In our March 27 First Alert (COVID-19: Effect on Obligations Under Real Property Agreements ), we provided an overview of issues and questions that can arise under real estate agreements in light of the current COVID-19 situation ... ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­ ͏ ‌     ­

Guidance for PPP Loan Recipients on Use of Funds for Qualifying Real Estate Expenses to Optimize Loan Forgiveness


In our March 27 First Alert (COVID-19: Effect on Obligations Under Real Property Agreements), we provided an overview of issues and questions that can arise under real estate agreements in light of the current COVID-19 situation. This updated First Alert provides some guidance to borrowers regarding the use of proceeds of Paycheck Protection Program (“PPP”) loans issued through The Coronavirus Act, Release, and Economic Security Act (the “Act”) for qualifying real estate related expenses, and obtaining and maximizing forgiveness of the full principal amount of a PPP loan.

Forgiveness of PPP Loans and Certain Costs Associated With Real Estate

In addition to “Payroll Costs,” PPP loans may be used for “Other Qualifying Costs,” which include rent payments, utility payments (electricity, gas and water) and mortgage interest payments incurred in the ordinary course of business by the borrower (but not principal payments or mortgage prepayments) for obligations under leases and mortgage loans entered into prior to February 15, 2020.

The extent of forgiveness of PPP loan amounts depends on the borrower’s ability to evidence compliance with requirements for proper expenditures. Not more than 25% of the PPP loan forgiveness amounts may be attributable to these Other Qualifying Costs, and the other 75% must be attributable to “Payroll Costs.” The eight-week period commencing on the date a lender makes the first disbursement of the PPP loan to a borrower is used for purposes of calculating the extent of a borrower’s loan forgiveness. Generally, borrowers will not be responsible for any PPP loan repayment if the borrower uses all of the loan proceeds for the forgivable expenditure purposes and if required employee and compensation levels are maintained. The Act requires that borrowers submit certified documentation evidencing payment of the Other Qualifying Costs in order to seek loan forgiveness. 

Rental Payments – Beware of Abatements

The ability of a tenant to use PPP loan proceeds to satisfy its rental obligations under a lease is beneficial to both tenants and landlords. It allows the parties to maintain the status quo under existing leases, and positive revenue streams enable landlords to make payments of any mortgage obligations associated with the real estate asset. Borrowers will need to provide certified documentation that such rental amounts were actually paid in order to obtain forgiveness of allocable portions of the loan. Any portion of a loan for which forgiveness is not awarded will be repaid in accordance with the loan documentation, arguably, still on favorable terms.

Tenants that have received PPP loans should be mindful of these forgiveness requirements when seeking rental abatements from landlords. Rather than seeking a rental abatement during the eight-week forgiveness period, a tenant and landlord should continue to adhere to the rental requirements under the lease and address any additional need for abatement or other rental relief after the expiration of the forgiveness period. Well-meaning landlords could unwittingly undercut a tenant’s ability to obtain loan forgiveness by agreeing to provide rental abatements or deferments during the eight-week forgiveness period, so all parties should consider the impact of rental abatements and deferrals on the forgivability of PPP loans.

My PPP Loan Application Has Been Approved – Now What?

In anticipation of receiving PPP loan proceeds, borrowers should consider implementing the following prudent business practices associated with administering such proceeds and providing the necessary documentation of Other Qualifying Costs in order to maximize loan forgiveness:

  • Set up a new bank account to receive the PPP loan proceeds and make all payments of qualifying expenses including rental, utility and mortgage interest payments from this account in order to efficiently track the disbursements of the loan proceeds.
  • Have a single repository in which to store copies of all monthly invoices, if applicable, and the check/ACH/EFT payment records to document the amounts and dates of payments for rental, utility and mortgage interest payments.
  • All PPP loan proceeds should be used during the eight-week period commencing on the date the lender distributes the loan proceeds to borrower.

Edited 05.02.2020 4:45 p.m.

Calfee invites you to visit our COVID-19 Resource Center containing First Alerts to help guide you through the challenges faced by individuals and organizations as a result of the novel coronavirus outbreak. We are committed to helping you meet the diverse and complex challenges and navigate the disruptions caused by this pandemic. Please check the COVID-19 Resource Center regularly for the latest updates, or subscribe to receive the most up-to-date Alerts sent directly to your email inbox. Please whitelist and to ensure these emails are delivered directly your inbox and not your spam filter.

For additional information on this topic, please contact your regular Calfee attorney or one of the Real Estate attorneys listed below.


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