Canada Emergency Commercial Rent Assistance – May 19 and May 20, 2020 Updates From CMHC
On May 19 and May 20, 2020 the Canada Mortgage and Housing Corporation (“CMHC”) posted additional details regarding the Canada Emergency Commercial Rent Assistance Program (“CECRA”). This blog post builds upon previous announcements by CMHC, which we covered in an earlier blog post from April 29, 2020.
Key takeaways from CMHC’s latest update include the following (which are described in further detail below):
- CMHC’s online application portal will open at 8 am EST on May 25, 2020, with staggered registration dates based on geographic location;
- CMHC has provided draft forms of sample documents (which include a rent reduction agreement and a forgivable loan agreement); and
- expanded and/or clarified eligibility criteria for the CECRA program.
CECRA will provide forgivable interest-free loans to eligible commercial property owners (each a “Property Owner”) to cover 50% of monthly gross rent payments that are payable by eligible small business tenants or subtenants (each an “Impacted Tenant”) experiencing financial hardship during April, May, and June of 2020 due to COVID-19. To receive the loan, Property Owners must reduce the Impacted Tenant’s rent by at least 75% for the three corresponding months pursuant to a rent reduction agreement – a sample of which has now been provided by CMHC. Impacted Tenants will still be responsible for up to 25% of the rent.
CMHC, together with MCAP and First Canadian Title, will administer CECRA on behalf of the federal and provincial/territorial governments. The program is expected to be operational later this month, and will involve an online application process requiring parties to submit attestations related to eligibility requirements, a rent reduction agreement, and a forgivable loan agreement.
Below is a summary of the key details announced by CMHC on May 19, 2020. For full details regarding CECRA, parties should consult the CMHC website and may consider signing up to receive notifications via the “Keep Me Posted” form.
Application Process and Sample Materials
The online application portal will open on May 25, 2020, and the deadline to apply is August 31, 2020 (the forgivable loans are able to be applied retroactively). Property Owners can apply with respect to multiple tenants at the same time and must apply for all three months at the same time (this means that tenants applying prior to the end of June can provide forecasts regarding June revenues as part of their attestation). In addition to relevant property information (including the address, property type, tax statement, and latest rent roll), and applicant information, parties will be required to submit the following documents:
- Tenant or sub-tenant attestation re eligibility requirements;
- Property owner attestation re eligibility requirements;
- Rent reduction agreement; and
- Forgivable loan agreement.
CMHC has provided sample PDF forms of each of the above documents; however, these documents are samples only, with final / legal forms to be available in the application portal when it opens at 8 am on May 25.
Use of Funds and Forgiveness
In order of priority, Property Owners may use CECRA funds solely to:
- First, reimburse Impacted Tenants for amounts in excess of 25% paid during the period, unless the Impacted Tenant chooses to apply the previously-paid rent against future rent; and
- Second, cover costs and expenses relating directly to the property, including any financing held by the Property Owner, operation costs, and maintenance and repair obligations (e.g. common area maintenance, property taxes, insurance, and utilities).
The unsecured, interest-free loan will be forgiven on December 31, 2020, provided that certain conditions are met, including: (i) the parties have complied with the rent reduction agreement provided by the CMHC, and (ii) the attestations and application (including supporting documents) are accurate and truthful. A few important matters for Property Owners to keep in mind:
- All Property Owners will be required to maintain proper and detailed records and statements of account (including receipts, invoices) regarding the uses of the CECRA funds.
- Should an “event of default” occur, CMHC will have full recourse to recover the CECRA funds from the Property Owner, in addition to any other rights and remedies available to it. “Events of Default” may include failing to comply with the terms of the program, making false or misleading representations to CMHC or committing fraud or misconduct in connection with the application. If a Property Owner subsequently files for bankruptcy, restructures, reorganizes or dissolves its business, it will be required to pay back the loan.
- If a Property Owner becomes aware that the attestation of any Impacted tenant is “false or misleading” in any material respect, it must promptly report same in reasonable detail (together with providing an updated application, if necessary). If this occurs following the advance of the loan, the Property Owner may be obligated to use commercially reasonable efforts to recover rent previously forgiven (and shall use such amounts collected to repay CMHC).
Eligibility requirements clarified by CMHC’s May 19, 2020 Updates
- No mortgage requirement: Properties with or without a mortgage are eligible for CECRA.
- Ground lessees, nominees, and others: For the purposes of CECRA, “Property Owners” will include registered owners of legal title, and may also include: (i) a ground lessee, emphyteuta, superficiary, or usufructary (provided that the relevant lease, emphyteusis, superficies, or usufruct, or notice thereof, is registered on title) or (ii) a nominee, agent, or mandatary, provided that the applicant has authority under the relevant trust, nominee or agency agreement, or mandate to participate in the CECRA program.
- Non-arm’s-length parties: Non-arm’s-length parties will be eligible so long as: (i) the lease (or sub-lease) is on fair market terms; (ii) the total gross rent payable under such lease is no higher than fair market rent; and (iii) such lease has not been created or amended after April 1, 2020.
- Rental revenue requirement: The Property Owner must have declared commercial rental revenue from the property on tax returns for tax years 2018 and/or 2019, or attest that the property commenced generating commercial rental revenue in 2020.
- “New” Property Owners may be eligible: Property Owners may still be eligible for CECRA where their property is newly constructed or recently purchased, provided all other requirements are met, including having entered a lease with an Impacted Tenant on or before April 1, 2020.
- Government-owned property: CECRA does not apply to any federal, provincial, or municipal-owned properties. However, there are certain exceptions, including where the property owner is a post-secondary institution, hospital, or pension fund; a First Nation or an Indigenous organization or government under a long-term lease; long term lessees, including airports; and crown corporations with limited appropriations designated as eligible by CMHC.
- Attestation – “Other Funding Sources”: The sample attestation provided by CMHC requires Property Owners to state that they have (I) investigated and made application to available government programs targeted at commercial rent assistance in the context of COVID-19; and (II) sought to obtain any insurance proceeds available to it in respect of impairment to rental revenue from the property. Property Owners are required to disclose to CMHC any such amounts.
Tenant and Sub-tenant Eligibility
Tenants or sub-tenants are eligible where they: (i) pay no more than $50,000 in monthly gross rent per location; (ii) generate no more than $20M in gross annual revenues; and (iii) have experienced at least a 70% decline in pre-COVID-19 revenues.
- “Gross rent”: The CMHC website now includes a detailed chart (see under “FAQs for Property Owners”) listing items included and excluded from “gross rent”.
- Calculation of the $20M threshold: Gross annual revenues are calculated based on the Impacted Tenant’s 2019 financial revenue. If the tenant or its ultimate owner produces consolidated statements, the tenant would use revenues reported for the “group level of companies”. If the tenant does not produce consolidated statements, then the tenant’s revenue applies for the $20M threshold.
- 70% decline in revenues: Small businesses can compare revenues in April, May and June of 2020 to: (i) the same period in 2019, or (ii) the average of revenues earned in January and February of 2020.
- Open prior to March 1, 2020: Small businesses that opened on or after March 1, 2020 are not eligible for CECRA.
- Attestation requirement: If there are one or more sub-leases in place, each tenant and sub-tenant which is impacted (as defined by the CECRA program) must provide an attestation. Also, a rent reduction agreement must be entered into with respect to each lease and sub-lease in order to ensure that the benefits under CECRA are allocated to the appropriate party.
- Attestation – “Other Funding Sources”: Similar to Property Owners, Impacted Tenants are required to state that they have (I) investigated and made application to available government programs targeted at commercial rent assistance in the context of COVID-19; and (II) sought to obtain any insurance proceeds available to it in respect of impairment to rental revenue from the property. Impacted Tenants are required to disclose to the Property Owner (at the time of application) and to CMHC (thereafter) any such amounts.