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Canadian Emergency Commercial Rent Assistance Program Q&A with CHI Real Estate Group

As an operator, rent relief and assistance are top priorities as you navigate recovery, reopening, and the current COVID-19 lockdown measures. The Canadian Emergency Commercial Rent Assistance Program was recently introduced by the government, those working through eligibility and regulations can be difficult.

To provide a little clarity, MENU spoke with Mark Parmegiani, Director of Commercial Sales and Leasing for CHI Real Estate Group. You can watch a recording of our CECRA webinar with Mark here and find a Q&A with Mark below:

What is the Criteria for a Landlord/Commercial Property Owner to apply?

To qualify for CECRA for small businesses, the commercial property owner must:

  • Own commercial real property which is occupied by one or more impacted small business tenants
  • Enter (or have already entered) into a legally binding rent reduction agreement for the period of April, May and June 2020, reducing an impacted small business tenant’s rent by at least 75%
  • Ensure the rent reduction agreement with each impacted tenant includes:
    • a moratorium on eviction for the period during which the property owner agrees to apply the loan proceeds, and
    • declaration of rental revenue included in the attestation

Note: Small businesses that opened on or after March 1, 2020 are not eligible.

The commercial property owner must not:

  • Hold federal or provincial political office
  • Be controlled by an individual holding federal or provincial political office
  • CECRA will not apply to any federal-, provincial-, or municipal-owned properties, where the government is the landlord of the small business tenant

There are some other exceptions:

Where there is a long-term lease to a First Nation, or Indigenous organization or government, the First Nation or Indigenous organization or government is eligible for CECRA for small businesses as a property owner.

Where there are long-term commercial leases with third parties to operate the property (for example, airports), the third party is eligible as the property owner.

How long does a Landlord/Commercial Property Owner Have to apply? 

The application is available until August 31, 2020. Support would be retroactive to April 1, covering April, May and June 2020.

What is Considered an Impacted Small Business Tenant or Subtenant Under the Program?

An Impacted Small Business Tenant Or Subtenant are businesses — including non-profit and charitable organizations — that:

  • Pay no more than $50,000 in monthly gross rent per location (as defined by a valid and enforceable lease agreement)
  • Generate no more than $20 million in gross annual revenues, calculated on a consolidated basis (at the ultimate parent level)
  • Have experienced at least a 70% decline in pre-COVID-19 revenues (at the entity level)

Note: Eligible small business tenants who are in sub-tenancy arrangements are also eligible if these lease structures meet program criteria.

Can you Give me an Example of how the Program Works?

Imagine that the monthly rent for a small business is $10,000. In this example, assume the landlord doesn’t make a profit. The landlord forgoes $2,500 (25 per cent of rent). The small business would be responsible for paying $2,500 (25 per cent of rent). The government would cover the remaining $5,000, with $3,750 from the federal government (37.5 per cent of rent) and $1,250 (12.5 per cent of rent) from the provincial government.

This means the landlord gets up to 75 per cent of the rent or $7,500 of rent per month for April, May and June. This adds up to $22,500 for the Landlord over the course of the program.

As an Impacted Small Business Tenant, how do I Calculate the 70% Reduction in Revenues?

There are two scenarios by which to calculate your 70 per cent reduction in revenues:

If your small business was operating during April – June 2019, then compare your gross revenues from April, May, and June of 2020 to your revenues of April, May, and June of 2019.

If your small business was not operating during April – June 2019, then compare your average gross revenues from April, May, and June of 2020 to your average gross revenues for January and February 2020.

Note: Your revenue must consist of revenue earned from ordinary activities in Canada. Calculate your revenue using your normal accounting method and exclude revenues from non-recurring items.

For registered charities and non-profit organizations, the calculation would include most forms of revenue, excluding revenues from ‘non-arm’s length’ persons.

Your June forecast must be supportable by the variables at play for your business. The result is to be guided by the average revenue reduction for April and May and the forecasted change given your respective province or territory’s guiding principles for reopening the economy (i.e. where the impacted business falls in the staged approach).

If my Business was Closed Due to the COVID-19 Pandemic, Does it Still Qualify?

Yes, if your business was closed during March, April, and June, it will still qualify for the subsidy if it was open in January and February and earned revenue during that time.

If my Business Qualifies for CECRA but my Landlord Refuses to Participate in the Program, can I Still be Evicted if I Don’t Pay Full Rent?

Some provincial governments have instituted a ban on commercial evictions, provided that the business tenant in question qualifies for CECRA.

This legislation protects commercial tenants from being locked out or having their assets seized due to the negative impacts of COVID-19.

This legislation in Ontario was only backdated to June 3rd leaving those that didn’t pay April or May rent and were evicted with concerns they’ve been forgotten. There are also some lingering concerns that Landlords not applying for the program will just wait till September to evict. 

My Commercial Property Doesn’t Have a Mortgage — Would we Still be Eligible for the Program?

Yes. CECRA for small businesses is available to property owners who do not hold a mortgage.

Can I Obligate My Landlord To Apply?

Unfortunately, no. On the date of the news release from the Prime Minister’s office, there was both a collective sigh of relief and a flurry of new questions.

This lifeline brings into question both parties’ eligibility as well as the landlord’s ability and willingness to participate. Effectively, the landlord agrees to waive 25 per cent of the rent for the 3-month period (April, Many and June) and is made whole on the remaining 75 per cent by (1) receiving 25 per cent from the tenant and (2) 50 per cent in forgiven loans from the government (federal and provincial governments to share in the cost).

Some landlords have already extended free rent periods or other compromises /deductions to their small business tenants. This is also where having a relationship in good standing with the landlord is proving to be part of the decision too.

Applying for this program is a benefit to both landlords and small business tenants. If a small business tenant declares bankruptcy and the landlord must evict them they will have to continue to pay the mortgage or debt costs on the property, including property tax, maintenance, and other costs.  Landlords will also incur additional costs and go through a lengthy process — often between six to 18 months — to find a new tenant and they may pay much lower rent post-pandemic.

What Documentation and Information is Required for the Application?

The following documentation must be provided by the landlord to support the application. Documents can be found in the CMHC application portal.

  • Property Owner Attestation: signed and confirming the information relating to the property owner and the property provided in the application is correct and attest to their eligibility with the program requirements.
  • Tenant or Sub-Tenant Attestation: signed by each of their eligible commercial small business tenants and/or subtenants sign an attestation. Tenants are responsible for attesting to their eligibility with the program requirements.
  • Rent Reduction Agreement:for each impacted tenant. This agreement is conditional upon final approval of the application for CECRA for small businesses.
  • Forgivable Loan Agreement

The following information is also required for the application:

  • Property owner information such as: the property address, property type, property tax statement, latest rent roll for each property and the number of commercial units (a rent roll should include your tenants’ unit number, amount of square footage rented, the rent per square foot, their monthly rent and your gross rental income)
  • Applicant information includes: banking information (including bank statement), property owner contact information, co-ownership information and contact details for co-owners
  • Tenant information such as: contact information, registered business name, business number, number of employees, lease area and the monthly gross rent for the period of April, May and June

The application process is now open.

I Would Like to Know if I am Eligible, Who Can I Talk to?

A great resource for seeking clarity on your eligibility is your accountant. Landlords should also contact CMHC to discuss their options, including applying the loaned funds to other existing debts or fixed cost payments (e.g., utilities).

I am a Small Business Tenant and I Have Paid my Rent for April and May. How can I be Sure That my Landlord Will Forward the CECRA for Small Businesses Funding to me?

The loan agreement stipulates that your property owner will either:

  • Send you the funds upfront, or
  • if you agree, provide you a credit for future rental payment

Who Will Administer The Loans?

The Federal Canada Mortgage and Housing Corp.

I Have Tried My Best To Negotiate A Solution With My Landlord And We Have No Resolve. Is There Anyone Looking To Buy A Restaurant Business These Days?

Absolutely. We understand that it can be a difficult but necessary decision for some restaurateurs. The good news is that there are long-standing investors in the hospitality industry who are looking to the future and those who are choosing to enter the market now. There is always a demand for AAA locations. We help our clients make confident decisions in these trying times and negotiate excellent deal terms.

Will the program extend beyond June if public health measures remain in effect?

Possibly. We asked Gregory M. Prekupec from the law firm Dipchand LLP,  about some of the shortfalls of the Canada Emergency Commercial Rent Assistance program.

Dipchand LLP is a firm with a proven track record working with emerging and established clients providing insightful legal advice and strategies from starting-up, developing a new market, growing their existing business, or selling or purchasing an existing business. Their work includes dealing with landlords as well as tenants as it relates to the CECRA program.

On March 17th, 2020, the Government of Ontario declared a State of Emergency, ordering the closure of indoor recreational programs, public libraries, theatres, cinemas, private schools (all Ontario public schools were closed since March 14), daycares and the prohibition of all public gatherings of more than 50 people (later reduced to 5 people on March 28). Bars and restaurants however were allowed to remain open, but only for those that offer takeout. By order of the province, starting March 24, non-essential businesses were closed.

Whilst the Canada Emergency Commercial Rent Assistance was announced on April 24th, it wasn’t until May 25th that the program was open to receive applications. Even then, the initial criteria to qualify was very confusing and left both landlords and tenants in a state of flux. As such, the initial uptake was not as high as anticipated. Furthermore, while the program is retroactive to the months of April and May, it did nothing to assist tenants whose leases were terminated for failure to pay either April or May rent due to the state of emergency.

A combination of caveats restricting landlords from being eligible, a complex and sometimes confusing application process, and the high standard for revenue decline has turned off applicants.

For restaurants in particular, with those offering takeout, or those that converted to offering takeout in order to survive, should their revenue breakthrough the 70 per cent decline threshold they are automatically disqualified from participating in the rest-assistance program. Many restaurateurs are left asking “Would it have been more financially responsible for me to not open my business when I was allowed to offer takeout, and have prevented my scaled-down staff from collecting a paycheque?”

There’s businesses that if they lose 30 per cent, they’re in a tough spot just from that alone. It’s not one shoe fits all and different provinces are in very different positions. However, the federal government’s program is designed to be a hard qualification, either you qualify, or you don’t. Two solutions to the barriers small businesses are hitting when trying to access the emergency funds would be to adopt a sliding scale system that ties rent relief to revenue, or evaluating rent relief on a month-by-month basis.

How is Restaurants Canada advocating to improve this program?

According to a survey that Restaurants Canada conducted at the beginning of June, half of restaurant owners across the country are still dealing with landlords who are not willing to participate in the CECRA program or any other rent relief arrangement.

Restaurants Canada is continuing to advocate for government to take the following actions:

  • Ensure commercial tenants are protected until solutions are in place. The federal government needs to work with the provinces to ensure commercial tenants continue to be protected against evictions until long-term solutions are in place that work for all parties.
  • Tenants should be able to apply for the CECRA program and an application from an eligible tenant should make a landlord’s participation compulsory.
  • Eligibility requirements should be expanded to be more inclusive of all foodservice business models.
  • Support through the CECRA program should be available on a sliding scale, recognizing the tenuous financial circumstances that many commercial tenants still face. Relief should continue until business revenues return to a determined percentage of pre-pandemic levels.

Sources referenced for this article can be found here.

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