The $2.2 Trillion Package Includes Help for All Property Sectors, But It May Not Be Enough.
By Randyl Drummer
March 26, 2020
A $2 trillion legislative aid package approved by the Senate to address the financial fallout from the coronavirus pandemic provides fiscal stimulus, bailout grants and loans amounting to almost 10% of the nation's economy. Some of the initiative is expected to benefit the commercial real estate industry, directly and indirectly, as it braces for an uncertain financial future.
With partial lockdowns leading to a sudden stop in economic activity, the United States is expected to experience the largest economic contraction and the most severe surge in unemployment on record, according to Nancy Vanden Houten, an economist with global economic forecasting and consulting firm Oxford Economics.
Commercial real estate landlords, investors, brokers and tenants are expected to be affected by a slowing economy. The latest stimulus measures are meant to support a post-virus rebound in real estate, retail, travel and other business activity, but some analysts and economists say it may not create the hoped-for $6 trillion in stimulus to the economy.
The bill adds a level of support for businesses and individuals that may increase the likelihood that a property owner's tenants will be able to pay rent during the crisis, but landlords may still have to make concessions in many cases, said Kevin Cody, senior consultant with CoStar Portfolio Strategy.
While the $2 trillion package is cause for optimism, it comes with a caveat for retailers and their landlords and apartment owners.
"We are already seeing retailers announce they will be paying reduced or no rent at many locations, and apartment owners halting evictions," Cody said.
Under normal circumstances, the bill’s expansion of unemployment benefits and direct payments to many Americans would support consumer spending. However, with a high number of layoffs and uncertainty going forward, consumers may be more likely to save or spend on essential goods rather than discretionary items such as cars, jewelry or vacations.
"The program acts more as a floor preventing an economic collapse rather than providing a pure boost to activity," Vanden Houten said in her note.
Here are the key elements of the bill identified by real estate analysts, lobbyists and economists. The legislation is scheduled to be considered Friday by the House.
Long-Sought Tax Code Tweaks for Commercial Real Estate
The bill could mean $15 billion a year of tax savings for hotels, restaurants, retail and other commercial real estate owners.
The legislation includes several corporate tax breaks totaling $232 billion, equivalent to more than 1% of the nation's gross domestic product, according to Oxford Economics. The package allows corporations to apply losses from 2018 through 2020 to offset income from the past five years.
A provision would allow commercial property owners to immediately write off building improvement expenses on their taxes, a change from the current tax law that requires them to depreciate those expenses over almost four decades. That change is described by commercial real estate advocacy group NAIOP as a "drafting error" to the 2017 Tax Cuts and Jobs Act that has prevented certain businesses from immediately deducting renovation expenses.
Real estate investment trusts, which use a unique accounting method to report income, are excluded from the so-called carryback net operating loss provision.
The legislation would also provide immediate help for property owners by temporarily suspending current limits on deductions for operating losses and expenses, NAIOP President Thomas Bisacquino said.
It also lets employers defer their share of payroll taxes owed for the rest of this year until the end of 2021.
Small Business Benefits, but Is It Enough?
The bill is meant to support businesses with almost $1 trillion in loans, loan guarantees and bailout funds, including $350 billion for small businesses and other companies with fewer than 500 employees through the end of the year. That could help landlords who rely on small business tenants keeping their doors open and paying rent and bills, and it could boost other businesses that serve the commercial real estate industry.
The loans can be used to cover payrolls and paid medical leave, mortgage payments, insurance premiums and other debt. The loans would be forgiven for rent, utility, payrolls and interest payments for an eight-week period, but the amount of forgiveness would be reduced if workers are laid off or have significantly reduced hours.
While an exception was added for employees rehired by April 1, Vanden Houten said it's unlikely that small businesses would take out loans to rehire employees under current economic conditions.
“The majority of small businesses will not be able to survive a prolonged shutdown, no matter how well they've done before the coronavirus,” said Patrick Braswell, owner of Transcend, an Atlanta-based commercial brokerage. “I believe that forgiving the loans if they don't get paid back would be the right approach.”
It Could Take Some Time to Determine Winners and Losers
The bill's more than 820 pages include numerous exemptions and provisions aimed at hotels, airlines, defense contractors and many other sectors.
The measure is meant to help both large and small businesses, but it is still unclear how the measures could help a wide swath of companies in the middle that didn't receive carve outs, including some hotel franchises and midsize firms funded by large private-equity companies.
The legislation includes $350 billion in small-business loans for all companies with fewer than 500 employees. The Small Business Administration typically provides loans based on workforce size and revenue that vary by industry sector.
However, tech companies and other startups owned by private-equity giants such as The Carlyle Group or Apollo Asset Management or controlled by venture capital partnerships are still considered affiliated with the firm's other portfolio companies under current SBA rules.
That means a company with less than 500 employees would not qualify for a loan if the private-equity firm's portfolio companies employ a total of 500 or more people. The same is true if a larger venture capital firm controls more than 50% of a startup firm's stock.
Lodging Industry Needs Mortgage Relief
The American Hotel and Lodging Association last week asked the White House and Congress for a $150 billion bailout package for hospitality companies. The stimulus bill passed by the Senate is instead a package of loans, grants and tax relief listed under the $350 billion allocation for small-business assistance. Most qualify for the loans as businesses with fewer than 500 employees.
The association said the legislation could help rescue as many as 4 million hotel employees ranging from housekeepers and maintenance personnel to desk clerks and managers that have been laid off or had hours slashed in recent weeks.
However, the current version of the legislation limits Small Business Administration loans to 2.5 times the total of a company's average monthly payroll, so it won't allow companies to both pay worker and meet debt obligations on more than $350 billion in loans and mortgages industrywide for longer than two months, American Hotel and Lodging Association President Chip Rogers said in a statement.
That makes the current plan "unworkable" for hoteliers, Rogers added.
"The law will result in furloughing the very workers the bill seeks to protect," he said. "Since the measure reduces debt forgiveness with any reduction in payroll, hoteliers would be forced to use the entire loan amount on payroll at the expense of debt service."
Construction Industry May Need More Help
The bill does not specify direct assistance to the commercial real estate construction industry, which is shut down in some parts of the country as a nonessential business.
While the Senate measure is aimed at protecting companies and their workers to help keep the doors open, the construction industry is expected to need much more help from Congress in coming weeks to recover from the crisis, said Stephen Sandherr, CEO of the Associated General Contractors of America.
Lawmakers may need to compensate contractors for losses related to virus-related delays and cancellations of highway construction and other federally funded projects, Sandherr said.
The measure "will provide construction employers and employees with critically needed access to capital, expedited cash flow, worker benefit protection and critical tax relief, among other measures," Sandherr said in statement issued early Thursday. "These measures will provide construction firms and their employees with a needed lifeline to help them cope with a rapidly deteriorating business environment."
But he cautioned that "the industry will not be able to truly recover until federal officials pass measures designed to stimulate new demand for construction, make contractors whole for losses incurred because of the coronavirus."
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