CARES Act: An Emergency Assist From Congress for Some Landlords

April 16, 2020April 18, 2023 Mark Elliot CARES Act, COVID-19, NAA

Congress in March passed H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which extended unemployment benefits for laid-off workers and granted a ‘recovery rebate’ of $1,200 to qualified taxpayers. But there was A LOT more in that federal bag o’ treats, and many — but not all — multifamily housing owners in Beverly Hills may benefit. Let’s take a look at Washington’s largess and the multifamily housing industry’s opportunities for relief under the CARES Act of 2020.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) act was most notable for the unprecedented cash benefit to taxpayers of $1,200 per individual and $500 per child (the adult benefit tapers with income greater than about $100,000). But that support was a drop in the bucket compared to what renting families need. In Beverly Hills, for example, one-third of households paid more than $2,500 in rent according to 2018 census figures and more than half of renting households are in the category of ‘rent-burdened.’ We are paying more than 30% of our household income to the landlord.

So a cynic might say that taxpayers were bought-off on the cheap for $1,200 relative to the generous support provided to business. Early figures show that the majority of businesses awarded a forgivable small business loan were large concerns, and those with personal banking contacts went to the front of the queue. And there is much more federal largesse coming.

There are several provisions in the CARES Act that might benefit some landlords:

Mortgage forbearance. Multifamily property owners, under section 4023 of the CARES Act, can seek forbearance from lenders on mortgage payments if they affirm they are “experiencing a financial hardship during the COVID–19 emergency.” It works like our own moratorium on eviction for non-payment: the tenant who can document COVID–19 financial impact can seek forbearance from the landlord.
Carry-back of net operating losses for five years. This has always been a boon to multifamily landlords: paper losses generated from operations could be used in another year to offset taxable income to reduce the tax bill. This paper hustle provided a significant benefit back when the corporation tax rate was 35% and rules were liberal. Tax reform in 2017 trimmed the carry-back (to pay for the much more expansive grab-bag of tax giveaways) but the CARES Act loosened the reins: now paper losses can wipe taxable income going back five years and — bonus! — the break is at that old 35% tax rate not the now-lower corporate rate of 28%. That means substantial cash flow for the sophisticated multifamily operator.
Delay in paying the payroll tax. Another cash-flow benefit for larger operators! Instead of paying the employer’s 6.2% share of the payroll tax this year, the CARES Act allows the employer to delay for a year the first half of payroll taxes and for two years the second 50% half of the payroll tax. That’s money in the pocket for partners and shareholders today.
Forgiven small business loans. There is already mounting criticism of the $349 billion ‘Paycheck Protection Program’ under the CARES Act. This Small Business Administration program offers loans for operating expenses (payroll, mortgages, office rent and utilities) that are not delayed like tenants’ rent but forgiven. Nobody in DC is talking about rent forgiveness but the CARES Act provides forgiveness to eligible business owners for business expense forgiveness. Moreover, forgiven debt will not count as taxable income (unlike consumer debt when discharged for a tenant).

There is more money coming to localities pursuant to the CARES Act that will go to some landlords in Beverly Hills. One little-noticed provision provides a $5 billion shot-in-the-arm to the federal Community Development Block Grant (CDBG) program, which is channeled to localities across the country. Beverly Hills gets on average about $200,000 per year which funds our ‘home handyworker’ program. That money is split between single-family homeowners and multifamily landlords (the latter for repairs that they should otherwise make as part of their business). The handyworker program is likely to get a chunk of that block grant money.

CARES Act Benefits Won’t Reach All Landlords

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, H.R. 748) can benefit rental housing owners with properties that are insured or guaranteed or subsidized by Housing and Urban Development, the Federal Housing Administration, and Fannie Mae or Freddie Mac. But that will exclude some mom-and-pop landlords who don’t have a mortgage or don’t participate in certain federal programs.

For example, relatively few Beverly Hills landlords participate in the federal programs that subsidize housing and which get a boost from the CARES Act. Our city has far fewer tenants enrolled in Section 8 (rent vouchers) and probably no landlord participates in HUD’s Project-Based Rental Assistance program.

Not one multifamily development in Beverly Hills has benefited from the federal Low Income Housing Tax Credit that funds affordable housing. We also have no public housing agency (and so can’t tap the $685 million Public Housing Operating Fund provided by the legislation).

In contrast, rent-control neighbors like West Hollywood, Santa Monica and Los Angeles will see real money flow to residential landlords under the CARES Act. Property owners in those cities participate in federal programs at a higher rate and in each city there exists much more new housing for which federally-insured financing and tax credits have played a role.*

Also, the federal Small Business Administration does not generally loan money to landlords because smaller apartment leasing businesses are considered by the government to be “passive” investments rather than product or service providers. Often mom-and-pop landlords have no employees at all but instead ‘pass-through’ net income to owners which is claimed as personal income.

But rest assured the landlords and their industry associations are on the job looking for federal largess. Real estate interests have reached out to congress. Rental Housing Providers Need Immediate Relief, proclaimed the headline of a recent National Apartment Association post [since deleted]. On the wish list: tax relief for multifamily property owners, eligibility for forgivable Paycheck Protection Program loans, and rental assistance for tenants affected by COVID-19.

“Multifamily businesses of all shapes and sizes struggle to survive these difficult times,” says the Association. “Apartment operators, employees and residents need additional economic relief to avoid a total collapse of the rental housing sector, which contributes $3.4 trillion annually to the U.S. economy.”

While landlords look to open the federal aid spigot, it’s worth noting that the limited assistance to landlords under the CARES Act shows just how narrow is the Beverly Hills residential rental market. Rental properties are predominantly older and in private hands. Few are subsidized in any way. Just 1% of tenancies use a federal housing voucher, according to a 2018 analysis of our rental unit registry (and it’s probably significantly less than 1% anyway).

Arguably that leaves tenants and landlords in Beverly Hills more exposed to economic disruption than would landlords and tenants be in cities where a greater percentage of rental housing is deed-restricted and affordable.