How the Self Storage Industry Can Benefit from the CARES Act

By Laura Williams-Tracy, SSA Magazine

Amid a global pandemic that is rapidly halting economic growth and threatening a double-digit unemployment rate, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act in late March. The CARES Act will provide nearly $2 trillion in emergency relief to blunt expected monumental losses to people and businesses in the wake of the pandemic.

It is unknown what impact the sharp economic downturn will have on the self storage industry, but concerned owners and operators can participate in provisions of the CARES Act to help them through this treacherous time.

“Self storage has always been considered recession resistant, but is it pandemic resistant?” said Terry Campbell, executive vice president of small business lending for Live Oak Bank, the largest SBA lender by volume in the country.

As storage weathers the unknown ahead, here are the main benefits of the CARES Act and how storage operators and investors might take part:

• Six months of loan payments for anyone holding an SBA loan.
• New provisions to tax law to accelerate depreciation and reduce 2019 tax obligations and potentially earn a refund from prior years.
• The potential to receive a forgivable loan through the Paycheck Protection Program to keep staff paid through the duration of the pandemic.

Paycheck Protection Program

SBA lenders, such as Live Oak Bank, are administering the Paycheck Protection Program, which is funded with almost $350 billion from the CARES Act to help companies make payroll and avoid laying off workers. The expectation is that the SBA will begin processing those requests starting Friday, April 3.

Under PPP, employers with fewer than 500 employees can apply to get a loan equivalent to two and a half times their average monthly payroll expenses, which includes healthcare and retirement expenses for employees. The loans are made at a low fixed rate, according to details available to lenders on April 1. Borrowers will make no payments for six months and the total loan term is expected to be two years.

“The purpose is to keep employees being paid,” said Campbell. “Hopefully, two and a half months will cover expenses so when we start coming out of this mess this will tide you over for rent, utilities and salaries.”

What has piqued interest in PPP is a promise that if borrowers use the funds to keep people employed through June, keep paying bills and come out of the pandemic as a viable business, up to 100% of the loan can be forgiven. Campbell said full guidance on how loans are forgiven hasn’t yet come from the SBA. He said forgiven loans would simply be wiped clean, not forgiven as some sort of tax credit, nor would the loans be considered taxable income.

“It’s a heck of a program for small businesses,” Campbell said. “There are so many small businesses that at any given time are a month or less away from not being able to survive without their normal cash flow.”

Good News for SBA Loan Holders

The CARES Act includes $17 billion to cover loans for businesses that already have SBA loans. That means self storage owners holding SBA loans in good standing will not have to make a payment on their loan for six months. The payment, principal and interest, will be made for them. The credit does not add six months to the term of the loan.

“It’s a subsidy, a gift. If you got an SBA loan, the SBA is going to make that payment for six months,” Campbell said. “Borrowers don’t believe it, and they want to see something in writing. I tell them, you are getting six months free. They can’t comprehend it.”

Those holding SBA loans need not apply to get the six months paid on their loan. It will happen automatically.

The subsidy will likely be a boon to self storage startups who got funding for their project with an SBA loan and haven’t refinanced to a conventional loan. Many of those projects with SBA loans are likely still in lease up.

Disaster Loans Administered

The Small Business Administration is administering the Economic Injury Disaster Loan program. The program is intended to cover certain expenses that business owners cannot cover during the crisis with loans of up to $2 million, an interest rate of 3.75% and a term of up to 30 years.

Tax Relief for Property Owners

The CARES Act modifies the rules around net operating losses, allowing real estate owners to reduce their current tax liabilities and potentially receive a tax refund, said Warren Dazzio, a commercial property tax consultant with Cost Segregation Services, Inc.

Cost segregation is a process that defines assets within buildings that can be depreciated over a shorter period of time, thus accumulating larger depreciation expenses for a year of operation. Cash-strapped self storage owners can possibly create losses by participating in a cost segregation analysis and apply those losses to the 2019 tax year. Now that the deadline for paying 2019 taxes has been extended to July 15, property owners can take the loss for 2019 and apply it to whatever they still owe, potentially allowing them to hold onto cash that would have otherwise gone to the government.

Under a process called a loss carry back – which is reinvigorated in CARES – a loss that is big enough to zero out any 2019 tax liability with more to spare can be applied to a year within the last five years when a storage owner may have paid significant taxes, resulting in a tax refund check now.

“Self storage is a great candidate for cost segregation,” Dazzio said. “Our numbers in recent years have made our clients very happy.”

For storage owners who have never done a cost segregation analysis before, the potential tax savings are between 20% and 40% of the value of the building asset, Dazzio said. On a $1 million dollar storage building, a $300,000 deduction multiplied by a 37% tax rate (for state and federal taxes combined) results in about a $111,000 tax savings.

Here’s how it works:

• Any commercial building owner can use accelerated depreciation so long as the building is part of active income. A doctor, for example, who owns a self storage business that generates passive income can zero out his tax liability for the current year with a cost segregation study but cannot generate a loss through accelerated depreciation.

• A cost segregation study takes about six to eight weeks to complete. There is still time to complete a study ahead of the July 15 tax filing deadline.

• Most firms will provide a pre-analysis to determine if the loss is likely to be large enough to warrant a full cost segregation study. This will be an estimate of capital assets and how much depreciation can be accelerated. The pre-analysis takes about three business days. 

• During a cost segregation study, a team will analyze capital expenditures and break expenses into categories. The cost of interior doors and new partitions on an expansion can be depreciated over just five years, which is shorter than the overall building. Other capital expenses are depreciated over seven years, 15 years or 39 years. The more expenses that can be accelerated into shorter time periods, the greater the potential for losses.

• The results of the cost segregation study are given to the self storage owner’s CPA firm as part of tax document preparation.

• If the loss is greater than the 2019 liability, property owners can take that loss backward to a prior “good year” when the owner may have paid a lot of tax. An amended 2019 return would take you back to 2014 when you possibly had a gain. The losses are applied each year and carried forward until used up. The result would be a tax refund from the prior years, resulting in a check from the government.

The 2017 Tax Cuts and Jobs Act did away with the ability to carry back losses. Prior to 2017, losses could be carried back three years. With CARES, the carry back loss returns and can be carried back 5 years.

Cost Segregation Studies are recommended for owners who have never done one before or who have added buildings or made improvements.

“Back in the 2008-09 recession, we did this for a restaurant owner who told us they didn’t have to pay $70,000 to the IRS,” Dazzio said. “That kept them afloat. This is a way to hold on to your cash or possibly get cash back.”