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    4. NP Connects: PPP, commercial real estate, interest rate and post-secondary education updates

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    NP Connects: PPP, commercial real estate, interest rate and post-secondary education updates

    July 15, 2020

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    By Christopher Keefe and Philip Taub

    NP Connects highlights for July 9, 2020 include Paycheck Protection Program (PPP) updates, and a discussion on the future of commercial real estate assets, Federal Reserve interest rates, and post-secondary higher education.

    NP Connects brings together leaders from a variety of backgrounds to share real-time perspectives on the coronavirus (COVID-19) pandemic. Our July 9, 2020 panel included Robert Drobnak, Partner at Nixon Peabody, Michael Franco, the Chief Executive Officer of SitusAMC, Jeremy Hitchcock, founder of Minim and former co-founder and CEO of Dyn, and Barry Knapp, Managing Partner at Ironsides Macroeconomics, LLC.

    Paycheck Protection Program (PPP) update:

    • Companies have until August 8 to apply for the remaining $130 billion in PPP funding. Note that depending on the size of your loan, there will be public disclosures for loans over $150 thousand.
    • The PPP Flexibility Act automatically provides a 5-year extension to the loan's maturity, allowing a borrower to maximize the benefits of the PPP loan. However, this extension does not apply to all PPP loans. A borrower that received a PPP loan prior to the PPP Flexibility Act's passage must negotiate the terms with its lender.
    • The forgiveness process commences when the borrower submits the forgiveness form. The lender has up to 60 days to issue a decision to the Small Business Administration (SBA). The SBA will, subject to any review process, remit the forgiveness amount within 90 days of receipt of application. If there isn't a review (which is ordinarily going to be the case for loans under $2 million), several lenders have advised that they intend to process applications within two weeks.

     Business response to PPP:

    • There was a misalignment of public perception of the PPP and the policy's intent, resulting in highly politicized conversation. Aside from headline-grabbing stories of big companies borrowing under the program, the June ADP Employment Report offered compelling support for the PPP program. The April employment for businesses with 49 or fewer employees dropped by 5.2 million, but in May and June, those businesses gained back 44% of the April loss, far outpacing the 20% recovery for companies with 500 or more employees where losses were 9.3 million.
    • VC and technology industries were torn as to whether companies with cash on their balance sheets were eligible for PPP loans. The PPP loans allowed small businesses to move forward with their growth plans and were positive.
    • Within the residential real estate market, government-backed loans through Fannie Mae and Freddie Mac account for ~65% of all residential mortgages. Currently, eviction and forbearance agreements are in effect, and banks are being very accommodative. It appears highly likely that the initial forbearance periods will be extended as political pressure remains high.
    • Commercial real estate debt is bouncing back. Commercial mortgage-backed security (CMBS) spreads have contracted, and new issuance activity is 80% of its pre-COVID volume, despite the average deal being smaller. Regional malls, comprising approximately 15-40% of Class B and C assets, could disappear by next year. Co-tenancy issues arise when anchor tenants disappear, so big mall operators are buying into retailers to preserve rental rates or keep companies in their leases.

     Looking ahead:

    • Many commercial real estate assets will be repositioned into mixed-use/multifamily use/office park. As the work from home trend increases, there will be fewer workers in the office, but the number of square feet for each worker will increase, resulting in a net neutral change for the office market. Co-working trends will accelerate in some areas as more people will need a local office
    • The Federal Reserve has stated it is not raising interest rates. Pre-crisis, the majority of outstanding debt was at the household level. There was a large deleveraging after the global credit crisis. Now, as a result of the federal stimulus response to the COVID-19 crisis, the majority of debt exists at the government level. Looking forward, real interest rates will increase.
    • The pandemic has made significant changes to the post-secondary education system too. All are deciding what online programming means to their brand as schools evaluate their brand, value, and cost. Students are moving to skill-based learning, with enrollment in vocational programs expected to rise. The number of graduating high school seniors taking a gap year before matriculating to college or university may approach 15% this year, up from 3%.

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    The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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