Changes to the Paycheck Protection Program make providing the right tools to commercial borrowers near impossible
The Paycheck Protection Program Flexibility Act was met with a sigh of relief by America’s small business community when it was signed into law on June 5. Among the changes made to the original Paycheck Protection Program are an increase in the time borrowers have to spend their loan proceeds (from eight to 24 weeks), two new exceptions that allow borrowers to obtain full forgiveness without restoring their workforces to pre-COVID-19 levels, and a decrease in the mandatory payroll spending requirement from 75% to 60%.
According to Michael Franco, CEO of SitusAMC, that change in payroll spending could prove to be the commercial sector’s saving grace. With April and May profits wiped out for most small businesses, the ability to shift PPP funds from payroll to rent or mortgage payments should create breathing room for businesses that were having the life squeezed out of them by COVID-19 mitigation efforts.
“If all the money in the plan was drawn, you’d have to figure that there’d be a decent amount going to these rent payments or mortgage payments,” Franco says. He estimates that the reallocation of funds could translate into as much as $125 billion in additional financial stimulus for small businesses.
“The additional flexibility is very material to the commercial real estate side because it lets those borrowers know that they can spend the money and still get that recoupment,” in the form of the PPP Forgiveness Act’s forgiveness provisions.
But the PPPFA, while undoubtedly helpful for commercial real estate, has proven somewhat of a challenge for lenders. They now have another new set of rules to explain to their customers and another new set of forms they’d love to create solutions around. But providing automated tools to help clients with their PPP auditing can be a risky investment when rules, terms and forms are constantly changing.
“That’s really been the struggle for lenders,” says Franco. “You put out something and then whatever guidance you give might not be relevant.”
Commercial lenders are in a situation that leaves little room for error: Mixed signals around any of the program’s details could spell the end of a long-term relationship with a borrower, especially in such anxious times. Franco suggests that lenders get in front of their clients immediately and explain the requirements of the program as they currently exist. At the moment, it’s really the only tool at their disposal. (The new loan forgiveness form hasn’t even been released yet.)
“Everybody in the market has kind of been, ‘I want to help the borrower. I want to make sure I’m doing right by my customer. But I don’t know what I need to do yet because Congress keeps rewriting it and the SBA keeps on issuing additional guidance,’” he says.
Despite the challenges of loan officers bringing clients up to speed with the PPP Flexibility Act, Franco says the original PPP has had a positive impact on the CRE space. He explains that REIT collection data for May was largely consistent with April’s, but whereas April’s rents could be paid with March’s pre-COVID-19 income, May’s relied on April’s returns, which were next to nothing. PPP may already have saved the day for countless businesses.
“It shows there was some baseline put into the market,” Franco says, “and I think the PPP is part of what set that baseline.”