SBA Clarifies Related Party Rent Expense for PPP: Better to Lease Than Own

The Paycheck Protection Program (PPP) allows borrowers to include certain nonpayroll costs paid or incurred during their covered period in their forgiveness calculation including:

1. Interest on covered mortgage obligations on real or personal property;
2. Covered rent obligations for real or personal property; and
3. Covered utility payments.

Is Rent to a Related Party Considered Forgivable?

In the absence of guidance from the Small Business Administration (SBA) or U.S. Treasury, the general thought has been that related party rent or lease payments are forgivable, so long as there was a rent or lease agreement in place prior to February 15, 2020.

On August 24, 2020, the SBA released a new Interim Final Rule (IFR) limiting the forgivable portion of related party rent expense to the amount of mortgage interest owed on the property during the covered period allocated to the space being rented by the borrower. The IFR defined a related party as any ownership in common between the borrower and the property owner.

The IFR’s goal is to ensure equal treatment of business owners who hold property within the operating entity (and pay mortgage interest to a third party) and those that hold property in a separate entity (and pay related-party rent). However, the provision appears to penalize borrowers who own their facilities through a separate entity rather than lease them through a third party, even if rent payments to the separate-but-related entity are at market rates. 

How is Rent Treated for Affiliated Businesses or Subleases?

The IFR also limits forgivable rent expense to amounts related to the borrower’s business. In other words, the portion of rent paid that is reimbursed by a subtenant is not forgivable. For example, if a borrower rents an office building for $10,000 per month and subleases out part of the space to other businesses for $2,500 per month, then only $7,500 per month is eligible for loan forgiveness.

If you have questions or need advice on your specific situation, please contact us. We’re here to help.

© 2020