COVID-19 Opportunities for Real Estate Companies

Like many other industries, the real estate industry has been hit hard by the COVID-19 pandemic. When businesses face economic uncertainty, their financial instability trickles down to landlords, builders, and contractors. If lessees cannot make their lease payments, the real estate industry grinds to a halt, and landlords or builders that are highly leveraged may have a difficult time meeting various debt obligations. There are a few steps impacted companies can take to alleviate at least some of the burden, but it may not come in the forms they expect. To help clients, prospects and others, Wilson Lewis has provided a summary of key points below.

Emergency Loans Have Not Provided Adequate Protection

The short-term solutions proposed by the Federal government have been ineffective in assisting those in the real estate industry. In March, The Small Business Administration (SBA) began offering two different loans that, had they been adequately funded, could have helped many businesses survive the economic downturn.

The Economic Injury Disaster Loan (EIDL) program has been around for decades, but it was expanded in March to provide emergency relief to small businesses that experience economic hardships from COVID-19. Under normal circumstances, EIDL program loans are ideal for businesses that need a quick influx of cash because they can receive an advance of up to $10,000 within only days of applying and then up to $2 million once the application has been processed. Unfortunately, the EIDL program has been underfunded and cash reserves for COVID-19-related needs ran out on April 16^th. The SBA states they are “unable to accept new applications… based on available appropriations funding.”

Lawmakers and the Trump Administration are working to add another $250 billion to the program. Business owners who need assistance should have the application filled out and ready to submit when and if this program gets refunded. As of April 21, the SBA was no longer accepting loan applications, but if and when they bring it back, businesses should be ready to apply for this first-come, first-served program.

Another option is – or rather, was – the Paycheck Protection Program (PPP). When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27^th, they created a $350 billion loan program that provided relief for companies that maintain certain payroll thresholds during the coronavirus crisis. The loans were for up to 2.5 times the borrower’s average monthly payroll costs, at a maximum of $10 million, and would be forgiven if businesses maintained a certain level of payroll. This program was not intended to help businesses keep debt obligations, but it helped cover payroll and operating costs, which may have been enough to help small business owners squeak by. Unfortunately, the $349 billion program is also out of money.

Other COVID-19 Opportunities

Employee Retention Tax Credit

Since businesses cannot rely on Federally funded loan programs, they may need to turn to credits and incentives instead. The Employee Retention Tax Credit provides a payroll tax credit of up to 50% of qualified wages. Wages that qualify for this program are those paid to keep workers employed when operations have been suspended due to a Federal, state, or local ordinance beginning March 12^th through the end of the year. Just note that this credit is not available to businesses that were able to get a PPP loan.

Qualified Opportunity Zones

The Qualified Opportunity Zone (QOZ) program provides a temporary capital gains tax deferral when taxpayers invest capital gains into a Federally designated opportunity zone. If they invest in a QOZ before December 31, 2021, and hold their investment for at least five years, they can exclude 10% of their initial gain and defer the rest until December 31, 2026. In addition, if they hold their investment for at least 10 years, their appreciation within the fund will be permanently excluded.

The program has strict guidelines that must be followed, and with the COVID-19 pandemic wreaking havoc on our economy, it may be difficult to meet investment deadlines. Typically, investment in a qualified opportunity fund (QOF) is required within 180 days of realizing a capital gain. Fortunately, the IRS extended this 180-day reinvestment deadline – at least for some taxpayers. In Notice 2020-23, the IRS stated that investors whose 180-day reinvestment period was on or after April 1, 2020, and before July 15, 2020, will have until July 15, 2020, to invest in a QOF. This extra time may make all the difference.

Qualified Investment Property

The CARES Act snuck in one more taxpayer-friendly provision for those in the real estate industry. Qualified investment property (QIP) is no longer depreciable over 27.5 or 39 years, but rather 15 years. QIP, a property class that was created in 2015, was always intended to be depreciated over 15 years, but an oversight by lawmakers kept QIP at the same depreciable life as the associated building. Now (and retroactive to January 1, 2018), builders and real estate investors who have qualified investment property can depreciate their QIP over 15 years and even apply 100% bonus depreciation to these assets, accelerating depreciation deductions to produce immediate tax savings.

Contact Us

There are a lot of moving parts to Federal-aid packages and tax laws, and it seems like each week there is something new to share. In order to take advantage of these opportunities, it is essential to conduct a complete COVID-19 tax analysis. If you have questions about the information outlined above or need assistance with a COVID-19 tax analysis, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us.