The COVID-19 pandemic greatly affected economic activity, causing financial hardship. The United States federal government, through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), implemented relief services, providing loans for small businesses, and non-profit organizations.
Although many of these relief programs focus on small businesses and other aforementioned entities, to some extent, tenants and landlords are not exempt. Some of these relief options prove beneficial for landlords and tenants struggling to pay rent.
Perhaps the most widely known of these programs is the Paycheck Protection Program (PPP). Others include Economic Injury Disaster Loans (EIDL) and Federal Rental Relief (FRR).
In this article, we'll discuss the intricacies of PPP loans for rental property owners, including how other programs can help landlords recover lost rents.
What is the PPP?
The paycheck protection program is a multi-billion dollar business loan program launched in 2020 by the United States federal government, through the CARES act. This program runs for the benefit of self-employed workers, small business owners, and non-profit organizations, granting these individuals and firms access to loans.
The PPP is implemented by the Small Business Administration (SBA), aiming to grant several entities access to low-interest loans to pay for their payroll, and cover other costs. These funds can cover up to eight weeks' worth of payroll costs, plus additional benefits.
For reasons we'll mention soon, landlords aren't directly eligible for these loans. However, landlords can still benefit from these loans through eligible tenants' involvement.
Who Is Eligible for the Paycheck Protection Program?
Eligibility for the PPP boils down to several factors, depending on the entity involved. For an entity to be eligible for a PPP loan, they must be:
For sole proprietors to qualify, they must file a Schedule C (Form 1040) to report income and losses for their business.
For an independent contractor, the requirements to apply for a loan includes the submission of a Form 1099-MISC and a Schedule C.
Self-employed individuals must provide payroll tax filings reported to the Internal Revenue Service (IRS) before they're deemed eligible for participation in the PPP.
Non-profit organizations must have had a payroll in 2019 or 2020, which they'll submit. Faith-based organizations should read the SBA's support article concerning faith-based organizations' participation in PPP.
To be eligible for a PPP loan, S-corps must provide a payroll document. Otherwise, they're deemed ineligible.
Partners must not submit separate applications but turn in a single PPP application representing their partnership. Also, you should submit payroll forms.
Also, several entities are ineligible for a PPP loan, including:
- Household employers (individuals hiring nannies and house help)
- Individuals and businesses engaging in illegal activities in violation of federal, state, or local law
- An individual or business currently in bankruptcy
- A private equity firm
- A business not in operation in Feb 2020
PPP Loans for Property Owners
The PPP program is a centerpiece of the Cares Act, but landlords can't receive a PPP to replace their lost rent since it isn't considered payroll, but that doesn't mean they can't get one for other reasons.
You can apply for a PPP covering up to 2.5 times your monthly payroll costs if you hire a property manager, renters, or other employees (including yourself) to look after your tenants' needs or maintain your rental properties. Also, a tenant in financial need can qualify for a PPP loan.
PPP loans may be more beneficial for a hotel owner-operator with many properties and a large number of direct employees, but not for a real estate business with a multi-million dollar portfolio handled by a total workforce of less than 15 direct workers.
PPP Application Process
An eligible applicant can apply for PPP loans directly with Small Business Administration-approved lending services, or an eligible private lender. It's important to note that some private lenders may only consider PPP applications from firms that already have a depository account with them.
The SBA maintains a standard application form. However, private lenders can use their own paper or electronic forms if they're substantially equal to the SBA's standard form. An applicant must submit proof to substantiate the loan amount requested.
Payroll reports, payroll tax filings, Form 1099-MISC, etcetera can serve as proof, and if these records are lacking, a lender might use bank records if they help to satisfy the criteria.
While lending services aren't required to ask a firm to justify the rationale for its certification, the SBA may. However, eligible applicants must assert that the current economic uncertainty makes the loan request vital to maintain the applicant's continued activity.
In addition, the Equal Credit Opportunity Act requires lending services to notify applicants of a decision on a PPP application within 30 days of receiving either a loan number or a response from the SBA on funding availability.
Concerning incomplete PPP loan requests, the ECOA requires a lending service to advise the applicant of the problem, also providing the applicant with a reasonable amount of time to finish the application.
Furthermore, a lending service can reject an incomplete application only if the applicant fails to complete it within the time frame set by the lender. A lender also can't turn down a PPP application because of non-response from the SBA.
PPP Loan Terms
Several terms exist governing PPP loan applications, including:
- All small businesses are eligible.
- The maturity rate of the loan is two years, including a one percent interest rate.
- A PPP loan is forgivable and can become a non-taxable grant when forgiven, aiding cost segregation.
- Personal requirements or collateral aren't required to obtain PPP funds.
- There are no required application or approval fees.
- Loans approved by the SBA after June 5th, have a maturity rate of five years, with the option of an extension by the lender.
An individual isn't required to begin payment of principal or interest until the SBA disburses the amount of forgiveness to the lender.
If a business doesn't apply for forgiveness, there isn't a requirement to begin payment of interest or principal. These payments don't begin until a period after the funds' distribution to the business is done.
PPP Loan Forgiveness
Loan forgiveness means you're no longer required to pay a percentage, or all, of your loan debt. After all the loan funds the borrower is asking for have been utilized, the borrower can petition for forgiveness.
Borrowers can request forgiveness at any time up to the loan's settlement date. If borrowers don't ask for forgiveness within 10 months after the end of the covered term, their PPP loan payments will no longer be delayed, and they will be required to pay their PPP lending services immediately.
Steps to Apply for Loan Forgiveness
We've summarized the steps to apply for loan forgiveness into a few points, including:
Determine whether your lender participates in SBA direct forgiveness and fill out the appropriate form.
- Compile your paperwork.
- Submit your forgiveness form, with your documentation, to the SBA or your PPP lender.
Continue monitoring your forgiveness application.
For a detailed breakdown of how you can apply for forgiveness, read the SBA's official article on PPP loan forgiveness.
Can You Apply for a Loan Through More Than One Lender?
One of the most frequently asked questions by most individuals is whether it's possible to submit applications through several lending services.
Yes! It's very possible to submit PPP fund applications with more than one lender. Whichever lender processes your application first, will receive approval from the SBA for your business.
Applying with more than one lender is only beneficial if you're eligible for the loan. Regardless of the number of PPP-approved lending services you visit, you won't be able to acquire a loan if you're ineligible. So, applying to several lenders doesn't in any way ruin your chances of getting a loan as long as you qualify for one.
What Can PPP Loan Funds Be Used for?
PPP loan funds must be used appropriately. A minimum of 60 percent of the loan must be used to cover payroll and employee benefits, while the remaining 40 percent can be spent on:
- Rent and lease payments
- COVID-compliant worker protection expenditures
- Mortgage payments
- Supplier costs including the cost of sold goods
- Property damage costs are not covered by insurance
During the loan application, you'll be asked to confirm that the funds will be spent appropriately, and if you use the funds otherwise, you could be charged with fraud. Apart from PPP loans for rental property owners, we'll discuss other loan programs and the benefits they provide landlords.
Economic Injury Disaster Loan (EIDL)
Also, from the SBA, the EIDL program provides landlords and business owners with low-interest loans during economic recessions. Although the EIDL has always been active, even before the pandemic, the program expanded in 2020.
Depending on their financial needs, landlords can apply for up to $2 million worth of EIDL loan funds. Afterward, the EIDL will determine the final amount.
Furthermore, an EIDL loan includes an affordable interest rate of 3.75 percent, which is significantly lower than most lending programs demand, and additionally, to the EIDL program, the SBA introduced the EIDL Advance program, which offers up to $10,000 dollars in grants for small-scale business owners and entrepreneurs in need. The program was later concluded when funds ran out.
However, in early 2021, the SBA launched the EIDL target advance program, which was especially for the applicants of the concluded advance program. To apply for the grant, you must have already been sent an invitation email by the SBA.
Federal Rent Relief
The Federal Rent Relief program began in late December 2021, making it the most recent stimulus relief program launched by the U.S. government. This program has provisions for landlords and tenants in particular.
This government relief program includes $25 billion dollars of rental funds, for directly covering rent for struggling tenants.
With states beginning to receive their allocations, tenants can apply for rental assistance, and the funds will be distributed directly by state governments to landlords. Landlords can also apply on their tenants' behalf and receive reimbursement covering as much as fifteen months’ rent.
However, to be eligible for a rental assistance application, a tenant must fall within or below eighty percent of the midpoint of their region's income distribution (also known as their Area Median Income).
In response to the economic struggles because of the pandemic, the government has made several programs available to offer aid to many landlords, and tenants struggling to pay rent.
These relief programs help alleviate financial struggles by providing PPP loans for rental property owners, offering forgivable loans for small business owners and entrepreneurs. These programs include the PPP, Economic Injury Disaster Loan, and Federal Rental Relief, and each has its way of aiding tenants, landlords, business owners, and entrepreneurs.
While there are several requirements for the previously mentioned application process, these loan platforms introduced by the government are here to offer you rental assistance.
During an economic crisis, it's often difficult to pay rent as a tenant, causing landlords to lose income. Take advantage of this information now, and apply for a loan in any of these government relief programs.
These stimulus packages will help you pay off overdue rent or solve the problem of your declining income as a property owner.