers with more than a hundred employees and the retention credit again is for, last bullet, for wages paid after March and before 2021. So it's again for the existing workforce.

Delay of payment, right? Again, everybody who files a tax return otherwise, we've all got extension of payment, which is almost unheard of till July and here you can see that the federal is 50% through '21 and through '22. Again, so now this gives you a broad overview of what happens and what you see in this slide deck so that you can use that as a reference point over the next couple of days as people refine, as we all refine the application.

The EIDO, which we'll talk about later, again more is like a loan program. It's a loan program and functions like that. So you have to apply for it, provide your personal financials, your corporate financials, the analysis decision will be based on more traditional loan factors where the PPP is designed off of payroll to get people employed, keep people employed in the workforce and that is the fundamental significant difference.

Here's a nice outline of who is eligible. Primarily small businesses, although there are some exceptions, a not for profit, individuals who operate as a sole proprietorship, and now independent contractors is being refined if you're self-employed, if you're a veteran, a minority and especially the last block is because the most... I'm sorry, the hardest hit is the restaurant, the lodging, the hospitality sector.

Then here are some of the very, very specifics about it, about the program. Right? This is a simple calculation of how it can be done and what we've gone through is where... and this is a very important factor depending on the payroll allocation. So like some of the sports teams in the country, if you have a disproportionate amount of payroll for a smaller group, you have to be careful and not just use a general average. You have to do an extrapolation of the payroll or a subset.

Lender responsibility for eligibility. Again, right now the volume is so great, the tide is so high, as I said a couple slides ago, the goal is have the money go out, deploy the money, because parenthetically if you think about it from a practical standpoint, deploying money is the purpose. So when the government or anybody, a bank puts in a program, their biggest goodwill is to say, "We've started the program, and in the short term we got monies deployed, we deployed the resources." It makes people obviously empowered, feels better and generates cash flow for the economy. So it's deploy the money, ordered it later, hold everybody accountable.

Again, what I said, the difference between the EIDL and the PPP again, there are guarantees, collateral ability to repay for the loan for the EIDL. Payroll is not for all the reasons we've talked about already and was well said, even though these are others, the main purpose is to put people back to work and regenerate a sagging economy. For those on this call, most people have talked to their lenders on multitude of cases about the application materials and so with that I will turn it over to my colleague Tim Speiss.

Timothy Speiss:Thank you very much. What we wanted to make sure we cover in this slide 16 is what's included in average monthly payroll costs. It's very diverse. It has not always been clear due to the guidance that's been released by the SBA. You'll see the more obvious ones at the top starting with salaries, wages, going down to cash tips or equivalents.

But then we get into some arenas that are not so obvious. This again is included in average monthly payroll costs and we've been working with many of our relationships to really make sure that we understand what are they including, what are the benefits, what are the allowable compensation elements that they're conveying in their payroll? You'll see some ones that are not always so obvious but that are included in compensation. Parental leave, medical or sick leave, those two are more prevalent, and separation pay. Payments for the provisions of healthcare benefits and insurance premiums and retirement benefits as well. Payment of state or local tax assessed on the compensation of the employee that's paid by the employer is definitely a cost that you'd want to capture and then sole proprietors, independent contractors, those are obvious ones. They report those themselves as was indicated earlier on the conference, the web conference. That inures to them in the context of net earnings from self-employment. Next one please.

Thank you. Now payroll costs in excessive of 100,000 is for a defined period, as you see. What's included and I can actually go to a list that we've prepared in addition to these. First, payroll retirement plan and railroad taxes, income taxes, those are included. Payroll costs on an employee who's residing outside of the US. I Should point out here that non US persons are not eligible to be counted in order to receive benefits, but you also have qualified sick leave and even where a credit's allowed under the Families First Corona Virus Response Act and then also the credit available under section 7,003.

Now let me just make sure, to make sure we've captured some of these. You also want to be including additional employee benefit plan conveyances. This includes dependent care, section 125 plans, personal use of employee automobiles, where that's included in income compensation, salary, vacation, which I believe we touched upon. Continuation pay, short term, disability. Excluded, we mentioned already were components of the Railroad Retirement Act and then any compensation with respect to federal employment taxes imposed or withheld. This is for a fixed period. This will be back from February 15 and moving forward to June 30 '20.

Now regarding loan forgiveness, borrowers are able to have a component of their compensation or their loans forgiven. It's not recognized for income tax purposes and you'll see that for the period cited is for a measurable eight week period beginning on when the loan was originated and you'll see these dates are fairly consistent. February 15 moving forward, borrowers are not responsible for any interest accrued during the eight week period that is interest accrued. That would be a required to be included in the loan that then ends up being forgiven by the SBA and loan forgiveness can be reduced based upon a reduction of employee headcount. However, reductions in head count that begin February 15 and end 30 days after the start of the CARES Act will not reduce the amount of the forgiveness if by June 30, the borrower employer eliminates the headcount reduction by that meaning hiring persons or wage reduction. Next slide please.

Let's look at an example. We have a number of full time equivalence during an eight week period and those average FTEs are divided by those for the period for the month, that 15 to June 30 '19 so let's assume that there was a forgivable amount of conveyance of $1 million. The average monthly employment of 100 persons, was for the period that 15 to June 30 the average monthly employment that was reduced was from 100 to 75 so therefore the forgivable amount is only going to be $750,000, why is that? Because you had a reduction down to 75 employees over the base period, average monthly denominator of 100 hence arriving at your $750,000 forgivable loan amount. Next slide please.

Now, the reduction of loan forgiveness is based upon a reduction in pay employees not earning more than a hundred thousand in salary who have their pay reduced during the eight week period following loan origination by more than 25% so we're going to change this from our previous slide as far as an example to look at the forgivable amount. So let's again assume that there was $1 million in salaries, 25 employed were earning 100,000 that was attained, but then salaries are reduced by 30%, the reduction is 25 by 100,000 times 30% at 25% gives you $125,000 so once again, the full $1 million in this example is not forgiven because this reduced by the reduction of 125,000 resulting in a forgivable loan amount of $875,000 but these rules obviously need to be calculated and we have to be keeping track of employees who not only had their pay reduced, but then also for other persons might also separate. I think the next slide now will be turned over to one of my colleagues.

Phil Campisi:Thank you, Tim. This is Phil Campisi from the law firm Westerman Ball. Good afternoon everyone. I'll pick up where Tim left off on the forgiveness process. What is the process.. You've now received this loan money, you've used the money in the covered eight week period following the origination date of the loan and now you need to determine what portion of the money will be actually forgiven. Assuming you used it for permissible use as well, you're going to make an application to your lender who issued the loan in connection with that application. You are going to have to be prepared to provide backup documentation as to your use of the funds for payroll costs that will include IRS tax rolls, state income and payroll tax documents. You should be contacting your-- if you have an outside payroll provider to get that eight week covered period or the backup payroll from that, rent, mortgage, interest, utilities, and the other permissible uses that you've used the money for, you should be prepared to submit those documents with your application.

The lender does have discretion to ask for additional documents that it believes are necessary to adequately review and process your application. You're then supposed to-- borrowers are supposed to get an answer within-- and a determination within 60 days of submitting the application on how much of the loan or all of it is forgiven. A couple of important things that my colleague Greg Zucker noted at the outset of the program. There was guidance last night that came down from the SBA and you can find posted online, it's called an interim final rule, and with respect to forgiveness the significant components that it adds is, it provides that in order to meet forgiveness criteria at least 75% of the loan, of the money's loaned to a borrower must be allocated towards payroll costs during the covered eight week period. The other 25% can be used for rent, mortgage, interest, utilities, other overhead and permissible uses.

And why this is important is because how the law was previously written, it seemed to have some loopholes. For example, it was touched upon that there's this, there was an escape clause, if you, if a company cut down on payroll or employee head counts but restored the head count or payroll by June 30, the company wouldn't be subject to forgiveness penalties. So there was a possibility of significantly reducing payroll using the money for other means, restoring payroll and still receiving full forgiveness that is now been eliminated by this interim guidance that came out, and the 75:25 ratio that they used essentially comports with the amount of money that you're loaned, you're being loaned money based on two and a half months of payroll costs and then the covered forgiveness period when you can use the money is only eight weeks, so it comes out to about 75% of payroll and the additional two weeks making up money's given on top of the expected use of the payroll costs.

Now, if any portion of a borrower's loan is not forgiven, that portion that tranche of the money that's not forgiven becomes repayable according to last night's guidance, which also changed the language of the legislation over a two year period at an interest rate of 1%. The first six months of payments are deferred, the legislation had said that lenders could defer from six months to a year, that's been changed to a straight six months where no payments would be due, but interest does accrued during that six months, during that six month period.

There will be further guidance on the forgiveness process. Page 13 of last night's interim guidance by the SBA indicates that further guidance on both presumably the mechanics and calculations of the forgiveness process will be issued. With respect to as a practical matter, you know there's a rush to file applications right now. There was-- there has been commentary that there will be priority given to potentially minority owned businesses, underserved markets, rural markets, veteran owned, female controlled entities and new businesses operating for less than two years. Other than any priorities that are specifically delineated the application process, it was clarified in last night's guidance is on a first come first serve basis. So, for anyone out there who is intending on submitting an application, it would certainly be beneficial to complete that, contact your lender and get that filed with your lender as soon as possible.

Robert Katz: Can I interrupt, this is Rob Katz. One--

Phil Campisi:Certainly Rob.

Robert Katz:One point did Phil just brought up, which is really critical, if you go on to the SBAs normal website in normal times they would tell you that the number one reason for delays or incomplete applications, so even though there is a rush for all the right reasons to get something submitted, it is more than critical that to the best you can and the best you know that you have a 100% complete package before it's submitted, because if it's not, it's just going to kick into a pool that, who knows when they'll start taking them again. Sorry Phil.

Phil Campisi:No, I think that's a great point Rob, and in fact we've been in advising our clients over the last week or so, we've been doing just that. We've been not only telling them to have their backup prepared to submit with their application and to calculate the defined payroll cost to come to your average monthly payroll costs, but also to the extent that you do have relationships with anyone at your bank or lender that you reach out. Let them know the application is coming, try to find out whether your lender has any specific procedures, it is going to require you to follow, so you're not flat-footed when the process rolls out, which is today.

I'm going to turn now to affiliation rules under the CARES act and in this program and as you can see in slide 24, traditionally the SBA has limited the ability of larger companies to obtain its loans and it's done this by employing affiliation rules that essentially aggregate the employee count and revenue numbers of businesses that share common ownership and control to not allow whether it concludes our larger businesses to apply for and receive a small business funding. These aggregation rules have traditionally been viewed on a number of factors. One of which, is ownership or power of control of 50% or more of a party's voting stock or being able to block voting in a company, separately, a party's ability under the business charter or bylaws or shareholders agreement to prevent a quorum or otherwise block action of the board or directors or shareholders and there are other rules for joint ventures. And those have been the traditional SBA rules in determining size and when you have to aggregate employees for purposes of eligibility for an SBA loan.

The CARES Act changes and waive some of those affiliation rules, and specifically, it waives affiliation rules for eligibility for a covered loan for any business concern of 500 employees or less that has been given in NAICS code beginning with 72 and I'll run through in a moment the list of those entities. A franchisee, and any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act, and on this slide you'll see the general industries that can benefit from the waiver of the affiliation rules, those with a code beginning with 72.

Hotels and motels, casino hotels, bed and breakfast inns, other travel accommodations, I won't go through them all, restaurants, but generally these are, these are businesses who may have separate entities in different holding companies, each restaurant is owned by a different entity and previously the head count in all of the separate entities would be aggregated under the affiliation rules and they're relaxing those rules in some instances for these industries in order to be eligible to receive a loan. How do businesses with multiple locations view this in order of determining eligibility to meet the lower than 500 employee threshold? If your business is covered by code 72 which we just looked at in the previous slide and you do not employ more than 500 employees at a physical location, which is important because if you do have 500 employees that are at a physical location, then the aggregation of course, you know does not matter, but if you have multiple locations, none of which have 500 employees and they're owned by different entities, the each location you don't aggregate.

If your business is not covered by NAICS code 72 and you have multiple locations then you do aggravate, you add up the employees at the individual locations. There is going to be, and it was specifically stated in last night's interim guidance. The SBA indicated that they would quote, unquote "promptly be issuing further guidance on affiliation", so we can expect that, that will be coming out short way. So, some of these issues please keep an eye out for further guidance on them.

Turning to the next slide. Franchises as previously identified are subject to the waiver under this rule. Companies that can benefit from the waiver, an example here is, as I was just discussing, a hospitality industry company has a business in a cupboard industry with 400 employees funded by or receives financing from a private equity fund which the equity fund is giving control rights, without the CARES waiver the business is being then affiliate of that private equity fund and other portfolio companies controlled by the fund, aggregate into the total number of employees and may take that company out of the eligibility threshold, so that's one instance. Turning to an example from the restaurant industry, a corporation owns six restaurants through six separate limited liability companies and each subsidiary has 100 employees. If you aggregate them, you're over the threshold because the restaurant industry is a code 72 industry which has provided relief and a waiver from the aggregate affiliation rules. Those individual entities would be able to make their own separate loans under the PPP program based upon their own payroll costs.

Companies that do not benefit from the waiver of affiliation rules and they don't benefit every company and an example would be a corporation directly controls two hotels with the total employee count of 1200 including over 500 who work at one physical location. That company would not be able to take advantage of the waiver of affiliation rules and the corporation is considered a single business and would not be able to have one of the-- you know, locations obviously apply for the loan. If of course it had less than 500 employees at each location, it could apply for the loan.

Again, the affiliation rules, there's been a lot of confusion about them we've found and I've been taking a lot of substantive questions about them and we do expect there would be further guidance. One thing that I should mention before I move on to the EIDL loan program with respect to affiliation, is that in the interim final rule that was issued last night and if you pull it up after today's webinar on page eight, it provides that businesses that are not eligible for PPP loans are identified in and then, if you go to this site, 13 CFR 120-110, it describes entities are and are not eligible and end of note, it indicates that passive businesses owned by developers and landlords that do not actively use or occupied the assets acquire or improved with the loan proceeds would not be eligible.

There's also, I don't have time to go into detail right now, but I know there've been a lot of questions about companies that own buildings and run payroll through management companies, which isn't as problematic if it's an affiliated management company, but if it's a non-affiliated management company that runs the payroll, which basically the single purpose building owner subsidizes is along with the management fee to the management company, is that single purpose business outside of the parameters of this loan and it looks like pending further guidance that it probably is and that the application lies with the management company that holds the payroll costs. Although, if you do go to that site that I had indicated again, 13 CFR 120-110 there's some more commentary about that and there is a control test about whether the entity that owns the holding seed's sole control to the management company but we do expect more guidance on this.

I'll now turn it over to the SBAs economic injury disaster loan program, which is a separate program from the PPP loans that we've been talking about on under the CARES Act, and this loan program provides for a qualifying and eligible businesses alone of up to $2 million per borrower for working capital. Your state and district has to have been declared a disaster area, which I believe almost all states throughout the United States.

I believe almost all states throughout the United States have as of today's date. And, in connection with the application process when you apply you're eligible to receive a $10,000 grant which will be paid within three days of applying. The slide 34 shows the companies that have qualified for eligibility under the EIDL eligibility rules. Businesses having not more than 500 employees, sole proprietorships or independent contractors, cooperatives having not more than 500 employees, and some others that you can review on the slide.

Loan uses under the EIDL. They're intended to assist businesses that are struggling to meet ordinary and necessary financial obligations. Similar to the PPP loan, you'll indicate that your business has been affected by the COVID-19 pandemic and that your company requires assistance to support its continuing operations which could go towards operating expenses, payroll, rent, fixed debt, higher interest rate debt. And loan proceeds are not intended to be used for lost profits or, as Robin mentioned earlier in connection with the other PPP loan, to expand businesses.

The limits on the EIDL loans are the lesser of $2 million or the amount of the economic injury that is determined by the SBA, less any business interruption insurance recoveries. And, for everyone out there, I'm sure, hopefully you've looked at your policies, if your insurance policies, if you've had business interruption based on this pandemic. And you probably note that there are some challenges in many of the policies in what is defined as damages for a business interruption policy and there's likely an exclusion for viruses or infectious diseases within your business interruption policy. But, if you haven't, you should certainly take a look at your insurance policy for business interruption.

The SBA will consider potential contributions from businesses or its owners and affiliates. If the business is deemed a major source of employment, the SBA has the authority to waive the $2 million limit and provide a larger loan.

There is a more robust application process with the EIDL program than there is for the Payroll Protection Program that we've been talking about, which is concerned with getting money to eligible borrowers quickly to allow them to continue in business and not cut employee headcount. It's to protect the workers.

This is a little... Then EIDL is a little more of a traditional process where you can see from the slide, although they're trying to rush decisions, you are required to provide more backup documentation for the application and the decision could take up to four weeks. The loans provided by the EIDL can be up to 30 years. They're not necessarily a 30 year term. There is an independent investigation by the SBA and that term could be shorter if they believe a company is in a financial position to turn things around and pay it back quicker. The interest rate is a fixed 3.75% for small businesses and 2.75% for not for profits. There is no prepayment penalty. There are no personal guarantees required for loans under $200,000 but there are for loans of over $200,000 for all owners of 20% or more of the borrower.

And that's a big distinction between if you're deciding to... Whether to apply for PPI money and EIDL money. The PPP money is non-recourse. Absent a determination that there's been some sort of fraud or knowing an intentional misuse of the monies under the PPP stimulus package, there is no personal guarantee, no collateral or other security that is provided. If your company has received an EIDL loan already, the PPP under the Cares Act provides that that loan can be refinanced into the PPP loan.

Which is a good result because that portion of the EIDL loan that you may have already received and is subject to repayment terms and they have a personal guarantee or other liability attached to it now potentially can be forgiven if you meet the forgiveness terms under the PPP program. As I noted earlier, I won't spend a lot of time with it, but there is an emergency advance option in applying for an EIDL loan which allows you to make an application for $10,000 to be received within three days of the filing of the application.

Can you have both a PPP loan and an SBA EIDL loan? Yes, you can, but they cannot cover the same items. If part of your EIDL loan is intended to cover payroll and other permissible uses of the PPP monies, you cannot double dip and it cannot overlap with money that you receive from the PPP. If you have a wholly separate economic injury that's not covered by the PPP program, but is by the EIDL, it is possible to have loans under both programs that cover separate economic injuries at the same time. For those that overlap, again, if you receive a PPP loan the outstanding amounts under the EIDL loan will be refinanced into the PPP product.

Applying for loan forgiveness. I went over this earlier in the presentation so I won't belabor it and instead I will turn the program over to Michael to learn of the Eisner firm.

Michael Torhan: Great. Thank you. This is Michael Torhan from EisnerAmper. Good afternoon to everybody or good morning to anybody listening to us from the West Coast. I'm going to go over is some of the tax implications of the Cares Act. Most of the sessions, so far, has focused on the different loans and some of the other benefits of the Cares Act. And I'm going to go over what specifically changed from a tax perspective and then I'm going to fill in some of the implications specifically for the real estate industry. Since I know most of our audience on the session is in real estate, we want to make sure that you understand how these tax changes specifically impact you.

Some of the main things that have changed under the Cares Act. There were some changes to the business interest expense limitations, loss limitation rules, net operating loss rules. There was a technical correction to qualified improvement property that I will speak about. That was something that many professionals have been waiting for the last two years. And then I'll go over some of the state and local tax implications.

The business interest expense limitation was a new limitation that was enacted under the Tax Cuts and Jobs act for tax periods beginning in 2018 and what this limitation did is it caused a business interest expense to be limited to 30% of a taxpayer's adjusted taxable income. Adjusted taxable income... There were several additions and subtractions to taxable income, but generally it was a taxpayer's taxable income of what add backs for interest expense, depreciation, and amortization. And the way the limitation works is when you have that adjusted taxable income, or what I'll refer to as ATI, your interest expense deduction for the current year is limited to 30% of ATI. For example, if you had $100 of ATI and $50 of interest expense incurred, 30% of the hundred dollars of ATI is only $30. The taxpayer would only be able to deduct $30 of interest expense and the other $20 would be carried forward.

Now, for real estate, there was a major exception. For taxpayers that qualified as a real property trader business, those taxpayers were able to make an election to be treated as a real property trader business. If you made this election, you were excluded from the 30% interest limitation. However, there were a couple of changes that would have applied then for your different tax reporting purposes. One of which is depreciation on certain assets would have to be done using the ADS recovery periods, Which is generally 40 years for nonresidential property as compared to 39 years. Or for residential real estate, either 30 or 40 years depending on when the residential real estate was placed in service. As many of you know, the general residential depreciation period is 27 and a half years.

Another important note is that you know, it's, it's out of scope for the session as to who qualifies as a real property trader business. But, certain businesses... This is a great example, is actually in the proposed regulations for this code section. Hotels are generally eligible to make the election because their main product is the provision of a real estate for occupancy. Whereas restaurants, which are also located in buildings, they're not eligible because food services are their main service. That's just something to keep in mind.

The major change interest expense limitation under the Cares Act is that instead of the limitation being based on 30% of ATI, it is now 50% for taxable years beginning in 2019 and 2020 and there's one exception for partnerships that we'll speak about now. The 50% limitation does not apply for partnerships for tax years beginning in 2019. The limitation is still 30% for partnerships. What happens to partnerships and the partners within those partnerships? If a partnership allocates excess business interest in 2019 to a partner, going back to my simple example, it's the $20 of interest that was disallowed at the partnership level.

The partners will receive that $20 of excess interest on their K1's for 2019 which would generally carry forward to future years until they had excess income from the same partnership. Under the Cares Act, that $20 of excess interest is now treated in two separate ways so that $20 of excess interest, so 50% is treated as regular interest expense in 2020 not subject to the limitation. Again, going back to the $20 example, $10 will be deductible by the partners in 2020 whereas the other 50% is treated as normal carry forward excess interest so that other $10 is just carried forward until the partnership generates excess taxable income. Now a couple of things to keep in mind about this change to 50% okay. A taxpayer is eligible to elect out of the 50% so the change from 30% to 50%, the taxpayer can elect not to have the 50% apply.

However, clearly for partnerships since the 50% does not apply to 2019 there is no election out for a partnership in 2019. One other important change to consider under the Cares Act is like I mentioned previously, the limitation is based on the texture is ATI, for the current year. In 2020 a taxpayer is eligible to use API from 19 because of what's going on in the world around us, it is expected that allow taxpayers 2020 ATI will be lower because revenues will decrease this year, so ATI would then naturally decrease as well, which means that for 2020 tax years your allowable interest deduction would be less, right? You're taking 30... You're taking 50% of a lesser number. Under the Cares Act, a taxpayer is eligible to elect to use the 2019 ATI which would result in a higher interest expense deduction.

Some important notes for a real estate entities in regards to the interest expense limitation. Again, many real estate entities might have already made the real property trader business election, which means that this change from 30% to 50% is really not applicable for these real estate entities because they are excluded from the limitation. However other entities, specifically restaurants and any other business that is not, was not and is not eligible to make that election. All of those entities should benefit from this new provision because you're going to be allowed an increased amount of interest expense deduction.

All right. If the election was made previously, and this I'm going to get into also a little bit more when I speak about the changes to qualify an improvement property, under the statute, that election is irrevocable and it's unclear whether there's going to be any kind of relief for that election. And where this is going to matter is when we speak about bonus depreciation for qualified improvement property. I'll cover this again in a couple of slides. And again for state considerations, each state has different rules of regarding whether they conform or not to federal limitations and in cult provisions. Just to keep in mind that certain states that do not conform to this interest expense limitation, there really won't be a change in those states either. Because the state deduction was not limited to begin with.

Moving forward to another change under the Cares Act. Again, under the TCGA that was enacted a couple of years ago, there was a new limitation on the deductibility of current year business losses. For joint tax returns, the limitation was 500,000. For all other filing statuses, it was 250,000 and what would happen is any business loss in excess of these amounts, such business loss would be disallowed and it will be treated as a NOL, a net operating loss, going forward. What Cares Act does is it delays the limitation on business losses. The 500,000 and 250,000, until tax years beginning after December 31, 2020.

A key action item here with respect to this is taxpayers who had loss limitations on the 2018 tax returns, you would be eligible to file an amended tax return because since that loss limitation no longer applies, you may be eligible for refunds of taxes paid. And likewise for 2019 tax returns. If returns have already been filed, I would... We would recommend looking at those tax returns to see, number one, whether this lost limitation applied and number two, what the implications would be as well as the cost savings of amending such return.

More changes on the Cares Act include those to the net operating loss rules. Again, going back to the TCGA. Under the TCGA, NOL carry backs, so any taxpayers experiencing a net operating loss, whereas historically there was a carryback period where you could carry back a current year loss and file for a refund. The TCG repealed that, so beginning with 2018 NOL had to be carried forward. What the Cares Act does is it reinstates the carryback of NOL and it actually makes the carryback period for any tax years. We have a table here. I'm looking at the middle section. Any tax years from 2018 to 2020, there's actually a five year carryback period now. All right. What does this mean for tax payers? Any NOLs generated for any of these years, you can now go back and claim refunds from a prior tax period. And there's some substantial benefits from this, especially for C corporations, which I'm going to get into on the next slide, but there's some significant tax savings and cash flow benefits that can be had here.

One other thing I wanted to mention was, let's see, TCGA also instituted a 80% limitation on NOLs. That is suspended as well for tax years 2019 and 2020. Whereas before the Cares Act, using an NOL in 2019 and 2020 would be limited to 80% of your current taxable income. You wouldn't get the full benefit of an NOL. That is suspended for these tax years.

And again, just looking at the table we have here is really great because as you see, any NOLs again generated for the next, for 2019 and 2020, you can carryback. Starting in 2021, there is no carry back anymore and the 80% limitation once again applies.

A couple of things to keep in mind and a couple of action items for these changes to the NOL rules. Number one, since other tax provisions of the Cares Act, and I'm going to mention a qualified improvement property shortly as well as the interest expense limitation which I discussed, debits are active to 2018. If you go back and amend your 2018 tax return, wherein you increase your NOL, you could then carry that back under these new rules.

If you increase your NOL in 2018 you could then carry that back five years to claim refunds under these new rules. Again, there's some significant tax savings that could be had here. Yes, there's going to be some analysis that's required because number one, it's determining where did you have an NOL or if you can increase an NOL in these years. And then number two, looking back to the carryback period to see what kind of benefit can be had from those NOLs. And another thing I want to mention is for a C corporation, so here there's a substantial benefit that can be had for carrying back NOLs. The current tax rate for C corporations is 21% so whereas before this change NOL carryback-

So whereas before this change, NOL carrybacks and carryforwards, any NOLs would give you a benefit of only 21% going forward. Now they are eligible for a C corporations to carryback NOLs. There's a possibility that you're carrying back an NOL to a year where the tax rate was higher, or the historical rate of 35%. So this is a substantial amount of savings that can be had for C corporations under these new NOL rules. Again, there's some analysis involved to discover those tax savings, but that's certainly something- if you are in a C corporation structure- something to consider.

Robert Katz:Michael, this is, this is Rob Katz for just a second, and I just want to chime in that when you think about opportunities and where to spend money, almost everybody should make the investment to do what Michael's saying: to look at the NOLs. Because it's buried in the act and everybody's focusing on the PPP, which is getting money right away. But this door is a significant opportunity, and if you, hopefully that the economy will return. This is a very small window because if the economy makes a turn, this could be one of the windows that closes very quickly. So it's, it's worth making the investment, at least it's my thinking.

Michael Torhan:Absolutely. Great, thank you. Again, a lot of these changes in the CARES Act will require an initial investment, but clearly the tax savings and cash flow opportunities, especially with everything that's going on in the world today, could be substantial. Moving forward to qualify an improvement property, which is a significant change under the CARES Act. So just to give everybody a little background, qualified improvement property is a category of improvements, which really has existed for a number of years. However, in 2018 the TCGA consolidated a number of other types of properties, qualified leasehold improvements, qualified retail, qualified restaurant improvements, as well as other general interior improvements to nonresidential buildings. All of these categories have really been consolidated into this QIP category and essentially the definition is interior improvements to nonresidential property. However, excluded from the definition is elevators, escalators, any enlargements to building, as well as any improvements or work on the internal structural framework of a building.

While Congress was drafting the TCGA based on the congressional committee reports, there was intent for QIP to be eligible for bonus depreciation and it would have been eligible by having a 15 year recovery period, because any property with a class life of 20 years or less is eligible for bonus depreciation, which is currently 100%. Unfortunately due to a drafting error, there was no recovery period assigned to QIP, and it defaulted to 39 years. And therefore QIP has not been eligible for bonus depreciation for the last two years. What the CARES Act did is it corrected this. And it changed the recovery period for QIP to 15 years. And by doing so, QIP is now eligible for bonus depreciation. And the CARES Act basically changed the text of the statute as if it was in effect when the TCGA was enacted.

So basically the QIP has an effective recovery period of 15 years for tax years beginning in 2018. And what does that mean? Bonus depreciation applies to that QIP. Just two other points I wanted to make. There's another, what I think is a significant change that was made to the language in the statute. Not only did they change the recovery periods of 15 years, they also inserted the words made by taxpayer. So QIP is any improvement made by the taxpayer to interior spaces of a nonresidential property. And where that's important is, the improvements actually have to be made by a taxpayer. So I know there was a lot of discussion when the TCGA was released, whether a building that's acquired could be, whether the cost of the property could be segregated using a call fix study and any interior improvements would be eligible for bonus depreciation. But under the changes here in the CARES Act, the improvements have to be made by the taxpayer.

Earlier we spoke about the interest expense limitation, and I mentioned that real property trades or businesses are eligible to be excluded from those interest limitations. If you make that election to be a real property trade or business, one of the implications of the election is that you're not eligible for bonus depreciation for QIP. And like I mentioned earlier, it's unclear if there's any kind of release that will be provided by treasury; because again, the statute specifically states that once the election is made, it's irrevocable.

Just a couple of action steps for QIP. Again, for taxpayers that not made the real property trade or business election, there's significant savings that can be had by analyzing improvements for both 2018 and 2019. And if you have improvements that are eligible for bonus depreciation, certainly there could be significant tax savings that could be had. Likewise, any bonus depreciation that could be taken, you have to keep in mind that that additional loss on the tax return can have other impacts on other provisions, such as net operating losses, the interest limitations, as well as other limitations and provisions in the code. So just something to keep in mind that there could be other interrelated effects of the bonus depreciation. Which could be positive. Again, if you have a significant amount of bonus depreciation in 2018, then you can now take you, you'll now have an NOL you could carry back and claim refunds from earlier years.

One caveat to keep in mind, many states decouple from bonus depreciation. So even if you're eligible to take bonus depreciation on your federal return, your state return might not allow you to take bonus depreciation, and so you will have an income adjustment for your state purposes.

Moving forward to some other changes that have been both from the CARES Act and from other changes from the federal and state jurisdictions, tax filing deadlines have been extended by the IRS as well as many state and local jurisdictions. For example, the IRS, New York State, and Connecticut have extended the April 15 tax filing deadline to July 15. To any individual, trust, partnership, corporation, and any taxpayer with a federal payment or return due on April 15, there are specific filings that appears to be excluded from the extension, so definitely keep in mind that certain informational returns and other filings might still be due.

Many states have similar extensions and we have a link, actually, on the slide that if you access you could go state by state to see what's the current status of any extension, because there are slightly different rules for some state, and especially local jurisdictions. One example: New York City has a slightly different rules as of today, where New York City will waive certain penalties via a request from a taxpayer on a late filed extension or return. And that was released about a week ago by the New York City tax department. So just to keep in mind that just because the federal is extended, States have different rules.

Now I'm going to wrap up with, just to adjust some other internal revenue code provisions, other deadlines, other timelines that haven't necessarily been extended, but are very important to keep in mind, especially in the real estate industry. And the two I'm going to focus on are: section 1031 exchanges, and qualified opportunity funds.

All right, so section 1031 exchanges. As many of you are aware, there's certain deadlines that a taxpayer has to meet in order to qualify for a tax deferral under a 1031 exchange. Two big deadlines are: within 45 days of selling a property, which is considered your relinquished property in a forward deferred exchange, you have to identify your replacement property; and within 180 days of selling relinquished property, you have to acquire that replacement property. So historically the IRS has granted extensions for various provisions for 1031 exchanges. And these extensions were for weather related events, disasters such as hurricanes, wildfires. There's actually a revenue procedure, of 2007-56 where the IRS sets forth guidelines, where and how these deadlines can be extended.

The key thing to keep in mind is in order to have an extension, the IRS needs to issue a notice of some other guidance providing relief. We are not aware of the IRS yet issuing such a notice, and so even though disaster zones have been declared for many states where COVID-19 is prevalence, it's unclear whether just those disaster declarations are sufficient. Again, based on the revenue procedure, no other guidance from the IRS would be needed for relief. So that's something to keep in mind, if you have any outstanding, a 1031 exchanges.

In that same revenue procedure, just to clarify, there are different qualifications that would need to be met. If that notice is issued by the IRS, the relinquished property, or the sold property, it would've had to have been transferred on or before the date of the federally-declared disaster, and there has to be some kind of effect, either on the exchanger because of disaster, or some other difficulty in meeting the exchange guide- exchange deadlines. Likewise, the exchange agreement would also have to provide for an extension in the event of a federally declared disaster.

And just to wrap up on the last point. I had mentioned for qualified opportunity funds, again over the last year to two years, qualified opportunity funds have been a really hot topic in the area of real estate. Again, there's multiple timing deadlines for QF, including the 180 day deadline for investors to reinvest proceeds or a capital gain proceeds from the sale of property. And likewise for the actual qualified opportunity funds, there's certain asset tests to have to be met, either at the QF level, or as many of you aware there's a two tier structure for qualified opportunity funds. There's also a test at the qualified opportunities on business level.

Again, the question is how, what's going on in the world with COVID-19 is going to impact these QFs and the various deadlines. There are some relief provisions within the regulations for QFs, that should be considered. Number one, for corporate opportunities on businesses. There is a onetime cure for defects that cause an entity to fail to qualify it as a [inaudible 00:13:51]. Again, that is only a one time cure, so that should be used cautiously.

Another main timing deadline that might be a concern for many of you, for the qualified opportunities on businesses, there is a working capital safe Harbor, which many of you might have previously heard of or been working on. Again, just a little bit of background, that working capital safe Harbor allows a QOZB to hold cash, cash equivalent, or certain debt instruments for up to 31 months in order to prevent the qualified opportunities of business from being disqualified under a 5% non-qualified asset test. There are some provisions that allow for an extension of that 31 month period, for up to 24 months for federally declared disaster zones. Again, it's unclear without an explicit extension from the IRS as to how the extensions are going to apply for qualified opportunities on businesses. So we are hoping, many professionals are hoping for further guidance in the near future.

But this is just if you're in a qualified opportunity fund or if you're running a qualified opportunity business, we definitely recommend speaking with your tax advisors if you have any concerns as to meeting any of the standard deadlines. Because as many of you are aware, the economy has come to a standstill in a lot of areas. So we are aware that there might be some current concerns meeting these deadlines. Again, we're all hoping for some guidance from the IRS in the very near future.

Lisa Knee:Great. So we have, we have gone over on our time, and I think Greg Zucker is going to come on and maybe answer a question or two. And then thank you guys for sticking with us. And we will- if you do have a question that was unanswered- we will be sending all the Q&A's out to everybody as answered, and we will be specifically responding to people that answered questions. So Greg, I know that perhaps you can give one or two answers to some of these questions that we've been getting and thank you again for your time everybody today.

Greg Zucker:Oh, thank you, Lisa. So the question that we've been getting the most, is everybody seems to be fairly familiar as to what the CARES Act previously provided, but most people haven't been familiar with the interim final rule that came out yesterday. And this was promulgated by the small business administration, and as I said, there's been a number of, they've been giving clarity as to certain issues and actually changing some of the aspects of the CARES Act.

So what I said is, it's now clear that independent contractors do not count as employees for purposes of the employer's loan. Sole proprietors and independent contractors can separately apply. The interest rate has been changed to 1%, the maturity rate is now 2%, there's a six month deferral, interests will still gather, and the forgiveness portion has to be 75% payroll. There's been confusion regarding the affiliation rules that my partner Phil Campisi went over and they're going to be giving us further guidance.

By far, what people seem to be most concerned about is the new rule that deals with who qualifies and who doesn't qualify, and whether or not they're a passive company. If everybody looks at the interim final rule which is available online, it says on page 8, at the top, "businesses that are not eligible for the PPP loans or identified as 13 CFR 12110." If you go to that statute, it'll show you that they're talking about passive businesses, such as developers and landlords. And if you go further, there is a further material called SOP 50N5K. Again, you'll see this in the interim rule on page 8, at the top.

If you go to pages 104 through 107 of that material, you will see that they talk about various passive businesses in the real estate field. Now, as Rob Katz previously said, and I think he's dead on this, is that what this act is driving to do is to keep people employed and to focus on payroll. So to the extent that you have a management company and you have active management payroll, you have people that work for you, admin people, or what have you. Those people are on your payroll. That's an operating company. The government's trying to keep those people employed, and so the same rule would apply, apply for the loan. What they're not looking to do is to provide a loan to a passive business.

I think, Lisa, I think that answers the main question, and the rest we could answer after the program. And of course, as we indicated previously, this is something that is developing on a day by day basis, and as new guidance comes down we'll be up to speed with the new guidance. Thank you.

About Michael Torhan

Michael Torhan is a Tax Partner in the Real Estate Services Group. He provides tax compliance and consulting services to clients in the real estate, hospitality, and financial services sectors.

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.

About Robert D. Katz

Robert Katz CPA is a Managing Director of EisnerAmper Financial Advisory Services Group, and works with public and private companies, in and out of bankruptcy, to create and execute the strategy needed to restructure or improve operating performance.

About Timothy Speiss

Timothy Speiss is Co-Leader of EisnerAmper's Personal Wealth Advisors Group and Vice President of EisnerAmper Wealth Planning LLC. He chairs our Asia Practice and is a member of the firm’s community service group, EisnerAmper Cares.

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