Peace on the Lower East (Landlords and Tenants)
Originally Published : April 12, 2020
FOR THE FIRST TIME IN HISTORY LANDLORDS & TENANTS WILL COME TOGETHER
Dear HL Clients,
Poof! Pretty soon, that loan cash is going to magically appear in your bank account and, if you have been following along, you know that you can use up to 25% of that amount to pay rent to your landlord. For the first time in a while, you will have what landlords need most. Cold. Hard. Cash. It’s going to be a good time to reset the table and get serious about lease negotiations.
Whoa, hold your horses cowboys and cowgirls. Before we go in guns a blazin’, we need to take a beat and accept that if negotiations are going to work, we need to try to understand one another and, you know, empathize. Don’t gag, you gotta do it.
Tenants need to acknowledge that all landlord’s are not super-wealthy, money hungry, amoral sharks. And landlords need to understand that just because there is a line out the door for Sunday Brunch does not mean that their restaurant tenant is “killing it”. Misconceptions abound but it strikes me that both sides need to get to the truth and come together and try to work through this so we can all survive to fight another day. As the saying goes, a landlord’s problem is the landlord’s problem and a tenant’s problem, is the landlord’s problem (a landlord attorney told me that one today. Not bad.).
Anyway, let’s fix the damn problems and make offers to landlords that address our concerns and acknowledge theirs. Ours: We can’t stay in a space if the rent will eat up all our profits. Theirs: they need income to pay their mortgage and maintain staff and services to their properties. So, we are both are in a pickle and maybe we do have something to talk about after all.
It’s a unique time in Landlord-Tenant relations that call for some creative solutions. We have been talking to landlords and their lawyers every day and we have come up with some innovative ideas that landlords are not dismissing out of hand. Here’s one to chew on:
1. Tenant agrees that once the loan money hits, tenant pays the landlord a big chunk of rent representing 15-25% of the loan. That rent payment will cover all past, current and future rent up to the time that the city allows restaurants to reopen. Then;
2. Once the restaurant reopens, tenant moves to a percentage rent deal (8-10%) until customer flow normalizes. This can be 3, 6, 9 months, we don’t know yet. We don’t expect the floodgates to open all at once, so our 100 seat restaurant may very well be a 40 or 50 seater for awhile. Then;
3. Once everything settles down, we can go back to a normal rent schedule or keep a percentage rent deal or do a hybrid.
A percentage rent deal until we know how things shake out coupled with no heavy past due rent debt is the only way this will work for us. Landlords get the benefit of a big cash infusion and the security of knowing that they will keep their tenant. Both parties get some mental comfort because there’s a plan and everyone wins a little and loses a little but at least we can all sleep better at night.
There are many other scenarios and variables and every relationship has its own quirks and one size certainly does not fit all and I understand that. I just want us all to be thinking creatively and realistically.
To that end, I am also working on a webinar that Im calling Peace On the Lower East that will bring together restaurant tenants and attorneys and landlords and their lawyers to share perspectives and open up discussions on how we can all work together in peace. We Are The World. Details to follow.
PPP’s and QQQ’s Webinar Report
We hosted our first live webinar last Friday and spent our time tackling the complexities of PPP loan forgiveness. Many thanks to all of you that joined and submitted such thoughtful questions! If you were unable to tune in, we’ve made the recording available on YouTube at:
Here’s a list of new and improved and totally fresh frequently asked questions asked before, during, and after the webinar…
TOP 15 PPP QQQs
1. What are the conditions to full loan forgiveness under the PPP?
2. What are the “permitted purposes” for PPP loans?
You can only use PPP loan proceeds for (i) covered payroll costs (see below); (ii) rent and utility costs for leases/service contracts in effect as of February 15, 2020; (iii) interest (not principal) on mortgage obligations incurred prior to February 15, 2020; and (iv) interest (not principal) on debt obligations incurred prior to February 15, 2020. Please note, however, that payments relating to interest on debt obligations are permitted, but will not be forgivable.
3. What is included in “payroll costs” for calculating loan forgiveness?
Payroll Costs include:
- Salary, wages, commissions, or similar compensation
- Cash tips of the equivalent
- Payments for vacation, parental, family, or sick leave
- Severance fees
- Payments for employee benefits consisting of group health care coverage, insurance premiums, and retirement benefits
- Payments of state and local taxes assessed for compensation
Payroll Costs DO NOT include:
- Compensation paid to non-U.S. residents;
- Compensation paid to independent contractors;
- Compensation to an employee in excess of $100k per year on an annualized basis;
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020
4. Do “payroll costs” include fees/payments to managing members/partners that are classified as ‘guaranteed payments’?
This is a good question. Neither the CARES Act nor current SBA guidance addresses ‘guaranteed payments’ payable to a borrower’s equity owners. Profit distributions and dividends are not covered under ‘Payroll Costs,’ but the law is currently silent on guaranteed payments. The CARES Act does explain, however, that ‘wages, salaries, and similar compensation’ payable to employees are covered under the PPP program, which leads us to believe that guaranteed payments are covered under the PPP program to the extent that they are paid in exchange for actual services rendered. The case for including these guaranteed payments is strongest, in our opinion, when the company owners are performing a service that would otherwise have to be outsourced to an employee (e.g., when an executive chef is also an equity owner of the business).
This said, the law is not yet clear on this issue, and the industry is awaiting SBA guidance on this issue specifically.
5. When does the 8 week covered period start?
PPP loan proceeds are only forgivable if they are spent within an 8 week period beginning on the loan origination date, which is the date on which you first receive loan proceeds from your bank.
While we have heard that lenders may ultimately have some discretion when it comes to disbursing the funds to your account, this will depend entirely on your bank. Each lender will have different policies relating to when the loan proceeds will be distributed following the acceptance of a loan application, and whether or not the borrower has any say in when the loan proceeds will be distributed once the application is approved. It couldn’t hurt to reach out to your bank to see whether this date is negotiable. Smaller banks are more likely to work with borrowers on a case-by-case basis than larger banks.
6. This is the first I’m hearing of this 75% limitation. What does it mean?
The SBA’s Interim Final Rule states that 75% of your total loan proceeds must be spent on covered payroll costs. In other words, in order for any portion of your loan to be forgivable, at least 75% of the total loan amount must be spent on payroll costs within the 8-week covered period.
Please note that certain SBA materials, as well as the US Dept. of Treasury guidelines, frame this 75% rule as applying only to forgivable amounts, which would mean that borrowers wouldn’t necessarily have to spend 75% of the total loan on payroll costs. However, the SBA’s Interim Final Rule makes very clear that this 75% rule should be interpreted as an all-or-nothing requirement for forgiveness. Therefore, we encourage borrowers to err on the safe side and assume that, in order for the loan to be forgiven, 75% of the total loan amount must be spent on payroll costs. We are actively seeking clarification from the SBA on this.
7. Can we give bonuses to meet this 75% requirement within 8 weeks?
Though the answer to this question is not completely clear, the answer is likely no. Payroll Costs are defined to include only ‘salaries, wages, commissions, or similar compensation,’ and bonuses are not included in the list. Legislators passed this bill with the hope that employees would be rehired as soon as possible. Businesses that wait until the last minute to rehire, and then attempt to satisfy the salary metrics through last-minute bonuses, are not nearly as likely to receive loan forgiveness as those borrowers who rehire early and pay their employees in accordance with ordinary payroll practices.
8. The only way I can meet the 75% rule is to pay people to sit at home and do nothing. Is this permitted?
Yes. The SBA is not concerned with what the rehired employees are actually doing, only that they are being paid.
9. As long as I spend 75% of the total on payroll, will my loan automatically be forgiven?
No; you’ll have to submit a separate application for forgiveness with your vendor, along with substantiating documentation that your loan was spent for the permitted purposes.
Your total loan amount may also be reduced for purposes of forgiveness if you experience a reduction in your full-time equivalent (FTE) employee headcount or if you reduce salaries more than 25% of what they were during the pre-COVID measuring periods. So, in addition to the 75% threshold test, in order to receive full forgiveness, borrowers will also need to rehire their staff and restore salaries to within 25% of their prior levels within the 8 week covered period.
10. How do I calculate FTE when most of my employees are actually part-time employees?
For these purposes, a full-time employee is one that works an average of 30 hours per week. FTE, on the other hand, measures the number of hours being worked by all of your employees, rather than a total number of employees working for you. For example, two employees, each of whom works 15 hours per week, are the equivalent of one full-time employee. Please reach out to us if you have any questions on how to calculate your FTE.
11. Are the forgiveness applications available for review? What will they involve?
There are not yet any forgiveness applications available for review. These will be made available by participating banks in the coming weeks.
This said, we do know that the forgiveness applications will require documentation substantiating that at least 75% of the loan proceeds were used towards covered payroll costs, and that 100% of the loan proceeds were used only for permitted purposes (payroll costs, rent, utilities, and/or interest on mortgage payments). In other words, it’s important that borrowers keep careful written records detailing exactly how PPP proceeds are spent, and that borrowers work with their accountants to ensure that all financial activities are being appropriately documented.
12. Can I spend nothing during the 8-week period and just treat it as a 1% loan over the 2 years?
Yes. If you are not applying for forgiveness, you can spend the loan proceeds over a longer period of time, provided you spend them only for the permitted purposes (to cover payroll costs, rent, utilities, and interest on debt obligations). Note that the entire loan must be repaid within 2 years, so it would not make sense to space out the spending beyond that 2 year period.
13. If we rehire people to use PPP proceeds, will they be giving up their right to full unemployment benefits?
Unfortunately, yes. Employees will not be eligible to collect full unemployment benefits for as long as they remain on your payroll.
This said, New York has waived the waiting period associated with unemployment benefit applications. So, to the extent you are not able to retain your staff beyond the 8 week covered period, your employees would be eligible to reapply for unemployment benefits without suffering a waiting period, and the unemployment benefits would be retroactive to the termination date.
14. Can I just hire family members and put them on payroll to meet these forgiveness requirements?
Borrowers are required to certify that they will spend this money in good faith on the permitted purposes. Simply hiring friends or family members in favor of laid-off staff would very likely run afoul of that certification. We encourage borrowers to try to rehire the same people who were on their payrolls prior to the pandemic.
To the extent that those same people are not willing to return to payroll, or cannot be located, then you are free to replace those employees with different employees. There is no penalty associated with doing so. In this case, we advise borrowers to ensure that any replacement employee is independently qualified for the position in question, and would be a suitable long-term replacement.
15. Can I reclassify a 1099 independent contractor as an employee in order to meet the forgiveness requirements?
Not necessarily. The reclassification of an employee can be an incredibly complicated process, and while you may ultimately be able to do this successfully, it is not as simple as having them re-hired and/or issuing new paperwork. As a general rule, please reach out to Lee Jacobs ([email protected]) and Megan Shaw ([email protected]) from our Employment Group before implementing any change like this one.
INSURANCE UPDATE by Joe Taylor
Let’s just cut right to the chase; file your business interruption claims. Don’t listen to the insurance industry tell you why you shouldn’t; be like Mike and just do it. Here is why.
First, the exclusions that the insurance industry has referenced in alleging that there is no business interruption coverage during this pandemic may not be in your policy. Specifically, they claim that COVID-19 does not cause the type of damage that would trigger coverage and, even if it did, coverage for viruses is excluded. Simply put, they are wrong. Several states have already set forth how COVID-19 causes physical damage due to its ability to survive on surfaces. Furthermore, not every policy has a virus exclusion. In fact, as many as 20% of all business interruption policies nationwide have no virus exclusions.
Second, even if the exclusions are included in your policy, they may not apply in the manner that the insurance industry wants you to believe. The specific policy language determines the coverage, and this is open to interpretation. We are not saying that everyone will have a successful claim, but you won’t know until you file it. That is why it is so important that everyone files their claims.
Lastly, even if your policy has any of the relevant exclusions, there is a national group at work fighting on behalf of the restaurant industry. The group is called BIG, the Business Interruption Group. Their lead attorney, John Houghtaling, has been at the forefront of every insurance disaster for the last twenty years. If the name is familiar, it is likely because he was appointed the Plaintiffs Liaison Counsel by the Federal Court in the aftermath of Hurricane Sandy. John has been in direct contact with President Trump about this issue and President Trump is listening. We spoke to John this morning about BIG and the message is clear, they need everyone’s support. Please take a moment and go to their website, www.werbig.org, to sign up. We also ask that you take the time to fill out this questionnaire regarding your business interruption policy so we can better understand the issues directly affecting New York restaurants regarding the business interruption insurance.
We are all in this together. We support BIG and you should too. Now is the time to band together and show the insurance industry that they made a huge mistake.
ALERT: Face Masks for Employees Mandatory by Wednesday
On April 12, 2020, Governor Cuomo issued an Executive Order directing employers to provide their essential workers, who are present in the workplace, with either cloth or surgical face masks whenever they directly interact with the public. These masks are to be provided to your employees free of charge to them. This means that if you are currently operating, you will have until Wednesday, April 15 at 8 PM, to provide face masks to your employees and they must be worn whenever your employees are in direct contact with customers or members of the public. This order is similar to the one that has been implemented in New Jersey and was enacted with the hope to prevent employees, who may be asymptomatic, from spreading it to others.
That’s it from now, all of a sudden, sunny Greenpoint.