Analysis

4 Lingering Real Estate Questions After $2T COVID Stimulus

By Andrew McIntyre
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Law360 (April 8, 2020, 8:41 PM EDT) -- While the historic $2 trillion COVID-19 relief package is intended in part to help the retail, restaurant and hotel sectors, real estate lawyers say landlords, tenants and employees in those areas still remain uncertain as to whether — and how — they might obtain some of those funds.

The hospitality sector in particular is trying to get more clarity from the federal government on a question of whether funds from the Coronavirus Aid, Relief and Economic Security Act passed in March can be used for payroll, given that hotels generally don't hire employees directly but use third-party companies instead.

And condos and co-ops are also trying to figure out if they are eligible for relief, according to attorneys.

Here, Law360 looks at four lingering unknowns for the real estate industry.

Can Hotels Get Payroll Assistance?

Hotels, which have been particularly hard-hit by the pandemic because of the plunge in travel, are struggling to understand whether they can benefit from the CARES Act since the payroll aspect of the relief is meant to be used for employee expenses, yet hotels generally don't directly hire employees. Hotels, instead, are generally operated by third parties that hire the employees.

"It really doesn't address the ownership structure. The act talks about employees," said Joseph Guay, Holland & Knight LLP's real estate section leader and co-chair of the firm's hospitality, resort and timeshare group.  "Most hotels don't have employees. They have a third-party manager."

In fact, Guay said, in setting up their agreements with third-party operators, hotels often go to great lengths to make it clear in contracts that the employees work for the third party, not the hotel.

He said the hospitality industry has been seeking clarity from the U.S. Treasury Department on whether hotels can find a workaround and tap into the assistance.

Guay said the general feeling within the hospitality industry is that Treasury will allow the payroll CARES Act assistance to go to hotels, but cautioned that as the law currently stands, the funds would only apply to payroll for employees who work directly for the hotels.

"You can't tell [hotels] with legal certainty that they are able to apply," Guay said. "The intent of the CARES Act was to really provide that [assistance] to the employees. ... The federal government wanted to help, but maybe didn't have a full appreciation of how these businesses work."

Third parties can apply, but the problem is that payroll costs generally sit with hotel owner rather than the third party, Guay said. Those costs are passed through from the third party to the owner under a hotel management agreement, so it's the owner that really needs the assistance, not the manager. 

How Much of the Relief Will Flow to Landlords?

Landlords have also found themselves in a difficult position, since much of the funding from the CARES Act won't go directly to them, and they'll need to claim that assistance from tenants, lawyers say.

But that's tricky because it requires that tenants get the assistance and that landlords and tenants work out a way for the money to come back to the landlords.

"My sense is a lot of the commercial tenants are going to hold off as long as possible to pay rent because of the local eviction moratoriums that are out there," said Craig Coan, a partner at Greenberg Glusker Fields Claman & Machtinger LLP. "Virtually every commercial tenant that I've seen has applied and seems to think they will get funding."

"When the rubber hits the road, landlords are caught in a difficult place," Coan added.

The challenge for landlords, Coan said, is that they aren't getting forbearance from lenders on their loan payments but are losing rental income from tenants.

He said that in some cases, landlords have agreed to rent deferrals on the condition that tenants apply for funding through the CARES Act and then send that funding back to the landlords once they receive it. Coan said he has seen new landlord-tenant documents to that effect.

And the problem could get worse for landlords a month from now.

"Commercial property owners don't seem to have much forbearance protection for their mortgage," said Grace Winters, a partner at Manatt Phelps & Phillips LLP. "When April 1st rolled around, there were a number of tenants that presumably didn't pay rent."

That lack of rent, Winters said, is likely to create a "second wave of problems" when mortgage payments for landlords come due May 1.

What's the Best Timing for Hotel and Restaurant Owners?

Restaurants and hotels face a knotty timing issue when contemplating applying for payroll CARES Act funding, since many of them have sent their employees home, and it's unclear if it's a good idea to bring workers back yet, given that consumer demand remains low amid the pandemic.

"A lot of folks did what they thought they were supposed to do. They sent their employees home, and then the CARES Act comes and provides relief for employees. If you've already sent your employees home, are you going to bring your employees back?" Guay said. "How do you navigate that? ... Are they better off leaving their employees furloughed and terminated?"

That question, though, is difficult because it's hard for hotel and restaurant owners to predict how long the pandemic will last, and owners have to make some kind of an educated guess on that point in order to weigh the pros and cons.

"There are a lot of different considerations. There's just a flood of interest," Guay said. "A lot of folks are asking and figuring it out as they go along."

Are Condos and Co-ops Eligible for Relief?

While hotels and commercial landlords have their sets of questions, cooperative housing corporations and condominium associations are also scrambling to figure out if they can get payroll relief from the CARES Act.

Leni Morrison Cummins, a partner at Cozen O'Connor, said she initially encouraged her condo and co-op clients to apply for CARES Act assistance, with the thought that they might or might not get it but that they could roll the dice and try.

Matters now, though, are slightly more complex since the Small Business Administration has since said there could be False Claims Act or criminal penalties if applicants make misleading or false statements.

And new SBA guidance still does not make it clear whether co-ops and condos can get relief, Cummins said.

"The SBA issued an interim final rule," Cummins said, referring to additional guidance on April 2. "The name is important because it is an interim rule but is also a final rule. When an agency like the SBA issues a rule, there is a required 30-day notice and comment period. … But these are unprecedented times, so this rule became effective immediately."

Cummins said she and others have reached out to the SBA for additional guidance and clarification.

"This comes at a time when all the condos and co-ops are really struggling," Cummins said. "There are sick employees. Even the most high-income buildings don't have huge balance sheets."

--Editing by Jill Coffey and Kelly Duncan.

For a reprint of this article, please contact reprints@law360.com.

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