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April 9, 2020

Stroock Special Bulletin

By: Evan Hudson, Jeffrey S. Lowenthal, Jeffrey D. Uffner, Michelle M. Jewett, Jeffrey R. Keitelman, Brian Diamond, Robert Abrams

In our March 13, 2020, client alert, “Navigating Coronavirus: A Guide for REIT General Counsel,” we described key considerations for in-house lawyers of REITs in the wake of the World Health Organization’s declaration of a COVID-19 pandemic. In this update, we explore additional issues and share select observations from the weeks that followed, including issues and observations relating to the passage of the CARES Act.

Because there are many topics to cover, we will use bullet-point summaries for this alert.

Communication with investors. Most REITs have communicated with their stockholders admirably at this point. GCs should ensure that their REITs continue to engage stakeholders as they consider the effects of COVID-19 and implement their crisis response plans.

SEC disclosures. Over the past few weeks, a number of REITs have worked to update their risk factors, forward-looking statements legends and management discussion and analysis language to address the risks from and effects of the crisis. On March 25, 2020, the SEC’s Division of Corporation Finance issued Disclosure Guidance Topic No. 9, which provides the staff’s views about disclosures related to COVID-19 and related business and market disruptions. Although there are no surprises in this SEC release, REIT in-house and outside counsel should review the SEC guidance. When considering disclosures, counsel should ensure that REITs effectively communicate the particularities of how their businesses are being affected by COVID-19 and how the uncertainty of the situation makes forward-looking statements susceptible to change.

SEC filing deadlines. On March 25, the SEC also extended the filing periods covered by its previous relief for certain public company filing obligations affected by COVID-19. Specifically, the SEC issued an order that, subject to certain conditions, provides public companies, including publicly traded and non-traded public REITs, a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020. One of the conditions is that for each periodic report that is delayed, companies must provide, through a current report on Form 8-K filed with the SEC not later than the original due date of the periodic report being delayed, a summary explaining how their particular circumstances warrant a need for relief and addressing the impact of COVID-19 on the company’s business. Click here for a copy of the press release announcing the SEC relief.

Annual meetings. Continuing a trend we have observed since early March, in recent proxy statements, a number of public REITs with upcoming annual meetings have either announced plans to hold a “virtual” annual meeting over the internet, or have announced an expected date, time and place for a traditional annual meeting while also advising of the possibility that the COVID-19 pandemic may require that the meeting be changed to a remote or virtual meeting and indicating how stockholders would be informed of any such change.

Increasing liquidity. REITs continue to take steps to preserve and enhance their liquidity positions, and GCs should be aware of what their peer REITs have been doing. Steps have included deferring or canceling planned capital expenditures, reducing or suspending dividend payments, drawing on credit facilities, reducing executive and director compensation, issuing debt securities in the public markets and, in a few instances, issuing securities to investors in PIPE transactions. As pointed out in our March 13 client alert, certain of these steps involve tax considerations that should be carefully reviewed with the REIT’s tax advisers.

Further executive compensation matters. GCs should note that, in addition to implementing reductions in compensation, compensation committees in some cases are considering updating the performance targets for executive officers. Compensation committees may consider it appropriate to revise the metrics used for the determination of compensation to take into account the changed circumstances resulting from the virus crisis.

Availability of SBA loans. This is top of mind for many REITs and their executives. The CARES Act appropriates $349 billion for the Small Business Administration’s relief program. To the extent REITs are passive real estate owners, their eligibility is doubtful; however, management companies are treated differently. For more information regarding SBA relief eligibility, see our April 6, 2020, client alert, “SBA’s $349 Billion Business Relief Program Is Off to a Bumpy Start.”

Indicia of oversold conditions. In a hint of sentiment that the equity markets may be oversold, we have fielded questions from REIT clients regarding their ability to purchase publicly traded real estate securities. In consultation with outside counsel, general counsel of REITs and other public real estate companies should carefully consider REIT compliance and the considerations under the Investment Company Act and, if applicable, the Investment Advisers Act, before initiating or increasing a stake in public real estate securities.

In a second hint of sentiment that certain securities are oversold, REITs with enough capital resources have announced new share repurchase programs or reactivated existing repurchase programs to take advantage of what they see as unwarranted dislocation in share prices. As we said in our March 13 alert, issuers should be cognizant of all relevant securities law considerations, many of which were addressed by the staff of the SEC in their March 25 Disclosure Guidance Topic No.9, and GCs of REITs should coordinate with outside counsel on sensitive questions about public disclosures and the timing of repurchases.

Third, other REITs, particularly those that were sitting on cash prior to the downturn, have hinted that they may be on the hunt for acquisition opportunities.

Mortgage REITs. Certain mortgage REITs are feeling the strain. A handful have recently encountered variations on the following theme: margin calls from financing counterparties – inability to fund – hopes for forbearance – hopes dashed – REIT’s suspension of dividends – counterparty’s sale of collateral. Of course, other asset classes, such as malls and hotels, are also feeling the strain, but mortgage REITs are ahead of the curve in experiencing actual loss of collateral.

Considerations for non-traded REITs.

  • NAV calculations. As we noted in our March 13 alert, we were seeing non-traded REITs revise their disclaimers about the limitations of their NAV calculations given new uncertainty in NAVs. More recently, certain non-traded REITs in heavily affected sectors have expressed an intent to update their estimated NAV per share in light of recent uncertainty in asset values and the probability that values have fallen.Other non-traded REITs have decided to defer their calculations of NAV per share. Sponsors of non-traded REITs engaged in ongoing offerings should consider the effect that the offering price per share has when investors suspect that asset values have fallen.Further, reasonable investors might rethink their participation in a distribution reinvestment program if they suspect that the reinvestment price is out of alignment with fair value.
  • Share repurchase programs. In our March 13 alert, we said that managers of non-traded REITs should review their repurchase plans, prepare for the possibility of increased redemptions in coming months, consider liquidity levels and review the relevant documents with an eye toward potential suspensions. Since then, we have seen many suspensions of share repurchase programs. In more than one case, a non-traded REIT has essentially frozen its capital markets activity, suspending not only its share repurchase program, but also its initial public offering, all distributions and its dividend reinvestment plan.

• Tax Considerations – CARES Act:

  • Payroll Taxes. Certain employers, including REITs, whose businesses are affected by COVID-19 may be eligible to receive a refundable “employee retention” payroll tax credit of $5,000 per employee for “qualified wages” paid from March 13, 2020, through December 31, 2020. Employers that were carrying on a trade or business at the beginning of 2020, and either (x) have experienced a reduction in gross revenue of at least 50% in a calendar quarter in 2020 compared with the same calendar quarter of 2019 or (y) had their operations suspended due to governmental orders related to COVID-19 restricting commerce, travel or the size of group meetings, are generally eligible for the refundable payroll tax credit for each employee on the payroll. For employers with more than 100 full-time employees, “qualified wages” are wages paid to employees when they are not working due to COVID-19-related circumstances. For businesses with 100 or fewer employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order.

? Deferred Payments. Additionally, employers can defer payment of the employer portion of the 6.2% payroll tax due for the rest of 2020. Normally, employers are required to make payroll tax payments monthly or twice per month (although this time frame may be greatly reduced where substantial amounts are involved). The amounts not paid in 2020 will be due in two installments, on December 31, 2021, and on December 31, 2022.

? Observation. The employee retention payroll tax credit and/or the payroll tax deferral may be available to a REIT or to the REIT manager, depending on which entity is responsible for compensating the employees. The employee retention payroll tax credit is generally available if the business of the REIT or manager is significantly adversely affected by COVID-19, provided the REIT or manager does not receive an SBA loan. The payroll tax deferral provision is generally available to the REIT or manager unless it takes advantage of the SBA loan program and the applicable loan is forgiven. Stroock has put out alerts on this topic including “The CARES Act Tax Provisions: an Overview” (March 30, 2020) and “The CARES Act – Implications for Fund Managers” (April 6, 2020).

  • Qualified Improvement Property. The CARES Act addresses what was thought to be an oversight in the treatment of “qualified improvement property” under the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The TCJA did not include qualified improvement property in the category of property eligible for 15-year (or certain accelerated) depreciation. The CARES Act clarifies that this beneficial treatment does apply to qualified improvement property, retroactively back to the original effective date of the TCJA.

? Observation. Taxpayers are entitled to file amended returns to claim additional depreciation with respect to qualified improvement property for the 2018 and 2019 tax years. This is expected to be a meaningful benefit for REITs, particularly in the retail, hospitality and restaurant industries, where the accelerated depreciation could significantly reduce their distribution requirements to stockholders.

  • Other Tax Relief Provisions. The CARES Act contains a number of other business-related tax provisions that may be beneficial to REITs. Stroock has summarized these provisions in “The CARES Act’s Tax Provisions: an Overview” (March 30, 2020).

Real estate matters. Since our March 13 alert, Stroock has put out alerts on the following real estate topics: “COVID-19: Practical Steps for Landlords and Tenants,” (March 16, 2020), “Rent Abatements and Other Relief for COVID-19 Business Disruptions?” (March 17, 2020), “Land Use and Planning During the State of Emergency: ULURP Freeze,” (March 17, 2020), “What Cuomo’s ‘on PAUSE’ Order Means for the Real Estate Industry,” (March 23, 2020), “Legal and Practical Risks: How COVID-19 Is Complicating Real Estate Closings,” (March 24, 2020), “Relief for Borrowers From the Federal Government and in NY and Fla.” (March 24, 2020), “NY Issues Condo and Co-op Plan Guidance Amid COVID-19 Pandemic,” (March 31, 2020), “Pre-Negotiation Letters During COVID-19,” (April 1, 2020) and “An Old Law for the New War: Defense Production Act Not Just for Government Contractors,” (April 2, 2020). We have also established a multidisciplinary task force focused on coronavirus-related legal issues. Our aim is to provide holistic and proactive business guidance. Please do not hesitate to contact us with any questions or concerns you may have during this period.

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For More Information

Evan Hudson

Jeffrey S. Lowenthal

Jeffrey D. Uffner

Michelle M. Jewett

Jeff Keitelman

Brian Diamond

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.