Introduction
OCECRA will provide rent relief of over $900 million, in the form of forgivable loans to assist small businesses and commercial landlords. The assistance applies to rent obligations of tenants that were considered non-essential businesses, in the context of COVID safety measures, whose revenue has dropped 70%.
The program has been designed so that landlord’s before-profit fixed costs will be shared between landlords, small business tenants, and governments. The concept of before-profit fixed costs refers to the landlord’s fixed costs without a profit element. The costs will be shared as follows: landlord – 25%, tenant – 25%, Federal and Ontario governments – 50% (37.5%/12.5% respectively).
The OCECRA will be administered by Canada Mortgage and Housing Corporation (CMHC) and be available until September 30, 2020. The program will become operational in May 2020.
The overall result is that the landlord will forego profit on April, May and June rent, forgo 25% of fixed costs and possibly be out of pocket for costs that do not qualify as fixed costs. This does not appear to be an advantageous arrangement for landlords if they can instead negotiate rent deferral arrangements. It may however be attractive to landlords with rent collection risk or cash flow pressures.
The limited program details released so far are unclear and require further clarification.
Ontario Government example
Monthly rent for a small business is $10,000. For the purposes of this example, we are to assume that the rent cost does not include a profit element. The landlord forgoes $2,500 (25% x $10,000), the small business tenant pays $2,500 (25% x $10,000) and the Federal and Ontario governments pay the remaining $5,000 (50% x $10,000).
Conditions for the Program
The program will provide forgivable loans to eligible commercial property owners who may experience potential rent shortfalls due to their small business tenants being impacted by COVID-19. To be eligible for the forgivable loan, the following conditions have to be met:
- Property owners will have to reduce the rent of small business tenants for three months (April to June 2020) by at least 75%. The tenant’s maximum rent will be 25% of the rent that relates to before-profit fixed costs; and
- Sign a rent forgiveness agreement between the impacted tenant and landlord with a moratorium on eviction for three months.
Eligible commercial properties include commercial properties with a residential component and residential mixed-use properties with a 30% commercial component.
The eligible property owner must be the “registered owner” and landlord of the eligible commercial property. The registered owner can apply for the program with the rental property secured by a mortgage. Otherwise, the owner will need to contact CMHC to discuss options such as applying funds against other forms of debt or fixed cost payment obligations (i.e. utilities).
Eligible small business tenants must meet the following conditions:
- pay monthly gross rent payments of $50,000 or less; and
- be a non-essential small business that temporarily closed or experienced a 70% drop from pre-COVID-19 revenues.
The revenue reduction will be determined by comparing revenue in April, May or June 2020 to the same months in 2019 or alternatively comparing them to the average revenue of January and February 2020.
Not-for-profit and charitable entities will also be eligible for the OCECRA program.
Comments
There remain many items which require further clarification.
- it is unknown whether fixed costs will include mortgage interest, major repair chargebacks, management and administration fees, etc.
- with respect to the definition of an eligible small business tenant, will the $50,000 monthly rent limit be measured based on a location or on an entity basis?
- will a property held by a trustee corporation, but beneficially owned by another entity qualify?
- currently the program does not encompass sub-lease arrangements.
- the program’s applicability to non-arms length rental arrangements.
Application for relief is the landlord’s responsibility, but qualification for relief is dependent on the tenant’s financial results, which in practice will be difficult to confirm.
