Seyfarth Synopsis: On December 21, 2020, Congress passed the $2.3 trillion Consolidated Appropriations Act, 2021, H.R. 133 (the "Act"), which combined the $1.4 trillion omnibus spending bill for the 2021 federal fiscal year with the $900 billion stimulus relief package aimed to respond to the economic fallout caused by the COVID-19 pandemic. On December 27, 2020, President Trump signed the Act, which enhanced and expanded certain provisions of the previous relief package—the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 (the "Cares Act") into law. The enacted 5,593-page legislation contains several key provisions that directly impact the hard-hit real estate industry at large. This Legal Update specifically focuses on summarizing certain relevant provisions of the Act which set forth relief measures or benefits for the real estate industry. The following measures were passed with the enactment of the Act and are described in greater detail below: (1) allocation of $25 billion for rental assistance to be administered by the Department of Treasury; (2) extension of the current federal eviction moratorium through January 31, 2021; (3) direct distribution of one-time $600 stimulus payments to qualifying Americans and the restoration of the Federal Pandemic Unemployment Compensation of $300 per week; (4) continuation of Troubled Debt Restructuring ("TDR") relief for many financial institutions; and (5) passage of several real estate tax and bankruptcy provisions that have the potential to aid businesses and individuals alike who are experiencing financial hardship due to the COVID-19 pandemic.
Note, this is the second Legal Update in our series discussing the stimulus relief package, and its implications in the real estate context. The first Legal Update dated December 28, 2020 provided an in-depth analysis of significant changes to the Paycheck Protection Program ("PPP") with the passage of the stimulus relief package. In sum, the Act is the second largest ever stimulus relief package to be passed and is an important piece of legislation serving as a lifeline to many and provides the necessary tools to protect landlords, tenants, borrowers, potential buyers, financial institutions, and small businesses.
Summary of Key Provisions in the Consolidated Appropriations Act, 2021 that Impact the Real Estate Industry
Below is a high-level summary of the key provisions in the Act which set forth relief measures or benefits for the real estate industry.
Sec. 501. Emergency Rental Assistance. Under Section 501 of the Act ("Emergency Rental Assistance"), Congress allocated $25 billion for a new federal rental assistance program to be used to provide financial assistance to eligible households, including the payment of rent, rental arrears, utilities and home energy costs, and other expenses related to housing incurred due, directly or indirectly, to COVID-19. These funds will pass through the Coronavirus Relief Fund ("CRF") at the Department of Treasury and then be disbursed to states by formula in order to provide financial assistance and housing stability to eligible households. Of the total funding designated for rental assistance, $400 million is allocated to US territories and $800 million for tribal communities, with the remaining funds to be distributed within 30 days to states and localities with populations of 200,000 or more. Section 501 of the Act departs from the CARES Act, where localities with populations over 500,000 could only request a direct CRF allocation from the Department of Treasury. Under the rental assistance program, the fund allocations will be based on a state's population, with all states receiving at least $200 million. This provision establishes a September 30, 2021 deadline by which states must utilize the allocated funds. Once state programs are designated and operative, eligible households will be able to apply to the entities that state and local grantees selected to administer the rental assistance program. Beyond the provision in Section 501 of the Act, Congress, states and localities will have flexibility and discretion in how the funds are ultimately distributed.
Eligible households may receive a maximum of twelve months of funding, plus an additional three months if necessary, to ensure housing stability. These payments made on behalf of eligible households will not be considered taxable income and may be applied for both past due rent and future rent payments (nine months of rental arrears, three months going forward). However, future rent assistance is limited to three-month increments, after which a subsequent application must be submitted for additional assistance and is subject to limitations. Also, if an eligible household owes past due rent, assistance for prospective rent payments can only be made if assistance is first provided to reduce those rental arrears.
An eligible household consists of one or more individuals occupying a residential property, who are obligated to pay rent, and satisfies one of the following three conditions: (1) at least one of the individuals qualifies for unemployment benefits or has experienced financial hardship caused by the COVID-19 pandemic; (2) at least one of the individuals demonstrates a risk of homelessness; and (3) the household income does not exceed 80% of the area median household income. Applications for rental assistance are deemed priority and considered first if either an eligible household's income is at or below 50% of the area median income or one or more members in the household is unemployed for 90 days or more before the submission date of the application. In terms of the mechanics of how this application is made, an application for emergency rental assistance may be filed in one of two ways—either directly submitted by an eligible household or submitted by a landlord on behalf of the eligible household. A landlord may only apply for rental assistance on behalf of tenants if notification is given to the tenant that assistance is being sought on their behalf. In so doing, the landlord must obtain the tenant's consent in the form of a signature on the application, and provide tenants with a copy of the application and accompanying documentation. Any payments received by the landlord must be directly applied to the tenant's rental obligations. In general, the Act provides that states should provide these emergency funds directly to landlords and/or utility providers after an eligible household's application for funds is approved. However, if a landlord does not wish to participate in the process on the qualified household's behalf, the funds may be provided directly to the eligible household.
Sec. 502. Extension of Eviction Moratorium. On September 4, 2020, the Department of Health and Human Services ("HHS") and the Centers for Disease Control and Prevention ("CDC") announced a nationwide moratorium on residential evictions for failure of paying rent ("CDC Order"), entitled Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19, which was due to expire on December 31, 2020. Section 502 of the Act ("Extension of Eviction Moratorium"), extended this eviction moratorium through January 31, 2021. Similar to the CDC Order, Section 502 of the Act does not relieve a tenant's contractual obligations to pay rent. Therefore, tenants are still responsible for payments of any arrears once the eviction moratorium expires. Additionally, Section 502 of the Act only prohibits evictions due to failure to pay rent and as such it is possible that tenants may still be evicted for other reasons, including a violation of the applicable lease. Further, nothing in Section 502 of the Act precludes landlords from charging or collecting fees, penalties, or interest as a result of the failure to pay rent under the terms of the applicable lease or agreement.
Landlords may not evict "covered persons" from residential properties in jurisdictions where the extended moratorium on evictions applies, if such covered person invokes the Act's protections. In order for qualified tenants to invoke the extended moratorium of the Act, tenants must, among other things, provide an executed copy of a Declaration Under Penalty of Perjury form to their landlord. In terms of scope, Section 502 of the Act does not apply to any state or locality with a residential eviction moratorium that provides the same or greater level of protection as the requirements set forth in Section 502 of the Act. As such, landlords should note that even if tenants do not meet the criteria for protection under the Act, tenants might still be protected under a state or local eviction moratorium.
Sec. 316. Housing Cooperatives. Section 316 of the Act ("Housing Cooperatives"), amends the eligibility requirements of the Paycheck Protection Program to include housing cooperatives, as defined in Section 216(b) of the Internal Revenue Code of 1986. This change departs from the Cares Act which did not include cooperatives or condominiums as eligible entities for the program. The current legislative language of the Act explicitly refers to only cooperatives, while not mentioning condominiums or homeowner's associations, thereby excluding the former entities. Condominiums remain ineligible under the PPP.
On January 6, 2021, the Small Business Administration ("SBA") and Department of Treasury issued guidance for the reconstituted PPP in the form of two interim final rules. This Interim Final Rule, ("Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act"), confirms the eligibility requirements set forth by the Act. The regulations are interpreted to include cooperatives as eligible entities, and confirms the exclusion of condominiums as an eligible entity. Housing cooperatives that employ no more than 300 employees are eligible to apply for PPP loans so long as other eligibility requirements are met. In addition, the provisions applicable to affiliation apply to housing cooperatives in the same manner as with respect to a small business concern. All in all, qualifying cooperatives with commercial tenants who suffered financial loss due to executive shutdown orders could potentially benefit from the second round of PPP funds, since commercial rent often accounts for a significant portion of its revenue and may have qualifying losses.
Sec. 202. Depreciation of Certain Residential Rental Property Over 30-Year Period. Under Section 202 of the Act ("Depreciation of Certain Residential Rental Property Over 30-Year Period"), Congress provided for favorable provisions relating to the depreciation of certain residential rental property. For taxpayers who previously ever elected out of Internal Revenue Code Section 163(j) by making the "real property trade or business" election, residential rental properties placed in service before January 1, 2018 are now permitted to be depreciated over 30 years. This change is retroactive to tax years beginning after December 31, 2017. Prior to the Act being passed into law, the same residential rental property was required to be depreciated over 40 years using Alternative Depreciation System ("ADS"). Therefore, Section 202 of the Act reduces the recovery period for residential rental property to 30 years under the ADS rather than 40 years, and includes properties placed in service before January 1, 2018. This provision may be of interest to multi-family housing owners who elected out of the new Tax Cuts and Jobs Act limits on the deductibility of business interest. As such, real property owners will have to determine if filing amended returns is warranted.
Sec. 324. Grants for Shuttered Venue Operators. Under Section 324 of the Act ("Grants for Shuttered Revenue Operators"), Congress allocated $15 billion in grants to be administered by SBA to qualifying businesses. Eligible businesses who may apply for this grant assistance include shuttered live event venue operators, as well as other venue establishments such as independent motion theatres, live performing arts organization operators, cultural institutions, and museums. Among other items, an eligible business must demonstrate that it was fully operational on February 29, 2020; experienced a 25% reduction in revenues when comparing 2019 revenues to 2020 revenues in the same period; is open or intends to reopen as of the date the grant is received; is not owned or controlled by an entity that is publicly traded or received more than 10% of its gross revenue from federal funding during 2019; and has not received a PPP loan after December 27, 2020. The grants must be used for expenses specified in the Act and will not be considered taxable income.
Sec. 541. Extension of Temporary Relief from Troubled Debt Restructurings and Insurer Clarification. Under Section 541 of the Act, Congress extended the Troubled Debt Restructurings relief for financial institutions through January 1, 2022. This one-year extension provides relief from accounting and disclosure requirements on loan modifications made in response to the COVID-19 pandemic. Section 541 of the Act also clarifies that insurance companies are now included in this relief.
Sec. 542. Healthcare Operating Loss Loans. Section 542 of the Act ("Healthcare Operating Loss Loans"), authorizes the Department of Housing and Urban Development ("HUD") to insure mortgages of health care facilities which were financially stable before the declaration of a national emergency on March 13, 2020. To receive funds, under this program, in addition to evidencing its financial stability the facility must evidence it had exhausted all other forms of possible assistance. If eligible, the HUD insured loan would be up to one year's worth of the health care facility's expenses.
Amendments to Tax Related Provisions as they Pertain to the Real Estate Industry
Sec. 102. Energy Efficient Commercial Buildings Deduction. Section 102 of the Act ("Energy Efficient Commercial Buildings Deduction") provides for a permanent extension of the Section 179D deduction for energy-efficient commercial buildings. The Section 179D deduction is an upfront deduction that is obtained for the installation of energy-efficient construction or improvements to commercial buildings that reduce total annual energy or power costs by 50%. These improvements include, but are not limited to, interior lighting, HVAC, and building envelope systems.
Sec. 112. New Markets Tax Credit. Section 112 of the Act ("New Markets Tax Credit"), provides for a five-year extension of the New Markets Tax Credit extension through 2025. This credit provides an incentive for investment in low-income communities, in the hopes of stimulating the development of more affordable housing.
Sec. 201. Minimum Low-Income Housing Tax Credit Rate. Another significant change in the Act is the establishment of a 4% minimum credit rate for the Low-Income Housing Tax Credit ("LIHTC") that is generally used for the rehabilitation and renovation of affordable housing. The LIHTC rate has previously floated in relation to the federal borrowing rate. This new floor rate would apply to projects which receive the tax credits after December 31, 2020. Congress enacted the permanent 4% LIHTC rate in the hopes of encouraging more equity investments in affordable housing. As a result, this is likely to increase the attractiveness of these credits to investors who would be eligible to receive aa reduction on federal income taxes for ten years based on this rate.
Amendments to Bankruptcy Related Provisions as they Pertain to the Real Estate Industry
Sec. 1001. Bankruptcy Relief. The Act amended several provisions in the US Bankruptcy Code, specifically Titles 11 and 13.
Section 1001 (b) of the Act ("Discharge"), amends 11 U.S.C. § 1328 by creating a new procedure that provides bankruptcy courts discretion in deciding whether or not to grant discharges for a Chapter 13 debtor who has not completed payments to the trustee or creditor holding a security interest in a principal residential residence. This relief may only be considered if the debtor did not default on more than three monthly payments on or after March 13, 2020 and the default was caused by a material financial hardship due to the COVID-19 pandemic, among other requirements that must be met. This provision sunsets on December 27, 2021.
Section 1001 (d) of the Act ("CARES Forbearance Claims"), creates a new supplemental claim for mortgage lenders called a "CARES Forbearance Claim" for the amount of a federally backed mortgage loan or multifamily mortgage loan as defined by the CARES Act previously granted forbearance under the CARES Act. Only a creditor is authorized to file this supplemental proof of claim for a CARES forbearance claim. The supplemental claim must include details of the forbearance agreement or loan modification, and must be filed no later than 120 days after the end of the forbearance period. This provision sunsets on December 27, 2021.
Section 1001 (f) of the Act ("Executory Contracts and Unexpired Leases"), amends Section 365(d)(3) of the Bankruptcy Code to extend a small business debtor's time with an additional 60-day period (up to 120 days total) to perform all post-petition obligations arising under the terms of an existing lease of commercial real property lease if the debtor is experiencing or has previously experienced a direct or indirect material financial hardship due to the COVID-19 pandemic. The extension allows for a deferment of rent due the first 120 days of the bankruptcy case since the extension is limited to 60 days after the filing, and a period for an additional 60 days if the court finds the debtor is continuing to experience a COVID-19 financial hardship. Nothing in this section waives the obligation to pay this post-petition rent to the landlord. This provision sunsets on December 27, 2022.
While 2020 proved to be unprecedented and a great source of uncertainty for our economy, including the real estate market, the Act is intended to provide assistance to the real estate market, among others, in 2021.
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