The vertical pandemic: Niches needing help
As part of our ongoing series on how the coronavirus pandemic is impacting specific client niches, accounting firms share the problems their clients are facing — and the advice they’re giving them — in four sectors: medical and dental practices, hotels, real estate and e-commerce.
A pain delay
Medical professions with private practices, like general practitioners and dentists, are in an unusual position, with their profession as a whole mobilized to face a massive health issue, while their personal practices are suffering many of the same restrictions as nonessential businesses. “What’s been tough for them is they’re sort of on the front lines, but not necessarily,” explained Kathy Walsh, CPA, JD, a partner at Top 100 Firm Cohen & Co., which provides tax, accounting and consulting services to over a hundred medical and dental practices. “But they’re trying to see their patients while protecting the patients and protecting themselves and protecting their staff.”
As businesses, they face the same pressures that are plaguing the economy as a whole — though the way they get paid has put off some of the pain. “Like any other business, cash flow is key,” Walsh said. “If you have less people coming in, you have less payments coming in — although, for most of these businesses, they don’t see their money for 30 to 90 days from the insurance companies, so they haven’t necessarily been impacted as much other business may have been. Their impact is delayed — where the services that they had provided in March and April and May have been declining, they’re going to see that hit their cash flow in the next couple of months coming up. So they had a little more of an opportunity to see that coming and plan accordingly.”
“We’ve been doing cash flow planning for them, and working on getting the grants that are available for them,” she continued. “They’re looking at their staffing needs, and we worked with them on the Paycheck Protection Program.”
Cohen & Co. got out ahead of the PPP, in fact, communicating frequently with clients as the program and its rules took shape, and working to make sure clients were ready to go the minute banks start accepting applications. “That was the question two weeks ago, was getting all the applications in,” Walsh said in early May. “This week’s questions are, ‘OK, now that we have the money, how do we account for it?’ Again, our firm is way out in front of it, talking to the players that are making these decisions, saying, ‘The banks are all over the board with what they want; we need one black-and-white rule of what qualifies and how is it computed, because right now we don’t have that.’”
Her firm also helped clients get up to speed on other elements of the stimulus, particularly those related to the medical profession, such as the Medicare Health & Human Services Stimulus provision of the CARES Act that proactively sent health care providers funds in early April based on their Medicare payments from 2019. There is a second element of that program that Cohen’s clients are applying for now, and the firm is working to decipher the details of other federal relief efforts.
“Once the government figures out what we have to do and what we have to submit and how do we account for this to get the pieces forgiven, we will be involved with helping our clients do that,” Walsh said. “What are the banks going to require? We don’t know yet, but I’m sure they’re going to want a nice, neat package, and that’s something that we’ll be providing for our clients.”
Beyond navigating the stimulus and the varying Medicare and Medicaid rules that each state is imposing, Cohen is consulting on business planning, which can range from going through the nitty-gritty details of new tax rules to providing a sympathetic ear. “A lot of it’s just listening to the clients,” Walsh said. “Sometimes I feel like I have a psychology degree on my wall, because sometimes they just need somebody to talk to, and to realize they aren’t the only ones going through this.”
That sympathy, naturally, is backed up with expertise in long-term scenario planning, cost-cutting, staff management, tax laws, and more, as well as some very specific tools that the firm has built, including a cash flow projector and a liquidity dashboard to help companies plan for the future.
The shape of the future remains uncertain, but Walsh pointed to two developments that she expects to play out among medical practices. The first is the move to providing diagnostic services over the phone or online, as physicians try to make up for declining revenues while maintaining social distancing. “A lot of them are trying to go into telehealth, to the extent that they can,” she said. “I had an oncologist tell me, though, that you can’t feel a lump over the screen, so it’s limited to certain practices, but we’ll see growth in that area.”
Walsh also predicts that the pandemic will, paradoxically, dampen a long-term trend of more engagement with health care, as patients shy away from doctors’ offices and hospitals for fear of exposure to the coronavirus. “The Affordable Care Act had really tried to get people to be proactive about their health and take an interest and be proactive and ask questions and be preventative, and this has presented a step backwards,” she explained. “If you have a toothache, where normally you would have gone in, now you think, ‘Oh, it’s not so bad, plus the dentist’s office isn’t even open unless it’s an emergency,’ so I think people are thinking twice about that, and I think that’s an impact we’re going to see undoing what we’ve been trying to do in the medical field.” — Daniel Hood
Trying to keep the doors open
The hotel industry has been particularly hard hit by the pandemic, as shelter-in-place orders and travel bans have severely reduced the number of guests. The results have been drastic for the hotel clients of St. Louis, Missouri-based Anders CPA, according to Adam Prest, a principal in the tax group. A part of the firm’s larger hospitality and restaurants niche, Anders’ hotel clientele range in size from boutique hotels to local ownership groups to international investor groups with hotels across the country. Prest also explained that as of early May, all those clients’ properties were still open (though one temporarily closed under orders from its county), but their occupancy rates have been dismal.
“Hotel clients are really struggling right now,” he said. “Right now, we are approaching what is traditionally the busier time of year for hotel clients. We’ve seen occupancy rates [plummet] — hotel clients I’ve talked to in the last two days have had a 5 to 10 percent occupancy rate in the last few weeks. A couple are lucky, with 20 percent occupancy rates — lucky by comparison.”
Prest explained that typical occupancy rates for their average hotel clients range from the high 60s to 80 percent. Still, the fact that Anders’ clients are open for business at all gives Prest the “feeling we might be in the minority … we are on the lucky end.”
“In reality, they are trying to keep their doors open, keep people employed, and the level of service, and keep the stay that hotel clients are expecting,” Prest said. “Most are optimistic things will be turning around at some point, and [the hotels] will keep their strong reputation.”
Despite the optimism, hotels have yet to see evidence of an uptick in business on the horizon.
“The worst part is booking summer and fall — it’s not promising,” Prest continued. “There are a lot of different conventions that are delayed for 2020 or canceled. Sporting events, concerts, fairs are canceled, and people are canceling their space. The lack of revenue is causing cash flow issues, and we are seeing our hotels dramatically reduce workforce, from 70 to 80 percent.”
Anders is working with these clients to evaluate their options. “We are advising clients on the CARES Act — there are a lot of aspects to the legislation to provide relief,” Prest said, including the Paycheck Protection Program, which “some of our clients are utilizing to keep as many staff on as possible during the crisis.”
Anders assembled a firmwide COVID-19 response team to advise on the rules and requirements of the continually updated CARES Act, the PPP, and other coronavirus-related legislation that is “not necessarily straightforward,” according to Prest. The multidisciplinary team of about 10 people reviews the tax aspects of the law to make sure clients are taking full advantage of them, and also works with their banks to help sustain cash flow. Prest reports clients are seeking help “to defer their loan payments, not for the long term but in helping with cash for the short term, to push back loan payments.”
Prest and the rest of the tax team are also advising on the wider tax implications of the CARES Act, including a fix to the retail glitch in the Tax Cuts and Jobs Act, which again makes qualified improvement property eligible for bonus depreciation. The guidance Anders is giving hotel and other qualifying clients to amend their returns in accordance with the new rules is just one more wrinkle in an already prolonged tax season.
“The unique challenge is this all started still in the middle of busy season,” Prest shared. “We’re still trying to work through the typical workload, and [keep] clients advised as much as possible. There’s ordinarily so much we can work with clients face to face. To communicate with clients during social distancing, with telephone calls, teleconferences, emails — we try to be proactive and reach out to clients, with things changing daily.”
Anders has been producing more webinars and even worked with a local news station to keep the community informed. “The firm hosted webinars on the CARES Act, the PPP, with a pretty robust Q&A, taking questions and answering as many as we can on the webinar,” Prest said. “We have them all on the database to be proactive. As quickly as things are changing — we talk to a client on Monday, and by Thursday things change. We make them aware of things by putting out mass communication. We are circling back to clients and the marketing group is handling the technology behind it, and getting it out to the proper channels.”
Looking forward, Prest expressed concern for the industry’s future. “My thought is that if demand doesn’t return soon, we’ll see more hotels close doors,” he predicted. “Not just hotels themselves, but also attached restaurants, bars — a lot of them are closed for the foreseeable future. It’s a pretty terrible time for a lot of clients in the hospitality industry.”
Prest has been impressed with the creativity exhibited by some hospitality clients — like restaurants that have pivoted to curbside delivery and contactless transactions. Unfortunately, he added, hotels are unable to rely on similar techniques. “One [hotel client] I spoke to yesterday basically reduced all hourly staff, and salaried staff is performing functions they normally wouldn’t. … It’s a pretty unique time.”
Prest cautioned that current trends must reverse for the industry to truly recover. “Operating below 35 percent [occupancy rate] for an extended period of time makes it difficult to stay viable as a hotel business,” he explained. He also expects continued uncertainty from potential customers. “It will be an extended period of time for business travel [to get back to] pre-COVID levels,” he said. “Recreational travel — there is a pent-up demand for vacation travel, but some may be hesitant to travel for a while, with social distancing. It might delay recovery for the industry.” — Danielle Lee
A mixed market in real estate
Real estate has been a major focus during the pandemic, with rent freezes and a possible housing market crash dominating headlines early on, but the field covers such a wide scope of businesses and uses, there are multiple effects — both good and bad — currently impacting the industry.
Marsha Ruddle, a tax shareholder at Pittsburgh-based Schneider Downs who helps lead the real estate practice at the Top 100 Firm, says that the current conditions of the real estate market depend on who you talk to. “The current state of the real estate industry varies greatly by sector,” she said. “Hospitality was immediately impacted as travel shut down in early March and has yet to recover. … The retail sector expected more than half of tenants to not be able to pay their rent by May. As universities closed and returned students home, student housing leases went unpaid and next year remains questionable.”
Some areas, however, have remained stable or even seen growth, said Ruddle. “Office and multifamily currently appears to remain stable, with the assistance of the CARES Act. Industrial has actually seen an uptick as more shopping has moved online. As for development projects in process, we have seen a mixed result — some developers have pulled back while some proceeded, and some lenders have pulled back, while others moved forward.”
Carol Wright, principal and leader of the real estate industry group at Troy, Michigan-based firm Top 100 Firm Rehmann, added that the industry faces its own unique set of challenges. “Many new developments, including federal legislation like the FFCRA and CARES Act, need to be considered by all those in the industry,” she said. “In real estate, owners invest primarily in buildings, rather than employees. Since not many employees are affected, the focus of the economic aid has not provided as much benefit to real estate as to service industries. However, the real estate industry has its own unique needs that are not necessarily covered by the available relief programs.”
Unsurprisingly, the biggest concern around real estate clients is monetary, as the pandemic has upended regularly scheduled payments. “Cash flow management and employee concern are the greatest challenges faced by our clients,” said Ruddle. “Tenant rents either sharply or gradually declined for several clients or they are anticipating so. Fortunately, lenders have been understanding and flexible, granting 90-to-180-day extensions on payments and, in some cases, even modified loans.”
Wright echoed this fall in cash flow: “Many clients were ready for a downturn, but no one could have predicted the pandemic we are experiencing,” she said. “For a single-family residential property management company, the normal delinquency rate for rent payments falls around 25 percent, but last month it was around 45 to 50 percent, causing severe concern for many owners.”
“Owners of retail centers face a situation where many tenants have closed temporarily, and cash flow has stopped,” she added. “In that sector, some tenants were approved for Paycheck Protection Program loans, which will support paying bills on time. Lessors of residential, commercial and industrial space are struggling with many of the same issues. However, resilient and forward-thinking owners are using this time to look for opportunities and deals that could be beneficial in the long run.”
Challenges facing the real estate sector are also directly linked to banking, as mortgages and loans are the lifeblood of the industry. “As tenant cash flow issues become property owners’ cash flow issues, property owners need to work with their lenders,” advised Ruddle. “A large challenge to date has been that those lenders, particularly [commercial mortgage-backed securities] lenders, shifted their focus to implementing a process for the SBA PPP loans.”
“Additionally, guidance is continuing to be issued and evaluated regarding how to procedurally file carryback claims for the retroactive real estate-specific tax law changes of the CARES Act,” added Ruddle. “Understanding the goal is to provide the industry with the much-needed liquidity as quickly as possible, flexible options are available; however, the nuances of each taxpayer’s circumstances require analysis for independent assessment and recommendation.”
“With a lackluster opportunity for real estate owners to qualify for a PPP loan, they must focus on other sources of cash to meet their own financial obligations,” said Wright. “Additionally, with many states not enforcing evictions, there is potential for bad actors to use that to their advantage. In the same light, some employees may not want to return to work. Real estate business owners will need to be careful as they handle human resource issues that may be unfamiliar territory for them.”
Both Ruddle and Wright say their firms are focusing on preparation for the coming months, helping clients best understand their options moving forward.
“We have been assisting clients initially with preparing cash flow forecasts and sensitivity analyses to help them project and manage their cash flow,” Wright said. “As legislation has occurred and guidance is evolving, we are assisting clients understand their opportunities and obligations under the CARES Act.”
“We are also analyzing clients’ potential cash tax benefit of the various real estate-specific tax law changes contained within the CARES Act,” Ruddle added. “Opportunities to retroactively make changes regarding qualified improvement bonus depreciation and the interest expense limitation’s real property trade or business election could assist clients with much-needed liquidity.”
“We’re helping clients examine what the next 13 weeks will look like, then taking a deeper dive into the next full year,” said Wright. “In doing so, we can examine clients’ next steps: Does the client need to contact their mortgage lender for an extension? Where will income levels be? How many employees will be affected? Is there a need to reallocate funds elsewhere?”
“We have also been evaluating the immediate needs as many clients begin to re-engage,” she added. “As tenants begin returning, clients are forced to consider sanitation processes [and] potential liabilities from not following the detailed new rules being issued by multiple levels of government.”
And while long-term recovery in real estate is certainly plausible, the short-term won’t be without its struggles. “In my opinion, the real estate industry will continue to be bumpy for at least the next year,” Ruddle predicted. “There could be quite a bit of debt-induced sales activity as cash flow trouble continues and lenders shift their focus from PPP and deferments to true credit risk. Fall will likely become a market for opportunistic investors and see more foreclosure activity.”
“For the most part, all those we’ve spoken with in the real estate industry are eager to get back to work,” said Wright. “When examining the various sectors within real estate, it is important to note it’s not a one-size-fits-all industry. Each sector will continue to be impacted differently. Now that the industry is beginning to reopen, we will see more sale closings for homes, as appraisers are able to return to work. Additionally, there will be additional opportunities for businesses to grow and transition into the new normal.” — Sean McCabe
The emotional switch
As consumers rushed to stock up on toilet paper, food and other necessities in the face of the pandemic, non-necessities like electronics and clothing fell by the wayside — and e-commerce companies have felt the effect. One of CPA Jay Kimelman’s e-commerce clients that sells clothing saw their revenue fall from six figures monthly to four figures overnight. And that, Kimelman said, may be indicative of how these online sellers will bounce back — that is, it may happen very quickly, when the moment comes. Why? Because discretionary spending’s real trigger is emotion, not liquidity, per se. Once consumers feel safer, they will loosen their grip on their wallets once again. Until then, uncertainty controls consumer spending.
While Kimelman’s firm, The Digital CPA, serves primarily e-commerce clients, not all of them are in the same boat as his garment seller. One client, for example, creates virtual backgrounds for Zoom and other video-
conferencing platforms. While these certainly are “luxury” items, the company’s sales have gone up as workers nationwide try to find ways to be creative in the new remote environment.
“It started out with suppliers being impacted,” Kimelman said. “So orders in the supply chain were delayed. Companies were low on inventory, and unable to sell. Then they were impacted on having items in stock that they couldn’t sell because people were saving their income.” E-sellers in areas where demand exists, such as those that sell office equipment, are struggling to keep up with demand because of the supply chain impact, no less because many of them depend on Chinese suppliers.
The other major factor is, of course, Amazon, which most of Kimelman’s e-commerce clients depend on as a marketplace to sell their products. The online selling behemoth’s response has been confusing and unevenly implemented, with the company saying it will de-emphasize nonessential items and prioritize necessities, but then not following through on that promise exactly. For instance, while Amazon workers strike for better pay and working conditions, part of their gripe has been that they have been coming into work at the warehouses shipping goods that are nonessential. Sellers are left confused, unsure how to communicate with their clients when order fulfillment and delivery has been applied haphazardly.
The confusion for e-commerce companies stems partly from the fact that online sellers, unlike brick-and-mortar stores, operate region-agnostically. So, as different regions apply and lift restrictions at will, sellers find it difficult to stay on top of not only the changes, but Amazon’s response as well.
Kimelman’s clients have different immediate goals as they move through the pandemic. For companies with staff, they want to keep them employed with pay, so have been aggressively pursuing options such as PPP loans. Others aim to simply persevere, getting through with the savings they have in the bank, and hoping the emotional spending switch will flip sooner rather than later.
Kimelman had one client that approached him for relief on accounting fees, and he was able to work with them to scale back services a little bit and work out a new engagement fee to help his client get through the next period while revenues are depressed. Kimelman himself has been conducting Facebook Live events almost daily, where he discusses the news and whatever comes to mind regarding issues that may affect his clients.
Kimelman is also thinking ahead. “We’re about two months in now. If the economy drifts off another month or two, we might start seeing customers saying that at this point they need to review their engagement,” he said. “But I truly think this is the time where they need us the most, and we should be their partners in this, because we’re the ones who can build the plan, help with cash flow, and make sure they get the funding they need.”
As companies fight to get through the pandemic with their business intact, it can be a good use of downtime to plan for the future and think about what they can do to be better prepared for a crisis like this should it happen again. Kimelman’s advice to his e-commerce clients begins with insurance: They should review their coverage, and make sure it includes business interruption insurance.
Second, they need to have systems in place so that they know how much cash they have and how much they can survive on, and plan out cash flow accordingly should such a crisis occur in the future.
Finally, they should source products from multiple regions. While companies of all kinds have come to depend on China for production, e-commerce clients are particularly dependent, because of supply chain realities that have grown in recent years due to trade law and other geopolitical forces. But diversifying product sources will be key in the future, as pandemics such as this typically start in one region and can take it down quickly.
E-commerce is an area that will remain of particular interest in the coming months. More brick-and-mortar stores will be setting their sights on moving online, and there will be domino effects in local towns across the country as stores change their way of doing business. The companies that have been operating online from the start will be leading the way. — Ranica Arrowsmith