May 27, 2020 | By David Rivers, The Palomar Group
The Wall Street Journal recently ran a poorly written article that negatively portrayed landlords that were recipients of PPP funding (article Landlords Were Never Meant to Get PPP Bailout Funds). On the surface, one would believe commercial real estate companies should not have received an enormous amount of PPP funding. The biggest issue I have is the broad brush use of the word landlord and how this broad interpretation leads to the point being made that real estate companies that have a connection to real estate ownership somehow unethically sought PPP funding.
The journalist goes on to slightly define the differences between real estate companies and the landlord. I would like to further define the stark differences between the two. Real estate is typically owned by a special-purpose entity (i.e. an LLC or REIT), this is the landlord. These special-purpose entities ownership structure in many instances are set up with a sponsor/ managing partner and limited partners. Quite often the sponsor/ managing partner also owns a real estate company that manages the litany of tasks that come with owning commercial real estate (i.e. legal, accounting, leasing, sales, management, marketing, etc.). The real estate company is an entirely separate business/ entity from the landlord that owns the real estate. The real estate company operates independently from the landlord, the entity that owns the real estate, and is funded by the fees and commissions generated from the real estate. The fees fund operations, company expenses, and salaries. These companies often employ over 100 individuals.
When the government shuts down businesses, particularly retail, two big things happen, 1. vacant spaces aren’t being leased and outparcels aren’t being sold therefore no fees are being generated, 2. reduced gross rental revenue results in lesser management fees because the fees are a percentage of gross rental revenue. These two items produce a lack of cash flow for the real estate company to fund their business expenses (including meeting payroll obligations), herein lies their need for PPP funding. As it relates to the landlord (the special-purpose entity) limited partners, otherwise known as investors, are paid a preferred return that comes out of cash flow after expenses (including real estate fees) and debt service. When revenue is drastically reduced as rent stops coming in an investor’s returns are possibly suspended or reduced. I agree that the landlord (special purpose entity) should not qualify for PPP funding but to throw a real estate company such as Time Equities into this bucket is candidly poor journalism and a lack of understanding of the drastic difference between the landlord (special-purpose entity) receiving passive income from the real estate investment and the real estate company that works for that landlord/ entity.