Optimizing the Fairness and Effectiveness of the Canada Emergency Commercial Rental Assistance Program

May 05, 2020

Optimizing the Fairness and Effectiveness of the Canada Emergency Commercial Rental Assistance Program

Synopsis
8 Minute Read

In a letter to the federal government, we address key steps to optimize and improve the new CECRA program.

MNP applauds the steps the federal and provincial governments have taken to address and alleviate the challenges people and organizations are facing across the country due to COVID-19 — including the recently announced Canada Emergency Commercial Rental Assistance (CECRA) program.

However, we also recognize legislators have had to move quickly to bring these measures forward. Resultingly, there are several areas within the CECRA which either require further clarification or minor adjustments to better achieve their stated objectives. Moreover, we have identified several additional considerations the federal government will want to consider as they evolve the CECRA through the evolving pandemic.

Our Real Estate and Construction team has compiled these questions and concerns in a consideration letter, which we sent to the Government of Canada on April 29, 2020. We have volunteered our expertise on this matter and look forward to the opportunity to collaborate and represent the interests of all Canadian businesses over the coming weeks.

Program Considerations for The Canada Emergency Commercial Rental Assistance

April 29, 2020

Background

The COVID-19 pandemic has created historic challenges for Canadian Small Businesses. As a result of the public health measures implemented to protect Canadians, the businesses and nonprofits for which they work have been impacted. This Commercial Rental Assistance program is a welcome addition to the suite of individual and business supports announced by the Government of Canada.

These programs provide welcome relief for Canadian businesses that are facing an unprecedented crisis. It is our intent to provide your government with some questions for consideration to ensure fairness and to achieve the maximum effectiveness of this program, and others, to keep small businesses, nonprofits and charities solvent across Canada during this crisis.

What is considered in the eligible rent price?

Consideration:

Commercial rents take two basic forms; Gross Rent or Net Rent. Gross Rent arrangements whereby the lessor’s rent is inclusive of all costs. Net Rent is an arrangement whereby the lessees pay rent plus additional costs, which could include property tax, building insurance, and other costs (like common area maintenance).

Further, many lease agreements factor in Tenant Improvements or Build to Suit arrangements whereby the Lessor has undertaken additional risk in building or modifying property amortized through the lease agreement through the duration of the lease term.

Some lessees, like in shopping centers for example, may have variable rents based on revenues in addition to a baseline rent. How would these circumstances be considered in this program?

Suggested Policy Adjustment:

In order to be equitable and simple for the lessors and the lessees, the programs could cover Gross Rent, or at least Gross Rent minus Property taxes, if that cost to small businesses is relieved through an alternative program. If the program does not cover gross rent, there is a high degree of potential for confusion on the responsibilities to pay other components of rent and the lessee may have to pay more than 25% of the “total rent” (i.e. the rent considered in the program).

Potential Accountability Mechanism:

These businesses would be subject to the same accountability mechanisms, including the rent reduction agreements described in the release

How are lessors safeguarded against bad faith actors?

Consideration:

Given that enrolment in the program will include a no-eviction guarantee, how can the program ensure that bad faith actors do not take this measure for granted.

Suggested Policy Adjustment:

Allow for evictions in the cases of negligence, criminal behavior, etc. This would protect the spirit of the program by ensuring no evictions for rent non-payment, while safeguarding against bad faith actors.

How will the 70% loss in revenue be calculated?

Consideration:

Calculating revenue loss can be a complicated process with many considerations.

70% may also be too high of a threshold for those businesses – like a local restaurant - that have attempted to pivot and provide curbside or remote service; however they have still experienced an extreme decline in revenue. Such a high threshold may disincentivize businesses from pivoting to online, delivery, or curbside in some cases if that limited revenue, which is still a significant decline from their pre-COVID revenues keeps them from the 70% threshold, rendering them ineligible for the program.

Like with the Canada Emergency Wage Subsidy program the calculation of revenue decline led to a number of questions including how non-arms-length revenue was considered, and how the nuances of different industries would be considered. To a large extent these were addressed by the time the CEWS program went live.

Suggested Policy Adjustment:

Utilize the same process as the Canada Emergency Wage Subsidy to simplify the program and consider using the same 30% threshold as CEWS.

What about those that have already made alternative arrangements?

Consideration:

Many businesses may have already made alternative arrangements with their lessors, including rent deferrals. These arrangements likely would have already dealt with the rent that was due on April 1. Moreover, some of these agreements would have deferred the rent to a later date, but ultimately the lessor would expect to collect the full amount of rent.

Given the program eligibility is based on the lessee, but the program is designed to be delivered through the lessor, is this program voluntary for both parties, thereby leaving it to the lessor or the lessees to determine if they will participate or can one party elect to participate in this program, if they qualify, forcing the other into the arrangement?

For example, if the lessee and lessor have previously agreed to a rent reduction of 50% of base rent can the lessee then force the landlord into the program on that basis? In this case, it would be reasonable to presume both parties are better off under the rental assistance program if the original contracted amounts (100% eligible rent for March) as the lessor would be challenged to operate on just 75% of the emergent 50% rent arrangement for April. If both parties agree to revert back to 100% for the purposes of the program will the program allow for this?

Suggested Policy Adjustment:

Provide lessors, in consultation with their lessees, the ability to determine best fit as to whether this, or another suitable arrangement may work in their circumstance. Consideration should be given to have the option to begin the program on May 1, if the landlord opts out of participating in April.

If a deferral has been agreed to, it could be considered that lessors are still eligible for the program while the lessee simply pays their 25% after re-opening for the periods of April, May and June.

Additional Considerations

Addressing additional Fixed Costs

Two of the most significant costs to businesses are Rent and Property Tax. We applaud the government for addressing the first of these two challenges, however without a program in which the Provincial and Federal Government’s provide the legislative authority and financial resources to allow municipalities to forgive property tax during this period, businesses may still not survive, leaving Canadians disadvantaged for economic recovery.

Guiding Principles for the larger lessees

Lessees with commercial rents in excess of $50,000 represent a variety of industries, and types of businesses.

Our hope is that such a program would consider the following

  • Simplicity – Given the variety of provincial and federal supports businesses are navigating right now, program simplicity will maximize participation and, in turn, ensure all businesses are best positioned to survive these challenges.
  • Industry agnostic – That, like the announced program, ensuring this is available to any business or nonprofit has met the revenue decline criteria.
  • Equitable for all Lessees and Lessors – by ensuring that program loans or grants can be accessed by any lessor, rather than just those with mortgages;
  • Safeguard against bad faith actions – by ensuring the program allows for eviction in specific circumstances

Looking to the Future

MNP wholeheartedly appreciates the work the Government of Canada is doing to address the immediate and serious concerns facing Canadians. The Commercial Real Estate industry is experiencing an incredible disruption, catalyzed by COVID-19 that will have longstanding implications on the industry. Given the ties between Life Insurance Companies, Pension Funds, and the Banking Sector with Commercial Real Estate, the viability of the industry is tied intrinsically to the viability of the economy. MNP would welcome the opportunity to participate in any discussions, or a task force, looking to what medium and long-term measures may be required to ensure the commercial real estate sector and our economy are strong into the future.

For Questions:

Lee Thiessen
National Leader, Real Estate and Construction
403.803.8053
[email protected]

Alex Levin
Partner, Real Estate and Construction
(416)418-9121
[email protected]

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