COVID-19: Financial Considerations to Ponder Before Applying to the Canada Emergency Commercial Rent
CECRA provides relief to businesses experiencing financial hardship due to COVID-19. Whether you’re a landlord or a tenant, CECRA can be of tremendous help to you operating cash flows. In exchange for landlords reducing their tenant’s rent, the Canadian federal and provincial governments will offer unsecured, forgivable loans to eligible commercial property owners.
The governments’ position is that every landlord should apply for CECRA on behalf of their CECRA-eligible tenants. However, it appears as if landlords have not fully committed to the program as they have instead been left contemplating a variety of financial impacts, that the CECRA program will cause them. Below are a variety of financial concerns landlords have been left to consider, with regards to CECRA:
If non-arms length entities are both the landlord and tenant, how will they be able to navigate CECRA;
If landlord applies for CECRA, they will lose a minimum of 25% of their gross rental income, with potentially up to 50% if the tenant fails to pay their own 25%;
Prior to CECRA’s announcement, landlords were giving tenant’s rent payment deferrals/reductions: how can they manage those initial discussions, now that CECRA is an option;
If tenant already paid some months in full, how does landlord proceed in order to apply for and obtain CECRA funding;
How will landlords know whether a tenant’s income has reduced by the required percentage and then how do they monitor their tenant’s continued eligibility for CECRA;
If a landlord applies for the program, how can they ensure/maintain a cash flow positive position;
To maintain cash flow positive positions, will applying for CECRA eliminate the landlord’s ability to apply for other COVID-19 relief measures;
In terms of the CECRA program eligibility calculations, how does one calculate gross annual revenues, non-arms length relationships, monthly gross rents etc.;
Landlords will need to understand the disclosures they’re conceding to the government, in order to obtain 50% funding. They’ll need to make sure they’ve filed tax returns for at least 2018/2019;
Landlords will need to understand the rules surrounding how they are allowed to use the CECRA loan funds received and what sort of funds received will reduce the 50% CECRA amount received from the governments;
It is imperative to understand the CECRA loan dates and potential interest rates. Furthermore, landlords contemplating a change to their ownership structure or potential selling of the property, may be advised to stay away from CECRA;
Although advertised as an interest-free loan, landlords need to understand the accelerated payback terms and who bears liability, in the event of a loan default;
In the event of a loan default, landlords must understand what to do with the CECRA funds, which lender has priority to these funds and who is the agency that will deal with the collection of fund repayments;
Landlords are considering the commercial/retail tenancy market, in a COVID-19 market. Beyond the questions as to what the rental rates will be, square footage retail lease rates have fallen and new/amended retail leasing agreement terms are evolving.
Applying for CECRA is not an easy task. Each application on behalf of a tenant should be carefully examined and all related risks of the program should be understood in their fullest.
Questions in how the above matter may relate to you? Reach out to Blumenfeld Woznica & Co to see how this matter may impact your specific accounting and/or tax situation
This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as account/tax opinion or advice.