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How the CARES Act could benefit Investors

Jan 01, 2021

The $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by President Trump on March 27th, 2020. The economic stimulus package is designed to bolster the U.S. economy with fiscal stimulus, grants and loans equal to nearly 10% of the country’s economy.1

There are also a number of potential benefits for the real estate industry in the CARES Act, including direct cash payments and tax advantages for real estate investors, landlords, and tenants.

In this article we’ll take a look at tax advantages included in the CARES Act that could benefit accredited real estate investors.

How the CARES Act could benefit commercial real estate investing

Under the existing tax code real estate investors generate losses from depreciation by gradually writing down the value of their properties, then using some of those losses to offset other taxes.2
The TCJA (Tax Cuts and Jobs Act) passed in December 2017 limited those losses. For example, a married couple could only shelter the first $500,000 of non-business income, such as capital gains from investments, and were required to carryforward any additional losses to future years.3
The CARES Act removes the restriction the TCJA created for three years – retroactive to 2018 and 2019, and the current 2020 tax year – which may benefit couples with more than $500,000 in annual capital gains or income from sources other than their business.4

Potential tax benefits for real estate investors in the CARES Act

Here are the highlights from the CARES Act that could offer tax benefits to real estate investors:5

5-year carryback allowed for NOLs

Net operating losses (NOLs) accrued in 2018, 2019, and 2020 may be carried back for five years preceding the NOL. Prior to the CARES Act, NOL deductions could not be carried back to prior years and were limited to 80% of a business’s taxable income. However, REITs are not allowed to carry back NOLs.

Suspension of NOL deduction limitation

The NOL deduction limit of 80% of taxable income is also suspended during 2020. This allows businesses to use NOLs to offset 100% of their taxable income in 2020. The 80% limit will be reinstated beginning in 2021.

Corrects QIP depreciation

Qualified Improvement Property (QIP) – also known as leasehold improvements – are now eligible for immediate depreciation, a provision that may be of significant benefit to hotels, restaurants, and retail establishments. The change applies to the current 2020 tax year and is retroactive to 2018 and 2019. Taxpayers must file amended returns the prior years to recover any overpaid taxes.

While touted as a benefit for the 1% by publications such as The New York Times6, the CARES Act actually corrects an error made in the Tax Cuts and Jobs Act (TCJA) passed on December 22, 2017 that mistakenly made the QIP depreciable over 39 years instead of 15.

Loss limitations for non-corporate taxpayers removed

The TCJA placed a limit on the amount of tax deductions arising from business losses that non-corporate taxpayers could make. The CARES Act removes those limitations for 2018 through 2020. Taxpayers who were subject to these limitations may file amended returns for 2018 and 2019 to benefit from this change.

Business interest expense deduction increased

The maximum amount of tax-deductible business interest expenses is increased from 30% to 50% of adjustable taxable income (ATI) for 2019 and 2020. Taxpayers are not required to use this change. Instead, they may elect to use their 2019 ATI to determine their maximum business interest deduction for 2020, rather than their ATI in 2020.

AMT credits may be used immediately

Corporations with unclaimed AMT credits may now claim them immediately. Previously, the TCJA allowed corporations with previous AMT liability to claim credits but required the credits to be spaced out over several years.

Readers interested in reviewing the entire 880-page CARES Act may download the PDF from the Tax Foundation here.

Other parts of the CARES Act affecting investors and tenants

According to The National Law Review, other parts of the CARES Act that could benefit commercial real estate investors include:7

Multifamily mortgage loan payment forbearance: Borrowers under a federally backed multifamily mortgage loan may be able to temporarily forbear payments for three 30-day extensions, provided by are current on payments as of February 1, 2020. During the forbearance period the borrower may not evict a tenant for nonpayment of rent or charge late fees or other penalties for late payment of rent.

Eviction moratorium on federally backed properties: For 120 days following the enactment of the CARES Act, an owner cannot initiate actions for evictions, or any act related to the tenant’s nonpayment of rent or fees. The rule applies to mortgages insured, guaranteed, supplemented, protected, or assisted in any way by federal loan programs from organizations including HUD, Fannie Mae, and Freddie Mac.

Small business paycheck protection program: Qualifying small businesses – including full or part-time sole proprietors, independent contractors, self-employed individuals, and gig economy workers – may apply for a forgivable loan program to help support their payroll and operations during the COVID-19 pandemic.

$2 trillion and looking for more

A recent article on The Real Deal reports that while the CARES Act could help to ease the economic pain for renters – and therefore landlords and lenders – the $2 trillion Act may not be enough.8

The CEO of the California Apartment Association (CAA) notes that the current relief package contained in the CARES Act does little for landlords who do not have federally backed mortgages or subsidized renters. That may be one reason why plans are already being put together for another stimulus package for April.

According to The Wall Street Journal, think tanks and lobbyists, economists, administration officials, and legislators from both sides of the aisle are currently roughing out another emergency spending package that may be larger than the $2 trillion CARES Act.9

Conclusion

The New York Times also notes that the CARES Act could be a “potential bonanza” for America’s richest real estate investors.10

In part, that’s because the Act could provide $170 billion in tax breaks if real estate investors make use of the renewed provisions to use real estate losses and depreciation to reduce the amount of federal income tax owed.

References

1. https://www.loopnet.com/learn/five-real-estate-takeaways-from-senate-approval-of-coronavirus-stimulus-/511170555/

2. https://www.irs.gov/publications/p946

3. https://www.congress.gov/bill/115th-congress/house-bill/1/text

4. https://files.taxfoundation.org/20200325223111/FINAL-FINAL-CARES-ACT.pdf

5. https://www.natlawreview.com/article/real-estate-provisions-coronavirus-aid-relief-and-economic-security-act-cares-act

6. https://www-nytimes-com.cdn.ampproject.org/c/s/www.nytimes.com/2020/03/26/business/coronavirus-real-estate-investors-stimulus.amp.html

7. https://www.natlawreview.com/article/real-estate-provisions-coronavirus-aid-relief-and-economic-security-act-cares-act

8. https://therealdeal.com/2020/03/30/kicking-the-can-down-the-road-real-estate-industry-says-2t-relief-plan-doesnt-do-enough/

9. https://www.wsj.com/articles/after-three-coronavirus-stimulus-packages-congress-is-already-prepping-phase-four-11585483203

10. https://www.vanityfair.com/news/2020/03/coronavirus-stimulus-package-trump-jared-kushner-tax-break-real-estate

All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Readers are recommended to consult with a financial adviser, attorney, accountant, and any other professional that can help you understand and assess the risks associated with any investment opportunity.

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Why Passive Investors Love Multifamily Syndication

08 Jan, 2021

There’s no question that multifamily real estate is one of the best investments available. The problem is, these investments are expensive and can be difficult to manage.

Trends in Multi-Family Housing

26 Dec, 2020

For nearly 10 years, the multifamily market has continued to grow and today, industry leaders believe that the sector may continue that growth in 2020. To understand if those optimistic views of this asset class are justified, we’ll begin by reviewing the performance of the multifamily housing market in 2019. Then, we’ll explore five multifamily housing trends that may influence the demand for rental investments in 2020. Multifamily 2019 in review RealPage Chief Economist Greg Willett writes that the multifamily market ended 2019 in great shape.¹ Occupancy rates reached 96.3% in 2019, the lowest level since 2000. Since the middle of 2018, rent growth has exceeded 3% due to strong and consistent demand.² Research from Yardi Matrix shows that over 320,000 multifamily units were absorbed in 2019, marking the 6th year in a row where absorption has exceeded 250,000 units.³ Yardi also reports that tenant demand in 2019 was strong despite market rents increasing in most segments. Property values are at all-time highs with robust deal flow and few delinquencies with debt markets functioning smoothly. Multifamily housing trends in 2020 The National Apartment Association recently reported that the U.S. needs about 4.6 million new multifamily units by 2030 to keep up with demand. That’s about 328,000 new units annually over the next 10 years.⁴ Drivers behind the rising demand for multifamily housing include:⁵ Growing number of renters across all demographic classes Job portability Strong economic growth Historically low unemployment Accommodative fiscal policy by the Federal Reserve Significant capital available for commercial real estate investment With those fundamentals in mind, here are some of the top multifamily housing trends that may influence the demand for rental investments in 2020: Trend #1: Developer Activity in 2020 Since 2016, nearly 1.1 million new multifamily units have been delivered to the market, according to CBRE.⁶ Although permits, starts, and completions were at or near cyclical highs last year, the firm forecasts that 280,000 units or more will come to market in 2020. Part of the reason for this development trend is that multifamily is viewed as a commercial investment asset with possible lower volatility and a potential safe haven in unpredictable markets.⁷ Multifamily property generally sees steady tenant demand from a diversified renter base, short-term leases with rates that can be adjusted for inflation and better market value, with less capital required for upkeep relative to other CRE assets. Financing backed by Freddie Mac and Fannie Mae also provides investors with a potential liquidity benefit that most other commercial property types do not benefit from. Freddie Mac expects multifamily loan origination volume in 2020 to reach $390 billion, an increase of 5.7% compared to 2019 and an increase of 15% compared to 2018.⁸ Multifamily fundamentals, investor demand, and low interest rates are helping to create the supply side demand for capital and multifamily development in 2020. Trend #2: Millennials driving multifamily demand On the demand side, growth in the multifamily market in 2020 may come in large part from millenials.⁹ The National Association of Home Builders (NAHB) notes that 22% of adults between the ages of 25 and 34 still live at home. That’s a market of over 8.7 million potential new renters, according to the Kaiser Family Foundation and the Census Bureau.¹⁰ The rising cost of homeownership, student debt, and lifestyle preferences are key reasons why millennials are opting to rent rather than own. Developers have responded by building in urban and suburban areas where neighborhoods are walkable and opportunities for entertainment, services, and socializing are plentiful. In order to attract and retain these “renters-by-choice,” developers are creating multifamily communities with amenities such as on-site coffee bars, rooftop cafes, bars, and indoor basketball and bowling. Trend #3: Yields may tighten on multifamily investments The equity and debt flow into the multifamily sector are expected to increase in 2020, even as cap rates compress and yields tighten.¹¹ Institutional investors are allocating more money to the sector, traditional and private lenders are competing for business, and Fannie Mae and Freddie Mac have a combined $200 billion in loan purchases that must be completed by the end of 2020. Low interest rates, billions of dollars to lend and intense investor interest should create another “white hot year” for the multifamily sector, according to National Real Estate Investor (NREI).¹² The availability and reduced cost of capital may also cause cap rates to compress and yields to tighten. Over the last five years, average multifamily cap rates have declined from about 6% to 5.5% through November 2019. The U.S. Department of the Treasury reports the current 10-year Treasury yield is 1.33%.¹³ However, returns can and do change. In fact, the CoStar Group expects cap rates to decline across all property classes this year. CoStar’s managing consultant notes that because real estate lacks liquidity, it takes time for commercial real estate yields to trend down and compress closer to the 10-year Treasury returns of less than 2%. Trend #4: Secondary markets may outperform urban areas CBRE has been the top apartment broker in the U.S. since 2001.¹⁴ According to the commercial real estate brokerage and research firm, there will be more construction of new multifamily property in suburban markets than in urban markets in 2020. Many smaller markets with 2 million or fewer residents saw rents grow by 4% or more through Q3 2019, a trend that CBRE sees continuing in 2020. Secondary markets may have a higher risk of overbuilding. However, this risk is mitigated in cities with a healthy balance of supply and demand, driven in part by new renters attracted to areas undergoing urban revival. Smaller markets to watch in 2020 include: Albuquerque, New Mexico Birmingham, Alabama Colorado Springs, Colorado Greensboro, North Carolina Memphis, Tennessee Dayton, Ohio Tucson, Arizona Trend #5: High-growth and gateway markets CBRE also recommends that multifamily investors may benefit from lower vacancy and increasing rent rates in very high-growth metropolitan areas and gateway markets. These are metro areas where population, household, and employment growth help drive the demand for multifamily product.¹⁵ According to the firm’s Multifamily 2020 U.S. Real Estate Market Outlook report, the top four major markets for multifamily performance in 2020 are: Austin, Texas Atlanta, Georgia Phoenix, Arizona Boston, Massachusetts Summary The law of supply and demand may be working in favor of multifamily investors in 2020, with tenant demand for rental property continuing to grow. Recent surveys show that 32% of rental households don’t believe the American Dream includes homeownership, 26% of people who do own a home wish they were renting instead, and 20% say they never plan on buying a home in their lifetime.¹⁶ With high occupancy rates and rising rents, and property in short supply, demand from investors for multifamily product also may continue to rise. Multifamily investors in 2020 may find that property prices remain high, while future cap rate compression may increase asset values even more while driving today’s relatively high yields down. If you’ve been thinking about investing in the multifamily asset class, consider MogulREIT II , RealtyMogul’s REIT that exclusively invests in multifamily assets and has generated quarterly distributions of 4.5% since inception.¹⁷ All the assets currently in the MogulREIT II portfolio were previously only offered as private, single property investments available only to accredited investors with minimums of $35,000 or more. Open to all investors, a $5,000 minimum MogulREIT II investment can now gain you access to this vetted portfolio of multifamily assets. Investing in MogulREIT II’s common shares is speculative and involves substantial risks. The “Risk Factors” section of the offering circular contains a detailed discussion of risks that should be considered before you invest. These risks include, but are not limited to illiquidity, complete loss of capital, limited operating history, conflicts of interest and blind pool risk. MogulREIT II’s multifamily investments can be subject to specific risks including changes in demographic or real estate market conditions, resident defaults, and competition from other multifamily properties. References 1. https://www.housingwire.com/articles/heres-what-will-happen-in-multifamily-real-estate-in-2020/ 2. https://www.housingwire.com/articles/multifamily-housing-market-wrapping-up-2019-on-a-strong-note/ 3. https://www.yardi.com/news/press-releases/yardi-matrix-shows-u-s-multifamily-market-wrapping-up-a-strong-year/ 4. https://www.nmhc.org/contentassets/0662d3fe113046bb89019d0dfabfb271/apartment_supply_shortage_2018_08_fact_sheet.pdf 5. https://www.forbes.com/sites/forbesrealestatecouncil/2019/12/13/workforce-multifamily-rentals-will-remain-cres-darling-in-2020/#57764ebd313e 6. https://www.cbre.us/research-and-reports/2020-US-Real-Estate-Market-Outlook-Multifamily 7. https://www.multifamilyexecutive.com/business-finance/five-2020-trends-to-consider-in-multifamily-investment_o 8. https://mf.freddiemac.com/viewpoints/steve_guggenmos/20200113-2020-outlook.html 9. https://www.worldpropertyjournal.com/real-estate-news/united-states/irvine/national-association-of-home-builders-international-builders-show-us-apartment-production-data-in-2020-multifamily-housing-starts-in-2020-real-estate-news-11781.php 10. https://www.worldpropertyjournal.com/real-estate-news/united-states/irvine/national-association-of-home-builders-international-builders-show-us-apartment-production-data-in-2020-multifamily-housing-starts-in-2020-real-estate-news-11781.php 11. https://www.bisnow.com/national/news/multifamily/the-incredible-flow-of-capital-into-multifamily-is-expected-to-increase-in-2020-101023 12. https://www.nreionline.com/multifamily/expect-yields-multifamily-investments-tighten-further 13. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield 14. https://www.constructiondive.com/news/cbre-ranks-the-hottest-multifamily-markets-for-2020/569832/ 15. https://www.cbre.us/research-and-reports/2020-US-Real-Estate-Market-Outlook-Multifamily 16. https://www.housingwire.com/articles/more-claim-the-american-dream-involves-renting/ 17. MogulREIT II has declared distributions on a quarterly basis since January 1, 2018. The quarterly distributions equate to approximately 4.50% on an annualized basis based upon the then current purchase price. The annualized distribution rate is not a guarantee or projection of future distributions, and the board of directors may in the future declare lower distributions or no distributions at all for any given period.

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*The information provided is for convenience only. It is not investment advice or a recommendation, it does not constitute a solicitation to buy or sell securities, and it may not be relied upon in considering an investment in a Lannister fund. Past performance is no guarantee of future results. Any historical returns expected returns or probability projections may not reflect actual future performance. All securities involve risk and may result in partial or total loss. Investment in Lannister funds is available only to independently verified “accredited investors” through an offering made in accordance with Rule 506(c) under Regulation D of the Securities Act of 1933. Before investing in any Lannister fund, prospective investors should consider carefully the investment objective(s), risks, arches, and expenses. While the data we use from third parties is believed to be reliable, we cannot ensure the accuracy or completeness of the data provided. Lannister Capital does not provide legal or tax advice. Prospective investors should consult with a tax or legal adviser before making any investment decision.

**Targeted IRR and Equity Multiple listed above represents the property’s internal rate of return (IRR) or Equity Multiple based on the property’s forecasted cash flows generated over a period of time and the amount invested in the property. This is different from the forecasted IRR or Equity Multiple to the investor in the applicable fund or other investment vehicle.

***We temporarily ceased distributions for 3 months in response to COVID-19 as a business decision to protect the Fund and also in accordance with the Operating Agreement. We have since started making distributions again. There could be reasons in the future that we similarly make the decision to cease distributions if it is in the best interest of the Fund.

The website may contain forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. These statements involve known and unknown risks, uncertainties, and other factors that may cause an investment’s actual results to be materially and adversely different from those expressed or implied by these forward-looking statements. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in partial or total loss. Before making an investment decision with respect to any offering, potential investors are advised to carefully read the related subscription and offering memorandum documents and to consult with their tax, legal and financial advisors. Lannister Capital does not give investment advice or recommendations regarding any offering posted on the website.