The CARES Act: Help for Landlords Through the Small Business Administration
By Matt Williams, Founder, Williams Real Estate Advisors
COVID-19 has thrown the multifamily industry into a tailspin. With local cities empowering renters to not pay rent during the emergency period and giving them six to twelve months, and maybe longer, to pay back deferred rent, owners are finding themselves in a tough spot and struggling financially. They now have less money coming in but almost the same amount of expenses going out.
As a property manager, my clients call me daily asking what can they do? The truth is there is very little they can do in relation to the renter non-payment other than work with then in line with the local jurisdiction’s ordinance or Governor’s Order. However, there are other options such reducing operating cost, prioritizing bills, asking lenders for mortgage deferment or forbearance, and now with the recent passage by Congress of the CARES Act, looking at possible Small Business Administration (SBA) Loans available during an emergency like this. Out of the four options listed above, we are going to give a brief overview of the two SBA Loans: Economic Injury Disaster Loan Program (EIDL) and Paycheck Protection Program (PPP)
- Paycheck Protection Program
First off, Paycheck Protection Program or a “PPP” Loan is a great option for owners that have employees including themselves. In order to qualify for the PPP, an owner must have received actual payroll in 2019 for their property management activities or created a separate Schedule-C for their real estate business. By actual payroll, this means an owner was paid with employment taxes taken into account. The loan is based on the average monthly payroll from 2019 multiplied by 2.5. Payroll can include any individual employed in your business that is Form W2 employee and the benefits associated with payroll such as health insurance and retirement benefits. This means that independent contractors such as 1099 “employees” or vendors are excluded. Accordingly, no gardeners, no handymen, no maintenance personnel and even no onsite managers are eligible for an owners “PPP” Loan if they receive 1099s. They would have to apply for the PPP themselves.
Under the PPP, there are requirements on how you can spend the money. 75% must go to payroll and 25% can go to operating expenses like rent, mortgage interest, utilities, and other eligible costs. But funds may not be applied to soft story retrofitting projects. This loan is forgivable so long as you keep the same number of employees and keep within the 75%-25% payroll to operating expenses percentages.
It is highly recommended that you first apply through the bank with which you have your business accounts. Most major institutions are already backed up with requests and may place applicants on a waiting list. Should this happen, “Plan B” is to find a bank that will process your loan without having a prior relationship with them .
- Economic Injury Disaster Loan Program
Secondly, there is the Economic Injury Disaster Loan Program or “EIDL.” These are loans specifically tailored for emergencies tied to reduced cash flow. Unlike the PPP which is focused on payroll, EIDL provides cash to stop the financial bleeding.
The math is simple. Take the total number of tenants that are not paying rent and multiply it by the length of the emergency period. This number cannot include units that were vacant prior to the emergency period.
Yes, we are all the same page. If it wasn’t for this crisis, our units would be rented by now. But the Small Business Administration is only looking at actual renters not paying their rent, and not the potential rental income lost due to a vacancy. This can be used to cover operating expense such as mortgages on properties and other operating expenses. Same as with PPP Loans, EIDL can’t be used to finance a soft story retrofitting or to refinance out existing debt. EIDL is not forgivable but no collateral is required for loans under $25,000. To apply for a EIDL, all an owner has to do is go to https://covid19relief.sba.gov/#/.
- What Option Do You Take?
Taking a step back and looking at the big picture. PPP Loans are the hot thing right know but they are incredibly tough to get due to payroll requirements. EIDL Loans are easier to apply for but require underwriting from the Small Business Administration. The good news about EIDL Loans is that up to $10,000 can be wrapped into the PPP Loan so long as it is connected with payroll. But the EIDL Loan must be taken out before the PPP loan. For an owner, that may be tight on cash flow and unable to cover their mortgage, applying for both may be a good idea. An owner is under no obligation to take either, should they be approved.
There is one final thought that must be shared. A forward-thinking owner may be able to defer loan payments for up to 90 days but at the end of 90 days may find themselves with a big payment. The tenants are paying back the rents incrementally generally over six to 12 months. This will not provide the owner the needed resources to cover the loan after 90 days. Having these applications in the pipeline is a great option to address this possible problem.
This is only brief synopsis of the Small Business Administration loan programs available to apartment owners. There may be other programs you can tap into. It is recommended that owners take the time to visit the SBA website themselves and see which loan looks best for them. The website is https://www.sba.gov/funding-programs/loans/coronavirus-relief-options. Please note that given the current times, what may be true today can be different tomorrow even with the Small Business Administration loans as they are continually being modified. Make sure to stay up to date on the latest requirements and programs – be sure to stay informed.
Matt Williams is the principal of Williams Real Estate Advisors, Inc. which is a full-service property management company that has approximately $150,000,000 of multifamily assets under management throughout Southern California. You can reach Mr. Williams at firstname.lastname@example.org.