Related Party Leases, Related Party Mortgages and Home Offices – Are These Expenses Eligible for Forgiveness?
The Interim Final Rule posted by the Department of Treasury in conjunction with the Small Business Administration on August 24, 2020 (the “IFR”), sets forth a few new rules related to loan forgiveness for businesses with related party leases, related party mortgages and expenses related to home-based businesses as follows:
Are rent payments to a related party eligible for loan forgiveness?
Yes – but there is a cap to such loan forgiveness amount. The IFR states that as long as the lease and mortgage were entered into prior to February 15, 2020, rent payments to a related party will be eligible for loan forgiveness but cannot be more than the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by the business. This rule is problematic for many borrowers, as it will preclude many borrowers from receiving forgiveness for rent payments if such borrowers own their office space in a separate entity free and clear of any mortgage. A related party is one with any common ownership between the borrower and the property owner. The IFR does not state any particular or range of ownership percentage threshold meaning that the smallest ownership percentage will qualify a borrower as a related party of the property owner.
Also, the IFR states that “PPP loans are intended to help businesses cover certain non-payroll obligations that are owed to third parties, not payments to a business’s owner that occur because of how the business is structured”, and it further indicates that if a borrower requests loan forgiveness for the amount of the rent payment to a related party, then such related party cannot also request loan forgiveness for the amount of the mortgage interest. The IFR claims that this will maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations.
Are rent or mortgage interest payments that are offset by payments from a tenant or subtenant of the PPP borrower eligible for forgiveness?
No. If a borrower subleases part of its office space to a subtenant, it can receive loan forgiveness for the amount of rent it pays to its landlord; however, the amount of loan forgiveness will be reduced by the amount of rent paid by the subtenant to the borrower.
Similarly, if a borrower is an owner of a building and leases part of such building to a tenant, the portion of mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value of the space that is not leased out to other businesses.
Further, if a borrower shares a rented space with another business, the amount of rent and utility expenses eligible for forgiveness must be prorated in the same manner as on the borrower’s 2019 tax filings, or if the business is new, the borrower’s expected 2020 tax filings.
Are amounts attributable to the business operation in the context of home-based businesses eligible for forgiveness?
Maybe. For a borrower that works out of the home, the only expenses eligible for forgiveness are those that were deductible on the borrower’s 2019 tax filings, or if a new business, those that are expected to be deducted on the borrower’s 2020 tax filings.