Florida is the only state that imposes sales tax on the lease of commercial real property. Over the last several years, this tax rate has been reduced in increments from 6.0% to 5.5%. Under recently enacted legislation, this rate will be further reduced to 2.0%. However, this rate reduction will not go into effect until two months after Florida’s Unemployment Compensation Trust Fund is replenished to pre-pandemic levels. Depending upon future unemployment claims, Florida economists estimate this may occur in 2024 or 2025. The 3.5% reduction is estimated to save commercial tenants approximately $1.2 billion annually. The local sales tax portion of the commercial rent tax is not changed by the new legislation.
Borrowers of federally backed loans owned by Fannie Mae and Freddie Mac will not have to repay missed payments in a lump sum once their forbearance periods end. Mark Calabria, Director of the Federal Housing Finance Agency (FHFA), made this clear in a statement aimed to correct consumer confusion after reports revealed loan servicers were telling borrowers they would have to repay missed payments in a lump sum. This misinformation was problematic for the tens of millions of unemployed Americans who feared they would continue to face financial hardship due to the COVID-19 emergency. Continue reading
In response to requests to provide guidance on the impact of mortgage loan forbearance programs on the tax treatment of securitization vehicles, such as real estate mortgage investment conduits (“REMICs”) and investment trusts, the IRS issued Revenue Procedure 2020-26. The IRS establishes that forbearance programs offered as COVID-19 relief will not jeopardize the tax treatment and qualifications of REMICs and investment trusts.
The Rev. Proc. applies to forbearances granted under the CARES Act, and other forbearance programs offered by loan servicers and holders, either voluntarily or state mandated, for borrowers experiencing financial hardship due to the COVID-19 emergency. Continue reading
Title IV of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), provides mortgage relief to homeowners with federally backed mortgage loans. The CARES Act allows eligible borrowers to request forbearance on loan payments for six months, and then request an additional six month forbearance period. The Act also includes a moratorium on foreclosure actions. The applicable provisions are summarized below.
Loans Secured by Property Designed for 1-4 Families
Eligibility: Federally Backed Mortgage + Financial Hardship
Only borrowers holding a “federally backed mortgage loan” are eligible for forbearance. “Federally backed mortgage loans” are loans secured by a lien on real property designed for 1-4 families and which are insured by the FHA, the Department of Veterans Affairs, or the USDA (or made directly by the USDA), and loans purchased or securitized by Fannie Mae and Freddie Mac. Therefore, not all mortgagors will be benefitted by these provisions. Borrowers should note that forbearance is not forgiveness of the debt. Instead, forbearance provides additional time for repaying the debt. During the forbearance period, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time, shall accrue.
According to the National Housing Law Project, approximately 70 percent of single-family mortgages are federally-backed. To determine whether your loan is purchased by Fannie Mae or Freddie Mac, you can search the databases available on their websites. For other information regarding whether your loan is federally backed, you can contact your loan servicer (if you do not know the identity of your loan servicer, you can check the Mortgage Electronic Registration Systems website). Even if your loan is not federally backed, some lenders are offering similar deferral programs for borrowers who are ineligible under the CARES Act.
Additionally, a borrower holding a federally backed mortgage must have experienced “financial hardship” due to COVID-19. To receive forbearance, the borrower must submit a request to the borrower’s servicer attesting financial hardship due to COVID-19. The term, “financial hardship” is not defined in the Act, and loan servicers may not require additional documentation evidencing financial hardship.
The Act does not limit the amount of debt that may be deferred.
Loan forbearance period
Borrowers may request an initial forbearance of up to 180 days and an extension for an additional period of up to 180 days during the “covered period.” The covered period began with the adoption of the CARE Act and will end upon the sooner of: (i) termination of the national COVID-19 emergency, and (ii) December 31, 2020.
Moratorium on Foreclosures
Except with respect to a vacant or abandoned property, a servicer of a federally backed mortgage loan (as defined above) may not initiate any foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or sale before May 17, 2020. (See below for a discussion on the temporary freeze on writs of possession, which are required to remove a foreclosed borrower.)
Loans Secured by Multifamily Property (5+ Families)
Section 4023 of the Act provides for forbearance for borrowers holding “federally backed multifamily mortgage loans,” which include loans secured by real property designed for 5 or more families made or insured by the federal government. This specifically includes loans made in connection with HUD and loans purchased by Fannie Mae and Freddie Mac.
Temporary financing, such as construction loans, are not eligible for forbearance. As such, many developers may not be able to take full advantage of these provisions.
Multifamily borrowers may request forbearance by attesting financial hardship due to COVID-19. However, the borrower must have been current on its payments as of February 1, 2020.
The initial forbearance period is 30 days from the multifamily borrower’s request. The borrower may extend the forbearance for up to 2 additional 30-day periods, provided the request is submitted at least 15 days prior to the initial forbearance period. (We interpret the 15-day deadline as referring to only the first request for an extension, but the statute is unclear.) All initial and extension requests must be made before the sooner of: (i) termination of the national COVID-19 emergency, and (ii) December 31, 2020.
During the period that the multifamily borrower receives forbearance, it may not evict a tenant from a unit in the applicable property solely for failure to pay rent, charge late fees or penalties for failure to pay rent, or require a tenant to vacate a unit. Even if a multifamily borrower does not receive forbearance or has stopped receiving forbearance, it may be prohibited from performing the above actions pursuant to the moratorium on evictions described below.
Moratorium on Evictions
Under Section 4024 of the Act, borrowers holding a federally-backed mortgage or multifamily mortgage, may not, before July 25, 2020, evict a tenant from the applicable property solely for failure to pay rent, charge late fees or penalties for failure to pay rent, and require a tenant to vacate a unit. This moratorium applies to all borrowers holding a federally-backed mortgage, regardless of whether they actually apply for or receive forbearance. Even if borrowers are able to bring an eviction action against a tenant, a recent order from the Supreme Court of Florida has potentially delayed their ability to obtain a writ of possession, the final order in an eviction lawsuit used to remove an evicted tenant.
Given the lack of guidance surrounding the definition “financial hardship” and loan servicers’ inability to refute a borrower’s claim of hardship, the number of borrowers eligible for forbearance under the Act is potentially immense. A borrower who is unable to keep mortgage payments current is encouraged to contact the servicer to request forbearance. A borrower should be prepared to describe the financial hardship to the servicer, and should follow up to obtain written documentation as to the forbearance.
Our team at Williams Parker is ready to assist individuals, developers, and owners of multifamily property who are considering taking advantage of the loan forbearance provision in the CARES Act. We are monitoring governmental publications and will share any further guidance that is provided as to the circumstances that constitute “financial hardship.”
Williams Parker’s COVID-19 response team is continuing to monitor these and other developments, and advise on issues arising from the Coronavirus. View the latest updates.
Partner Terri S. Costa contributed to this post.
In recognition of COVID-19’s impact on the ability of Floridians to make mortgage and rent payments, Florida Governor Ron DeSantis issued Executive Order #20-94 on April 2 suspending the ability of mortgage lenders and landlords to bring actions for foreclosure or eviction for a period of 45 days from the date of the order (including any subsequent extensions). The order does not relieve an individual from making mortgage or rent payments.
The suspension on foreclosure proceedings applies to both residential and commercial mortgages. The suspension on eviction proceedings, on the other hand, is limited to residential tenancies.
Businesses are still subject to eviction for failure to pay rent during the COVID-19 pandemic. Although a commercial landlord can commence eviction proceedings, the landlord may not, however, be able to finalize the eviction and remove the tenant. On March 24, the Florida Supreme Court issued an order suspending the Florida Rule of Civil Procedure requiring clerks to issue writs of possession. Writs of possession are the final court orders in an eviction proceeding necessary to remove an evicted tenant. That order stays in effect until April 17, unless subsequently extended.
The suspension on eviction proceedings is also limited to evictions arising out of a residential tenant’s failure to pay rent due to the COVID-19 emergency. Residential landlords may still commence eviction proceedings for other defaults under a lease.
Williams Parker’s COVID-19 response team is continuing to monitor these and other developments, and advise on issues arising from the Coronavirus. View the latest updates.
Following is a video of a short conversation between Williams Parker attorneys Thomas B. Luzier and James-Allen McPheeters about federal stimulus availability for small businesses, independent contractors, and sole proprietorships.
For more information on these programs, please contact James-Allen. Keep in mind that aid currently available can be handled directly through the Small Business Administration or with your local banker.
For the latest developments on virus-related matters and the impact on businesses, visit our COVID-19 resource page, which is updated regularly.
Given widespread financial hardship due to COVID-19, commercial landlords are receiving requests for relief from tenants unable to pay the next month’s rent. Legally, landlords are probably justified in refusing to abate or defer rent, though this issue is far from settled and ripe for future litigation.
A tenant in this situation has two likely arguments for seeking rent deferral:
- A force majeure clause in the lease (one that provides both parties relief from obligations upon events such as natural disasters, war, and acts of God); and
- Frustration of Purpose (a legal doctrine excusing a party from performing its obligations under a contract if it is prevented from acting due to an unforeseen event).
As lease disputes arise, it is possible that these arguments convince courts—potentially sympathetic to tenants who have not been able to pay rent during the COVID-19 emergency—to grant an abatement or deferral of rent. To add more uncertainty for landlords, Sarasota County’s Clerk of Court, relying on an order last week from the Supreme Court of Florida, has temporarily stopped issuing writs of possession (the final orders in an eviction lawsuit necessary for removing an evicted tenant).
As long as the Clerk of Court takes this position, landlords will be prevented from promptly evicting delinquent tenants. Given these obstacles, and considering landlords have a vested interest in ensuring the long-term success of many of their tenants, landlords should consider creative solutions when responding to a tenant’s request for relief. Below are options a landlord can consider in this situation:
- Refuse any abatement or deferral. This approach may only be viable for financially strong tenants, or those with whom the landlord has little long-term incentive to cooperate (e.g., tenants with a poor payment history, or who will be moving locations soon, or permanently closing their business). Also, a landlord may have more leverage to take this position for leases that do not contain a force majeure.
- Require tenants apply for assistance under the CARES Act or other emergency assistance programs. The recently enacted CARES Act allows small businesses to apply for assistance from the Small Business Administration. Certain tenants may also be eligible for the Florida Small Business Emergency Bridge Loan Program. Landlords can request eligible tenants apply for this assistance, and pass it on to the landlord in the form of continued rent payments. Alternatively, landlords might want to require this assistance as a condition to deferral of rent payments under Options #3 and #4, below, to ensure that the tenant will have sufficient cash to continue to pay rent once the COVID-19 emergency ceases.
- Temporarily defer rent payments and make up missed payments over a period of time. The deferral could be for the entire amount of the rent, or just a portion, and can be allocated in whatever manner the parties may agree is workable (i.e., for a period of several months after the COVID-19 emergency ceases). However, landlords may wish to take a “wait and see” approach and only agree to the deferral on a month-to-month basis.
- Defer rent payments and agree to extend the lease for the duration of the deferral. Generally, this approach is less beneficial for landlords than Option #3, but tenants who might be slow to recover after the emergency, or who were barely able to pay rent before the emergency, might only agree to an extension of the lease, rather than making increased payments once normal business operations resume.
Each tenant’s ability to pay rent will vary, and landlords with multiple tenants face a myriad of challenges as they attempt to develop solutions that maintain continuity of their own cashflow without alienating their best and most reliable tenants. At Williams Parker, our team of experienced business and real estate attorneys are uniquely equipped to provide landlords with the depth of counsel they need to respond to these quickly evolving challenges.
Writs of possession are also required to take possession of property after a foreclosure.
The Clerk’s position applies to both residential and commercial evictions. For recent developments surrounding a federal moratorium on certain residential evictions, see our article Mortgage Relief in the CARES Act.
Section 199A generally provides a 20 percent deduction for qualified business income of a trade or business. Many comments made with respect to the proposed Section 199A regulations focused on when rental real estate activities will constitute a trade or business, and thus be eligible for the Section 199A deduction. The final regulations generally define a trade or business by referencing Section 162, and the IRS acknowledged there is uncertainty regarding when rental real estate activities constitute a trade or business for purposes of Section 162. In connection with issuing the final Section 199A regulations on January 18, 2019, IRS issued notice 2019-07, which provides notice of a proposed revenue procedure detailing a proposed safe harbor under which rental real estate activities may be treated as a trade or business solely for purposes of Section 199A.
The notice provides that a “rental real estate enterprise” will qualify for the safe harbor if:
(a) Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
(b) For taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed per year with respect to the rental enterprise. For taxable years beginning after December 31, 2022, in any three of the five consecutive taxable years that end with the taxable year (or in each year for an enterprise held for less than five years), 250 or more hours of rental services are performed per year with respect to the real estate rental enterprise; and
(c) The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding (i) the hours of all services performed, (ii) a description of all services performed, (iii) dates on which such services are performed, and (iv) who performed the services. This contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019.
The notice defines a rental real estate enterprise as an interest in real property (or multiple properties) held for the production of rents. The interest must be held directly or through an entity disregarded for income tax purposes. Commercial and residential real estate may not be part of the same enterprise. Real estate used by the taxpayer (including an owner or beneficiary of an owner of a pass-through entity that owns the real estate) as a residence for any part of the year under Section 280A is not eligible for the safe harbor.
Importantly, real estate leased under a triple net lease is also not eligible for the safe harbor. The notice provides that a triple net lease includes a lease arrangement that requires the tenant to pay taxes, fees, and insurance, and to be responsible for maintenance activities in addition to rent and utilities.
Rental services may be performed by the owner, employees, agents, and/or independent contractors of the owner. Rental services include (a) advertising to rent the real estate; (b) negotiating and executing leases; (c) verifying information contained in prospective tenant applications; (d) daily operation, maintenance, and repair of the property; (e) management of the real estate; (f) purchase of material; and (g) supervision of employees and independent contractors. Rental services do not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or operation reports; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.
In order to apply the safe harbor, the taxpayer claiming the Section 199A deduction must attach a signed statement (described in the notice) to its income tax return.
If a rental real estate activity fails to satisfy the safe harbor, it may still be treated as a trade or business for purposes of Section 199A if the activity otherwise qualifies as a trade or business under Section 162.
This post is one in a series of posts on the 199A regulations.
Since the enactment of Section 199A as part of the Tax Cut and Jobs Act late last year, tax practitioners have been devising ways to take a specified service trade or business, such as a physician group, and segregate the parts of the business that are a specified service trade or business from the parts that are not. For example, there has been speculation as to whether an S corporation operating a physician group that provides medical services (which is a specified service trade or business), owns its building, and employs administrative and billing staff could be divided into three S corporations. S corporation 1 would provide medical services to patients, S corporation 2 would own the medical office building and lease it to S corporation 1, and S corporation 3 would employ the administrative and billing staff and provide its services to S corporation 1 in exchange for fees. The hope would be that the common owners of the three S corporations would be eligible for a 199A deduction with respect to S corporation 2 and S corporation 3 (they would generally not be eligible for a 199A deduction if all of the components of the physician group were contained within one entity).
The proposed 199A regulations provide rules addressing this issue in Section 1.199A-5(c)(2). These rules provide that a specified service trade or business includes any trade or business that provides 80% or more of its property or services to a specified service trade or business if there is 50% or more common ownership (using the related party rules in Sections 267(b) and 707(b)) of the two trades or businesses. If a trade or business provides less than 80% of its property or services to a specified service trade or business that has 50% or more common ownership, then the portion of the trade or business providing property or services to the commonly-controlled business will be treated as part of the specified service trade or business. For example, if a dentist owns a dental practice and a building used in the practice in separate entities, and 40% of the real estate is leased to the dental practice and 60% of the real estate is leased to an unrelated tenant, then 40% of the real estate business will be treated as part of the dental specified service trade or business. But, if 80% of the real estate was leased to the dental practice, then all of the real estate would be treated as part of the dental specified service trade or business.
We previously blogged that the Florida Legislature enacted a reduction to the state sales tax rate on commercial real property leases from 6% to 5.8% effective January 1, 2018. The language of the new statute is unclear as to whether the rate decrease would apply to current leases. However, we have confirmed with a representative of the Florida Department of Revenue that they interpret the rate reduction as applying to current leases for periods after December 31, 2017.