Are you out of rental income? What can you do to protect your properties from facing a foreclosure? This information is exclusively for property owners and for landlords who are actually facing a difficult time and you’re trying to find solutions to see how you can actually get access to funding in order to protect your real estate business.
The concept of a small business is actually very important because this is going to set the tone for what you can qualify or you cannot qualify. For the Small Business Administration, the small business is any business who employs 500 people or less. This doesn’t have anything to do with how much money they make. They could be making millions of dollars, but the concept of what constitutes a small business is any business, whether it’s your real estate portfolio or an actual active business, as long as it employs 500 people or less.
The CARES Act stands for the Coronavirus Aid, Relief, and Economic Security Act. That is not to be confused with the Families First Coronavirus Response Act, which was passed two weeks prior to the CARES Act. They’re not exactly the same thing. Why? Because the Families First Coronavirus Response Act was put in place to help out businesses to provide paid leave, that is sick leave or people who have to take off due to the Coronavirus.
The CARES Act has two important sections:
- Keeping Americans Workers Paid
- Employed Act and the Assistance For American Workers, Families, and Business.
The business administration role in the CARES Act is that they intervene in the situation to aid, counsel, assist and protect the interests of small businesses to preserve, maintain, and strengthen the overall economy of the nation. The CARES Act is working in conjunction with the SBA to provide assistance, to provide financial assistance to help small businesses or real estate investors.
Those small business loans are business loans. They’re not a personal loan or a grant. What does that mean? It means that this assistance is not part of the personal help that you’ll be receiving.
One of the many programs that the CARES Act has to offer is:
- Economic Injury Disaster Loan, also known as EIDL. What can you do with EIDL? You can borrow up to $2 million for your business.
How do you do that? You have to put your properties inside of an LLC, you have to run everything like it is a business. We’re talking about having your operating costs, having all of your receipts, declaring all of that, rental income through your taxes, and having the ability to properly show that your rental business is an actual business.
You can borrow up to $2 million. You can qualify for $10,000 in advance as a grant, and the SBA advances you up to $10,000 and you can get that within three days of the application. The SBA is actually taking longer than usual because as you know, we are in the middle of a crisis and a lot of people are trying to get access to those type of loans.
This type of loan is forgivable. What does forgivable mean? It means you can get access to the $10,000 and as long as you can prove that you’re using it for what it’s intended to, then you don’t have to repay it back.
The EIDL, it’s a loan. It’s a loan from the SBA, therefore, there are interest rates that come with it. For small businesses, you will be paying three points 3.75%. If you’re running a nonprofit, then the rate is lower. It’s actually 2.75%.
The term of that loan is up to 30 years. Payment can be deferred to six months or one year. For this type of loan, you won’t need to provide any type of collateral, as long as it’s less than $200,000. Anything exceeding $200,000, you will have to provide some type of collateral.
Who is eligible? The eligibility applies to all businesses, including non-profits, veterans organizations, tribal business, sole proprietorships, self-employed individuals, and independent contractors with 500 or fewer employees.
An example of a self-employed individual could be nannies who work for themselves, or anyone who files for a Schedule C, where they’re filing their taxes. A good example of independent contractors are Lyft or Uber drivers. You work for a company but you don’t necessarily receive benefits from them, but you work for them under their umbrellas. That makes you an independent contractor.
- Economic injury disaster loan emergency advance, this loan will provide up to $10,000 of economic relief to businesses that are currently experiencing temporary difficulties.
The goal with this $10,000 grant is to get you access as fast as possible so that you can meet your financial responsibilities, and then, apply normally, and wait to get an answer for anything else that you can qualify it through them, but the goal is to get you this instantly or almost instantly so that you can meet your financial responsibilities.
- The next program that the CARES Act is offering is the Paycheck Protection Program. Popularly known as PPP or 3P. It’s also an SBA loan. What does the PPP has to offer? Basically, the federal government allocated a total of $349 billion for this program. The goal is to provide businesses with the fund to cover payroll costs. In a minute, we’re going to go over the definition of what they see as payroll costs. The money is available until the funds run out. The faster you do this, the better.
What exactly is included in payroll costs?
In this case, for the PPP program, we’re talking about salaries, we’re talking about wages, commissions or any cash tips that could be added to your employees. For example, bartenders, they’ve got a lot of cash tips. Now it also covers pay leave for vacation or sick leave or medical leave. We’re talking about people who probably got hit with the virus or maybe they had a family member that was impacted by the virus.
It is also meant to cover health care payments for those who have a business that includes insurance premium for your staff. It’s also designed to help you cover 401K payments.
The payroll cost also includes payment of state or local taxes for compensation for employees. For those who already have a small business or are running your rental portfolio like it is a business, you will realize that every time you pay your staff, you have to worry about taxes. You have to contribute to their taxes as well, and then part of that pool includes federal state or local taxes, for example, New York State has all three.
New York State has to contribute to the federal, it has to contribute to the State of New York and it has to contribute to New York City as part of their local taxes. This will include the state and local tax but will exclude the federal tax.
What is not included as part of your Paycheck Protection Program?
Any compensation or salary in excess of $100,000. You can go ahead and contribute to people’s salary, contribute to your staff and your team, as long as it does not exceed $100,000. $100,000 is the cap.
It doesn’t include tax credit for sick leave or family leave under the Families First Coronavirus Response Act. Why? Because the IRS doesn’t want you to double-dip. This doesn’t include federal employment taxes and it doesn’t cover any compensation for employees who are not residents of the US.
What else is included in the Paycheck Protection Program? It covers independent contractors, it covers self-employed, it also covers sole proprietors. The CARES Act created the PPP with the intention to have you use the money to cover payroll costs, including healthcare insurance, any interest on mortgages or rent that you have in place.
How do you prove that? It’s just very simple. You can share your bank statements. You can gather any financial statements that you have put together and just prove that there has been a slowdown in sales. Some of these can be even local like it’s no news that certain states have been issued a complete lockdown.
The loan, it’s also designed to help you cover any utilities in place. By that, we’re talking about electricity and the internet in the event that you’re taking your business online.
Let’s say if you’re doing deliveries and you’re taking orders online through Grubhub or whatever other site that you’re leveraging, then you also have to cover the internet. That’s meant to help you cover those types of expenses.
The good thing about this type of program is that for the PPP, you will not need any collateral or personal guarantee. The payment is deferred to six months. Why? Again, the SBA or the government is probably figuring that, “Hey, it would take approximately about six months for these businesses to get back on their feet, so let’s just cut them some slack and give them a break and let them use the funds and take care of any obligation that they have and then we’ll worry about getting that money back six months after the fact.”
The interest rate on the loan is 1%. The term was originally issued for 10 years. Now, they have made an amendment, they have made a correction and now the term is two years. That could change as well, but this is information that was updated as April 4th 2020.
If you’re curious about who is providing those funds, the fund is provided by the SBA, but they’re working directly with approved lenders. In order for you to apply for this type of program, you’re going to have to work directly with the lenders.
What is the eligibility?
What criteria do you need to meet in order to qualify for this? This is pretty similar to the EIDL. This type of assistance is provided to all businesses, including nonprofits, veteran organizations, tribal business, sole proprietorship, self-employed individuals, and any individual contractors, as long as you have been in business as of February 15. February 15 is the cut-off date.
What are the exclusions? Any business that is engaged in activity that is considered illegal under federal state or local law. For example, marijuana is one of them. Any household employers, for example, nannies. Why is it excluded? Because they can apply for it themselves. Therefore you’re not qualifying for money so you can pay your nanny.
Your nanny can go ahead and apply for it herself or himself. Any business that contains 20% of ownership by someone who is under a felony or under indictment or if you have defaulted or delinquent on an SBA loan within the last seven years.
How is the amount determined? You’re probably wondering. Well, the maximum amount is 2.5 times your average monthly payroll expenses. If you’re wondering why 2.5 and not 3.5 or 7.5 or 8, whatever the amount is, they are thinking 2.5, that is the equivalent of two-and-a-half months.
They’re thinking that two-and-a-half months should be enough of a help to get the businesses up on their feet and help them to be able to afford their expenses.
What if you don’t qualify for any SBA loans? The CARES Act still offers assistance outside of the SBA and one of them is the Mortgage Forbearance Program. This is not to be confused with mortgage forgiveness. You are still held responsible for what you owe in your mortgage.
What mortgage forbearance means is that you are getting the opportunity to pause or reduce the payment of your mortgage for a limited period of time due to the impact of the coronavirus. You will still have to make your payments in the future.
For example: Let’s assume that you owe $100,000 in one year and you continue to make your payments. By year two, you have reduced some of your debt, and by then you will owe $90,000.
On a second example, let’s say you owe $100,000 a year and you took the forbearance, and you decided to either pause or reduce payment, whichever the option is it that you’re getting. By year two, you will possibly either owe $100,000 still if you decide to pause the mortgage payments or maybe $99,000, if you decide to reduce payments.
What about the mortgage interest
Do you prefer to pay your mortgage interest on the $90,000 or would you prefer to pay that on the 9,900 or the 100,000? That’s what it comes down to it. Yes, it will help you if you really have no other means to get through this and you really have to pause, otherwise, you will end up in foreclosure and they will be taking away your property.
Now, if you have a multifamily, then the forbearance can be requested up for 30 days with two additional 30 periods for a total of 90 days. The options for private loans differ and they can each dictate what the terms are.
They are also understaffed because people might have taken sick days or they just completely quit because they don’t want to expose themselves. Some of them are probably working from home and when you’re working from home, it’s not the same bandwidth as if you are actually working in an office space with high-speed internet.
In order for you to get access to this type of assistance, you must contact your lender directly or your loan servicer directly. What is a loan servicer? It is basically the company that sends you mortgage statements and manages your loan.
Depending on your situation, you will either contact the lender directly if your lender is still the one who’s managing your mortgage but if not, chances are you’re going to have to contact the loan servicer. How do you know who to call? Well, first thing, try to call the number and your mortgage statement, whatever that number is, it could take you either to your lender or to your loan servicer. If that is not the right number, they will eventually point you at the direction of someone who can actually help you.
The good thing about mortgage forbearance is that you won’t have to pay any additional fee. For example, usually with a mortgage, you have to pay for closing costs, you have to pay for a mortgage origination cost. For this type of assistance, you don’t have to pay any additional fees or any additional interest to request a forbearance. You will still have to pay for the interest in your mortgage, you just won’t have to pay for interest to request for the forbearance.
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